Registration No. 333-64729
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
Amendment No. 1
To
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
DISCOVERY ZONE, INC.
(Exact name of Registrant as specified in its charter)
--------------------
<TABLE>
<S> <C> <C>
Delaware 7990 65-0408845
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
--------------------
</TABLE>
565 Taxter Road
Fifth Floor
Elmsford, New York 10523
(914) 345-4500
Attention: Andrew M. Smith, Esq.
(Registrant's Address)
--------------------
<TABLE>
SUBSIDIARY GUARANTOR REGISTRANTS
<CAPTION>
EXACT NAME OF ADDRESS PRIMARY STANDARD I.R.S.
SUBSIDIARY GUARANTOR AND STATE OR INDUSTRIAL EMPLOYER
REGISTRANT AS TELEPHONE JURISDICTION OF CLASSIFICATION IDENTIFICATION
SPECIFIED IN ITS CHARTER NUMBER INCORPORATION CODE NUMBER NUMBER
- ------------------------ ------------ ------------- ---------------- ------
<S> <C> <C> <C> <C>
Discovery Zone (Canada) Limited........... c/o Discovery Zone, Inc. Canada 7990 52-2074150
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
(914) 345-4500
Discovery Zone (Puerto Rico), Inc. ....... c/o Discovery Zone, Inc. Puerto Rico 7990 36-3892589
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
(914) 345-4500
Discovery Zone (Nevada) Licensing, Inc.... c/o Discovery Zone, Inc. Nevada 7990 91-1878248
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
(914) 345-4500
</TABLE>
Copies to:
Stephen T. Giove, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
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Approximate date of commencement of proposed sale of the
Securities to the public: As soon as practicable after
the effective date of this Registration Statement.
--------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
<TABLE>
CROSS-REFERENCE SHEET
LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY PART I OF FORM S-4
<CAPTION>
Item No. Caption Location in Prospectus
- -------- ------- ----------------------
<S> <C> <C>
Item 1 Forepart of Registration Statement and
Outside Front Cover Page of Prospectus............... Facing Page of Registration Statement;
Cross-Reference Sheet; Outside Front Cover
Page
Item 2 Inside Front and Outside Back Cover Pages
of Prospectus........................................ Inside Front Cover Page; "Available
Information"; Outside Back Cover Page
Item 3 Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........................ "Summary"; "Risk Factors"; "Selected
Historical Financial Data"; "Financial
Statements"
Item 4 Terms of the Transaction............................. "Summary"; "The Exchange Offer";
"Description of Exchange Notes"; "Certain
U.S. Federal Income Tax Considerations"
Item 5 Financial Information................................ "Selected Historical Financial Data"
Item 6 Material Contracts with the Company Being
Acquired............................................. Not applicable
Item 7 Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters................................... Not applicable
Item 8 Interests of Named Experts and Counsel............... "Legal Matters"
Item 9 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities....... Not applicable
Item 10 Information with Respect to S-3 Companies............ Not applicable
Item 11 Incorporation of Certain Information by
Reference............................................ Not applicable
Item 12 Information with Respect to S-2 or S-3
Registrants.......................................... Not applicable
Item 13 Incorporation of Certain Information by
Reference........................................... Not applicable
Item 14 Information with Respect to Registrants
Other Than S-2 or S-3 Registrants.................... "Summary"; "Selected Historical Financial
Data"; "Management's Discussion and
Analysis of Financial Condition and Results
of Operations"; "Business"; "Certain U.S.
Federal Income Tax Considerations";
"Financial Statements"
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Item No. Caption Location in Prospectus
- -------- ------- ----------------------
<S> <C> <C>
Item 15 Information with Respect to S-3 Companies............ Not applicable
Item 16 Information with Respect to S-2 or S-3
Companies............................................ Not applicable
Item 17 Information with Respect to Companies
Other Than S-2 or S-3 Companies...................... "Summary"; "Selected Historical Financial
Data"; "Management's Discussion and
Analysis of Financial Condition and Results
of Operations"; "Business"; "Certain U.S.
Federal Income Tax Considerations";
"Financial Statements"
Item 18 Information if Proxies, Consents or
Authorizations Are to Be Solicited................... Not applicable
Item 19 Information if Proxies, Consents or
Authorizations Are Not to Be Solicited in an
Exchange Offer....................................... "Exchange Offer"; "Management";
"Principal Stockholders"
</TABLE>
iii
<PAGE>
Offer to Exchange
13 1/2% Senior Collateralized Notes due 2002
for all outstanding
13 1/2% Senior Collateralized Notes due 2002
($20,000,000 principal amount outstanding)
of
Discovery Zone, Inc.
(Incorporated in the State of Delaware)
-------------------------
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON JANUARY 22, 1999, UNLESS EXTENDED
-------------------------
Discovery Zone, Inc., a Delaware corporation ("DZ" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal, to exchange $20,000,000
aggregate principal amount of its 13 1/2% Senior Collateralized Notes due 2002
(the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(as defined herein) of which this Prospectus constitutes a part, for $20.0
million aggregate principal amount of the outstanding 13 1/2% Senior
Collateralized Notes due 2002 (the "Private Notes") of the Company (the
"Exchange Offer"). The Exchange Notes and the Private Notes are collectively
referred to herein as the "Notes."
Subject to certain conditions, the Company will accept for exchange
any and all Private Notes that are validly tendered on or prior to 5:00 p.m.,
New York City time, on the date the Exchange Offer expires, which will be
January 22, 1999 unless the Exchange Offer is extended (the "Expiration Date").
In the event that the Exchange Offer is extended, it will remain in effect for a
maximum of 30 business days, including all extensions. Tenders of Private Notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date, unless previously accepted for exchange. The Exchange Offer is
not conditioned upon any minimum principal amount of Private Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement (as defined herein). See "The Exchange Offer."
The Company has agreed to pay the expenses of the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
The date of this Prospectus is December 23, 1998
<PAGE>
The Exchange Notes will be obligations of the Company entitled to the
benefits of the Indenture (as defined herein). The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Private Notes, except that the Exchange Notes, having been registered under
the Securities Act, will not contain terms with respect to transfer
restrictions. In addition, following the completion of the Exchange Offer, none
of the Notes will be entitled to the benefits of the Registration Rights
Agreement relating to contingent increases in the interest rates provided for
pursuant thereto. See "The Exchange Offer."
See "Risk Factors" commencing on page 20 for a discussion of certain
information that should be considered prior to making an investment in the
Exchange Notes.
The Exchange Notes will mature on May 1, 2002. Interest on the
Exchange Notes is payable in cash quarterly in arrears on each November 1,
February 1, May 1 and August 1 (each, an "Interest Payment Date"), commencing
February 1, 1999, and shall accrue at a rate of 13 1/2% per annum from November
1, 1998, the last Interest Payment Date on which interest was paid on the
Private Notes so surrendered. The interest to be paid on the Exchange Notes on
February 1, 1999 will be paid to the Holders of record on January 15, 1999 of
the Private Notes surrendered for exchange. Interest on each Private Note
accepted for exchange will cease to accrue upon issuance of a corresponding
Exchange Note. Holders of Private Notes whose Private Notes are accepted for
exchange will be deemed to have waived the right to receive any payment in
respect of interest on such Private Notes accrued from the most recent Interest
Payment Date to which interest has been paid on such Private Notes to the date
of issuance of the Exchange Notes. A portion of the net proceeds of the offering
of the Private Notes was used to fund the Escrowed Interest Account (as defined
herein) from which the Company shall pay the scheduled interest payments on the
Exchange Notes through August 1, 1999.
The Exchange Notes will be redeemable, at the option of the Company,
in whole or in part, at any time on or after August 1, 1999, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time or from time to time, the Company may
redeem up to 100% of the original principal amount of the Exchange Notes with
the proceeds of one or more offerings (each, a "Primary Offering") of Capital
Stock (other than Disqualified Stock) (each as defined herein) at 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption; provided that such redemption shall occur within 30 days of the
date of the closing of such Primary Offering. Upon a Change of Control (as
defined herein), the Company is required to offer to repurchase all of the then
outstanding Exchange Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of repurchase.
The Exchange Notes will be senior secured indebtedness of the Company
and will rank senior in right of payment to all present and future subordinated
indebtedness of the Company and pari passu in right of payment with all present
and future unsubordinated indebtedness of the Company, including, but not
limited to, borrowings outstanding under any Eligible Credit Facility and the
Company's Existing Notes (both as defined herein). The Exchange Notes will be
guaranteed on a full, unconditional, and joint and several senior secured basis
by each of the Company's current and future Subsidiaries (as defined herein)
other than DZ Party and the Limited Investment Subsidiaries (each as defined
herein). The Company has no Limited Investment Subsidiaries and the operations
of DZ Party are inconsequential to the results of operations of the Company
taken as a whole. Because all of the Subsidiary Guarantors will guarantee the
Company's obligations under the Exchange Notes on a full, unconditional, and
joint and several basis, the Company has not included separate financial
statements with respect to the Subsidiary Guarantors in this Prospectus.
The Exchange Notes will be secured by a security interest in certain
assets of the Company (except real estate leasehold interests existing prior to
the offering of the Existing Notes and substantially all of the Company's real
property and improvements thereon) and by a pledge of the capital stock of all
current and future Subsidiaries. Subject to certain conditions, the Exchange
Notes will also be secured by a mortgage lien on certain leasehold interests in
new store properties acquired by the Company after the offering of the Existing
Notes and on substantially all of the Company's real property and improvements
thereon. The security interest in the collateral securing the Exchange Notes
will be senior to the security interest securing the Existing Notes and
subordinate to the security interest securing the McDonald's Obligations (as
defined herein), any Eligible Credit Facility and certain statutory liens of
creditors.
The exchange of the Private Notes for the Exchange Notes will be made
pursuant to the Exchange Offer and in accordance with the Indenture.
2
<PAGE>
The Private Notes were initially represented by one or more global
Private Notes (the "Old Global Note") in registered form, registered in the name
of Cede & Co., as nominee for The Depository Trust Company ("DTC"), as
depositary. The Private Notes sold to Institutional Accredited Investors who are
not Qualified Institutional Buyers (as defined in Rule 144A of the Securities
Act) were issued in certificated, fully registered form without interest coupons
and were registered in the name of such Institutional Accredited Investors or
their nominees. The Exchange Notes exchanged for Private Notes will be
represented, respectively, by one or more global Exchange Notes (the "New Global
Notes") in registered form, registered in the name of a nominee of DTC. Except
in limited circumstances, Exchange Notes in certificated form will not be issued
in exchange for beneficial interests in a New Global Note. See "Description of
Exchange Notes -- New Certificated Notes."
Based on no-action letters issued by the staff of the Commission to
third parties, the Company believes the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
that purchased such Private Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an "affiliate" of the Company within the meaning of Rule 405 of
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act; provided that the holder acquires
such Exchange Notes in the ordinary course of its business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. In the event that the Company's belief is inaccurate,
holders of Exchange Notes who transfer Exchange Notes in violation of the
prospectus delivery provisions of the Securities Act and without exemption from
registration thereunder may incur liability under the Securities Act. The
Company does not assume or indemnify holders against such liability.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. For a period of 180 days after the
Expiration Date, or such shorter period which will terminate when such
broker-dealers have completed all resales subject to applicable prospectus
delivery requirements, the Company has agreed that it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company believes that none of the registered holders of the
Private Notes is an affiliate (as such term is defined in Rule 405 under the
Securities Act) of the Company.
The Private Notes have been designated eligible for trading in the
Private Initial Offerings, Resales and Trading through Automated Linkages
("PORTAL") Market of the National Association of Securities Dealers (the
"NASD"). The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or to seek approval through any automated quotation
system. There can be no assurance regarding the future development of a market
for the Exchange Notes, or the ability of holders of the Exchange Notes to sell
their Exchange Notes or the price at which such holders may be able to sell
their Exchange Notes. If such a market were to develop, the Exchange Notes could
trade at prices that may be higher or lower than the initial public offering
price depending on many factors, including prevailing interest rates, the
Company's operating results and the market for similar securities. See "Risk
Factors -- Absence of Public Market."
Holders of Private Notes whose Private Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Private Notes and will
be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Private Notes will continue to be subject to
existing restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Private Notes held by them.
3
<PAGE>
The Company will not receive any proceeds from, and has agreed to bear
all registration expenses of, the Exchange Offer. No dealer-manager is being
used in connection with the Exchange Offer. See "The Exchange Offer -- Resale of
the Exchange Notes."
THE COMPANY IS NOT ASKING FOR A PROXY AND THE HOLDERS OF THE PRIVATE
NOTES ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY EXCHANGE MADE PURSUANT HERETO SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
NOTICE TO NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A
REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER
CHAPTER 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
4
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 (including all amendments thereto, the "Registration Statement") under
the Securities Act, with respect to the Exchange Notes offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference.
The Company is subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith is required to file reports
and other information with the Commission. The Registration Statement (with
exhibits), as well as such reports and other information, when so filed, can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
regional offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048; and at 500 West Madison Street, Chicago, Illinois 60661.
Copies of such material may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a website on the Internet at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements," including
statements containing the words "believes," "anticipates," "expects" and words
of similar import. All statements other than statements of historical facts
included in this Prospectus and the documents incorporated by reference herein,
including, without limitation, such statements under and incorporated into,
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and located elsewhere herein, regarding
the Company or any of the transactions described herein, including the timing,
financing, strategies and effects of such transactions, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from expectations are disclosed in
this Prospectus, including, without limitation, under the caption "Risk
Factors." The Company does not intend to update any forward-looking statements
contained herein.
-------------------------
References made in this Prospectus and in the Exhibits hereto to
"Discovery Zone, Inc.," "DZ" and the Company's logo, refer to registered
trademarks and service marks owned by the Company. References made in this
Prospectus and in the Exhibits hereto to "Pepsi-Cola Company," "Pepsi," "Pizza
Hut, Inc." and "Pizza Hut" refer to registered trademarks and service marks of
the Pepsi-Cola Company. References made to "Playorena" and "Gymboree" refer to
the registered trademarks and service marks of EduPlay Corporation and The
Gymboree Corporation, respectively.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. As used in this Prospectus, unless the context otherwise requires,
references to the "Company" or "DZ" mean, collectively, Discovery Zone, Inc. and
its consolidated subsidiaries. References to any historical fiscal year refer to
the 12 months ending on December 31 of such year. This Prospectus contains
forward-looking statements which involve risks and uncertainties, including,
without limitation, statements regarding the Company's planned promotional
activity and partnerships, expected operating results and the availability of
funds. The Company's actual results could differ materially from the results
anticipated in those forward-looking statements as a result of numerous factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The Company
The Company is the leading owner and operator of pay-for-play
children's entertainment centers ("FunCenters") in North America, with a
national network of 197 FunCenters in 39 states, Canada and Puerto Rico which
are targeted to appeal to children ages two to 12. The Company's FunCenters are
designed to offer children a unique entertainment experience while meeting their
parents' needs for value and convenience. The Company believes that it is the
first company to develop this concept nationally. As a result, the Company
believes that it is well positioned to capitalize on a variety of favorable
demographics in its customer base, including projected growth in the population
of children under the age of 13, which management believes will increase
spending on children's leisure activities. DZ hosted approximately 18.5 million
visits by children and adults in 1997.
Due to its national market presence and the strength of its brand
name, the Company believes that it is well positioned to act as a platform for
other promotional and product "tie-ins" with children's entertainment and
consumer product companies, which should give the Company access to a wide
variety of joint marketing, cross-promotional and in-store entertainment
opportunities.
FunCenters generally are located in strip shopping centers and, to a
lesser extent, in shopping malls. Through December 1997, FunCenters typically
included: (i) "soft play" zones consisting of a series of tubes, slides, ball
bins, climbing mountains, air trampolines, obstacle courses, ramps and other
devices for crawling, jumping, running, swinging and climbing, all of which have
been designed and constructed with an emphasis on safety; (ii) "game zones"
consisting of games that award tickets redeemable for prizes; (iii) food and
beverage operations; and (iv) party rooms for birthdays and other group events.
During the fourth quarter of 1997, the Company began an extensive FunCenter
renovation program designed to broaden their entertainment offerings, upgrade
their facilities and give them a "new look" consistent with the Company's brand
repositioning campaign. See "-- Product Improvements."
Since emerging from bankruptcy, the Company has completed the
renovation of approximately 60% of its FunCenters as of November 30, 1998 to
expand and update its product offerings to include: (i) themed laser tag, (ii)
arts and crafts, (iii) promotional areas featuring changing events and (iv) a
stage area which features custom DZ programming and kid Karaoke, and creates a
FunCenter focal point for character appearances and other presentations. The
Company's strategy is to create a changing entertainment environment featuring
cross-promotional activities with major entertainment and consumer product
companies. During this period, the Company also completed the conversion of
approximately 75% of its FunCenters to offer Pizza Hut, Inc. ("Pizza Hut") brand
menu items. See "Business -- Product Improvements."
6
<PAGE>
History
The Company was founded in 1989 and grew from 28 locations in 1991 to
a peak of 347 locations in 1994, achieving much of its growth through the
acquisition of certain of its franchisees and other businesses. The Company's
rapid expansion resulted in a loss of control over costs and quality at the
store and corporate levels, which diminished customer service, reduced store
operating margins and caused selling, general and administrative expenses to
increase dramatically. This negatively affected the Company's overall
profitability and led to a series of defaults under the Company's primary credit
facility in late 1995 and early 1996. On March 25, 1996, Discovery Zone, Inc.
and all of its domestic subsidiaries filed voluntary petitions for relief under
Chapter 11 of the U.S. Bankruptcy Code ("Chapter") with the U.S. Bankruptcy
Court for the District of Delaware.
During the Company's reorganization under Chapter 11, Wellspring
Associates L.L.C. and its affiliates (collectively, "Wellspring") and certain
unrelated entities acquired a controlling interest in the Company. In December
1996, Wellspring recruited Scott W. Bernstein, a former executive with Six
Flags' Northeast operations, to assist in developing a new business strategy for
the Company, and to assume the role of Chief Executive Officer. The Company
subsequently hired several other senior managers with backgrounds in the
entertainment and consumer marketing industries.
The Company operated under the protection of Chapter 11 from March 25,
1996 through July 29, 1997 (the "Effective Date"). Throughout 1997, and on an
accelerated basis since the Effective Date, the Company has implemented a new
business strategy (the "Turnaround Plan") designed to revitalize, reposition and
restore the Company's core business through: (i) a broad expense reduction
program, (ii) new in-store programs that feature added entertainment activities
and (iii) a refocused marketing strategy.
Cost Reduction Program
Beginning in 1995 and continuing through 1997, the Company implemented
a broad cost-reduction program to reduce its expenses relative to revenues and
to increase efficiency. This program resulted in the closing or sale of
approximately 130 FunCenters that were either unprofitable or determined to be
unlikely to contribute to future profitability as a result of a variety of
factors, including leases with uneconomic terms, unfavorable demographics,
undesirable facility size or saturation of particular markets.
The Company also implemented several initiatives to reduce annual
selling, general and administrative expenses, including: (i) a substantial
reduction in the Company's corporate and regional management personnel; (ii) a
reduction in expenditures for corporate support functions; and (iii) the
elimination of expenses related to certain discontinued operations. In addition,
the Company further reduced costs through changes in labor planning, food and
beverage operations, a revised birthday party reservation system and
renegotiated store lease terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
The Company also established an incentive-based compensation plan tied
to store profitability and service quality measures for its FunCenter and
regional managers in order to create a stronger sense of ownership and
accountability and to build support for the Company's business strategy among
such managers.
7
<PAGE>
Product Improvements
During the fourth quarter of 1997, the Company began an extensive
FunCenter renovation program designed to broaden its entertainment offerings,
upgrade its facilities and give such facilities a "new look" consistent with the
Company's brand repositioning campaign. These renovations typically included the
addition of designated areas for laser tag, arts and crafts, stage events and
promotional activities. The Company had renovated approximately 60% of its
FunCenters as of November 1, 1998 and may renovate additional FunCenters by the
end of 1999 if adequate funds are available. These renovations were more costly
and took longer to complete than originally anticipated. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity."
The Company intends to create a series of regularly changing
activities and events tied in with major entertainment properties and consumer
products that appeal to children using the new venues in the renovated
FunCenters ("DZ Live," "Laser Adventure," the "Art Factory" and the "Cage"), as
well as open space in unrenovated FunCenters. Laser tag was initially themed to
"Men in Black" and is currently themed to "Godzilla," both hit motion pictures
and animated television series. The Company began 1998 with a hockey skills
promotion with the National Hockey League and CCM, a leading hockey equipment
brand. In April 1998, the promotion theme was changed to New Line Cinema's major
motion picture release of "Lost in Space." During the second half of 1998, the
Company began a series of promotions with Fox Kids Worldwide. See "Business --
New Marketing and Entertainment Strategy."
In 1997, the Company entered into marketing and product agreements
with Pizza Hut and the Pepsi-Cola Company ("Pepsi"), respectively. These
agreements provide for joint promotions and, the Company believes, increase the
appeal and quality of its food service operations. Through November 1998,
approximately 75% of the FunCenters have been converted to permit the sale of
Pizza Hut menu items. During the remainder of 1998, the Company expects to
expand its food offerings and begin to convert additional FunCenters to permit
the sale of Pizza Hut and/or other branded food menu items.
In addition to the Pizza Hut and Pepsi agreements referred to above,
during 1997 and the first nine months of 1998, the Company entered into
promotional arrangements with Fox Kids Worldwide, Cartoon Network, Hasbro,
Columbia Tri-Star, New Line Cinema, the National Hockey League, CCM, the
Worldwide Wrestling Federation, Welches, Oscar Meyer and the Nabisco Foods
Group. The Company is negotiating with a number of other possible promotional
partners in the toy, television, film and consumer product industries and
expects to continue to pursue such arrangements in the future. The Company
believes that such alliances will provide significant marketing support and
theme-based promotions to periodically refresh its product offerings and to
stimulate repeat customer visits on a cost-effective basis.
The Company has also sought to increase revenue by better utilizing
DZ's existing facilities. To increase weekday visits, the Company developed
interactive parent-child play programs for preschoolers in 1997. These programs
offer tumbling, climbing, exercising and singing and are now being offered under
the "Discovery Zone University" and "DZU" brand names. During the remainder of
1998, these weekday programs will be provided in approximately 25 FunCenters.
The Company does not currently intend to expand these programs in 1998 beyond
the locations currently offering them. In the future, the Company may consider
expanding these programs to additional FunCenters and to include after school
programs for older children.
8
<PAGE>
Marketing and Entertainment Strategy
Since mid-year 1997, the Company has developed and begun to implement
a new marketing strategy consisting of several components:
o Reposition and relaunch "New DZ" brand -- Building on its revamped
product offerings, the Company is reintroducing itself as the "New
DZ." Through a combination of local and national public relations
efforts and a new advertising campaign, the Company is repositioning
itself from a children's indoor playground venue to a children's
entertainment center.
o Reorient marketing to regional and local focus -- During the second
half of 1998, the Company has begun to reorient its marketing efforts
to focus on local and regional marketing and advertising programs with
a national "overlay."
o Form strategic marketing partnerships -- The Company is establishing
cross-promotional alliances with local and regional businesses, such
as supermarkets, convenience stores and malls, as well as national
promoters in the toy, television, film and consumer product
industries.
As part of its ongoing marketing efforts, the Company's strategy is to
target two subsegments of the children's market; kids ages six to 12 ("Core
Target") and pre-schoolers. The Core Target will be the primary focus of
in-store entertainment programs. Separately, a specific programming calendar
will be aimed at the younger children, called "DZ Jr." Given the strong interest
and efforts of entertainment companies in both of these markets, the Company
believes this strategy will create even broader tie-in opportunities.
Financing Arrangements
Upon emerging from Chapter 11, the Company issued 85,000 units (the
"Existing Units") consisting of $85.0 million aggregate principal amount of its
13 1/2% Senior Secured Notes due 2002 (the "Existing Notes") and 85,000 warrants
(the "Existing Warrants") to purchase an aggregate of 805,154 shares of the
Company's common stock (the "Common Stock") at an exercise price of $.01 per
share. The Company also issued $15.0 million in convertible preferred stock, par
value $.01 per share (the "Convertible Preferred Stock"). The net proceeds of
the offerings of the Existing Units and Convertible Preferred Stock totaled
$93.8 million, of which the Company used (i) $45.5 million to repay borrowings,
claims and expenses incurred while under Chapter 11, (ii) $21.6 million to
purchase U.S. Treasury Securities that were placed in escrow and pledged as
security for scheduled interest payments on the Existing Notes through August 1,
1999 and (iii) the remaining proceeds of $26.7 million to finance capital
expenditures, to provide for working capital and for other general corporate
purposes. On March 31, 1998, the Company entered into a new $10.0 million credit
facility with Foothill Capital Corporation (such facility, as amended from time
to time, the "Revolving Credit Facility"), primarily to finance working capital
and for other general corporate purposes.
On July 17, 1998, the Company completed a $29.5 million financing from
the offering of three series of units (collectively, the "Unit Offerings"): the
Note Units, the Series A Preferred Stock Units and the Series B Preferred Stock
Units. The Note Units consisted of (i) $20.0 million aggregate principal amount
of Private Notes, (ii) 340,000 warrants (the "Series A Note Warrants") to
purchase an aggregate of 601,585,205 shares of Common Stock at an exercise price
of $.00017 per share and (iii) 340,000 redeemable warrants (the "Series B Note
Warrants" and together with the Series A Note Warrants, the "Note Warrants") to
purchase an aggregate of 265,405,238 shares of Common Stock at an exercise price
of $.00017 per share. The Series A Preferred Stock Units consisted of (a) $2.0
million stated value of the Company's 14 1/2% Series A Senior Cumulative
Preferred Stock (the "Series A Cumulative Preferred Stock") and (b) 80 warrants
(the "Series A Preferred Unit Warrants") to purchase, in the aggregate,
170,533,397 shares of Common Stock at an exercise price of $.00017 per share.
The Series B Preferred Stock Units consisted of (x) $8.5 million stated value of
the Company's 14 1/2% Series B Junior Cumulative Preferred Stock (the "Series B
Cumulative Preferred Stock" and
9
<PAGE>
together with the "Series A Cumulative Preferred Stock, the "Cumulative
Preferred Stock") and (y) 340 warrants (the "Series B Preferred Unit Warrants"
and together with the Series A Preferred Unit Warrants, the "Preferred Unit
Warrants") to purchase an aggregate of 724,766,937 shares of Common Stock at an
exercise price of $.00017 per share. Collectively, the Note Warrants and the
Preferred Unit Warrants entitle the holders thereof to purchase an aggregate of
99.6% of the Common Stock on a fully diluted basis, before giving effect to
future issuance of options under the Company's Stock Incentive Plan. As part of
its post-closing obligations in connection with the Unit Offerings, the Company
was required to hire a chief operating officer or a consulting firm to serve in
such capacity. In fulfillment of this obligation, in August 1998, the Company
retained Carl Marks Consulting Group, LLC ("Carl Marks") and subsequently
appointed Chet Obieleski, a representative of Carl Marks, as the Company's Chief
Operating Officer. The Company pays Carl Marks for the services of Mr.
Obieleski.
The Unit Offerings resulted in net proceeds to the Company of
approximately $27 million after costs and expenses which (i) were used to repay
outstanding borrowings under the Revolving Credit Facility, (ii) were used to
purchase $2.8 million of U.S. Treasury Securities that were placed in escrow and
pledged as security for scheduled interest payments on the Notes through August
1, 1999 and (iii) are available for working capital, capital expenditures and
other general corporate purposes. In addition, shares of Convertible Preferred
Stock with an aggregate stated value of $1 million were tendered to the Company
as part of the consideration paid for the Series A Preferred Stock Units, which
shares were thereupon cancelled by the Company.
Recent Developments
Effective November 27, 1998, Scott W. Bernstein resigned as the
Company's President, Chief Executive Officer and as a director of the Company.
Chet Obieleski, the Company's Chief Operating Officer, assumed the additional
titles and responsibilities of President and Chief Executive Officer. In
addition, on November 11, 1998, the Company's Board of Directors elected Mr.
Obieleski as a director of the Company to fill the vacancy created by Mr.
Bernstein's resignation. Mr. Obieleski has more than 30 years of senior
management experience in retailing and consumer goods. He most recently served
as interim chief operating officer and chief financial officer of AIG Designs, a
furniture importer, and previously was executive vice president of Britches of
Georgetown, a national specialty menswear chain, and senior vice president,
finance and operations of Sterns, a major department store chain in New York.
On December 18, 1998, the Company obtained a $2.5 million increase in
the Revolving Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
---------------
Discovery Zone, Inc. is a Delaware corporation founded in 1989. The
Company's principal executive offices are located at 565 Taxter Road, Fifth
Floor, Elmsford, New York 10523, telephone number (914) 345-4500.
10
<PAGE>
Summary of Terms of Exchange Offer
On July 17, 1998, the Company issued $20.0 million principal amount of
Private Notes as part of the Unit Offerings pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. The Exchange Offer relates to the exchange
of $20.0 million aggregate principal amount of Exchange Notes for an equal
aggregate principal amount of Private Notes. The Exchange Notes will be
obligations of the Company entitled to the benefits of the Indenture relating to
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes, except that the Exchange Notes, having been
registered under the Securities Act, will not contain terms or bear legends with
respect to transfer restrictions. In addition, following completion of the
Exchange Offer, none of the Exchange Notes will be entitled to the benefits of
the Registration Rights Agreement (as defined herein) relating to certain
contingent increases in the interest rates provided pursuant thereto. See "The
Exchange Offer."
The Exchange Offer....................... Up to $20.0 million aggregate
principal amount of Exchange Notes
will be issued in exchange for up to
$20.0 million principal amount of
Private Notes validly tendered
pursuant to the Exchange Offer. As of
the date hereof, $20 million in
aggregate principal amount of Private
Notes are outstanding. The Company
will issue the Exchange Notes to
tendering holders of Private Notes on
or promptly after the Expiration
Date.
Resale of the Exchange Notes............. Based on an interpretation by the
Commission's staff set forth in
interpretive letters issued to third
parties unrelated to the Company, the
Company believes that the Exchange
Notes issued pursuant to the Exchange
Offer generally will be freely
transferable by the holders therefor
without registration or any
prospectus delivery requirement under
the Securities Act. See "The Exchange
Offer -- Purpose and Effect of the
Exchange Offer."
Expiration Date.......................... The Exchange Offer will expire at
5:00 p.m., New York City time, on
January 22, 1999, unless the Exchange
Offer is extended, in which case the
term "Expiration Date" means the
latest date and time to which the
Exchange Offer is extended. See "The
Exchange Offer -- Expiration Date;
Extensions; Amendments." The Company
will accept for exchange any and all
Private Notes which are properly
tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on
the Expiration Date. If any tendered
Private Notes are not accepted for
exchange because of an invalid tender
or the occurrence of certain other
events set forth herein, such
unaccepted Private Notes will be
returned, without expense, to the
tendering Holder thereof as promptly
as practicable after the Expiration
Date.
Accrued Interest on the Exchange
Notes and the Private Notes............. Interest was paid on the Private
Notes on November 1, 1998 to Holders
of record of the Private Notes on
October 15, 1998. The Exchange Notes
will bear interest from
11
<PAGE>
November 1, 1998 (the last Interest
Payment Date upon which interest was
paid on the Private Notes
surrendered). Holders who exchange
their Private Notes for Exchange
Notes will receive the same interest
payment on February 1, 1999 (the
first interest payment date with
respect to the Private Notes and the
Exchange Notes) that they would have
received had they not accepted the
Exchange Offer. Interest on each
Private Note accepted for exchange
will cease to accrue upon the
issuance of a corresponding Exchange
Note. Holders of Private Notes whose
Private Notes are accepted for
exchange will be deemed to have
waived the right to receive any
payment in respect of interest on
such Private Notes accrued from the
most recent Interest Payment Date to
which interest has been paid on such
Private Notes to the date of issuance
of the Exchange Notes. See "The
Exchange Offer -- Interest on the
Exchange Notes."
Termination of the Exchange Offer........ The Company may terminate the
Exchange Offer if it determines that
its ability to proceed with the
Exchange Offer could be materially
impaired due to any injunction, order
or decree by any court or
governmental agency, any new law,
statute, rule or regulation or any
interpretation of the staff of the
Commission of any existing law,
statute, rule or regulation, or the
failure to obtain any necessary
approvals of governmental agencies or
Holders of the Private Notes. The
Company does not expect any of the
foregoing conditions to occur,
although there can be no assurance
that such conditions will not occur.
Holders of Private Notes will have
certain rights against the Company
under the Registration Rights
Agreement should the Company fail to
consummate the Exchange Offer. See
"The Exchange Offer -- Termination."
Procedures for Tendering Private
Notes.................................. Each Holder of Private Notes wishing
to accept the Exchange Offer must
complete, sign and date the Letter of
Transmittal, or a copy thereof, in
accordance with the instructions
contained herein and therein, and
mail or otherwise deliver such Letter
of Transmittal, or such copy,
together with any corresponding
certificate or certificates
representing the Private Notes to be
exchanged (if in certificated form)
and any other required documentation,
to Firstar Bank, N.A., as Exchange
Agent, at the address set forth
herein and therein.
Persons holding Private Notes through
The Depository Trust Company ("DTC")
and wishing to accept the Exchange
Offer must do so pursuant to the
DTC's Automated Tender Offer Program
("ATOP"), by which each tendering
participant will agree to be bound by
the Letter of Transmittal.
12
<PAGE>
By executing or agreeing to be bound
by the Letter of Transmittal, each
Holder will represent to the Company
that, among other things, (i) the
Exchange Notes acquired pursuant to
the Exchange Offer are being acquired
in the ordinary course of business of
the person receiving such Exchange
Notes, whether or not such person is
the Holder of the Private Notes, (ii)
neither the Holder nor any such other
person has or intends to have an
arrangement or understanding with any
person to participate in the
distribution of such Exchange Notes,
(iii) neither the Holder nor any such
other person is an "affiliate," as
defined in Rule 405 under the
Securities Act, of the Company, or if
it is such an affiliate, that will
comply with the registration and
prospectus delivery requirements of
the Securities Act to the extent
applicable to it, and (iv) if such
Holder is a broker-dealer, that it
acquired the Private Notes as a
result of market making activities or
other trading activities. Pursuant to
the Registration Rights Agreement,
the Company is required to file a
registration statement for an
offering to be made on a continuous
basis pursuant to Rule 415 under the
Securities Act in respect of the
Private Notes of any Holder that is
not eligible to participate in the
Exchange Offer or does not receive
freely tradeable Exchange Notes in
the Exchange Offer and so requests
that it wishes to have its Private
Notes registered under the Securities
Act. See "The Exchange Offer --
Procedures for Tendering."
Special Procedures for Beneficial
Owners................................. Any owner of a beneficial interest in
an Old Global Note holding through a
broker, dealer, commercial bank,
trust company or other nominee and
who wishes to tender in the Exchange
Offer should contact such entity
through which it holds such
beneficial interest promptly and
instruct such entity to tender on his
behalf.
Guaranteed Delivery Procedures........... Holders of Private Notes who wish to
tender their Private Notes and whose
Private Notes are not immediately
available or who cannot deliver their
Private Notes (or who cannot complete
the procedure for book-entry transfer
on a timely basis) and a properly
completed Letter of Transmittal or
any other documents required by the
Letter of Transmittal to the Exchange
Agent prior to the Expiration Date
may tender their Private Notes
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights........................ Tenders of Private Notes pursuant to
the Exchange Offer may be withdrawn
at any time prior to 5:00 p.m., New
York City time, on the Expiration
Date. See "The Exchange Offer --
Withdrawal of Tenders."
13
<PAGE>
Acceptance of Private Notes and
Delivery of Exchange Notes............. Subject to certain conditions (as
summarized above in "Termination of
the Exchange Offer" and described
more fully under "The Exchange Offer
-- Termination"), the Company will,
unless such Private Notes are
withdrawn in accordance with the
withdrawal rights specified in "--
Withdrawal Rights" above, accept for
exchange any and all Private Notes
which are properly tendered in the
Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration
Date. See "The Exchange Offer --
Expiration Date."
Certain Federal Income Tax
Considerations.......................... The exchange pursuant to the Exchange
Offer should not be a taxable event
for U.S. federal income tax purposes.
See "Certain U.S. Federal Income Tax
Considerations."
Exchange Agent........................... Firstar Bank N.A., the Trustee under
the Indenture (formerly Firstar Bank
of Minnesota, N.A.), is serving as
exchange agent (the "Exchange Agent")
in connection with the Exchange
Offer. The address of the Exchange
Agent is: Firstar Bank N.A., 1555
North RiverCenter Drive, Suite 301,
Milwaukee, Wisconsin 53212,
Attention: Corporate Trust
Department/Transfer Unit. For
information with respect to the
Exchange Offer, the telephone number
for the Exchange Agent is (414)
905-5000 and the facsimile number for
the Exchange Agent is (414) 905-5049.
Consequences of Failure to
Exchange................................ Private Notes that are not tendered
or that are not properly tendered
will, following the completion of the
Exchange Offer, continue to be
subject to the existing restrictions
upon transfer thereof under the
Securities Act and, upon consummation
of the Exchange Offer, certain
registration rights under the
Registration Rights Agreement will
terminate. Such Private Notes will,
following consummation of the
Exchange Offer, bear interest at the
same rate as the Exchange Notes. The
liquidity of the market for a
Holder's Private Notes could be
adversely affected upon completion of
the Exchange Offer if such Holder
does not participate in the Exchange
Offer. See "Risk Factors -- Failure
to Exchange Private Notes."
14
<PAGE>
Summary of Material Terms of the Exchange Notes
Securities Offered....................... $20.0 million aggregate principal
amount of 13 1/2% Senior
Collateralized Notes due 2002.
Use of Proceeds.......................... The Company will not receive any
proceeds from the issuance of the
Exchange Notes pursuant to the
Exchange Offer. In consideration for
issuing the Exchange Notes as
contemplated in this Prospectus, the
Company will receive in exchange
Private Notes in like principal
amount. The Private Notes surrendered
in exchange for the Exchange Notes
will be retired and canceled and
cannot be reissued. Accordingly,
issuance of the Exchange Notes will
not increase the indebtedness of the
Company. See "Use of Proceeds."
Maturity Date............................ May 1, 2002.
Interest Rate and Payment Dates.......... The Exchange Notes will bear interest
at a rate of 13 1/2% per annum,
payable quarterly in cash in arrears
on each February 1, May 1, August 1
and November 1 (each, an "Interest
Payment Date"), commencing February
1, 1999. Interest will accrue on the
Exchange Notes from November 1, 1998
(the most recent Interest Payment
Date to which interest has been paid
on the Private Notes). The interest
to be paid on the Exchange Notes on
February 1, 1999 will be paid to the
Holders of record on January 15, 1999
of the Private Notes surrendered for
exchange.
Escrowed Interest Account ............... As security for the scheduled
interest payments on the Exchanging
Notes through August 1, 1999, a
portion of the net proceeds from the
offering of the Private Notes in an
amount of approximately $2.8 million
was used to purchase U.S. Treasury
Securities which were placed in the
Escrowed Interest Account held by the
Trustee for the ratable benefit of
the holders of the Exchange Notes,
subject to the terms and conditions
of the indenture governing the
Exchange Notes (the "Indenture") and
the Escrow Agreement (as defined
herein). See "Description of Exchange
Notes -- Escrowed Interest Account."
Guarantees............................... The Exchange Notes will be jointly
and severally guaranteed on an
unconditional senior secured basis by
all present and future Subsidiaries
of the Company (other than DZ Party
and Limited Investment Subsidiaries).
The guarantees of the Exchange Notes
by present and future Subsidiaries
will be subject to the rights of any
Lenders under any Eligible Credit
Facility. See "Description of
Exchange Notes -- Security."
Optional Redemption...................... The Exchange Notes will be redeemable
at the option of the Company, in
whole or in part, at any time on or
after August 1, 1999 at the
redemption prices set forth herein,
together with accrued and unpaid
interest, if any, to the date of
15
<PAGE>
redemption. See "Description of
Exchange Notes -- Redemption."
In addition, the Company may at any
time redeem up to 100% of the
original principal amount of the
Exchange Notes with the proceeds of
one or more Primary Offerings at a
redemption price of 100% of the
aggregate principal amount thereof,
together with accrued and unpaid
interest to the redemption date.
Security................................. The Exchange Notes will be secured by
(i) a security interest in the
collateral securing the Existing
Notes (including cash, accounts
receivable, inventory, equipment,
general intangibles, intellectual
property rights, books and records
and furnishings and fixtures), (ii) a
pledge of the capital stock of all
current and future Subsidiaries,
(iii) subject to the Company's
obligation to utilize its best
efforts to obtain the consent of
McDonald's Corporation, a mortgage
lien on substantially all of the
Company's real property and
improvements thereon, which mortgage
lien shall be subordinated to a first
mortgage lien in favor of McDonald's
Corporation, and (iv) subject to
certain conditions, mortgage liens on
leasehold interests in the premises
and improvements thereon occupied by
the Company pursuant to leases of
store properties entered into by the
Company after the date of issuance of
the Existing Notes. The holders of
the Exchange Notes will not be
entitled to any liens on leasehold
real estate interests existing prior
to the date of issuance of the
Existing Notes. The security
interests in the collateral securing
the Exchange Notes will be senior to
the security interests securing the
Existing Notes and will be
subordinated to a lien securing the
obligations under the McDonald's
Obligations, any Eligible Credit
Facility and, in certain
circumstances, statutory liens in
favor of certain creditors of the
Company.
Change of Control........................ Upon the occurrence of a Change of
Control, the Company will be required
to make an offer to repurchase all of
the outstanding Exchange Notes at a
purchase price in cash equal to 101%
of the principal amount thereof. Upon
a Change of Control, the Company is
required to comply with substantially
similar provisions governing the
Existing Notes. There can be no
assurance that the Company will be
able to obtain access to sufficient
funds to consummate a Change of
Control Offer for any or all of the
Exchange Notes and the Existing
Notes. See "Description of Exchange
Notes -- Certain Covenants --
Purchase of Exchange Notes Upon a
Change of Control."
16
<PAGE>
Ranking.................................. The Exchange Notes will be senior
secured obligations of the Company,
will rank pari passu in right of
payment with all existing and future
unsubordinated indebtedness of the
Company that is not by its terms
expressly subordinated in right and
priority of payment to the Exchange
Notes (including, but not limited to,
the Existing Notes and any Eligible
Credit Facility) and will be senior
in right of payment to all
subordinated indebtedness of the
Company. As of September 30, 1998,
the Company had $108.3 million of
indebtedness outstanding. See "Risk
Factors -- Substantial Leverage and
Ability to Service Debt."
Certain Covenants........................ The Indenture restricts the ability
of the Company, among other things,
to incur additional indebtedness,
create liens, engage in
sale-leaseback transactions, pay
dividends or make distributions in
respect of its capital stock, make
investments or certain other
restricted payments, issue or sell
stock, enter into transactions with
stockholders or affiliates, effect a
consolidation or merger or sell
assets. The Company is also required
to maintain key man life insurance
and to use its commercially
reasonable efforts to obtain
leasehold mortgages on new store
locations. These limitations are,
however, subject to important
qualifications and exceptions. See
"Description of Exchange Notes --
Certain Covenants."
Risk Factors
See "Risk Factors," immediately following this Summary, for a
discussion of certain information that should be considered in evaluating the
Company, its business and the Exchange Notes.
17
<PAGE>
Summary Financial Data
The following summary of certain financial data of the Company for
each of the years in the two-year period ended December 31, 1996, the
seven-month period ended July 31, 1997 and the five-month period ended December
31, 1997 and balance sheet data as of December 31, 1997, have been derived from
the audited consolidated financial statements of the Company. The consolidated
financial data for the two-month period ended September 30, 1997 and the
nine-month period ended September 30, 1998 and balance sheet data as of
September 30, 1998 have been derived from unaudited consolidated financial
statements of the Company and, in the opinion of the Company's management, have
been prepared on a basis consistent with the audited financial statements and
include all adjustments that are considered by management to be necessary for a
fair presentation of such financial information. Historical data and interim
results are not necessarily indicative of future results, and interim data are
not necessarily indicative of results for a full year. The financial data
presented below with respect to periods prior to the Company's emergence from
Chapter 11 on July 29, 1997 are not comparable to that for periods after such
date because of the application of Fresh Start Accounting with respect to
periods after such date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fresh Start Reporting." The data set
forth below should be read in conjunction with the discussion under "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Predecessor Company Successor Company
---------------------------------------------- -------------------------------
Five
Seven Months Nine
Months Ended Two Months Months
Year Ended Ended December Ended Ended
December 31, July 31, 31, September 30, September 30,
1995 1996 1997 1997 1997 1998
------ ------ --------- --------- ------------- -------------
(Dollars in thousands except per share and location data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue.............................. $259,490 $181,725 $ 82,537 $ 48,485 $ 20,080 $ 98,595
Cost of goods sold......................... 50,227 34,276 14,136 7,311 3,060 15,895
Store operating expenses (1) (2)........... 185,587 140,486 59,267 44,189 16,756 78,445
Selling, general and administrative
expenses (2).......................... 58,201 40,779 11,160 10,244 4,142 20,207
Depreciation and amortization.............. 31,972 21,876 11,920 9,314 3,982 16,654
Operating loss before restructuring
costs and other charges............... (66,497) (55,692) (13,946) (22,573) (7,860) (32,606)
Operating loss............................. (438,657) (55,692) (13,946) (22,573) (7,860) (32,606)
Extraordinary item-- gain on
discharge of debt..................... -- -- 332,165 -- -- --
Net income (loss).......................... (449,245) (83,834) 326,712 (27,966) (10,470) (43,339)
Accretion of Convertible and
Cumulative Preferred Stock to
redemption value...................... -- -- -- (97) (36) (234)
Dividends on 14.5% Cumulative
Preferred Stock....................... -- -- -- -- -- (319)
Net income (loss) attributable to
common shareholders................... (449,245) (83,834) 326,712 (28,063) (10,506) (43,892)
Per common share--
basic and diluted (3):
Loss before extraordinary item........ (8.30) (1.45) (0.09) (7.02) (2.63) (0.36)
Extraordinary gain.................... -- -- 5.75 -- -- --
Net income (loss)..................... (8.30) (1.45) 5.66 (7.02) (2.63) (0.36)
Other Data:
EBITDA (4).................................. (406,685) (55,101) (15,272) (13,259) (3,878) (15,952)
Capital expenditures........................ 51,732 2,672 567 10,642 723 14,865
Store Data:
Company-owned stores at period
end (5)............................... 321 212 210 207 208 200
Franchised stores at period end (6)......... 15 7 -- -- -- --
-------- -------- --------- --------- --------- ---------
Total stores at period end.................. 336 219 210 207 208 200
Operating Ratio:
EBITDA/total interest expense (7)........... -- -- -- -- -- --
Ratio of earnings to fixed charges (8)...... -- -- -- -- -- --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Successor Company
----------------------------------------------------------------------
As of December 31, 1997 As of September 30, 1998 (9)
---------------------------------- ------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (unrestricted)............... $ 8,607 $ 2,527
Restricted cash and investments........................ 19,017 13,868
Total assets........................................... 176,591 161,087
Long-term debt, including current portion.............. 88,193 108,287
Convertible Preferred Stock............................ 13,897 13,122
Cumulative Preferred Stock............................. -- 10,510
Total stockholders' equity (deficit) (excluding
Preferred Stock) ................................ 42,255 (1,471)
</TABLE>
- --------------------
(1) Excludes depreciation and amortization and certain unallocated expenses.
(2) Net of $13.6 million, $0.2 million, $0.0 million, $0.3 million, $0.1
million and $0.7 million of capitalized costs related to the Company's
expansion for the years 1995, 1996, the seven months ended July 31, 1997,
the five months ended December 31, 1997, the two months ended September
30, 1997 and the nine months ended September 30, 1998, respectively.
(3) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, was adopted by the Company in 1997. All periods presented have
been restated to conform to the provisions of SFAS No. 128.
(4) EBITDA represents net earnings (losses) before interest, income taxes,
depreciation and amortization, other income and expense, including
minority interest and the portion of capitalized lease expense
attributable to interest, change in accounting method, extraordinary item
and unallocated reorganization value. EBITDA is presented here to provide
additional information about the Company's operations. EBITDA is not a
measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered as an alternative to (i)
net income (loss) as a measure of performance (or any other measure of
performance under GAAP) or (ii) cash flows from operating, investing or
financing activities as an indicator of cash flows or as a measure of
liquidity.
(5) Includes the Block Party Stores.
(6) The Company no longer has any franchised stores.
(7) EBITDA was insufficient to cover the full amount of total interest
expense by $418.9 million, $61.4 million, $18.5 million and $19.3 million
in each of the years ended December 31, 1995 and 1996, the seven months
ended July 31, 1997 and the five months ended December 31, 1997,
respectively, and $6.5 million and $27.0 million for the two months ended
September 30, 1997 and the nine months ended September 30, 1998,
respectively. Total interest expense does not include all fixed expenses
of the Company. See Note 14 to the Consolidated Financial Statements.
(8) For purposes of this item, "fixed charges" represent interest, the
interest element of rental expense, capitalized interest and amortization
of debt issuance costs, and "earnings" represent income (loss) before
income taxes, extraordinary items, cumulative effect of change in
accounting method and fixed charges. Earnings were insufficient to cover
fixed charges by $445.4 million, $83.8 million, $5.5 million, $28.0
million, $10.5 million and $43.2 million in each of the years ended
December 31, 1995 and 1996, the seven months ended July 31, 1997, the
five months ended December 31, 1997, the two months ended September 30,
1997 and the nine months ended September 30, 1998, respectively.
(9) Based upon an independent appraisal of the fair market value of the
equity interests in the Company, which concluded that the Note Warrants
and the Preferred Unit Warrants have no or a nominal value, the Company
has allocated $100,000 of the gross proceeds of the offering of the Note
Units to the Note Warrants and has allocated 100% of the gross proceeds
of the offering of the Series A and Series B Preferred Stock Units to the
Cumulative Preferred Stock. No assurance can be given that such
allocations will be indicative of the prices at which such securities may
actually trade.
19
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RISK FACTORS
An investment in the Exchange Notes discussed herein involves a high
degree of risk and thus is not appropriate for investors who cannot afford the
loss of their entire investment. In addition to the other information set forth
in this Prospectus, before purchasing the Exchange Notes prospective investors
should give careful consideration to the specific factors set forth below.
Certain information contained in this Prospectus, including information relating
to the Company's expected operations, its strategy for marketing and investing
in store facilities and related financing activities contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of numerous factors, including, but not limited to, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Business" included elsewhere in this
Prospectus.
Substantial Leverage and Ability to Service Debt
The Company is highly leveraged. As of September 30, 1998, the Company
had an aggregate of $108.3 million of outstanding indebtedness.
The Company's ability to make scheduled payments of principal and
interest or to refinance its obligations with respect to its indebtedness will
depend on its financial and operating performance, which, in turn, will be
subject to prevailing economic conditions and to certain financial, business and
other factors beyond the Company's control. For 1996 and 1997 and the first nine
months of 1998, the Company had negative EBITDA before extraordinary items and
unallocated reorganization value of $33.8 million, $15.3 million and $15.9
million, respectively. The Company expects to report negative EBITDA and net
losses for the year ending December 31, 1998. After August 1, 1999, interest on
the Existing Notes and the Notes will no longer be funded from payments out of
Escrow Accounts. There can be no assurance that based on current levels of cash
flow from operations, the Company will have sufficient cash available to pay
such interest as it becomes due. If the Company's cash flow and capital
resources are insufficient to fund its debt service obligations, the Company may
be forced to reduce or delay planned expansion and capital expenditures, sell
assets, obtain additional capital, restructure its indebtedness or file for
protection under the Bankruptcy Code. There can be no assurance that the Company
will achieve or sustain profitability or generate sufficient positive cash flow
or have sufficient capital resources to meet its debt service obligations,
capital expenditure requirements or working capital requirements. Any inability
to do so would have a material adverse effect on the financial condition and
results of operations of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's high degree of leverage could adversely affect the
Company in a number of ways. For example, (i) the ability of the Company to
obtain necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited, (ii)
the Company's level of indebtedness could limit its flexibility in planning for,
or reacting to, changes in its business, (iii) the Company will be more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage, (iv) the Company's degree of indebtedness may make it more
vulnerable to a downturn in its business or the economy generally, (v) the terms
of the existing and future indebtedness restrict, and may restrict, the payment
of dividends by the Company and (vi) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of principal and interest
on its indebtedness and will not be available for other purposes.
History of Net Losses
The Company has experienced substantial net losses. Since emerging
from bankruptcy under Chapter 11 of the Bankruptcy Code, for the five-month
period ended December 31, 1997 and for the nine months ended September 30, 1998,
the Company incurred a net loss before extraordinary items of approximately
$28.0 million and $43.3 million, respectively. The Company expects to incur net
losses for the remainder of 1998. As of September 30, 1998, the Company had an
accumulated deficit of approximately $71.3 million. No assurance can be given
that net losses will not continue to occur in future periods.
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<PAGE>
Successful Execution of Turnaround Plan
The Company is implementing a new business strategy, which consists of
a number of cost-cutting and revenue enhancing initiatives, including an
extensive FunCenter renovation program, a revamped marketing and promotional
campaign and an enhanced hiring and training program for store managers. While
the Company has completed planned renovations at 60% of the FunCenters as of
November 1, 1998, it has experienced significant delays and cost overruns in
completing the renovation program as originally contemplated, and there can be
no assurance that such program can be completed in a timely manner, if at all.
Implementation of the Company's business strategy also will require the
successful repositioning of the Company's brand image with its target customers,
which will depend, in part, upon successful marketing and promotional campaigns,
as well as customer acceptance of product changes. In connection with delays
experienced by the Company in its renovation program, the Company has
selectively deferred some of its marketing and promotional campaign, which has
affected, in turn, the Company's ability to attract additional customers. As a
result of its strategy of developing promotional events with partners, the
Company depends on the success of the product offerings of its promotional
partners to attract customers and increase visit frequency, which success is
largely beyond the Company's control and subject to unpredictable shifts in
consumer tastes. Finally, successful implementation of the Company's strategy
will depend upon its ability to attract and retain qualified FunCenter managers
capable of implementing the Company's revised operating strategy. The Company's
new strategy entails a heightened degree of interaction between Company
employees and customers, which has required the Company to implement more
selective hiring practices and to provide enhanced training for FunCenter
managers and employees.
Comparable store revenues during the first nine months of 1998
declined 2%, as compared to a decline of 17% during the first nine months of
1997. The Company's revenues in the first nine months of 1998 were less than
expected due to (i) construction delays in completing its FunCenter renovation
program and related business disruptions, (ii) corresponding delays in launching
certain marketing and promotional programs, (iii) unseasonably warm spring
weather in many parts of the United States, which diminished demand for a
variety of indoor entertainment activities, (iv) transitional staffing and
training expenses associated with the introduction of new entertainment
attractions at FunCenters and (v) delays in raising capital to continue funding
the Company's Turnaround Plan.
As a result of these factors, the Company experienced negative
comparable store sales and EBITDA for the third quarter of 1998 and a
significant decrease in net working capital versus the prior year period. The
Company may require additional capital to continue funding its operations and
implementing the Turnaround Plan. The Company is considering the sale of certain
non-core assets to provide additional capital for its operations. See "Risk
Factors -- Successful Implementation of Turnaround Plan." "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Business -- Business Strategy."
If the Company does not succeed in increasing revenues, the expected
improvement in the Company's results of operations would likely not materialize
and the Company may require additional capital beyond that provided by the Unit
Offerings (which may not be available). Such developments would make it more
difficult to reverse declines in comparable store sales and/or earnings which,
in turn, could reasonably be expected to have a material adverse effect on the
Company's liquidity and its ability to pay its debts as they come due, including
the Exchange Notes. Further, if the implementation of the Company's strategy is
not successful and the Company is unable to generate sufficient operating funds
to pay interest on the Exchange Notes, the Existing Notes and its other
obligations and to fund its additional capital requirements, there can be no
assurance that alternative sources of capital would be available to the Company
on commercially reasonable terms, if at all.
Security for the Exchange Notes
Under the Collateral Agreements (as defined herein), the obligations
under the Exchange Notes and the Indenture will be secured by (i) security
interests in and liens on personal property and assets of the Company (including
cash, accounts receivable, inventory, equipment, general intangibles,
intellectual property rights, books and records and furnishings and fixtures),
(ii) a pledge of the capital stock of all present and future Subsidiaries, (iii)
subject to the Company's covenant under the Indenture to utilize its best
efforts to obtain the consent of McDonald's Corporation, a mortgage lien on
substantially all of the real property and improvements thereon owned by the
Company, which
21
<PAGE>
mortgage lien shall be subordinated to a first mortgage lien in favor of
McDonald's Corporation, and (iv) a mortgage lien on leasehold interests in the
premises and improvements thereon occupied by the Company pursuant to leases of
store properties entered into by the Company after the date of issuance of the
Existing Notes (subject to the Company utilizing its best efforts to deliver
such Mortgages (as hereinafter defined), substantially in the form attached to
the Indenture for the purpose of securing such mortgage liens). See "Description
of Certain Indebtedness -- McDonald's Note." Holders of the Exchange Notes will
not be entitled to any Liens on leasehold real estate interests existing prior
to the date of issuance of the Existing Notes. The security interests in the
collateral securing the Exchange Notes will be subordinated, in certain
circumstances, to certain statutory liens of creditors of the Company and to the
security interests and liens securing indebtedness under any Eligible Credit
Facility, including, without limitation, the Revolving Credit Facility, and
senior to the security interests securing the Existing Notes. The pledge in
favor of the Trustee of capital stock of present and future Subsidiaries also
will be senior to the pledge of such stock in favor of the trustee (the
"Existing Notes Trustee") under the indenture relating to the Existing Notes
(the "Existing Notes Indenture").
Accordingly, prospective holders of the Exchange Notes should not
assume that valid security interests will be obtained with respect to all or
substantially all of the identified classes of collateral that are entitled to
such security interests. Moreover, to the extent security interests in or liens
on the collateral securing the Exchange Notes were granted by the Company, or
otherwise created by operation of law, on or after the date on which the
security interests in and liens on the collateral securing the Existing Notes
were perfected (all such security interests and liens, "Intervening Liens"),
holders of such Intervening Liens would be entitled to the proceeds from the
sale of such collateral to the extent of the obligations secured by such
Intervening Liens prior to any payment to holders of the Exchange Notes.
In the event of a default on the Exchange Notes, the proceeds from the
sale of the collateral securing the Exchange Notes in a liquidation proceeding
will likely be insufficient to satisfy the Company's obligations under the
Exchange Notes in full, as well as the McDonald's Obligations and the Company's
obligations under an Eligible Credit Facility, including, without limitation,
the Revolving Credit Facility, and the Existing Notes. The security interest in
the collateral securing the Exchange Notes will be subordinated to the security
interests securing an Eligible Credit Facility, certain statutory liens of
creditors of the Company and, to the extent of any fee interest in real property
of the Company, the McDonald's Obligations. In the event of the sale of any
collateral securing the Exchange Notes, an Eligible Credit Facility, including,
without limitation, the Revolving Credit Facility and/or the McDonald's
Obligations in any such liquidation proceeding, the holders of the Exchange
Notes will not receive any proceeds from the sale of such collateral until the
lenders under an Eligible Credit Facility, including, without limitation, the
Revolving Credit Facility, the holders of the McDonald's Obligations and the
holders of such statutory liens are paid in full. The amount to be received upon
any such sale of collateral would be dependent upon numerous factors, including
the conditions, age and useful life of the collateral at the time of such sale,
as well as the timing and the manner of the sale. A significant portion of the
Company's assets consist of leasehold improvements, and most of the Company's
assets are located on leaseholds. Because leasehold improvements may be deemed
to be a part of either the real property covered by the lease (which real
property is not owned by the Company) or the Company's real estate leasehold
interests (which interests are not included in the collateral available for the
Exchange Notes), there can be no assurance as to whether or to what extent such
improvements would be available as collateral security for the Exchange Notes.
Moreover, the ability of the Collateral Agent to obtain possession of collateral
located on leaseholds may be subject to conflicting claims of landlords. To the
extent third parties hold Permitted Liens, such third parties may have rights
and remedies with respect to the property subject to such liens that, if
exercised, could adversely affect the value of the collateral. Given the
intangible nature of certain of the collateral, any such sale of such collateral
separately from the Company as a whole may not be feasible. Additionally, the
inclusion of the Company's fixtures in the collateral securing the Exchange
Notes will be limited by (a) the extent to which such fixtures are deemed to be
personal property and (b) the extent to which any applicable state laws would,
for purposes of perfecting security interests with respect thereto, require that
the Collateral Agent make certain filings in applicable real estate land
records.
Furthermore, the right of holders of the Exchange Notes to benefit
from the security interests in and liens upon the collateral securing the
Exchange Notes will depend, among other things, upon the value ascribed to such
collateral in any bankruptcy proceeding commenced by or against the Company. For
example, there can be no assurance that a bankruptcy court will determine that
the value of the collateral securing the Exchange Notes would be based upon a
22
<PAGE>
"going concern" valuation as opposed to a liquidation valuation. The use of a
liquidation valuation would likely have a material effect upon the sufficiency
of the collateral securing the Exchange Notes. To the extent that the value
ascribed by the bankruptcy court to the collateral securing the Exchange Notes
were less than the total amount of the allowed claim relating to the
indebtedness (including all principal and accrued interest thereon) outstanding
under the Exchange Notes, such claim would not be fully secured. Accordingly,
notwithstanding the subordination agreements contained in the New Intercreditor
Agreement (as defined herein), there can be no assurance that the holders of the
Exchange Notes would recover the full amount of such claim, including
post-petition interest or fees, costs or expenses to which the holders of the
Exchange Notes may otherwise be entitled under the Indenture and the Collateral
Agreements.
Effect of Bankruptcy upon Exercise of Remedies
The right of the Collateral Agent to repossess and dispose of the
collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company prior to the Collateral Agent
having repossessed and disposed of the collateral. Under the U.S. Bankruptcy
Code, a secured creditor such as the Collateral Agent is prohibited from
repossessing its security from a debtor in a bankruptcy case, or from disposing
of security repossessed from such debtor, without bankruptcy court approval.
Moreover, the Bankruptcy Code permits the debtor to continue to retain and to
use collateral even though the debtor is in default under the applicable debt
instruments; provided that the secured creditor is given "adequate protection"
as such term is interpreted by the relevant bankruptcy court.
If a bankruptcy proceeding were to be commenced by or filed against
the Company or any of its Subsidiaries within 90 days of the date on which the
Company granted to the holders of the Exchange Notes security interests in and
liens on the collateral securing such Exchange Notes, such grant could be deemed
to be a "voidable preference" by the bankruptcy court in any such bankruptcy
proceeding. If such a grant were deemed to be a voidable preference, the
security interests in and liens on the collateral securing the Exchange Notes
could be voided, and the Company could be directed to release such security
interests and liens securing such collateral. In addition, any payments or other
distributions made in respect of the Exchange Notes within such 90-day period
could be susceptible to a preference suit by the bankruptcy estate for recovery
of such payments or distributions.
Restrictive Debt Covenants
The Indenture, the Existing Notes Indenture and the Revolving Credit
Facility contain a number of significant covenants which will impose significant
operating and financial restrictions on the Company and its Subsidiaries. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company and its Subsidiaries to incur
additional indebtedness, pay dividends, repay other indebtedness prior to stated
maturities or amend other debt instruments, create liens on assets, make
investments or acquisitions, sell assets, engage in mergers or consolidations,
make capital expenditures, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities. In addition, the
agreements governing the Convertible Preferred Stock, the Existing Warrants, the
Ten Year Warrants and the Preferred Units Warrants grant the holders of such
securities certain antidilution and other protective restrictions. These
restrictions could limit the ability of the Company and its subsidiaries to
effect future financings, make needed capital expenditures, withstand a future
downturn in the Company's business or the economy in general, or otherwise
conduct necessary corporate activities. In addition, the Revolving Credit
Facility also requires the Company to maintain compliance with certain financial
ratios. The ability of the Company to comply with such ratios may be affected by
events beyond the Company's control. A failure by the Company or its
subsidiaries to comply with these restrictions could lead to a default under the
terms of the Indenture, the Existing Notes Indenture and the Revolving Credit
Facility or any other Eligible Credit Facility, notwithstanding the ability of
the Company to meet its debt service obligations. Upon the occurrence of an
Event of Default (as defined herein) or an event of default under the Existing
Notes Indenture or an Eligible Credit Facility, the holders of the Exchange
Notes, the Existing Notes or the Lenders could elect to declare all amounts
outstanding under the Exchange Notes, the Existing Notes or such Eligible Credit
Facility, respectively, together with accrued and unpaid interest thereon, to be
due and payable, and there can be no assurance that the Company and its
subsidiaries would be able to make such payments or borrow sufficient funds from
alternative sources to make any such payment. Even if additional
23
<PAGE>
financing could be obtained, there can be no assurance that it would be on
commercially reasonable terms. If the Company were unable to repay all such
indebtedness when due, the holders of the Exchange Notes, the Existing Notes and
the Lenders under any Eligible Credit Facility could proceed against their
collateral, and there can be no assurance that the assets of the Company would
be sufficient to repay such indebtedness in full. See "Description of Exchange
Notes" and "Description of Certain Indebtedness."
Fraudulent Transfer Considerations Relating to Subsidiary Guarantees
The obligations of any Subsidiary Guarantor (as defined herein) under
its Subsidiary Guarantee and the grant by any Subsidiary Guarantor of a security
interest under the Collateral Agreements (as defined herein) may be subject to
review under applicable fraudulent conveyance statutes in the event of the
bankruptcy or other financial difficulty of any such Subsidiary Guarantor. For
example, under such laws, if a court in a lawsuit by an unpaid creditor or
representative of creditors of a Subsidiary Guarantor, were to find that at the
time such Subsidiary Guarantor incurred the indebtedness evidenced by its
Subsidiary Guarantee or pledged its assets to secure its obligations thereunder,
it: (i) received less than fair consideration or reasonably equivalent value
therefor and (ii) either (a) was insolvent, (b) was rendered insolvent by such
Subsidiary Guarantee or pledge, (c) was engaged in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small capital
or (d) intended to incur or believed (or reasonably should have believed) that
it would incur debts beyond its ability to pay such debts as they matured, such
court could void such obligations under its Subsidiary Guarantee and/or the
security interest in its assets and direct the return of any amounts paid with
respect thereto. Moreover, regardless of the factors identified in the foregoing
clauses (i) and (ii), a court could take such action if it found that the
Subsidiary Guarantee was entered into or the security interest was granted with
actual intent to hinder, delay or defraud creditors. The measure of insolvency
for purposes of the foregoing will vary depending on the law of the jurisdiction
being applied. Generally, however, an entity would be considered insolvent if
the sum of its debts (including contingent and unliquidated debts) were greater
than all of its property at a fair valuation or if the present fair salable
value of its assets were less than the amount that would be required to pay its
probable liability on its existing debts as they become absolute and matured.
A court will likely find that a Subsidiary Guarantor did not receive
fair consideration or reasonably equivalent value for its Subsidiary Guarantee
to the extent that its liability thereunder exceeds any direct benefit it
received from the issuance of the Exchange Notes. Each Subsidiary Guarantee will
limit the liability of the Subsidiary Guarantor thereunder to the maximum amount
that it could pay without the Subsidiary Guarantee being deemed a fraudulent
transfer. There can be no assurance that this limitation will be effective. If
this limitation is not effective, the issuance of a Subsidiary Guarantee by a
Subsidiary Guarantor could be deemed to render insolvent such Subsidiary
Guarantor. If this limitation is effective, there can be no assurance that the
limited amount so guaranteed would be sufficient to pay amounts owed under the
Exchange Notes in full.
Repurchase of Exchange Notes upon a Change of Control
In the event of a Change of Control, the Company is required under the
Indenture to offer to purchase the Exchange Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. See "Description of Exchange Notes -- Repurchase upon
Change of Control" and "-- Certain Definitions." The Company has similar
repurchase obligations with respect to the Existing Notes under the Existing
Notes Indenture. In the event that the Company is required to make an offer to
purchase the Exchange Notes and the Existing Notes upon the occurrence of a
Change of Control, there can be no assurance that it would have sufficient funds
available to purchase any or all of the Exchange Notes and the Existing Notes
tendered, and the Company would likely be required to refinance the Exchange
Notes and the Existing Notes. There can be no assurance that the Company would
be able to accomplish such refinancing or, if such refinancing were to occur,
that it would be accomplished on commercially reasonable terms.
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<PAGE>
Use of Proceeds from Asset Sales
If the Company or any Subsidiary consummates an Asset Sale and is
required pursuant to the Indenture to apply the net proceeds from such Asset
Sale towards the repurchase of the Exchange Notes, such net proceeds are also
required to be applied towards the repurchase of Existing Notes in accordance
with the terms of the Existing Notes Indenture. Accordingly, there can be no
assurance that the net proceeds from such an Asset Sale would be sufficient to
permit the Company to repurchase any or all of the Exchange Notes.
Absence of Public Market
The NASD has designated the Private Notes as securities eligible for
trading in the PORTAL market of the NASD. However, the Exchange Notes are new
securities for which there is currently no active trading market. The Company
does not intend to list the Exchange Notes on any national securities exchange
or to seek the admission thereof to trading in the Nasdaq National Market
system, and there can be no assurance as to the development of any market or
liquidity of any market that may develop for the Exchange Notes. If a market for
the Exchange Notes develops, the price of such Exchange Notes may fluctuate and
liquidity may be limited. If a market for the Exchange Notes does not develop,
purchasers may be unable to resell such Exchange Notes for an extended period of
time, if at all. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that, if a
market for the Exchange Notes were to develop, such market would not be subject
to similar disruptions.
Noncomparability of Financial Information
Information reflecting the results of operations and financial
condition of the Company since it emerged from Chapter 11 in July 1997 is not
comparable to prior periods due to: (i) store closings undertaken during the
Company's reorganization; (ii) the replacement of the management team and the
restructuring of the Company's store operations and general and administrative
activities; (iii) costs and expenses relating to the Company's bankruptcy case
and the impact of the restructuring or extinguishment of certain interests and
liabilities; and (iv) the application of Fresh Start Accounting, pursuant to
which the Company's assets have been stated at "reorganization value," which is
defined as the value of the entity (before considering liabilities) on a
going-concern basis following the reorganization. This valuation approximates
the amount a willing buyer would pay for the assets of the Company immediately
after reorganization. Accordingly, there is only limited financial and operating
history of the Company for a potential investor to evaluate. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Key Personnel
The Company's success is dependent upon its senior managers, including
Chet Obieleski, who is the President, the Chief Executive Officer and the Chief
Operating Officer; Robert G. Rooney, who is the Senior Vice President and the
Chief Financial and Administrative Officer; Sharon L. Rothstein, who is the
Senior Vice President of Marketing and Entertainment; and Jeffrey Sasson, who is
the Senior Vice President of Retail and Corporate Services. The loss of the
services of any such individuals could have a material adverse effect upon the
Company.
Control by Principal Stockholders
The Company's executive officers and directors (and their respective
affiliates) (collectively, the "Principal Stockholders") beneficially own 99.5%
of the Common Stock. See "Principal Stockholders." The Principal Stockholders,
if voting together, have sufficient voting power to elect a majority of the
Company's directors, exercise control over the business, policies and affairs of
the Company and, in general, determine the outcome of any corporate transaction
or other matters submitted to the stockholders for approval (other than with
respect to a decision to file a petition on behalf of the Company under Chapter
11 under the Bankruptcy Code), such as any proposed amendment to the certificate
of incorporation of the Company, the authorization of additional shares of
capital stock, and any merger, consolidation, sale of all or substantially all
of the assets of the Company, and could prevent or cause a Change of Control of
the Company, all of which may adversely affect the Company.
25
<PAGE>
Seasonality
The Company's FunCenters typically experience seasonal fluctuations in
their revenues, with generally higher revenues occurring in the first quarter of
the year due to the fact that many of the Company's facilities are located in
cold weather regions where children are unable to play outside during this time
of year. In 1997, the Company's FunCenters generated 30% of their revenue in the
first quarter versus 25%, 24% and 22% in the second, third and fourth quarters,
respectively. These fluctuations in revenues are primarily influenced by the
school year and the weather.
Industry Conditions/Competition
The Company competes against a wide variety of concepts vying for
family leisure time and entertainment spending. These competing concepts
encompass a broad spectrum of entertainment opportunities, including family
entertainment centers, theme parks, movie theaters and other in-home and
out-of-home entertainment activities. In particular, the Company competes in the
pay-for-play children's entertainment center industry by targeting its
activities and programming to children ages two to twelve. This industry is
affected by general and local economic conditions, demographic trends and
consumer tastes over which the Company has no control. Consumer tastes, in
particular, are subject to rapid changes which could result in the Company's
activities falling out of favor with its target customers, requiring it to
invest in new equipment for FunCenters. The Company's future revenues will
depend to a significant extent upon its ability to respond to changes in
consumer tastes. The performance of individual FunCenters may be affected by a
variety of factors such as the location of competing facilities, increased labor
and employee benefit costs and the availability of experienced management and
hourly employees.
Competitive market conditions, including the emergence of significant
new competitors, could materially adversely affect the Company's ability to
improve its results of operations. Such new competitors, which may include The
Walt Disney Company (which has a family entertainment concept in two locations
and has announced plans to open additional locations), and certain existing
competitors have or may have longer operating histories, substantially greater
name recognition and more extensive financial, technical, marketing, sales and
distribution resources. There can be no assurance that the Company will be able
to compete successfully against existing and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.
Limitation on Use of Net Operating Losses and Built-in Losses
The Company was required to reduce its Net Operating Loss
carryforwards ("NOL") as a result of the cancellation of indebtedness pursuant
to the confirmation of the Company's Plan of Reorganization under Chapter 11
(the "Plan of Reorganization").
On December 31, 1997, the Company's NOLs were approximately $178
million (after taking into account the reduction due to the cancellation of
indebtedness in connection with the Plan of Reorganization). As a result of its
reorganization under Chapter 11, the Company is treated as having experienced an
ownership change under Internal Revenue Code Section 382 (the "Code"). Thus, the
Company's ability to offset income in each post-reorganization taxable year by
its remaining NOLs and built-in losses (including depreciation and amortization
deductions of any portion of the Company's basis in assets with built-in losses)
is limited to an amount not to exceed the aggregate value of the Common Stock
immediately before such change in control (taking into account in such
calculation, however, any increase in value resulting from any surrender or
cancellation of creditors' claims in connection with the Plan of Reorganization)
multiplied by the long-term tax-exempt rate published monthly by the Internal
Revenue Service. Accordingly, the Company's use of approximately $137 million of
these NOLs is limited to approximately $4 million per year as of January 1,
1998, and may be further limited in the event of subsequent ownership changes
under the Code Section 382.
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Failure to Exchange Private Notes
The Exchange Notes will be issued in exchange for Private Notes only
after timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under any
duty to give notification of defects or irregularities with respect to tenders
of Private Notes for exchange. Private Notes that are not tendered or are
tendered but not accepted will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Private Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes will be
required to comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. Each broker-dealer
who holds Private Notes acquired for its own account as a result of market
making or other trading activities and who receives Exchange Notes for its own
account in exchange for such Private Notes pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. To the extent that Private Notes are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Private Notes could be adversely affected due to the limited amount,
or "float," of the Private Notes that are expected to remain outstanding
following the Exchange Offer. Generally, a lower "float" of a security results
in less demand to purchase such security and could, therefore, result in lower
prices for such security. For the same reason, to the extent that a large amount
of Private Notes are not tendered or are tendered and not accepted in the
Exchange Offer, the trading market for the Exchange Notes could be adversely
affected. See "Plan of Distribution" and "The Exchange Offer."
In the event the Exchange Offer is consummated, the Company will not
be required to register any Private Notes not tendered and accepted in the
Exchange Offer. In such event, holders of Private Notes seeking liquidity in
their investment would have to rely on exemptions to the registration
requirements under the securities laws, including the Securities Act. Following
the Exchange Offer, none of the Private Notes will be entitled to the contingent
increase in interest rate provided (in the event of a failure to consummate the
Exchange Offer in accordance with the terms of the Registration Rights
Agreement) pursuant to the Private Notes.
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THE EXCHANGE OFFER
This summary of the material provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement (as defined herein), a copy of which has been filed on August 14, 1998
as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
Purpose and Effect of the Exchange Offer
The Company sold the Note Units to Jefferies & Company, Inc. (the
"Initial Purchaser") on July 17, 1998 (the "Issue Date") pursuant to the terms
of the Purchase Agreement dated July 9, 1998 between the Initial Purchaser and
the Company (the "Purchase Agreement"). The Initial Purchaser subsequently
resold the Note Units to "qualified institutional buyers" in reliance on Rule
144A under the Securities Act and to a limited number of institutional
"accredited investors" (as defined in Rule 501(A)(1), (2), (3) or (7) under the
Securities Act). In connection with the offering of the Note Units, the Company
and the Initial Purchaser entered into a Registration Rights Agreement dated as
of July 17, 1998 (the "Registration Rights Agreement").
The Company agreed with the Initial Purchaser pursuant to the
Registration Rights Agreement, for the benefit of the Holders, that it would use
its best efforts, at its cost, after the Issue Date to file and cause to become
effective a registration statement with respect to a proposed offer (the
"Exchange Offer Registration Statement") to exchange the Private Notes for an
issue of notes with terms identical in all material respects to the Private
Notes (except that the Exchange Notes will not contain terms with respect to
transfer restrictions and contingent interest). As soon as practicable after
such registration statement is declared effective, the Company intends to offer
the Exchange Notes in return for surrender of the Private Notes. Such offer will
remain open for not less than 30 calendar days after the date notice of the
Exchange Offer is mailed to holders of the Private Notes. For each of the
Private Notes properly surrendered to the Company under the Exchange Offer, the
Holder will receive Exchange Notes of equal principal amount. Interest on each
Exchange Note will accrue from the last Interest Payment Date on which interest
was paid on the Private Notes so surrendered. In the event that applicable
interpretations of the staff of the Commission do not permit such an Exchange
Offer, or under certain other circumstances set forth in the Registration Rights
Agreement, the Company shall, at its cost, use its best efforts to cause to
become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to resales of the Private Notes and to keep such
registration statement effective until the expiration of the time period
referred to in Rule 144(k) under the Securities Act, as in effect from time to
time. The Company will, in the event of such a shelf registration, provide to
each Holder copies of the prospectus, notify each Holder when a registration
statement for the Private Notes has become effective and take certain other
actions as are required to permit resales of the Private Notes. A Holder that
sells its Private Notes pursuant to a Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions under the Securities Act in connection with
such sales and will be bound by the provisions of the Registration Rights
Agreement that are applicable to such a holder (including certain
indemnification obligations).
In the event that neither the Exchange Offer Registration Statement
nor the Shelf Registration Statement has been filed on or prior to the 120th day
after the Issue Date, then commencing on the day after the 120th day after the
Issue Date, additional interest shall accrue on the Private Notes over and above
any stated interest at a rate of 0.25% per annum of the principal amount of such
Private Notes for the first 90 days commencing on the 120th day after the Issue
Date, such additional interest rate increasing by an additional 0.25% per annum
at the beginning of each subsequent 90-day period. If neither the Exchange Offer
Registration Statement nor the Shelf Registration Statement is declared
effective on or prior to the 180th day after the Issue Date, then commencing on
the 180th day after the Issue Date, additional interest shall accrue on the
Private Notes over and above any stated interest at a rate of 0.25% per annum of
the principal amount of such Private Notes for the first 90 days immediately
following the 120th day after the Issue Date, such additional interest rate
increasing by an additional 0.25% per annum at the beginning of each subsequent
90-day period. If (A) the Company has not exchanged Exchange Notes for all
Private Notes validly tendered in accordance with the terms of the Exchange
Offer on or prior to the 210th day after the Issue Date, (B) if applicable, a
Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective
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at any time prior to the date which is 36 months after the Issue Date and is not
declared effective again within five business days or (C) pending the
announcement of a material corporate transaction, the Company issues a written
notice that a Shelf Registration Statement or Exchange Offer Registration
Statement is unusable and the aggregate number of days in any 365-day period for
which all such notices issued or required to be issued, have been, or were
required to be, in effect exceeds 120 days in the aggregate or 30 days
consecutively, in the case of a Shelf Registration Statement, or 15 days in the
aggregate in the case of an Exchange Offer Registration Statement, then
additional interest shall accrue on the Private Notes over and above any stated
interest at a rate of 0.25% per annum of the principal amount of such Private
Notes for the first 90 days commencing on the (x) 210th day after the Issue
Date, in the case of (A) above, (y) the day such Shelf Registration Statement
ceases to be effective without being declared effective again within five
business days in the case of (B) above, or (z) the day the Exchange Offer
Registration Statement or Shelf Registration Statement ceased to be usable in
case of clause (C) above, such additional interest rate increasing by an
additional 0.25% per annum at the beginning of each such subsequent 90-day
period; provided, however, that the additional interest rate on the Private
Notes may not exceed at any one time in the aggregate 1.00% per annum; and
provided further that (1) upon the filing of the Exchange Offer Registration
Statement or Shelf Registration Statement, (2) upon the effectiveness of the
Exchange Offer Registration Statement or Shelf Registration Statement, or (3)
upon the exchange of Exchange Notes for all Private Notes tendered, or upon
effectiveness of a Shelf Registration Statement which had ceased to remain
effective, as the case may be, additional interest on the Private Notes as a
result of the relevant default shall cease to accrue.
If the Company effects the Exchange Offer Registration Statement, it
will be entitled to close the Exchange Offer Registration Statement 30 calendar
days after the commencement thereof, provided that it has accepted all Private
Notes theretofore validly surrendered in accordance with the terms of the
Exchange Offer Registration Statement. Private Notes not tendered in the
Exchange Offer Registration Statement will bear interest at the rate set forth
on the cover page of the Offering Circular dated July 9, 1998 and be subject to
all of the terms and conditions specified in the Indenture and to the transfer
restrictions described therein under the caption "Notice to Investors."
Following the completion of the Exchange Offer, Holders of the Private
Notes not tendered will not have any further registration rights and those
Private Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for a Holder's Private Notes could be
adversely affected upon completion of the Exchange Offer if such Holder does not
participate in the Exchange Offer. See "Risk Factors -- Failure to Exchange
Private Notes."
Each Holder participating in the Exchange Offer Registration Statement
shall be required to represent to the Company that at the time of the
consummation of the Exchange Offer Registration Statement (i) any Exchange Notes
received by such Holder will be acquired in the ordinary course of its business,
(ii) such Holder will have no arrangements or understanding with any person to
participate in the distribution of the Private Notes or Exchange Notes within
the meaning of the Securities Act, (iii) such Holder is not an "affiliate" (as
defined in Rule 405 of the Securities Act) of the Company, or if it is an
affiliate, such Holder will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, (iv) if such Holder
is not a broker-dealer, that it is not engaged in, and does not intend to engage
in, the distribution of the Exchange Notes and (v) if such Holder is a
broker-dealer, that it will receive Exchange Notes for its own account in
exchange for Private Notes that were acquired as a result of market-making
activities or other trading activities and that it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
Under existing Commission interpretations, the Exchange Notes will, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided that, in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act is delivered upon resale by such
broker-dealers in connection with resales of the Exchange Notes. The Company has
agreed, for a period of 180 days after the consummation of the Exchange Offer,
to make available a prospectus meeting the requirements of the Securities Act to
any such broker-dealer for use in connection with any resale of any Exchange
Note acquired in the Exchange Offer. A broker-dealer which delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement, including certain
indemnification obligations. Any Holder who tenders in the Exchange
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<PAGE>
Offer for the purpose of participating in a distribution of the Exchange Notes
cannot rely on this interpretation by the Commission's staff and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction.
This Prospectus, together with the accompanying Letter of Transmittal,
is being sent to all registered Holders of Private Notes as of November 15, 1998
(the "Record Date"). The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Private
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering Holders for the purpose of receiving Exchange Notes from
the Company and delivering Exchange Notes to such Holders.
If any tendered Private Notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
such unaccepted Private Notes will be returned, without expense, to the
tendering Holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Private Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "-- Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on January 22, 1999, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In the event that the
Exchange Offer is extended, it will remain in effect for a minimum of an
additional five business days and a maximum of an additional 10 business days.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered Holders of Private Notes an announcement thereof, each prior to 5:00
p.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time.
The Company reserves the right, in its sole discretion, (i) to delay
acceptance of any Private Notes, to extend the Exchange Offer or to terminate
the Exchange Offer and to refuse to accept Private Notes not previously
accepted, if any of the conditions set forth herein under "-- Termination" shall
have occurred and shall not have been waived by the Company (if permitted to be
waived by the Company), by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, and (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof. If the Exchange Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose such amendment in a manner reasonably calculated to inform the Holders
of such amendment.
Without limiting the manner in which the Company may choose to make
public announcements of any delay in acceptance, extension, termination or
amendment of the Exchange Offer and except as required by the Securities Act,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
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Interest on the Exchange Notes
Interest was paid on the Private Notes on November 1, 1998 to Holders
of record of the Private Notes on October 15, 1998. Interest on the Exchange
Notes will accrue from November 1, 1998 (the last Interest Payment Date on which
interest was paid on the Private Notes so surrendered). Holders who exchange
their Private Notes for Exchange Notes will receive the same interest payment on
February 1, 1999 (the first interest payment date with respect to the Exchange
Notes assuming the Expiration Date is not extended beyond such date) that they
would have received had they not accepted the Exchange Offer. The interest to be
paid on the Exchange Notes on February 1, 1999 will be paid to the Holders of
record on January 15, 1999 of the Private Notes surrendered for exchange.
Procedures for Tendering
Only a Holder of Private Notes may tender its Private Notes in the
Exchange Offer, except as set forth in the following two paragraphs. To tender
in the Exchange Offer, a Holder must complete, sign and date the Letter of
Transmittal, or a copy thereof, have the signatures thereof guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such Letter
of Transmittal or such copy, together with any corresponding certificate or
certificates representing the Private Notes (unless such tender is being
effected pursuant to the procedure for book-entry transfer described below) and
any other required documents, to the Exchange Agent, prior to 5:00 p.m., New
York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Private Notes by
causing DTC to transfer such Private Notes into the Exchange Agent's account in
accordance with the DTC's procedure for such transfer. Although delivery of
Private Notes may be effected through book-entry transfer into the Exchange
Agent's account at the DTC, the Letter of Transmittal (or copy thereof) with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the Exchange Agent at its
addresses set forth herein under "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
If delivery of the Private Notes is to be made by book-entry transfer
to the account maintained by the Exchange Agent at the DTC, the Letter of
Transmittal need not be manually executed; provided, however, that tenders of
Private Notes must be effected in accordance with the procedures mandated by
ATOP. To tender Private Notes through ATOP, the electronic instructions sent to
DTC and transmitted by DTC to the Exchange Agent must contain the character by
which the participant acknowledges its receipt of and agrees to be bound by the
Letter of Transmittal.
The tender by a Holder of Private Notes will constitute an agreement
between such Holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its
address set forth herein. Holders may also request that their respective
brokers, dealers, commercial banks, trust companies or nominees effect such
tender for such Holders.
The method of delivery of Private Notes and the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holders. Instead of delivery by mail, it is recommended that Holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure timely delivery. No Letter of Transmittal or Private Notes
should be sent to the Company.
Any owner of a beneficial interest in an Old Global Note holding
through a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should contact such entity through
which it holds such beneficial interest promptly and instruct such entity to
tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor
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<PAGE>
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution") unless the Private Notes tendered pursuant thereto are
tendered (i) by a registered Holder who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" of the Letter
of Transmittal or (ii) for the account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered Holder listed therein, such Private Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender the
Private Notes on behalf of the registered Holder, in either case signed as the
name of the registered Holder or Holders appears on the Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with this Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Private Notes, neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Private Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Private Notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering Holder unless otherwise provided in the
Letter of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding subsequent
to the Expiration Date, or, as set forth under "-- Termination," to terminate
the Exchange Offer.
Guaranteed Delivery Procedures
Holders who wish to tender their Private Notes and (i) whose Private
Notes are not immediately available, or (ii) who cannot deliver their Private
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, or cannot complete the procedure for
book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent
received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and
address of the Holder of Private Notes, the certificate number or
numbers, if any, of such Holder's Private Notes and the principal
amount of such Private Notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal (or copy
thereof), together with the certificate(s) representing the Private
Notes to be tendered in prior form for transfer
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<PAGE>
and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of
Transmittal (or copy thereof), together with the certificate(s)
representing all physically tendered Private Notes in proper form for
transfer (or confirmation of a book-entry transfer into the Exchange
Agent's account at the DTC of Private Notes delivered electronically)
and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five business days after the
Expiration Date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Private Notes in the Exchange Offer, a
written, facsimile or electronic ATOP (for DTC participants) transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date and prior
to acceptance for exchange thereof by the Company. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Private Notes to be
withdrawn (the "Depositor"), (ii) identify the Private Notes to be withdrawn
(including the certificate number or numbers and principal amount of such
Private Notes), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Private Notes were
tendered (including any required signature guarantee) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to the
Private Notes to register the transfer of such Private Notes into the name of
the Depositor withdrawing the tender and (iv) specify the name in which any such
Private Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly tendered as set forth under "--
Procedures for Tendering." Any Private Notes that have been tendered for
exchange but are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Private Notes may be retendered by following one of the proce dures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
Termination
Notwithstanding any other term of the Exchange Offer, the Company will
not be required to accept for exchange, or exchange Exchange Notes for, any
Private Notes not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Private
Notes if (i) any injunction, order or decree shall have been issued by any court
or by or before any governmental agency with respect to the Exchange Offer,
which, in the Company's judgment, would materially impair the Company's ability
to proceed with the Exchange Offer, or (ii) any law, statute, rule or regulation
is proposed, adopted or enacted, or any existing law, statute, rule or
regulation is interpreted by the staff of the Commission in a manner which, in
the Company's sole judgment, might materially impair the Company's ability to
proceed with the Exchange Offer, or (iii) any governmental approval or approval
by Holders has not been obtained, which approval the Company shall, in its
reasonable judgment, deem necessary for the consummation of the Exchange Offer
as contemplated hereby.
If the Company determines that it may terminate the Exchange Offer, as
set forth above, the Company may (i) refuse to accept any Private Notes and
return any Private Notes that have been tendered to the Holders thereof, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
Expiration Date of the Exchange Offer, subject to the rights of such Holders of
tendered Private Notes to withdraw their tendered Private Notes or (iii) waive
such termination event with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Company will disclose
such change by means of a supplement to this Prospectus that will be distributed
to each registered Holder, and the Company
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<PAGE>
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
period.
Holders of Private Notes will have certain rights against the Company
under the Registration Rights Agreement should the Company fail to consummate
the Exchange Offer.
Exchange Agent
All executed Letters of Transmittal should be directed to the Exchange
Agent. Firstar Bank N.A., the Trustee under the Indenture, has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance
should be directed to the Exchange Agent as follows:
By Mail, Hand or Overnight Courier:
Firstar Bank N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Attention: Frank Leslie
Telephone: (612) 229-2600
Questions and requests for assistance and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Company as follows:
By Mail, Hand or Overnight Courier:
Discovery Zone, Inc.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Attention: Andrew M. Smith
Telephone: (914) 345-4500
Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange Offer will
be borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and their affiliates in person, by
facsimile, telegraph, telephone or telecopier.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, Letters of Transmittal
and related documents to the beneficial owners of the Private Notes and in
handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Private Notes pursuant to the Exchange Offer. If, however,
certificates representing Exchange Notes or Private Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Private Notes tendered, or if tendered Private Notes are registered in
the name of any person other than the person signing the Letter of Transmittal,
or if a transfer tax is imposed for any reason other
34
<PAGE>
than the exchange of Private Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
Consequences of Failure to Exchange
The Private Notes that are not exchanged for Exchange Notes pursuant
to the Exchange Offer will remain restricted securities within the meaning of
Rule 144 of the Securities Act. Accordingly, such Private Notes may be resold
only (i) to the Company or any subsidiary thereof, (ii) inside the United States
to a qualified institutional buyer in compliance with Rule 144A, (iii) inside
the United States to an institutional accredited investor that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Private Notes (the form of which letter can be obtained from the Trustee) and,
if such transfer is in respect of an aggregate principal amount of Private Notes
at the time of transfer of less than $100,000, an opinion of counsel acceptable
to the Company that such transfer is in compliance with the Securities Act, (iv)
outside the United States in compliance with Rule 904 under the Securities Act,
(v) pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available) or (vi) pursuant to an effective registration
statement under the Securities Act. The liquidity of the Private Notes could be
adversely affected by the Exchange Offer. Following the consummation of the
Exchange Offer, holders of the Private Notes will have no further registration
rights under the Registration Rights Agreement and will not be entitled to the
contingent increase in the interest rate provided for in the Private Notes.
Accounting Treatment
The Exchange Notes would be recorded at the same carrying value as the
Private Notes, as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the consummation of the Exchange Offer. The costs
of the Exchange Offer and the unamortized expenses related to the issuance of
the Private Notes will be amortized over the term of the Exchange Notes.
35
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the
Exchange Notes pursuant to the Exchange Offer. In consideration for issuing the
Exchange Notes as contemplated in this Prospectus, the Company will receive in
exchange Private Notes in like principal amount, the term and form of which are
identical in all material respects to the Exchange Notes. The Private Notes
surrendered in exchange for Exchange Notes will be retired and cancelled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not
increase the indebtedness of the Company.
The Unit Offerings resulted in net proceeds to the Company of
approximately $27 million after costs and expenses which (i) were used to repay
outstanding borrowings under the Revolving Credit Facility, (ii) were used to
purchase $2.8 million of U.S. Treasury Securities that were placed in escrow and
pledged as security for scheduled interest payments on the Notes through August
1, 1999 and (iii) are available for working capital, capital expenditures and
other general corporate purposes. In addition, shares of Convertible Preferred
Stock with an aggregate stated value of $1 million were exchanged for $1 million
of Series A Cumulative Preferred Stock.
36
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company as of
and for each of the years in the four-year period ended December 31, 1996, for
the seven-month period ended July 31, 1997 and as of and for the five-month
period ended December 31, 1997 have been derived from the historical audited
consolidated financial statements of the Company. The consolidated financial
data for the two-month period ended September 30, 1997 and as of and for the
nine-month period ended September 30, 1998 have been derived from unaudited
consolidated financial statements of the Company and, in the opinion of the
Company's management, have been prepared on a basis consistent with the audited
financial statements and include all adjustments that are considered by
management to be necessary for a fair presentation of such financial
information. Historical data and interim results are not necessarily indicative
of future results, and interim data are not necessarily indicative of results
for a full year. The financial data presented below with respect to periods
prior to the Company's emergence from Chapter 11 on July 29, 1997 are not
comparable to that for periods after such date because of the application of
Fresh Start Accounting with respect to periods after such date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fresh Start Reporting." The data set forth below should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996
---------------- ---------------- -------------------- ------------------
(Dollars in thousands, except per share and location data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue .................. $ 61,585 $ 180,573 $ 259,490 $ 181,725
Cost of goods sold ............. 15,131 36,858 50,227 34,276
Store operating expenses(1)(2) . 32,010 97,631 185,587 140,486
Selling, general and
administrative expenses(2) .. 6,300 36,451 58,201 40,779
Depreciation and amortization .. 4,670 16,183 31,972 21,876
Restructuring and other charges -- 14,024 372,160 --
--------- --------- --------- ---------
Operating income (loss) ........ 3,474 (20,574) (438,657) (55,692)
Interest income (expense), net . (1,667) (5,137) (12,226) (6,277)
Other income (expense), net .... 1,499 2,331 476 (580)
Minority interest .............. -- 256 5,162 --
Reorganization items ........... -- -- -- (21,285)
--------- --------- --------- ---------
Income (loss) before income tax,
extraordinary item and
cumulative effect of change
in accounting method ...... 3,306 (23,124) (445,245) (83,834)
Income tax provision (benefit) . -- (4,000) 4,000 --
Extraordinary item - gain on
discharge of debt ......... -- -- -- --
Cumulative effect of change
in accounting method ...... -- 5,773 -- --
Dividends on 14.5% Cumulative
Preferred Stock ........... -- -- -- --
Accretion of Convertible and
Cumulative Preferred
Stock to redemption value . -- -- -- --
--------- --------- --------- ---------
Net income (loss) applicable to
common shareholders ....... $ 3,306 $ (24,897) $(449,245) $ (83,834)
========= ========= ========= =========
Per common share -- basic and
diluted(3):
Income (loss) before
extraordinary item and
cumulative effect of change
in method of accounting ... $ 0.11 $ (0.45) $ (8.30) $ (1.45)
Extraordinary Gain ............. -- -- -- --
Cumulative effect of change
in accounting method ...... -- (0.13) -- --
--------- --------- --------- ---------
Net income (loss) .............. $ (0.11) $ (0.58) $ (8.30) $ (1.45)
========= ========= ========= =========
Weighted average number of
common shares outstanding .. 31,054 42,696 54,139 57,691
</TABLE>
<TABLE>
<CAPTION>
Successor Company
------------------ ------------------------------------------------------------
Seven Months Five Months Two Months Nine Months
Ended Ended Ended Ended
July 31, December 31, September 30, September 30,
1997 1997 1997 1998
------------------ ------------------- -------------------- ----------------
(Dollars in thousands, except per share and location data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue .................. $ 82,537 $ 48,485 $ 20,080 $ 98,595
Cost of goods sold ............. 14,136 7,311 3,060 15,895
Store operating expenses(1)(2) . 59,267 44,189 16,756 78,445
Selling, general and
administrative expenses(2) .. 11,160 10,244 4,142 20,207
Depreciation and amortization .. 11,920 9,314 3,982 16,654
Restructuring and other charges -- -- -- --
--------- --------- --------- ---------
Operating income (loss) ........ (13,946) (22,573) (7,860) $ (32,606)
Interest income (expense), net . (3,163) (6,076) (2,644) (11,050)
Other income (expense), net .... 73 683 34 442
Minority interest .............. -- -- -- --
Reorganization items ........... 11,583 -- -- --
--------- --------- --------- ---------
Income (loss) before income tax,
extraordinary item and
cumulative effect of change
in accounting method ...... (5,453) (27,966) (10,470) (43,214)
Income tax provision (benefit) . -- -- -- 125
Extraordinary item - gain on
discharge of debt ......... 332,165 -- -- --
Cumulative effect of change
in accounting method ...... -- -- -- --
Dividends on 14.5% Cumulative
Preferred Stock ........... -- -- -- (319)
Accretion of Convertible and
Cumulative Preferred
Stock to redemption value . -- (97) (36) (234)
--------- --------- --------- ---------
Net income (loss) applicable to
common shareholders ....... $ 326,712 $ (28,063) $ (10,506) $ (43,892)
========= ========= ========= =========
Per common share -- basic and
diluted(3):
Income (loss) before
extraordinary item and
cumulative effect of change
in method of accounting ... $ (0.09) $ (7.02) $ (2.63) $ (0.36)
Extraordinary Gain ............. 5.75 -- -- --
Cumulative effect of change
in accounting method ...... -- -- -- --
--------- --------- --------- ---------
Net income (loss) .............. $ 5.66 $ (7.02) $ (2.63) $ (0.36)
========= ========= ========= =========
Weighted average number of
common shares outstanding .. 57,705 4,000 4,000 122,686
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company Successor Company
---------------------------------------------------------- ----------------------------------------
Seven Months Five Months Two Months Nine Month
Year Ended December 31, Ended Ended Ended Ended
----------- ----------- ----------- ----------- July 31, December 31, September 30, September 30,
1993 1994 1995 1996 1997 1997 1997 1998
----------- ----------- ----------- ----------- ----------------------------------------------------
(Dollars in thousands except per share and location data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Cash provided by (used in)
operations .............. $ 20,055 $ (4,481) $ (59,103) $ (39,888) $ (10,959) $ (22,457) $ (12,910) $ (15,060)
Cash provided by (used in)
investing activities .... (97,641) (121,972) (64,562) 3,805 (468) (10,642) (723) (14,865)
Cash provided by (used in)
financing activities .... 187,218 16,162 121,729 33,460 51,493 (1,686) 476 23,845
--------- --------- --------- --------- --------- --------- --------- ---------
Net cash flows ............... $ 109,632 $ 110,291) $ (1,936) $ (2,623) $ 40,066 $ (34,785) $ (13,157) (6,080)
EBITDA(5) ................ $ 8,144 $ (4,391) $(406,685) $ (55,101) $ (15,272) $ (13,259) $ (3,878) (15,952)
Capital expenditures ..... $ 88,336 $ 119,134 $ 51,732 $ 2,672 $ 567 $ 10,642 $ 723 14,865
Store Data:
Company-owned stores at
period-end(4) ....... 111 318 321 212 210 207 208 200
Franchised stores at
period-end(6) ....... 57 29 15 7 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total stores at period-end 168 347 336 219 210 207 208 200
Operating Ratio:
Ratio of earnings to fixed . 3 -- -- -- -- -- -- --
charges(7)
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company Successor Company
------------------------------------------ ----------------------------
As of December 31 As of As of
------------------------------------------ December 31, September 30,
1993 1994 1995 1996(8) 1997 1998(9)
-------- ----------- ----------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents
(unrestricted) .................... $ 118,176 $ 7,885 $ 5,949 $ 3,326 $ 8,607 $ 2,527
Restricted cash and investments ....... -- -- -- -- 19,017 13,868
Total assets .......................... 252,550 474,686 171,571 125,786 176,591 161,087
Total long-term debt, including current
portion ........................... 115,843 139,796 240,663 350,072 88,193 108,287
Convertible Preferred Stock ........... -- -- -- -- 13,897 13,122
Cumulative Preferred Stock ............ -- -- -- -- -- 10,510
Total stockholders' equity (deficit) .. 98,091 238,963 (180,173) (263,572) 42,255 (1,471)
<FN>
(1) Excludes depreciation and amortization and certain unallocated expenses.
(2) Net of $22.2 million, $13.6 million, $0.2 million, $0.0 million, $0.3 million, $0.1 million and $0.7 million of capitalized
costs related to the Company's expansion for the years 1994, 1995, 1996, the seven months ended July 31, 1997, the five
months ended December 31, 1997, the two months ended September 30, 1997 and the nine months ended September 30, 1998,
respectively.
(3) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, was adopted by the Company in 1997. All
periods presented have been restated to conform to the provisions of SFAS No. 128.
(4) Includes the Block Party Stores.
(5) EBITDA represents net earnings (losses) before interest, income taxes, depreciation and amortization, other income and
expense, including minority interest and the portion of capitalized lease expense attributable to interest, change in
accounting method, extraordinary item and unallocated reorganization value. EBITDA is presented here to provide additional
information about the Company's operations. EBITDA is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and should not be considered as an alternative to (i) net income (loss) as a measure of
performance (or any other measure of performance under GAAP) or (ii) cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
(6) The Company rejected or terminated its arrangements with all franchises on or prior to the Effective Date.
(7) For purposes of this item, "fixed charges" represent interest, the interest element of rental expense, capitalized interest
and amortization of debt issuance costs, and "earnings" represent income (loss) before income taxes, extraordinary items,
cumulative effect of change in accounting method and fixed charges. Earnings were insufficient to cover fixed charges by
$23.1 million, $445.4 million, $83.8 million, $5.5 million, $28.0 million, $10.5 million and $43.2 million in each of the
years ended December 31, 1994, 1995 and 1996, the seven months ended July 31, 1997, the five months ended December 31, 1997
and the two months ended September 30, 1997 and the nine months ended September 30, 1998, respectively.
(8) Includes certain claims and other liabilities totaling $344.1 million as of December 31, 1996, which were restricted or
extinguished in connection with the Plan of Reorganization.
(9) Based upon an independent appraisal of the fair market value of the equity interests in the Company, which concluded that the
Note Warrants and the Preferred Unit Warrants have no or a nominal value, the Company has allocated $100,000 of the gross
proceeds of the offering of the Note Units to the Note Warrants and has allocated 100% of the gross proceeds of the offering
of the Series A and Series B Preferred Stock Units to the Cumulative Preferred Stock. No assurance can be given that such
allocations will be indicative of the prices at which such securities may actually trade.
</FN>
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the Company's
historical financial results of operations and financial condition, without
giving pro forma effect to the restructuring of the Company which occurred in
connection with the Plan of Reorganization and the implementation of the
Turnaround Plan, except to the extent that such restructuring had occurred prior
to the end of the periods discussed. As a result, management does not believe
that results of operations in future periods will be comparable to prior
periods. This discussion and analysis should be read in conjunction with the
"Selected Historical Financial Data" and the Company's condensed consolidated
financial statements and the notes thereto appearing elsewhere in this
Prospectus.
Overview
The Company is the leading owner and operator of pay-for-play
children's entertainment centers in North America, with a national network of
197 FunCenters in 39 states, Puerto Rico and Canada targeted at children ages
two to 12 and two entertainment centers targeting adult customers under the
"Block Party" name.
The Company generates revenue primarily from the operation of the
FunCenters. FunCenter revenues are derived from: (i) admission charges; (ii)
food and beverage sales; (iii) redemption game and other concession revenue; and
(iv) birthday party fees. The Company's revenues are subject to significant
quarterly variations based upon several factors, including seasonal changes in
weather, holidays and the school calendar. The Company experienced negative
comparable store sales while operating in Chapter 11 and this trend continued
through December 1997. Among other factors, comparable store revenues declined
because the Company (a) shortened FunCenter operating hours by approximately 18%
to curtail operations during unprofitable time periods, (b) reduced its
marketing expenditures (see below), and (c) did not update its product offering
while in Chapter 11. The Company also experienced a decline in sales during the
recent renovation of the FunCenters and expects future renovations to
temporarily reduce sales during such renovation period.
The Company's operating expenses at the store level consist primarily
of food and beverage costs, the cost of game merchandise, labor costs, occupancy
and maintenance expense. As a substantial portion of store operating expenses,
including occupancy costs, facility maintenance and core staffing requirements
are fixed, the Company has a high degree of operating leverage. The Company has
reduced its rent expense through renegotiation of certain store leases and,
since the Effective Date, has generated additional annual cost savings at the
store level on a comparable store basis through cost containment measures and
improved financial controls.
The Company incurred substantial restructuring costs while operating
under Chapter 11, including the costs of relocating the Company's headquarters,
terminating certain employees and rejecting selected store leases. A portion of
these costs were discharged in connection with the Plan of Reorganization and
other amounts were repaid with the proceeds of the Unit Offerings.
The Company is currently implementing its Turnaround Plan, which
consists of a number of cost-cutting and revenue enhancing initiatives,
including an extensive FunCenter renovation program to enhance its product
offerings, improved food and beverage offerings, a revamped marketing and
promotional campaign and an enhanced hiring and training program for store
managers. Through November 30, 1998, the Company had renovated approximately 60%
of the FunCenters, which enables such stores to offer new products that have
been developed by the Company in conjunction with its entertainment and
promotional partners, and converted approximately 75% of its FunCenters to offer
Pizza Hut products. Per-customer spending on food has increased in those
FunCenters offering Pizza Hut menu items since conversion.
Comparable store revenues during the third quarter of 1998 were down
6.3%, as compared to a decline of 15.5% during the third quarter of 1997, a
decline of 5.3% in the second quarter of 1998, and an increase of 4% in the
first quarter of 1998. During the first nine months of 1998, comparable store
revenues declined 2%, compared to a 17% decline in comparable store revenues in
the first nine months of 1997. This decline in comparable store revenues for
39
<PAGE>
the first nine months of 1998 consisted of a 5.3% increase in general admission
revenues, offset primarily by decreases in birthday party and game revenues.
During the first nine months of 1998, 81 stores (40.5% of total stores) had
increased comparable store revenues as compared to eight stores (4% of total
stores) in the 1997 period, and 145 stores (72.5% of total stores) had increased
general admission revenue as compared to nine stores (4% of total stores) in the
1997 period.
In spite of improvements relative to the comparable period of the
prior year, the Company's revenues in the first nine months of 1998 were less
than expected due to (i) construction delays in completing its FunCenter
renovation program and related business disruptions, (ii) corresponding delays
in launching certain marketing and promotional programs, (iii) unseasonably warm
spring weather in many parts of the United States, which diminished demand for a
variety of indoor entertainment activities and (iv) transitional staffing and
training expenses associated with the introduction of new entertainment
attractions at FunCenters.
As a result of these factors, the Company experienced negative
comparable store sales and negative EBITDA for the second and third quarters of
1998. The Company required additional capital to continue funding its operations
and implementing the Turnaround Plan, and, accordingly, consummated the Unit
Offerings on July 17, 1998, yielding net proceeds to the Company of
approximately $27 million. See "Liquidity and Capital Resources."
Results of Operations
Upon emergence from Chapter 11, the Company adopted Fresh Start
Accounting. Thus the Company's balance sheets and statements of operations and
cash flows after the Effective Date reflect a new reporting entity (the
"Successor Company") and are not comparable to periods prior to the Effective
Date (the "Predecessor Company").
The nine-month period ended September 30, 1997 includes the results of
the Predecessor Company and the Successor Company and the nine-month period
ended September 30, 1998 includes the results of the Successor Company. The
principal differences between these periods relate to reporting changes
regarding the Company's capital structure and indebtedness and the revaluation
of the Company's long-term assets, which primarily affect depreciation and
amortization expense and interest expense in the Company's results of
operations.
Comparison of the Nine Months Ended September 30, 1998 and 1997
Revenue. The Company had revenue of $98.6 million during the first
nine months of 1998, a decrease of 3.9% from revenue of $102.6 million during
the first nine months of 1997. This decrease was comprised of a 2% decrease in
comparable store sales during the 1998 period compared to the 1997 period (as
compared to a 17% decline in the 1997 period) and a reduction of revenue
attributable to fewer FunCenters being open during the 1998 period as compared
to the 1997 period. This decrease in revenues was offset in part by $1.1 million
of additional sponsorship revenue during the 1998 period. Changes in comparable
store revenue were primarily due to an increase in general admission revenue
offset by declines in birthday party and game revenues. Revenues during the
first nine months of 1998 were adversely affected by the factors set forth in
"Overview."
Cost of Goods Sold. Cost of goods sold, which consists primarily of
the cost of food, redemption merchandise and other product sales, was $15.9
million and $17.2 million during the first nine months of 1998 and 1997,
respectively. As a percentage of revenue, cost of goods sold declined from 16.7%
in the 1997 period to 16.1% in the 1998 period. This reduction was primarily
attributable to simplified product offerings, improved cost management and lower
costs associated with the conversion to a new food supplier, offset by increases
due to new product offerings.
Store Operating Expenses. Store operating expenses, which consist
primarily of compensation and benefits of FunCenter operating personnel,
occupancy expenses and facility repair and maintenance expenses, were $78.5
million and $76.0 million during the first nine months of 1998 and 1997,
respectively ($77.2 million and $76.9 million, respectively, before GAAP Rent
Adjustments (defined below)). As a percentage of total revenues, store operating
expenses increased from 74.0% in the 1997 period to 79.5% in the 1998 period.
This increase was attributable to increased labor costs associated with the
Company's new product offerings, offset by reductions in central reservation
40
<PAGE>
expenses and other cost savings generated through the Company's cost reduction
program and store closings. During the first nine months of 1998, store
operating expenses included certain non-recurring costs resulting from training
and start-up expenses for new product offerings and disruptions related to the
FunCenter renovation program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, which include salaries, corporate and regional
management expenses and other administrative, promotional and advertising
expenses, were $20.2 million and $15.3 million during the first nine months of
1998 and 1997, respectively. This increase was primarily attributable to an
increase in sales and marketing programs associated with the Company's
revitalization plan and to increases in general and administrative costs during
the 1998 period as compared to the 1997 period.
Depreciation and Amortization Expense. Depreciation and amortization
expenses were $16.7 million and $15.9 million during the first nine months of
1998 and 1997, respectively. During the 1998 period this expense reflected
depreciation and amortization expense related to an increase in the carrying
value of the Company's trademarks, property and equipment as a result of its
adoption of Fresh Start Accounting for the Successor Company.
Interest Expense. Interest expense was $11.9 million and $6.4 million
during the first nine months of 1998 and 1997, respectively. Reported interest
expense for the Predecessor Company did not include interest on pre-petition
indebtedness which was suspended during the Company's reorganization under
Chapter 11. Had these interest costs been accrued, reported interest expense for
the 1997 period would have been $15.6 million.
Interest Income. The Company reported interest income of $863,000
during the first nine months of 1998 compared to $616,000 during the first nine
months of 1997. The increase was due to earnings from the escrowed interest
account for the Existing Notes (the "Existing Escrowed Interest Account") and
short-term investment of proceeds from the Company's offering of the Existing
Units and Convertible Preferred Stock in the exit financing.
Reorganization Items. Reorganization items of $11.6 million were
incurred by the Company during its reorganization under Chapter 11 for the nine
months ended September 30, 1997, including $6.2 million incurred for
professional fees. Included in reorganization items for the nine months ended
September 30, 1997 was an increase in net income of $24.8 million which resulted
from the difference between the Company's reorganized value and a revaluation of
the Company's assets and liabilities. The remainder was primarily attributable
to losses on asset disposals associated with the closing of FunCenters, the
write-off of deferred financing costs on certain pre-petition indebtedness and
expenses associated with the Company's Plan of Reorganization.
EBITDA. The Company reported negative EBITDA for the first nine months
of 1998 of $14.7 million, before reorganization items and non-cash GAAP rent
adjustments which were affected by Fresh Start Accounting ("GAAP Rent
Adjustments"), and $15.9 million after such adjustments, compared to negative
EBITDA of $6.8 million before such adjustments, and $5.9 million after such
adjustments, in the comparable prior year period. This decline was primarily
attributable to lower revenues during the third quarter of 1998 as compared to
the prior year period and increased expenditures for sales and marketing
programs.
Comparison of Years Ended December 31, 1997 and 1996
The twelve months ended December 31, 1997 include the results of the
Predecessor Company for the seven months ended July 31, 1997 and the results of
the Successor Company for the five months ended December 31, 1997. The principal
differences between the periods relating to the Predecessor Company, on the one
hand, and the periods relating to the Successor Company, on the other hand,
relate to reporting changes regarding the Company's capital structure and
indebtedness and the revaluation of the Company's long-term assets, which
primarily affect depreciation and amortization expense and interest expense in
the Company's results of operations.
Revenue. The Company had revenue of $131.0 million in 1997, a decrease
of 28% from $181.7 million in 1996. This decrease resulted primarily from a
decrease in the number of FunCenters in operation and a reduction in average
sales per FunCenter. In connection with the Company's reorganization, the
Company has closed or sold 130 underperforming stores. See "Business -- Cost
Reduction Program." The decrease in same store average sales per FunCenter of
41
<PAGE>
approximately 15% was due primarily to disruptions in the business associated
with the Company's bankruptcy and a lack of new attractions at the FunCenters.
During the fourth quarter of 1997, revenues were also negatively impacted as the
Company temporarily closed stores and discounted admission prices as part of its
renovation program.
Cost of Goods Sold. Cost of goods sold was $21.4 million in 1997 and
$34.3 million in 1996. As a percentage of revenue, cost of goods sold declined
from 18.9% in 1996 to 16.3% in 1997. This percentage reduction was primarily
attributable to simplified product offerings, better cost management and,
beginning in the fourth quarter of 1997, lower costs associated with conversion
to a new food and supply vendor. The decline in actual dollars also was due, in
part, to a lower number of FunCenters operating in 1997.
Store Operating Expense. Store operating expenses were $103.5 million
in 1997, compared with $140.5 million in 1996. As a percentage of total
revenues, store operating expenses increased from 77% in 1996 to 79% in 1997.
The increase as a percentage of revenue was attributable to the decline in
revenues during 1997. The $37.0 million reduction in store operating expenses is
primarily attributable to the implementation of labor planning, lower rent from
renegotiated leases, reductions in central reservation expenses and other cost
savings generated through the Company's cost reduction program and store
closings. During the five months ended December 31, 1997, store operating
expenses included certain non-recurring costs resulting from training and
start-up expenses for new product offerings and renovation program disruptions
to FunCenter operations.
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $21.4 million in 1997, a decrease of 47.5% from
$40.8 million in 1996. As a percentage of revenue, selling, general and
administrative expenses declined from 22% in 1996 to 16% in 1997 despite a 28%
reduction in revenue. This decrease reflected a reduction in corporate staff and
related expenses, and marketing expenses as part of the Company's cost reduction
program, combined with a general reduction in spending due to the lower number
of FunCenters in operation during 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $21.2 million in 1997, a decrease of 3% from $21.9 million in 1996.
The decline resulted primarily from the reduction in the number of FunCenters in
operation, offset by an increase during the five months ended December 31, 1997
attributable to an increase in the carrying value of the Company's plant and
equipment as a result of adopting Fresh Start Accounting for the Successor
Company.
Interest Expense. Interest expense was $6.1 million during the five
months ended December 31, 1997 for the Successor Company and $3.2 and $6.3
million, respectively, for the Predecessor Company during the seven months ended
July 31, 1997 and the year ended December 31, 1996. Reported interest for the
Predecessor Company did not include interest on the pre-petition indebtedness,
which was suspended during the Company's reorganization under Chapter 11. Had
these interest costs been accrued, reported interest expenses would have been
$12.4 and $18.2 million, respectively, for the seven months ended July 31, 1997
and the year ended December 31, 1996.
Interest Income. The Company reported interest income of $1.1 million
during 1997 and $0 in 1996. The increase was due to investment earnings from the
Existing Escrowed Interest Account and short-term investments of the proceeds of
the offering of the Existing Units and Convertible Preferred Stock in the exit
financing.
Reorganization Costs. Reorganization costs of $11.6 million (increase
to income) and $21.3 million (decrease to income) were incurred by the Company
during its reorganization under Chapter 11 for the years ended December 31, 1997
and 1996, respectively, including $6.2 million and $7.1 million incurred for
professional fees in the 1997 and 1996 periods, respectively. Included in
reorganization items for the year ended 1997 was an increase in net income of
$24,829,000 which resulted from the difference between the Company's reorganized
value and a revaluation of the Company's assets and liabilities. See Note 4 to
the Consolidated Financial Statements. The remainder was primarily attributable
to losses on asset disposals associated with the closing of FunCenters, the
write-off of deferred financing costs on certain pre-petition indebtedness and
expenses associated with the Plan of Reorganization.
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Comparison of Years Ended December 31, 1996 and 1995
Revenue. The Company had revenue of $181.7 million in 1996, a decrease
of 30% from $259.5 million in 1995. This decrease resulted primarily from a
decrease in the number of FunCenters in operation and a reduction in average
sales per FunCenter. The 17% decrease in same store average sales per FunCenter
was due primarily to disruptions in the business associated with the Company's
bankruptcy filing, reduced and ineffective marketing programs in 1996 as
compared to 1995 and a lack of new attractions.
Cost of Goods Sold. Cost of goods sold was $34.3 million in 1996 and
$50.2 million in 1995. Cost of goods sold as a percentage of revenues was 19% in
1996, unchanged from 1995.
Store Operating Expense. Store operating expense was $140.5 million,
or 77% of revenue, compared with $185.6 million, or 72% of revenue in 1995. The
increase in store operating expense as a percentage of revenue resulted largely
from an increase in the number of leases requiring above market rental payments
and reduced oversight of store expenses related to the Company's rapid
expansion. In addition, the Company experienced lower than anticipated revenue
in 1996 due to disruptions related to the Company's Chapter 11 filing.
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $40.8 million in 1996, a decrease of 30% from $58.2
million in 1995. Selling, general and administrative expenses as a percentage of
revenue remained steady in 1996 and 1995 at 22%. The decrease of 30% in the
amount of selling, general and administrative expenses in 1996 from 1995
reflects a reduction in corporate staff, the elimination of regional offices and
a decrease in spending due to a reduction in the number of FunCenters.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $21.9 million in 1996, a decrease of 32% from $32.0 million in 1995.
This decrease resulted primarily from a reduction in the number of Company-owned
stores and in the value of property and equipment subject to depreciation, which
resulted from a decrease in the number of FunCenters in 1996. In addition, the
Company recorded increased goodwill amortization in 1995 related to the
acquisitions of certain businesses in 1994 and 1995. The carrying value of such
goodwill was written off at the end of 1995.
Interest Expense. Interest expense was $6.3 million in 1996, a
decrease of 48% from $12.2 million in 1995. This decrease resulted primarily
from a suspension of interest payments on indebtedness while the Company
reorganized under Chapter 11.
Other Income (Expense), Net. The Company recorded other income
(expense), net, of ($0.6 million) in 1996 and $0.5 million in 1995. The decline
in 1996 was primarily attributable to a decrease in interest income associated
with a lower value of funds available for investment.
Restructuring and Other Charges. In 1995, the Company incurred
restructuring and other charges of $372.2 million, resulting primarily from a
write-down of $306.2 million of intangibles, leasehold improvements and
equipment in accordance with the implementation of SFAS No. 121. In 1995, the
Company also recognized charges related to a reduction in the carrying value of
certain assets. Such reductions were not materially different from the charges
that would have resulted from the application of SFAS No. 121. Such charges,
which totaled $44.0 million, resulted primarily from the write-down of certain
entertainment facility equipment and from the write-down of property and
equipment related to a relocation of the Company's headquarters.
Reorganization Costs. Reorganization costs of $21.3 million incurred
by the Company in 1996 resulted from the Company's reorganization under Chapter
11. These costs included $7.1 million for professional fees and $8.9 million for
losses on asset disposals.
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Liquidity and Capital Resources
The Company does not require significant working capital to operate
because it does not have significant receivables or inventory and uses trade
credit in purchasing food products and other supplies. The Company requires cash
primarily to fund operating losses and debt service and to finance capital
expenditures to maintain and upgrade existing stores. Following the
implementation of its Turnaround Plan, the Company also expects to need cash to
build new stores. Historically, the Company has met these liquidity requirements
primarily through external financing, including through the issuance of debt and
equity securities and borrowings under revolving credit facilities, as well as
through cash flow generated by operating activities.
In connection with the Plan of Reorganization, substantially all of
the Company's pre-petition debt facilities and other obligations to creditors
were restructured, repaid or eliminated, including certain pre-petition tax
claims, the McDonald's Secured Note and the McDonald's Rent Deferral Secured
Notes. See "Description of Certain Indebtedness." Upon emerging from Chapter 11,
the Company issued (a) the Existing Units consisting of $85.0 million aggregate
principal amount of Existing Notes and the Existing Warrants and (b) $15.0
million of Convertible Preferred Stock. The net proceeds of the offerings of the
Existing Units and Convertible Preferred Stock totaled $93.8 million. Of that
amount, the Company (i) repaid borrowings, claims and expenses incurred under
Chapter 11 of $45.5 million, (ii) purchased an aggregate of $21.6 million of
securities, consisting of U.S. Treasury Securities, that were placed in the
Existing Escrowed Interest Account and pledged as security for scheduled
interest payments on the Existing Notes through August 1, 1999, and (iii)
applied $26.7 million to finance capital expenditures and to provide capital for
working capital and other general corporate purposes.
On March 31, 1998, the Company entered into a $10.0 million Revolving
Credit Facility with Foothill Capital Corporation as permitted under the
Existing Notes Indenture. The Revolving Credit Facility bears interest at prime
plus 1% plus certain fees and allows the Company to borrow 133% of the 12-month
trailing FunCenter contribution (as defined therein) for its 100 top performing
FunCenters up to a maximum principal amount of $10.0 million. The Company is
permitted under the Indenture and the Existing Notes Indenture to incur up to
$5.0 million of new indebtedness under an Eligible Credit Facility, which could
include a $5.0 million increase in the Revolving Credit Facility up to a maximum
principal amount of $15.0 million. On December 18, 1998, the Company obtained a
$2.5 million increase in the Revolving Credit Facility through March 15, 1999 at
which time the maximum principal amount of the Revolving Credit Facility will be
reduced to $12.0 million. There can be no assurance that the Company will be
able to obtain any additional financing.
On July 17, 1998, the Company completed a $29.5 million financing from
the offerings of (i) 20,000 Note Units which consisted of $20.0 million
aggregate principal amount of Private Notes and the Note Warrants, (ii) 80
Series A Preferred Stock Units which consisted of $2.0 million stated value of
Series A Senior Cumulative Preferred Stock and the Series A Preferred Unit
Warrants and (iii) 340 Series B Preferred Stock Units which consisted of $8.5
million stated value of Series B Cumulative Preferred Stock and the Series B
Preferred Unit Warrants. Collectively, the Note Warrants and the Preferred Unit
Warrants entitle the holders thereof to purchase, in the aggregate, 99.6% of the
Common Stock on a fully diluted basis, before giving effect to future issuance
of options under the Company's Stock Incentive Plan. The Unit Offerings resulted
in net proceeds to the Company of approximately $27 million after costs and
expenses which (i) were used to repay outstanding borrowings under the Revolving
Credit Facility, (ii) were used to purchase $2.8 million of U.S. Treasury
Securities that were placed in escrow and pledged as security for scheduled
interest payments on the Notes through August 1, 1999 and (iii) are available
for debt service, working capital, capital expenditures and other general
corporate purposes. In addition, shares of Convertible Preferred Stock with an
aggregate stated value of $1.0 million were tendered to the Company as part of
the consideration paid for the Series A Preferred Stock Units, which shares were
thereupon canceled by the Company.
The Company holds for sale certain parcels of undeveloped land which
secure the McDonald's Secured Note and the McDonald's Rent Deferral Secured
Notes. To the extent such sales occur prior to the maturity dates for these
notes, the net proceeds from such sales will be used to pay down the outstanding
principal amount on these notes.
During the fourth quarter of 1997, the Company began an extensive
FunCenter renovation program designed to broaden FunCenter entertainment
offerings, upgrade their facilities and give them a "new look." This renovation
program was much broader in scope and costlier than originally planned. As of
November 1, 1998, the Company had renovated
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approximately 60% of its FunCenters, and may renovate additional FunCenters by
the end of 1999, depending on the availability of capital. Through November 30,
1998, the Company also completed the conversion of approximately 75% of its
FunCenters to permit the sale of Pizza Hut menu items and renovated
approximately 25% of its locations to offer new weekday programs under the "DZU"
brand name. Through December 18, 1998, the Company had incurred or committed
approximately $28 million in connection with these programs of which
approximately $1.5 million remains unpaid.
During the nine months ended September 30, 1998 and 1997, cash used in
operations was $14.5 million and $20.7 million, respectively, before
reorganization items. The decrease in cash used in operations during the 1998
period was primarily attributable to decreases in prepaid expenses and other
assets, such as prepaid insurance and post-petition vendor deposits, in the 1998
period compared to the 1997 period.
At September 30, 1998, the Company had an unrestricted cash balance of
approximately $2.5 million and no borrowings under its Revolving Credit
Facility. The Company repaid all outstanding amounts under the Revolving Credit
Facility in July 1998 using the proceeds from the Unit Offerings. The Company
had $7.8 million in cash and investments in the Escrowed Interest Accounts for
the Existing Notes and the Notes as of November 30, 1998. This balance is
dedicated to making scheduled payments of interest on the Existing Notes and the
Notes through August 1, 1999. As of December 18, 1998, the Company had $8.5
million of borrowings outstanding under the Revolving Credit Facility and had
the ability to borrow an additional $2.2 million, subject to $0.5 million of
outstanding letters of credit. The Company expects to have an additional $1.8
million of borrowing availability under the Revolving Credit Facility once
certain real estate collateral documents are completed.
Historically, the cash necessary to fund the Company's capital
expenditures, working capital and operating losses has been provided by the
Company's financing activities, including proceeds from offerings of debt and
equity securities, equipment financing and the Revolving Credit Facility. The
Company has historically experienced significant operating losses during the
fourth quarter due to the seasonality of its business. Given its current level
of cash flows and its expected cash flows in the fourth quarter, the Company has
substantially reduced its level of capital expenditures. If the Company
continues to generate negative operating cash flow, this will adversely impact
its ability to implement the Turnaround Plan. Moreover, if the Company cannot
generate positive cash flow from operations in an amount necessary to satisfy
its debt service obligations, meet its working capital and capital expenditure
requirements and fund operating losses, the Company will require additional
financing. There can be no assurance that any additional financing will be
available.
Seasonality
The Company's FunCenters experience seasonal fluctuations in their
revenues, with higher revenues occurring in the first quarter of the year due to
the fact that many FunCenters are located in cold weather regions where children
are less likely to play outside during this time of year. In 1997, the
FunCenters generated 30% of their revenue in the first quarter versus 25%, 24%
and 22% in the second, third and fourth quarters, respectively. These
fluctuations in revenues are primarily related to the school year and the
weather.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No.
109"), issued in February 1992. Deferred income tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws in
effect when the differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance must be
established for deferred tax assets if it is "more likely than not" that all or
a portion of the deferred tax assets will not be realized. At December 31, 1997,
the Company's deferred tax valuation allowance was equal to its net deferred tax
assets because, in management's judgment, it is "more likely than not" that all
of the net deferred tax assets will not be realized.
As a result of its reorganization under Chapter 11, the Company
realized discharge of indebtedness income of $332.2 million. Although this
income is not taxable to the Company for federal or state purposes due to the
Company's
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insolvency, the Company's net operating loss carryforwards ("NOLs") are reduced
by a corresponding amount. In addition, as a result of the reorganization, the
Company is treated as having experienced an "ownership change" under Internal
Revenue Code Section 382. Accordingly, the Company's ability to offset income in
each post-reorganization taxable year by its then remaining NOLs and certain
built-in losses (including depreciation and amortization deductions of any
portion of the Company's basis in assets with built-in-losses) is limited to an
amount not to exceed the aggregate value of the Company's Common Stock
immediately before the change in control (taking into account the increase in
value resulting from the cancellation of creditors' claims under the Plan of
Reorganization) multiplied by the long-term tax-exempt rate published monthly by
the Internal Revenue Service. At December 31, 1997, the Company's NOLs were
approximately $178.0 million and the use of approximately $137.0 million of
those NOLs was limited to approximately $4.0 million per year.
Fresh Start Reporting
The effects of the Company's reorganization under Chapter 11 have been
accounted for in the Company's financial statements using the principles
required by the American Institute of Certified Public Accountants' Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh Start Accounting"). Pursuant to such principles, the
Company's assets and liabilities have been restated at "reorganization value,"
which is defined as the value of the entity before considering liabilities on a
going-concern basis following the reorganization and approximates the amount a
willing buyer would pay for the assets of the Company immediately after the
reorganization. The reorganization value for the Company has been determined by
reference to liabilities remaining after the Effective Date plus the estimated
value of total stockholders' equity of the outstanding shares of the Common
Stock. The reorganization value of the Company has been allocated to the assets
of the Company in conformity with the procedures specified by Accounting
Principles Board Opinion No. 16, Business Combinations, for transactions
reported on the basis of the purchase method of accounting.
New Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
and SFAS No. 129, "Disclosure of Information about Capital Structure," which are
effective for fiscal years ending after December 15, 1997. SFAS No. 128
simplifies the current required calculation of earnings per share ("EPS") under
Accounting Principles Board No. 15, "Earnings Per Share," by replacing the
existing calculation of primary EPS with a basic EPS calculation. It requires a
dual presentation, for complex capital structures, of basic and diluted EPS on
the face of the income statement and requires a reconciliation of basic EPS
factors to diluted EPS factors. SFAS No. 129 requires disclosing information
about an entity's capital structure. The Company adopted SFAS No. 128 in 1997
and experienced no material impact to the Company's EPS calculation or
disclosure information.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997.
This statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The new rule requires that the Company (a) classify items
of other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
balance sheet. The Company plans to adopt SFAS No. 130 in 1998 and expects no
material impact to the Company's financial statement presentation.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement requires annual
financial statements to disclose information about products, services and
geographic areas. This statement requires disclosing financial and descriptive
information about an enterprise's reportable operating segments based on
reporting information the way management organizes the segments for making
business decisions and assessing performance. It also eliminates the requirement
to disclose additional information about subsidiaries that are not consolidated.
This statement may result in more information being disclosed than presently
presented and require new interim information not previously presented. The
Company plans to adopt SFAS No. 131 in 1998 and expects that such adoption will
affect only the Company's disclosure information and not its results of
operation.
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Impact of Year 2000
The Year 2000 issue is the result of computer programs that were
written using two digits rather than four to define an applicable year. At the
turn of the century, the Company's computer equipment and software and devices
with imbedded technology that are time-sensitive may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to dates
in the Year 2000 and thereafter. For this purpose, the term "computer equipment
and software" includes systems that are commonly thought of as IT systems,
including accounting, data processing, and telephone/PBX systems, cash
registers, scanning equipment, and other miscellaneous systems, as well as
systems that are not commonly thought of as IT systems, such as alarm systems,
fax machines, or other miscellaneous systems. Both IT and non-IT systems may
contain imbedded technology, which complicates the Company's Year 2000
identification, assessment, remediation, and testing efforts. The Company has
completed an assessment of this situation and, during the third quarter of 1998,
began implementing a plan to modify or replace certain portions of its software
and hardware by June 30, 1999.
The Company has both internally developed software and hardware and
software purchased or licensed from third party vendors who have upgrade
releases available to address the issue. The Company has also communicated with
its key suppliers to determine the extent to which Year 2000 issues affect
services provided to the Company.
The Company believes that, in addition to its existing staff, the cost
of its Year 2000 identification, assessment, remediation and testing efforts
will be approximately $300,000, consisting primarily of previously planned
hardware and software upgrades.
The Company believes that with modifications to existing software and
hardware and upgrades to existing third-party vendor software, the Year 2000
issue will not pose significant operational problems for its computer equipment
and software. However, if such modifications are not made or are not completed
timely, the Year 2000 issues could have a material impact on the Company's
ability to operate.
The Company has begun, but not yet completed, developing an analysis
of operational problems and costs, including loss of revenues, that would be
reasonably likely to result should the Company and certain third parties not
complete efforts necessary to achieve Year 2000 compliance in a timely manner. A
contingency plan has not been developed for dealing with the most reasonably
expected worst case scenario and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by March 31, 1999.
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BUSINESS
Overview
The Company is the leading owner and operator of pay-for-play
children's entertainment centers in North America, with a national network of
197 FunCenters in 39 states, Canada and Puerto Rico, which are targeted to
appeal to children ages two to 12. DZ hosted approximately 18.5 million visits
by children and adults at its FunCenters in 1997. The Company also operates two
entertainment centers under the "Block Party" name which are targeted to appeal
to adults.
The Company's FunCenters are designed to offer children ages two to 12
years old a unique entertainment experience while meeting their parents' needs
for value and convenience. FunCenters generally are located in strip shopping
centers and, to a lesser extent, in shopping malls. Through December 1997,
FunCenters included: (i) "soft play" zones consisting of a series of tubes,
slides, ball bins, climbing mountains, air trampolines, obstacle courses, ramps
and other devices for crawling, jumping, running, swinging and climbing, all of
which have been designed and constructed with an emphasis on safety; (ii) "game
zones" consisting of games that award tickets redeemable for prizes; (iii) food
and beverage operations; and (iv) party rooms for birthdays and other group
events.
The Company operated under the protection of Chapter 11 of the U.S.
Bankruptcy Code from March 25, 1996 through the Effective Date. Throughout 1997,
and on an accelerated basis since the Effective Date, the Company has
implemented the Turnaround Plan, a new business strategy designed to revitalize,
reposition and restore the Company's core business through (i) a broad expense
reduction program, (ii) new in-store programs that feature added entertainment
activities and (iii) a refocused marketing strategy.
Since emerging from bankruptcy and as of November 30, 1998, the
Company completed renovation of approximately 60% of its FunCenters to expand
and update its product offerings to include: (i) themed laser tag, (ii) arts and
crafts, (iii) promotional areas featuring changing events and (iv) a stage area
which features custom DZ programming and kid Karaoke, and creates a FunCenter
focal point for character appearances and other presentations. The Company's
strategy is to create a changing entertainment environment featuring
cross-promotional activities with major entertainment and consumer product
companies. During this period, the Company also completed the conversion of
approximately 75% of its FunCenters to offer Pizza Hut brand menu items. See "--
Product Improvements" and "-- New Marketing Strategies."
New Ownership and Management
During the Company's reorganization under Chapter 11, an affiliate of
Wellspring acquired a controlling interest in the Company. Wellspring recruited
Scott W. Bernstein to assist in developing a new business strategy for, and to
assume the role of Chief Executive Officer of, the Company. Mr. Bernstein
previously served as a senior executive at Time Warner, Inc. and Six Flags Theme
Parks, Inc. ("Six Flags"), most recently as President of Six Flags' Northeast
operations, where he led a turnaround of the Six Flags Great Adventure theme
park in New Jersey. Mr. Bernstein was named the President and the Chief
Executive Officer of the Company in December 1996, and the Company has
subsequently hired several other senior managers with backgrounds in the
entertainment and consumer marketing industries. Mr. Bernstein resigned as the
President, the Chief Executive Officer and as a director of the Company
effective November 27, 1998. Chet Obieleski, originally employed as the Chief
Operating Officer of the Company, succeeded Mr. Bernstein as the President and
the Chief Executive Officer and as a director of the Company (having been
elected as a director by the Board of Directors on November 11, 1998 to fill the
vacancy created by Mr. Bernstein's resignation).
Pre-Chapter 11 Reorganization
The Company was founded in 1989 and grew from 28 locations in 1991 to
a peak of 347 locations in 1994, achieving much of its growth through the
acquisition of certain of its franchisees and other businesses. In 1995, the
Company acquired two Block Party Stores and certain related leases from
Blockbuster Entertainment Group. The Company acquired no businesses during 1996,
1997 or the first nine months of 1998.
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The Company financed its growth primarily through the issuance of debt
securities. The Company's rapid expansion resulted in a loss of control over
costs and quality at the store and corporate levels, which diminished customer
service, reduced store operating margins and caused selling, general and
administrative expenses to increase dramatically. This negatively affected the
Company's overall profitability and led to a series of defaults under the
Company's revolving credit facility in late 1995 and early 1996. On March 25,
1996 (the "Petition Date"), Discovery Zone, Inc. and all of its domestic
subsidiaries (the "Discovery Zone Group") filed voluntary petitions for relief
under Chapter 11 with the U.S. Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). Under Bankruptcy Court supervision, the Discovery Zone
Group continued to manage and operate its businesses as debtor in possession and
developed a Plan of Reorganization (the "Plan of Reorganization") to restructure
its financial affairs.
Emergence from Chapter 11; Plan of Reorganization; Exit Financing and Recent
Financing
In November 1996, the Company and Wellspring filed the Plan of
Reorganization with the Bankruptcy Court. The Plan of Reorganization set forth a
plan for repaying or otherwise compensating the Company's creditors in order of
the relative seniority of their respective claims while maintaining the Company
as a going concern. The Plan of Reorganization provided, among other things, for
(i) the payment in full of claims which arose after the Petition Date, (ii)
conversion of substantially all of the Company's pre-petition liabilities into
equity interests and (iii) cancellation of all pre-petition equity interests,
including the Company's then outstanding common stock. On July 18, 1997, the
Plan of Reorganization was approved by the Company's creditors in each class and
confirmed by the Bankruptcy Court. The Plan of Reorganization became effective
and the Company emerged from Chapter 11 on the Effective Date.
Upon emerging from Chapter 11, the Company issued $15.0 million in
Convertible Preferred Stock to an affiliate of the Wafra Investment Advisory
Group, Inc. ("Wafra"). The Company also issued 85,000 Existing Units consisting
of $85.0 million aggregate principal amount of Existing Notes and the Existing
Warrants to purchase shares of the Company's Common Stock at an exercise price
of $.01 per share. The net proceeds of the offerings of the Existing Units and
Convertible Preferred Stock totaled $93.8 million. Of that amount, the Company
(i) repaid borrowings, claims and expenses incurred under Chapter 11 of $45.5
million, (ii) purchased an aggregate of $21.6 million of securities, consisting
of U.S. Treasury Securities, that were placed in escrow and pledged as security
for scheduled interest payments on the Existing Notes through August 1, 1999 and
(iii) applied $26.7 million to finance capital expenditures and to provide for
working capital and capital for other general corporate purposes. The Company
also entered into a $10.0 million Revolving Credit Facility on March 31, 1998
primarily to finance working capital and for other general corporate purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On July 17, 1998, the Company completed a $29.5 million financing from
the offerings of (i) 20,000 Note Units which consisted of $20.0 million
aggregate principal amount of Private Notes and the Note Warrants, (ii) 80
Series A Preferred Stock Units which consisted of $2.0 million stated value of
Series A Senior Cumulative Preferred Stock and the Series A Preferred Unit
Warrants and (iii) 340 Series B Preferred Stock Units which consisted of $8.5
million stated value of Series B Cumulative Preferred Stock and the Series B
Preferred Unit Warrants. Collectively, the Note Warrants and the Preferred Unit
Warrants entitle the holders thereof to purchase, in the aggregate, 99.6% of the
Common Stock on a fully diluted basis, before giving effect to future issuance
of options under the Company's Stock Incentive Plan. The Unit Offerings resulted
in net proceeds to the Company of approximately $27 million after costs and
expenses which (i) were used to repay outstanding borrowings under the Revolving
Credit Facility, (ii) were used to purchase $2.8 million of U.S. Treasury
Securities that were placed in escrow and pledged as security for scheduled
interest payments on the Notes through August 1, 1999 and (iii) are available
for working capital, capital expenditures and other general corporate purposes.
In addition, shares of Convertible Preferred Stock with an aggregate stated
value of $1.0 million were tendered to the Company as part of the consideration
paid for the Series A Preferred Stock Units, which shares were thereupon
cancelled by the Company.
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Cost Reduction Program
In connection with the Company's reorganization, the Company has
closed or sold 130 underperforming stores that were largely unprofitable and
were unlikely to contribute to the Company's future profitability as a result of
a variety of factors, including leases with uneconomical terms, unfavorable
demographics, undesirable facility size or saturation of particular markets.
The Company also implemented several initiatives to reduce annual
selling, general and administrative expenses, including: (i) a substantial
reduction in the Company's corporate and regional management personnel; (ii) a
reduction in expenditures for corporate support functions; and (iii) the
elimination of expenses related to certain discontinued operations. In addition,
the Company further reduced costs through changes in labor planning, food and
beverage operations, a revised birthday party reservation system and
renegotiated store lease terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Comparison of Years Ended
December 31, 1997 and 1996."
The Company also established an incentive-based compensation plan tied
to store profitability and service quality measures for its FunCenter and
regional managers in order to create a stronger sense of ownership and
accountability and to build support for the Company's business strategy among
such managers.
Product Improvements
In 1997, the Company began implementing several programs designed to
increase attendance and in-store spending.
During the fourth quarter of 1997, the Company began an extensive
FunCenter renovation program, designed to broaden their entertainment offerings,
upgrade their facilities and give them a "new look" consistent with the
Company's brand repositioning campaign (see below). These renovations typically
included the addition of designated areas for laser tag, arts and crafts, stage
events and promotional activities. As of November 1, 1998, the Company had
renovated approximately 60% of its FunCenters and may renovate additional
FunCenters by the end of 1999 if adequate funds are available. These renovations
were more costly and took longer to complete than originally anticipated.
The Company intends to create a series of regularly changing
activities and events tied in with major entertainment properties and consumer
products that appeal to children using the new venues in the renovated
FunCenters ("DZ Live," "Laser Adventure," the "Art Factory" and the "Cage"), as
well as open space in unrenovated FunCenters. Laser tag was initially themed to
"Men in Black" and is currently themed to "Godzilla," both hit motion pictures
and animated television series. See "-- Current FunCenter Operations." The
Company began 1998 with a hockey skills promotion with the National Hockey
League and CCM, a leading hockey equipment brand. In April 1998, the promotion
theme changed to tie into New Line Cinema's major motion picture release of
"Lost in Space." During the second half of 1998, the Company began a series of
promotions with Fox Kids Worldwide. See "-- New Marketing Strategy."
In 1997, the Company entered into marketing and product agreements
with Pizza Hut and Pepsi. These agreements provide for joint promotions and, the
Company believes, increase the appeal and quality of its food service
operations. Through September 1998, approximately 75% of the FunCenters had
converted to permit the sale of Pizza Hut menu items. During the remainder of
1998, the Company expects to complete conversion of additional FunCenters to
permit the sale of Pizza Hut and/or other food menu items.
The Company has also sought to increase revenue by better utilizing
DZ's existing facilities. To increase weekday visits, the Company developed
interactive parent-child play programs for preschoolers in 1997. These programs
offer tumbling, climbing, exercising and singing and are now being offered under
the "Discovery Zone University" and "DZU" brand names. During the remainder of
1998, these weekday programs will be provided in approximately 25 FunCenters.
Due to the start-up nature of these programs, the Company does not currently
intend to expand these programs beyond the locations currently offering these
programs in 1998. In the future, the Company may consider expanding these
programs to additional FunCenters and to include after school programs for older
children.
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New Marketing and Entertainment Strategy
Since mid-year 1997, the Company has developed and begun to implement
a new marketing strategy consisting of several components:
o Reposition and relaunch "New DZ" brand -- Building on its
revamped product offerings, the Company is reintroducing
itself as the "New DZ." Through a combination of local and
national public relations and a new advertising campaign, the
Company is repositioning itself from a children's indoor
playground venue to a children's entertainment center.
o Reorient marketing to regional and local focus -- During the
second half of 1998, the Company has begun to reorient its
marketing efforts to focus on local and regional marketing
and advertising programs with a national "overlay."
o Form strategic marketing partnerships -- The Company is
establishing cross-promotional alliances with local and
regional businesses, such as supermarkets, convenience stores
and malls, as well as national promoters in the toy,
television, film and consumer product industries.
As part of its ongoing marketing efforts, the Company's strategy is to
target two subsegments of the Kids Markets: kids ages six to 12 ("Core Target")
and pre-schoolers. The Core Target will be the primary focus of in-store
entertainment programs. Separately, a specific programming calendar will be
aimed at the younger children, called "DZ Jr." Given the strong interest and
efforts of entertainment companies in both these age groups, the Company
believes this strategy will create even broader tie-in opportunities.
Due to its national market presence and the strength of its brand
name, the Company believes that it is well positioned to act as a platform for
other promotional and product "tie-ins" with children's entertainment and
consumer product companies, which should give the Company access to a wide
variety of joint marketing, cross-promotional and in-store entertainment
opportunities. In addition to the Pizza Hut and Pepsi agreements referred to
above, during 1997 and the first half of 1998, the Company entered into
promotional arrangements with Fox Kids Worldwide, Cartoon Network, Hasbro,
Columbia Tri-Star, New Line Cinema, the National Hockey League, CCM, the
Worldwide Wrestling Federation, Welches, Oscar Mayer and the Nabisco Foods
Group.
The Company is negotiating with a number of other possible promotional
partners in the toy, television, film and consumer product industries and
expects to continue to pursue such arrangements in the future. The Company
believes that such alliances will provide significant marketing support and
theme-based promotions to periodically refresh its product offerings and to
stimulate repeat customer visits on a cost-effective basis.
Industry Overview
Demographics
There are more than 54 million children under the age of 13, with
approximately 35 million children between the ages of five and 13. "Baby Boomer"
families (parents born between 1946 and 1965) are expected to contribute to an
increase in DZ's target market over the next four years. By the year 2000, there
are expected to be approximately 55 million children under the age of 13,
including approximately 36 million between the ages of five and 13 (representing
annualized growth rates for these groups of approximately 0.2% and 0.4%,
respectively).
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U.S. POPULATION BY AGE GROUP
(IN THOUSANDS)
UNDER 5 FIVE TO UNDER 13 TOTAL UNDER 13
------- ---------------- --------------
1995 19,591 34,384 53,975
2000 18,987 36,043 55,030
2005 19,127 35,850 54,977
2010 20,012 35,605 55,617
Source: Mid-range of U.S. Bureau of the Census estimates.
Competition
The Company competes against a wide variety of concepts vying for
family leisure time and entertainment spending. These competing concepts
encompass a broad spectrum of entertainment opportunities, including family
entertainment centers, theme parks, movie theaters and other in-home and
out-of-home entertainment activities. DZ is part of the children's entertainment
center segment of the industry, which includes admissions-based, or
pay-for-play, recreational and soft play centers that target children ages two
to 12.
The pay-for-play children's entertainment center industry is highly
fragmented and consists largely of local "mom and pop" stores, small regional
chains and local non-profit organizations that provide pay-for-play indoor soft
play facilities. The Company believes that it pioneered this concept when it
built its first FunCenter in 1989. While several national competitors, such as
Leaps and Bounds, subsequently emerged, the Company purchased many such
competitors in an attempt to consolidate the market. The Company's future
revenues will depend to a significant extent upon its ability to respond to
changes in consumer tastes. The performance of individual FunCenters may be
affected by a variety of local factors such as the location of competing
facilities, labor and employee benefit costs and the availability of experienced
management and hourly employees.
New competitors may include The Walt Disney Company, which has a
family entertainment concept in two locations and has announced plans to open
additional store locations. DZ also competes to some extent against certain
children's themed restaurant chains, which provide ancillary entertainment
offerings and merchandise in addition to food and do not charge admission fees.
Such competitors include ShowBiz Pizza Time, Inc., the operator and franchiser
of approximately 300 "Chuck E. Cheese" restaurants in the United States, and, to
a lesser extent, certain franchisees of McDonald's Corporation that operate
indoor playgrounds at a number of locations. These restaurants differ from DZ in
that they do not charge for admission and are focused on food as their primary
attraction and source of revenue. Certain of these competitors have longer
operating histories, substantially greater name recognition and/or more
extensive financial, technical, marketing, sales and distribution resources.
To a more limited extent, the Company competes against indoor/outdoor
family entertainment centers, including theme parks and other themed restaurant
chains. These destinations offer an entertainment experience centered around
attractions such as miniature golf, water rides, go-carts and video arcade
games. Theme parks provide a variety of thrill rides, redemption games and other
entertainment attractions. Such facilities generally require more travel and
have higher prices than FunCenters. Themed restaurants have grown in popularity
in recent years and include chains such as Planet Hollywood and Rainforest Cafe.
The generally older and/or broader age group focus of each of these concepts and
the differing nature of their product offerings limit the extent to which they
compete against the Company.
Current FunCenter Operations
The current FunCenters are indoor pay-for-play entertainment centers
for children. Adults are not permitted entry without a child. The Company
encourages the participation of parents and other accompanying adults, and play
equipment is constructed to allow them to play along with their children.
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A typical FunCenter is approximately 12,000 to 17,000 square feet and
contains the following special features:
o An indoor playground composed of a series of tubes, slides,
ball bins, climbing mountains, air trampolines, obstacle
courses, ramps, stairs and other devices for crawling,
jumping, running, swinging and climbing.
o A separate area for toddlers but on a smaller scale. In
renovated FunCenters, this area is called the "DZ Jr." play
area. Access to this play area is limited to children under a
specified height, which provides younger children their own,
less boisterous play area.
o Food and beverage operations which, in most cases, feature a
selection of Pizza Hut menu items and Pepsi beverage
products.
o A game zone, featuring activities and games in which children
are awarded tickets for play and, to a more limited extent,
video games. Tickets can be redeemed for a variety of small
toys and prizes.
o Three to five party rooms that can be reserved for birthdays
or other group events. FunCenters offer a variety of packages
that combine a celebration in the party room, including cake
and other snacks and beverage services, with access to the
entire FunCenter and tokens for use in the game zone for each
child attending a party.
o A redemption counter where awards for games are redeemed, as
well as Discovery Zone apparel, toys and products are sold.
Renovated FunCenters also contain the following features:
o A laser tag area called "Laser Adventure" which features a
maze of interactive targets which are themed to major
entertainment properties.
o An arts and craft room called the "Art Factory," featuring
regularly changing arts and crafts projects.
o A 1,000 to 1,400 square foot promotional area called the
"Cage," featuring a series of changing activities and events.
o A stage area called "DZ Live," featuring custom DZ Video
programming and kid Karaoke. The stage area represents a
FunCenter focal point where the Company can present public
relation appearances, costume characters, storytelling,
puppet shows, a talent contest and other appearances.
DZ currently targets children 12-years old and younger, with the
highest concentration of visitors being one to eight years old. With its
revamped product offerings, the Company hopes to attract a larger portion of the
eight- to 12- year-old market population.
FunCenters are designed and constructed with an emphasis on safety and
security. At each FunCenter, an identification bracelet is attached to each
child and matched at the exit with an identical bracelet given to the
accompanying adult. In addition, the entrance and exit at each FunCenter are
monitored for security purposes. At all FunCenters, play area equipment is
equipped with protective cushions and padding, and "coaches" are available to
assist children through play activities. All FunCenters prohibit smoking and
maintain high cleanliness standards.
FunCenters charge a general admission fee for each child, with prices
ranging from $3.99 to $8.99, depending on age, location and whether the
FunCenter has been renovated. The Company also offers discounted admission fees
for groups and birthday parties. Adults accompanying children are admitted
without charge. Typical hours of operation for FunCenters extend from 11:00 a.m.
to 7:00 p.m., Sunday to Thursday, and 10:00 a.m. to 9:00 p.m. on Friday and
Saturday. The Company generates most of its weekly revenue on weekends.
53
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Intellectual Property
The names "Discovery Zone" and "DZ" and the Company's logo are
registered trademarks and service marks in the United States for a variety of
goods and services offered at the FunCenters. The Company has registered and/or
is in the process of registering its names and/or logo in the following foreign
countries: Australia, Belgium, Brazil, Canada, France, Germany, Hong Kong,
Italy, Japan, Mexico, South Korea, Spain and the United Kingdom. The Company
considers these intellectual property rights material to its business and
actively defends and enforces them.
Insurance
The Company carries customary insurance coverages, including primary
commercial liability insurance with limits of $1 million per occurrence and $2
million in the aggregate, and umbrella and excess policies aggregating $100
million per occurrence and in the aggregate, which policies are available after
the Company has paid or become legally obligated to pay $100,000 or $250,000 per
claim, depending upon the policy year. When the Company's aggregate indemnity
and expense amounts in any policy year exceed an aggregate of $2.5 million, the
Company's trailing self-insured retention is reduced to $10,000 or $25,000 per
occurrence, depending upon the policy year. The Company believes that it carries
adequate insurance coverage for its business activities. However, there can be
no assurance that such coverage will prove to be adequate or will continue to be
available to the Company. In the event that such coverage proves to be
inadequate, such event may have a material adverse effect on the financial
condition or results of operations of the Company. Claims paid to date have been
within amounts accrued by the Company using historical data based on prior
experience.
Regulation
The Company is subject to various federal, state and local laws and
regulations affecting operations, including those relating to the use of video
and arcade games, the preparation and sale of food and beverages and those
relating to building and zoning requirements. The Company is also subject to
laws governing its relationship with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Difficulties or failures in obtaining required licenses or other
regulatory approvals could delay or prevent the opening of a new FunCenter, and
the suspension of, or inability to renew, a license or permit could interrupt
operations at an existing FunCenter.
Employees
At September 30, 1998, the Company had approximately 5,400 full and
part-time employees, including those employed at its corporate headquarters,
regional offices and Company-owned FunCenters. A typical Discovery Zone
FunCenter has a staff of between 20 and 40 employees, including managers,
counter attendants, coaches and party hosts, most of whom are part-time. The
Company's employees are not represented by any labor union or covered by a
collective bargaining agreement. The Company believes its relationship with its
employees to be good.
Properties
The Company currently operates 197 FunCenters in 39 states, Canada and
Puerto Rico. The Company also operates two Block Party stores. Approximately 80%
of the Company's FunCenters are located adjacent to, or are part of, major
shopping centers or strip shopping centers with large parking capacity. The
following chart shows a breakdown of the Company's FunCenters by location:
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Number of Number of
Location Fun Centers Location Fun Centers
- -------- ----------- -------- -----------
Alabama ...........................4 New Jersey .........................8
Arizona ...........................1 New Mexico .........................1
California .......................20 New York ..........................16
Colorado ..........................4 North Carolina .....................2
Connecticut .......................2 Ohio ..............................10
Delaware ..........................1 Oklahoma ...........................3
Florida ..........................10 Oregon .............................2
Georgia ...........................6 Pennsylvania .......................9
Hawaii ............................1 Rhode Island .......................1
Idaho .............................1 South Carolina .....................2
Illinois ..........................5 Tennessee ..........................4
Indiana ...........................8 Texas .............................19
Iowa ..............................1 Utah ...............................1
Kansas ............................2 Virginia ...........................8
Kentucky ..........................2 Washington .........................2
Louisiana .........................4 Wisconsin ......................... 4
Maryland ..........................6 ---
Massachusetts .....................6 Total United States ..............190
Michigan ..........................5 Canada ............................ 5
Minnesota .........................2 Puerto Rico ........................2
Mississippi .......................1
Missouri ..........................5 Total ............................197
Nevada ............................1 ===
The Block Party Stores are located in
Indiana and New Mexico.
Fourteen of the sites on which the FunCenters operate are owned by the
Company and are subject to mortgages and security interests held by McDonald's
(the McDonald's Rent Deferral Secured Notes and the McDonald's Secured Note
(collectively, the "McDonald's Obligations")). The Company currently leases all
but one of the remaining FunCenter sites. The Company believes that it could
find alternative space at competitive market rates if it were unable to renew
the lease on any of the Company-owned FunCenter sites. In the future, the
Company may from time to time purchase real estate for sites for the
construction of new FunCenters.
The Company currently holds four parcels of undeveloped land which it
intends to sell, of which three parcels secure the McDonald's Obligations. The
proceeds of sales of collateral securing the McDonald's Obligations, if any, are
required to be applied first to accrued interest on the McDonald's Obligations,
then to a reduction of principal on the McDonald's Secured Note and then to
principal of the McDonald's Rent Deferral Secured Notes. Future principal
payments on the McDonald's Secured Notes will be reduced to the extent of the
reduction of the outstanding principal balance (i.e., a 50% reduction in the
outstanding principal balance would reduce future principal payments by 50%).
The Company entered into a lease, commencing October 1, 1997, for
approximately 10,000 square feet of office space in the Plantation, Florida area
at which to locate its finance, purchasing, management information systems and
other administrative functions. The Company relocated to this space in January
1998. On October 31, 1997, the Company entered into a sublease for approximately
6,500 square feet of office space through June 30, 2001 for its executive
offices in Elmsford, New York and relocated to this space in November 1997.
55
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Legal Proceedings
In November 1996, the Company filed the Plan of Reorganization with
the Bankruptcy Court and a related disclosure statement. The Plan of
Reorganization was confirmed by the Bankruptcy Court on July 18, 1997 and became
effective on July 29, 1997, at which time the Company emerged from Chapter 11.
Substantially all of the claims against the Company relating to pre-petition
causes of action were discharged on the Effective Date.
The Company is involved in litigation from time to time in the
ordinary course of its business. In the opinion of the Company, any liability
that may be incurred upon the resolution of certain claims and lawsuits in which
the Company is involved at this time will not, in the aggregate, exceed the
limits of the Company's insurance policies or otherwise have a material adverse
effect upon the financial condition or results of operations of the Company.
56
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages as of December 1,
1998 of the executive officers and directors of the Company and the positions
they hold:
Name Age Position
- ---- --- --------
Chet Obieleski............. 55 President, Chief Executive Officer, Chief
Operating Officer and Director
Sharon L. Rothstein........ 41 Senior Vice President, Marketing and
Entertainment
Robert G. Rooney........... 41 Senior Vice President, Chief Financial and
Administrative Officer
Jeffrey Sasson............. 45 Senior Vice President, Retail and Corporate
Services
Terrance Shindle........... 51 Vice President of Store Operations
Andrew M. Smith............ 46 Vice President, Real Estate, General Counsel
and Secretary
Leighton J. Weiss.......... 46 Vice President and Controller
Martin S. Davis............ 71 Director
David L. Eaton............. 45 Director
Greg S. Feldman............ 42 Director
Jason B. Fortin............ 27 Director
Scott Johnson.............. 26 Director
David J. Kass.............. 39 Director
Mary McGrath............... 40 Director
L.G. Schafran.............. 60 Director
Christopher R. Smith....... 34 Director
Paul D. Kurnit............. 50 Director
Background of Directors and Executive Officers
Set forth below is a brief description of the business experience of
the executive officers and directors of the Company.
Mr. Obieleski has been Chief Operating Officer of the Company since
August 1998. Upon the resignation of Scott W. Bernstein, effective November 27,
1998, Mr. Obieleski became the President, the Chief Executive Officer and a
director of the Company as of such date, having been elected as a director by
the Board of Directors on November 11, 1998 to fill the vacancy created by Mr.
Bernstein's resignation. From October 1997 until June 1998, Mr. Obieleski served
as chief operating officer and chief financial officer of AIG Designs, a major
importer of casual furniture. From 1990 until 1996, Mr. Obieleski served as
executive vice president of Britches of Georgetown, a national specialty
menswear chain. From 1987 until 1989, Mr. Obieleski served as senior vice
president -- finance and operations of Sterns, a department store chain in the
New York and New Jersey.
Ms. Rothstein has been Senior Vice President -- Marketing and
Entertainment of the Company since March 1997. From April 1996 until March 1997,
she was vice president -- new business at Nabisco. From 1987 until April 1996,
she held several positions at Nabisco, including senior director -- new
business, director -- business marketing and product manager.
Mr. Rooney has been Senior Vice President, Chief Financial and
Administrative Officer of the Company since February 1997. From March 1994 until
September 1996, Mr. Rooney served as chief financial officer of Forschner
Enterprises, a venture capital group, and from September 1992 to February 1994,
Mr. Rooney served as a director and
57
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consultant on behalf of various investors and investment funds affiliated with
Forschner Enterprises. From 1989 through 1992, Mr. Rooney served as managing
director and chief financial officer of The Signature Group, a merchant banking
group specializing in troubled real estate. From 1986 through 1989, he served as
senior vice president, chief financial officer and treasurer of Imagine
Entertainment, Inc., a publicly held film and television production company. Mr.
Rooney is a certified public accountant.
Mr. Sasson joined the Company as Senior Vice President -- Retail and
Corporate Services in August 1998. From December 1996 until April 1998, Mr.
Sasson served as corporate vice president of Food Services at Six Flags Theme
Parks, Inc., a Time Warner Company. From May 1990 until December 1996, Mr.
Sasson worked for Service America Corporation and Compass Groups USA, both
national contract service companies. During that time, Mr. Sasson was employed
by Canteen Corporation, a T.W. Services Company, in several capacities,
including district manager and assistant regional general manager.
Mr. Shindle joined the Company as Regional Director of West Coast
Operations in February 1998 and has been Vice President of Company Operations
since April 1998. From October 1995 to November 1997, Mr. Shindle was a Regional
Partner with BC Detroit and Boston West California, two franchisees of Boston
Chicken, Golden Colorado. From June 1993 to August 1995, he served as executive
vice president of Midwest Operations and, from April 1985 to June 1993, served
as vice president of West Coast Operations for Bakers Square Restaurants, a
division of Vicorp Restaurants, Denver, Colorado.
Mr. Andrew M. Smith joined the Company as Vice President -- Real
Estate and General Counsel in October 1997 and has served as Secretary since
November 1997. From June 1996 to October 1997, Mr. Smith served as a managing
director of Alpine Consulting, a real estate consulting firm. From January 1995
to May 1996, he served as the vice president -- operations and as a director of
Influence, Inc., a medical device manufacturer. From 1986 to 1994, Mr. Smith was
a real estate partner with Weil, Gotshal & Manges LLP, an international law
firm.
Mr. Weiss has been Controller of the Company since 1996, and in 1997
he was named Vice President of Finance. He joined the Company in July 1995,
serving as Assistant Controller. Mr. Weiss held various positions as a
controller or finance manager within the music division of Blockbuster
Entertainment from January 1994 through June 1995. From October 1988 to January
1994, he served as controller and director of accounting for Sound Warehouse,
Inc. Prior to joining Sound Warehouse, Inc., Mr. Weiss held various positions
for Arthur Andersen LLP, where he achieved the position of manager in the audit
and financial consulting division. Mr. Weiss is a certified public accountant.
Mr. Davis was elected as a director of the Company in July 1997. Mr.
Davis is a founder and has been a managing partner of Wellspring since January
1995. Prior to founding Wellspring, Mr. Davis served as chairman and chief
executive officer of Gulf + Western Industries, Inc. and its successor company,
Paramount Communications, Inc., from 1983 to 1994. Mr. Davis is a member of the
board of directors of Lionel L.L.C., National Amusements, Inc., the parent
company of Viacom Inc., and SLM International, Inc.
Mr. Eaton was elected as a director of the Company in August 1998, as
one of the Noteholder Representatives (as defined herein) in accordance with the
terms of the Stockholders' Agreement (as defined herein). Mr. Eaton is currently
vice president -- member services at Attorneys' Liability Assurance Society,
Inc. ("ALAS"), a risk retention group, which he joined in 1997. At ALAS, Mr.
Eaton's responsibilities include shareholder relations, marketing, new product
development and strategic planning. From 1991 to 1997, Mr. Eaton was a partner
in the law firm of Kirkland & Ellis in Chicago, concentrating in complex finance
and reorganization matters. Prior to joining Kirkland & Ellis, Mr. Eaton was the
senior workout/bankruptcy counsel for Continental Bank N.A.
Mr. Feldman was elected as a director of the Company in July 1997. Mr.
Feldman has been a managing partner of Wellspring since its inception in January
1995. From September 1990 until January 1995, he was a vice president in charge
of acquisitions at Exor America Inc. (formerly IFINT-USA Inc.), the U.S.
investment arm of the Agnelli Group. From September 1988 until September 1990,
Mr. Feldman was vice president and founder of Clegg Industries, Inc., an
investment firm. Mr. Feldman is a member of the board of directors of Lionel
L.L.C., SLM International, Inc. and Chartwell Re Corporation.
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Mr. Fortin was elected as a director of the Company in August 1998.
Mr. Fortin is a vice president of Wellspring which he joined in March 1995. From
1992 until he joined Wellspring, Mr. Fortin had been an associate in the
corporate finance department of Donaldson, Lufkin & Jenrette Securities
Corporation since 1992.
Mr. Johnson was elected as a director of the Company in September
1998. Mr. Johnson is an associate of Wellspring, which he joined in March 1998.
From February 1997 until March 1998, Mr. Johnson was an analyst at J. W. Childs
Associates, a private equity firm. From May 1995 until February 1997, Mr.
Johnson was an analyst in the mergers and acquisitions department for Lehman
Brothers, Inc. Prior to May 1995, Mr. Johnson was a student at the University of
Texas at Austin where he received a degree in finance.
Mr. Kass was elected as a director of the Company in July 1998. Mr.
Kass is the chief financial officer of Wellspring which he joined in November
1997. From July 1995 to July 1997, Mr. Kass was a vice president and chief
financial officer of CW Group, an early stage healthcare venture capital group.
While at CW Group, Mr. Kass was actively involved in the management of several
portfolio companies, including CareAdvantage, Inc., a public managed care
company, where he served as interim president from July 1996 to April 1997. For
six years prior to joining CW Group, Mr. Kass was a director and senior
executive of Genetrix, Inc., a genetic services organization.
Ms. McGrath was elected as a director of the Company in August 1998,
as one of the Noteholder Representatives in accordance with the terms of the
Stockholders' Agreement. Ms. McGrath is currently a sales manager at Random
House, Inc., which she joined in 1991. From 1987 to 1991, Ms. McGrath was a
regional sales director and a national chain sales manager at Time Warner, Inc.
From 1985 to 1987, Ms. McGrath was a promotions director at Chas. Levy Co., a
wholesale distributor of magazines and books.
Mr. Schafran was elected as a director of the Company in July 1997.
Mr. Schafran has been a managing general partner of L.G. Schafran & Associates,
a real estate and development firm, since 1984. Mr. Schafran is a member of the
board of directors of several companies, including Comsat Corporation, Publicker
Industries Inc. and Kespar A.S.L., Inc., chairman of the board of directors of
Delta-Omega Technologies, Inc. and a trustee of National Income Realty Trust.
Mr. Chistopher R. Smith was elected as a director of the Company in
July 1997. Mr. Smith is a managing director of Wafra, which he joined in 1992.
From 1990 until 1992, Mr. Smith served as a vice president of Kouri Capital
Group, Inc., a merchant bank providing, among other things, privatization
advisory service. Prior to joining Kouri Capital Group, Mr. Smith served as
assistant vice president of Direct Equity Investment at Lambert Brussels Capital
Corporation and, prior to that, as a corporate loan officer at First Union
National Bank.
Mr. Kurnit was appointed as director in accordance with the terms of
the Plan of Reorganization as representative of the committee of pre-petition
unsecured creditors of the Company. He will serve for a term of three years
through July 2000. Mr. Kurnit's appointment was approved by the Bankruptcy Court
at the confirmation hearing. Mr. Kurnit has been president of Griffin Bacal Inc.
since 1988.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of securities ownership and changes
in such ownership with the Commission. Officers, directors and greater than 10%
shareholders also are required by rules promulgated by the Commission to furnish
the Company with copies of all Section 16(a) forms they file.
The Company is currently working with its officers, directors and
greater than 10% shareholders to ensure full current and future compliance with
the reporting requirements of Section 16(a). In 1998, the Company assisted each
of its officers and directors and Birch Holdings, L.L.C. in the filing of a
delinquent Form 3. In addition, three executive officers that were granted stock
options by the Company in 1997 did not timely file a Form 5 to report such
grants.
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Executive Compensation
The following table and discussion summarize the compensation earned
by the two individuals who have served as the Company's Chief Executive Officer
during the year ended December 31, 1997, and the other four most highly
compensated executive officers of the Company who earned more than $100,000 in
salary and bonuses (collectively, the "Named Executive Officers") for services
rendered in all capacities to the Company during the three years ended December
31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
Number of
Annual Compensation Securities
----------------------------------------------------------------- ------------
Other
Annual Underlying All Other
Compensation Options/ Compensation
Name Position Year Salary($) Bonus($) (1)($) SARs ($)
----------------------- --------------- ----- --------- --------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott W. Bernstein(2)(3) President/CEO 1997 416,667 200,000 37,862 357,845 --
1996 30,204 -- -- -- --
Donna R. Moore(4) ..... President/CEO 1997 115,962 -- 900 -- 300,000
1996 412,500 -- -- -- 2,699(5)
1995 145,594 150,000 -- -- 26,224(5)
Robert G. Rooney(2) ...... SVP--CFO 1997 185,000 45,000 4,615 89,500 75,000(6)
1996 8,538 -- -- -- --
Sharon L. Rothstein(2) ... SVP--Marketing 1997 185,000 75,000 4,615 89,500 --
Leighton J. Weiss ........ VP--Finance 1997 126,969 12,000 -- -- 50,000(6)
1996 115,987 23,356 -- -- --
1995 41,887 17,756 -- -- --
Stan Gerasimczyk ......... VP--Store 1997 147,115 12,500 2,400 -- 30,000(6)
Operations
- ---------------------------
<FN>
(1) Represents payments made by the Company for auto allowances and other perquisites pursuant to employment contracts.
(2) Mr. Bernstein, Mr. Rooney and Ms. Rothstein became executive officers of the Company in December 1996, February 1997
and April 1997, respectively.
(3) On November 27, 1998, Mr. Bernstein resigned as President, Chief Executive Officer and as a director of the Company.
Pursuant to his severance agreement with the Company, Mr. Bernstein forfeited all of the options to which he was or
may become entitled. In return, the Company agreed to pay Mr. Bernstein (i) a single payment of $200,000, (ii) his
salary through March 1999 and (iii) his benefits through December 1999.
(4) Ms. Moore held a nominal title of President and Chief Executive Officer through the Confirmation Date in order to
avoid the need for Bankruptcy Court approval in the event the Plan was not approved by the Company's creditors, in
which case Mr. Bernstein would have ceased to serve as President and Chief Executive Officer of the Company. Ms. Moore
was paid her salary through February 1997 and received severance pay of $300,000 upon the Company's emergence from
Chapter 11.
(5) Represents reimbursement for relocation expenses.
(6) Represents a one-time bonus awarded by the Company in recognition of efforts in connection with the reorganization
of the Company and its successful emergence from Chapter 11.
</FN>
</TABLE>
60
<PAGE>
Option and SAR Grants in Fiscal Year 1997
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term (2)
------------------------------------ --------------------------------
Number of % of Total
Securties Options/SAR
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh)(1) Date 5%($) 10%($)
- ----------------------- ------------- ----------------- ------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Scott W. Bernstein ... 357,845 66.7% 11.88 7/31/07 2,673,556 6,775,315
Robert G. Rooney ..... 89,500 16.7% 11.88 7/31/07 668,678 1,694,563
Sharon L. Rothstein .. 89,500 16.7% 11.88 7/31/07 668,678 1,694,563
- -----------------
<FN>
(1) The exercise price of each of the Company's outstanding stock options equals the fair market value of the Common Stock on the
date of grant, which the Company reasonably believed to be $11.88, based on the opening book value of the total equity of the
Company on a fully diluted basis as of July 31, 1997, as determined by Fresh Start Accounting.
(2) Amounts reported in these columns represent amounts that may be realized upon exercise of the Company's stock options
immediately prior to the expiration of their terms assuming the specified compounded annual rates of appreciation (5% and
10%) on the Common Stock over the term of the options. These assumptions are based on rules promulgated by the Commission and
do not reflect the Company's estimate of future stock price appreciation. Actual gains, if any, on the stock option exercises
are dependent on the timing of such exercise and the future performance of the underlying Common Stock. There can be no
assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received
by the option holder. As a result of the warrants issued in the Unit Offerings, the percentage ownership of these officers
has been substantially diluted. See "Principal Stockholders."
(3) On November 27, 1998, Mr. Bernstein resigned as President, Chief Executive Officer and as a director of the Company. Pursuant
to his severance agreement with the Company, Mr. Bernstein forfeited all of the options to which he was or may become
entitled. In return, the Company agreed to pay Mr. Bernstein (i) a single payment of $200,000, (ii) his salary through March
1999 and (iii) his benefits through December 1999.
</FN>
</TABLE>
Option and SAR Exercises in Fiscal 1997 and Year-End Option and SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Shares Options/SARs In-the-Money-Options/SARs
Acquired on Value at FY-End 1997 at FY-End 1997 ($)
Name Excecise Realized Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ------------------------------ -------------- ------------ -------------------------- ----------------------------
<S> <C> <C> <C> <C>
Scott W. Bernstein .......... -- 16.7% 0/357,845 7/31/07
Robert G. Rooney ............ -- 16.7% 0/89,500 7/31/07
Sharon L. Rothstein ......... -- 16.7% 0/89,500 7/31/07
Donna R. Moore .............. -- 16.7% 0/89,500 7/31/07
Leighton J. Weiss ........... -- -- -- --
- -----------------------
<FN>
(1) The Company's Common Stock was not publicly traded on December 31, 1997. The Company reasonably believes that the stock
options granted to Mr. Bernstein, Ms. Rothstein and Mr. Rooney in 1997 were not in-the-money at December 31, 1997.
</FN>
</TABLE>
61
<PAGE>
Committees of the Board of Directors
None.
Compensation of Directors
The Directors do not receive any fee for their services, except for
those Directors that are Noteholder Representatives who receive compensation of
$3,000 per quarter. All Directors are reimbursed for all out-of-pocket expenses
incurred in connection with attending meetings of the Company's Board of
Directors.
Employment Agreements
On July 21, 1997, the Company entered into an employment agreement
with Mr. Bernstein providing for his continued employment as Chief Executive
Officer, President and Director. The agreement with Mr. Bernstein expires on
January 1, 2001. The agreement provides for an annual base salary of $440,000
per year, with annual increases of $40,000 beginning January 1, 1998. In
addition, the agreement provides an annual bonus, equal to 2.0% of the Company's
earnings before interest, taxes, depreciation and amortization expenses. The
agreement also provides for the reimbursement of certain business related
expenses. Mr. Bernstein resigned as the President, the Chief Executive Officer
and as a director of the Company effective November 27, 1998. As part of a
severance package, the Company has agreed to pay Mr. Bernstein (i) a single
payment of $200,000, (ii) his salary through March 1999 and (iii) his benefits
through December 1999; and Mr. Bernstein has agreed to forfeit all of his vested
and unvested stock options.
On August 1, 1997, the Company entered into an employment agreement
with Ms. Rothstein providing for her employment as Senior Vice President,
Marketing and Entertainment. The agreement with Ms. Rothstein expires on
December 31, 2000. The agreement provides for an annual base salary of $185,000
(plus performance bonuses based on the achievement of certain objectives).
On August 1, 1997, the Company entered into an employment agreement
with Mr. Rooney providing for his employment as Senior Vice President, Chief
Financial Officer and Administrative Officer. The agreement with Mr. Rooney
expires on December 31, 2000. The agreement provides for an annual base salary
of $185,000 (plus performance bonuses based on the achievement of certain
objectives).
On August 26, 1998, the Company entered into an agreement with Carl
Marks Consulting Group, LLC ("Carl Marks") in order to obtain the financial and
management consulting services of Carl Marks. The Company appointed Mr.
Obieleski, a representative of Carl Marks, as the Company's Chief Operating
Officer. Upon the resignation of Scott Bernstein, Mr. Obieleski also became the
President, the Chief Executive Officer and a director of the Company. The
Company pays Carl Marks $42,500 per month for the services of Mr. Obieleski.
Committee Interlocks and Insider Participation
The Company's Board of Directors does not currently have a
compensation committee. The Company's Board of Directors determines all
executive compensation matters. Chet Obieleski serves as a director on the Board
of Directors and as Chief Executive Officer and President of the Company.
Stock Incentive Plan
All of the Company's option plans and equity securities in existence
prior to the Effective Date were canceled pursuant to the Plan of
Reorganization. The Company adopted the 1997 Stock Incentive Plan (the "Stock
Incentive Plan") in connection with the Plan of Reorganization. Pursuant to
their respective employment agreements, the Company granted to Mr. Bernstein,
Ms. Rothstein and Mr. Rooney options to purchase 357,485 shares, 89,500 shares
and 89,500 shares, respectively, of the Company's Common Stock at an exercise
price of $11.88 per share. One-third of such options vested on January 1, 1998.
One-third of such options will vest on January 1, 1999 and the remaining
one-third will vest on January 1, 2000. In the first quarter of 1998, the
Company awarded options to purchase approximately 150,000 shares to certain
62
<PAGE>
other management employees. In addition, such options vest in their entirety
upon the incurrence of a "Change of Control." Pursuant to his severance
agreement with the Company, Mr. Bernstein forfeited all of the options to which
he was or may become entitled. The Board of Directors of the Company may amend
or modify the Stock Incentive Plan at its discretion in accordance with the
Company's Certificate of Incorporation and By-laws. The Stock Incentive Plan
terminates ten years after the Effective Date. Shares of Common Stock subject to
the Stock Incentive Plan may represent up to a maximum of 10% of the outstanding
shares of Common Stock after giving effect to the issuance of the Ten Year
Warrants and the Warrants. The Company has reserved 715,692 shares of Common
Stock for issuance under this Stock Incentive Plan. The Company intends to
increase the amount of shares of Common Stock subject to the Stock Incentive
Plan to represent up to a maximum of 10% of the outstanding shares of Common
Stock after giving effect to the Ten Year Warrants, the Existing Warrants, the
Note Warrants and the Preferred Unit Warrants.
The Stock Incentive Plan is administered by the Board of Directors and
provides for the grants to eligible officers and employees of "Incentive Stock
Options" or "NonQualified Stock Options" (together, the "Stock Options"), or
both, to purchase shares of the Common Stock at no less than its fair market
value at the date of grant, in any such case subject to the discretion of the
Board of Directors. Pursuant to the Stock Incentive Plan, the Board of Directors
may also grant Stock Appreciation Rights (as defined therein). The Board of
Directors will fix the term of each Stock Option. However, no Incentive Stock
Options will be exercisable more than ten years after the date of grant. Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Company and, for a limited
time, upon the death, disability or retirement of the optionee. No Stock Option
will be transferable by the optionee other than by will, by the laws of descent
and distribution, or, in the case of a NonQualified Stock Option, as permitted
under the applicable option agreement. The Company may repurchase a portion of
the shares of Common Stock upon exercise of the Stock Options. The Stock
Incentive Plan allows an option holder to demand cash for his or her option upon
a Change of Control (as defined therein) of the Company.
The Stock Incentive Plan also provides for grants of Restricted Stock
(as defined therein). The Board of Directors may designate an award of
Restricted Stock (an "Award") which vests upon the attainment of certain
specified performance goals set by the Board of Directors. Prior to the letter
of expiration of the applicable restricted period and attainment of such
performance goals, a participant may not sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock other than to pledge the
Restricted Stock as security for a loan to provide funds to pay the exercise
price for the Stock Options. Holders of Restricted Stock will have all of the
rights of a stockholder of the Common Stock. Any Restricted Stock must be
forfeited upon termination of employment.
The Stock Incentive Plan also provides for grants of Performance Units
(as defined therein). The Board of Directors may designate an award of
Performance Units and may condition any settlement thereof upon attainment of
specified performance goals. Performance Units may not be sold, assigned,
transferred, pledged or otherwise encumbered during the award cycle. Upon
achievement of such performance goals, the Board of Directors will deliver to
the participant either shares of Common Stock equal to the number of Performance
Units or cash equal to the fair market value of such number of shares of Common
Stock.
The Board of Directors has approved a new 1998 Stock Incentive Plan to
replace the Stock Incentive Plan. The 1998 Stock Incentive Plan is very similar
to the Stock Incentive Plan except that it increases the amount of shares of
Common Stock that may be issued thereunder to approximately 10% of the
outstanding shares of Common Stock after giving effect to the Ten Year Warrants,
the Existing Warrants, the Note Warrants and the Preferred Unit Warrants. Final
adoption of the 1998 Stock Incentive Plan is subject to the approval of the
Company's stockholders at a stockholders' meeting scheduled to be held on
December 23, 1998.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth certain information concerning the
beneficial ownership of shares of Common Stock (all of which is Voting Common
Stock) on November 30, 1998 (the "Table Date"), by: (i) each stockholder known
by the Company to beneficially own more than 5% of the outstanding Common Stock;
(ii) each of the Company's executive officers; (iii) each of the Company's
directors; and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES OF
BENEFICIALLY-OWNED PERCENT BENEFICIALLY
BENEFICIAL OWNER COMMON STOCK (1) OWNED-(1)
- ----------------------------------------------- --------------------------- ---------------------
<S> <C> <C>
Birch Holdings L.L.C. (2) ......................... 513,615,830 99.6(3)
Birch Acquisition L.L.C. (2) ...................... 513,615,830 99.6(3)
Martin S. Davis (2) ............................... 513,615,830 99.6
Greg S. Feldman (2) ............................... -- --
Jason B. Fortin (2) ............................... -- --
David J. Kass (2) ................................. -- --
L.G. Schafran (2) ................................. -- --
Wafra Investment Advisory Group, Inc.,
or its designee (4) ............................. 171,645,581 28.6
Christopher R. Smith (5) .......................... -- (10)
Jefferies & Company, Inc.(6) ...................... 85,266,699 16.5
DZ Investors L.L.C.(7) ............................ 213,166,746 33.1
Paul D. Kurnit (8) ................................ 48,931 (10)
Robert G. Rooney (9) .............................. 29,833 (10)
Sharon L. Rothstein (9) ........................... 29,833 (10)
Chet Obieleski .................................... -- --
Jeffrey Sasson .................................... -- --
Terrance Shindle .................................. -- --
Andrew M. Smith ................................... -- --
Leighton J. Weiss ................................. -- --
Scott Johnson ..................................... -- --
David L. Eaton .................................... -- --
Mary McGrath ...................................... -- --
Directors and executive officers 685,489,291 99.9
as a group (2)(5)(6)(9) .........................
<FN>
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60
days of the Table Date are deemed outstanding. Such shares, however,
are not deemed outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Birch Acquisition L.L.C., an affiliate of Wellspring ("Birch
Acquisition"), directly owns 426,333,493 shares of Common Stock. In
addition, Birch Acquisition has voting power over 85,266,699 shares
beneficially owned by Jefferies & Company, Inc. ("Jefferies") pursuant
to an irrevocable proxy granted by Jefferies to Birch Acquisition.
Finally, Birch Acquisition has beneficial ownership of 2,015,639
shares of Common Stock directly owned by Birch Holdings L.L.C. ("Birch
Holdings"), in which Birch Acquisition has approximately 98% economic
interest and 100% voting power. Birch Acquisition is managed by Martin
S. Davis and Greg S. Feldman. In his capacity as a managing member of
Birch Acquisition, Mr. Davis exercises voting and dispositive power
over the shares of Common Stock directly held by Birch Acquisition and
Birch Holdings, and voting power over the shares of Common Stock owned
by Jefferies. Jason Fortin, David Kass and L.G. Schafran, directors of
the Company nominated by Birch Acquisition, and Mr. Feldman, disclaim
voting and dispositive power over the shares of Common Stock
beneficially owned by Birch Acquisition and Birch Holdings.
</FN>
</TABLE>
64
<PAGE>
(3) On a fully diluted basis, assuming the exercise of all outstanding
warrants and options, Birch Acquisition, Birch Holdings and Mr. Davis
would beneficially own 29.0% of the Company's outstanding Common
Stock.
(4) Wafra Acquisition Fund 6, L.P., an affiliate of Wafra, owns $14.0
million stated value of the Company's Convertible Preferred Stock
which, by its terms, is immediately convertible into 1,112,184 shares
of Common Stock before giving effect to the Offering and the offering
of Preferred Units. Wafra Acquisition Fund 6, L.P. and Wafra Fund
Management Ltd., another affiliate of Wafra, collectively own 80
Series A Preferred Unit Warrants to purchase, in the aggregate,
170,533,397 shares of Common Stock at an exercise price of $.00017 per
share.
(5) Christopher R. Smith, a director of the Company nominated by Wafra,
disclaims voting and dispositive power over the shares of Common Stock
beneficially owned by Wafra.
(6) Pursuant to a proxy granted by the Initial Purchaser to Birch
Holdings, Birch Holdings has voting power over all of the shares of
Common Stock and securities exchangeable for or convertible into
Common Stock held by Jefferies, but Birch Holdings does not have
dispositive power over such shares.
(7) DZ Investors L.L.C. owns 100 Series B Preferred Unit Warrants to
purchase, in the aggregate, 213,166,746 shares of Common Stock at an
exercise price of $.00017 per share.
(8) Paul D. Kurnit is the director of the Company nominated by certain
classes of pre-petition creditors of the Company pursuant to the Plan
of Reorganization, including Griffin Bacal, Inc., a pre-petition
creditor of the Company, of which Mr. Kurnit is an officer. Mr.
Kurnit, individually, is the beneficial owner of less than 5.0% of the
outstanding Common Stock.
(9) Represents the vested portion of Stock Options granted to Mr. Rooney
and Ms. Rothstein. The Company's Board of Directors has granted stock
options for 89,500 shares of Common Stock to each of Mr. Rooney and
Ms. Rothstein, one-third of which had vested as of the Table Date.
(10) Less than 1%.
65
<PAGE>
CERTAIN TRANSACTIONS WITH AFFILIATES
As required under the Plan of Reorganization, the Company reimbursed
Wellspring $1.1 million in connection with out-of-pocket expenses incurred in
connection with its joint sponsorship of the Plan of Reorganization. In
addition, an officer of Griffin Bacal, the Company's advertising agency, serves
as a director of the Company. The Company paid Griffin Bacal for media purchases
on behalf of, and creative services provided to, the Company of $7.7 million
during the year ended December 31, 1997 and $6.6 million for the nine months
ended September 30, 1998. Management believes that the terms of the agreement
with Griffin Bacal are at least as favorable to the Company as the Company could
have received from an independent third party.
66
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
General
The Exchange Notes will be issued pursuant to an Indenture (the
"Indenture") between the Company and Firstar Bank N.A. (formerly Firstar Bank of
Minnesota, N.A.), (the "Trustee"). The terms of the Exchange Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the "Trust Indenture Act"). The Exchange Notes and
the Registration Rights Agreement are subject to all such terms, and holders of
the Exchange Notes are referred to the Indenture, the Registration Rights
Agreement and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture and the Registration Rights
Agreement does not purport to be complete and is subject to and qualified in its
entirety by reference to the Indenture and the Registration Rights Agreement,
including the definitions contained therein. Copies of the proposed forms of
Indenture and Registration Rights Agreement are available from the Company upon
request. The definitions of certain terms used in the following summary are set
forth below under "Certain Definitions."
The Exchange Notes will be senior secured indebtedness of the Company
and will rank senior in right of payment to all present and future subordinated
indebtedness of the Company and pari passu in right of payment with all present
and future unsubordinated indebtedness of the Company, including, without
limitation, borrowings outstanding under Eligible Credit Facilities (including,
without limitation, the Revolving Credit Facility) and the Existing Notes. At
September 30, 1998, the Company had $108.3 million of indebtedness outstanding.
Principal of, premium, if any, and interest on the Exchange Notes will
be payable at the office or agency of the Company in the Borough of Manhattan,
The City of New York (which initially will be the corporate trust office of the
Trustee at Firstar Bank N.A.; provided that, at the option of the Company,
payment of interest may be made by check mailed to the address of the holder of
the Exchange Notes as such address appears in the security register.
The Exchange Notes will be issued only in registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
Security
Pursuant to the terms of the Collateral Agreements (as defined), all
of the obligations under the Exchange Notes and the Indenture will be secured by
(i) security interests in and liens on personal property and assets of the
Company (including cash, accounts receivable, inventory, equipment, general
intangibles, intellectual property rights, books and records and furnishings and
fixtures), (ii) a pledge of the capital stock of all present and future
Subsidiaries, (iii) subject to the Company's obligation to utilize its best
efforts to obtain the consent of McDonald's Corporation, a mortgage lien on
substantially all of the Company's real property and improvements thereon, which
mortgage lien shall be subordinated to a first mortgage lien in favor of
McDonald's Corporation (see "Description of Certain Indebtedness -- McDonald's
Secured Note"), and (iv) subject to certain conditions, a mortgage lien on
leasehold interests in the premises and improvements thereon occupied by the
Company pursuant to leases of store properties entered into by the Company after
the date of issuance of the Existing Notes (subject to the Company utilizing its
best efforts to deliver Mortgages (as hereinafter defined), substantially in the
form attached to the Indenture for the purposes of securing said mortgage
liens). The holders of the Exchange Notes will not be entitled to any Liens on
leasehold real estate interests existing prior to the date of issuance of the
Existing Notes. The security interests in the collateral securing the Exchange
Notes will be senior to the security interests securing the Existing Notes and
subordinated, in certain circumstances, to certain statutory liens of creditors
of the Company and to the security interests and liens securing indebtedness
under any Eligible Credit Facility, including, without limitation, the Revolving
Credit Facility. See "Description of Exchange Notes -- Intercreditor
Agreements." The pledge in favor of the Trustee of all of the capital stock of
present and future Subsidiaries will also be senior to the pledge securing such
stock in favor of the trustee under the Existing Notes Indenture (the "Existing
Notes Trustee"). In addition, pursuant to the terms of an intercreditor
agreement to be entered into between the Trustee and the Existing Notes Trustee
in accordance with the Indenture, the Existing Notes Trustee shall not be
entitled to receive, on behalf of the holders of the Existing Notes, any of the
proceeds from the enforcement of the mortgages securing the Existing Notes until
the obligations under the Exchange Notes are first paid in full.
67
<PAGE>
On March 31, 1998, the Company entered into the Revolving Credit
Facility, which permitted the Company to incur indebtedness in a principal
amount not to exceed $10.0 million. The Indenture and Existing Notes Indenture
provide that the Company shall be permitted to incur an additional $5.0 million
of indebtedness under one or more Eligible Credit Facilities up to an aggregate
principal amount not to exceed $15.0 million. On December 18, 1998, the Company
obtained a $2.5 million increase in the Revolving Credit Facility. The security
interests and liens securing the Exchange Notes will be subordinated to the
security interests in and liens on the Company's assets and properties securing
such Eligible Credit Facilities. See "Description of Exchange Notes --
Intercreditor Agreements" and "Description of Certain Indebtedness -- Revolving
Credit Facility."
Upon an Event of Default, the proceeds from the sale of collateral
securing the Exchange Notes will likely be insufficient to satisfy the Company's
obligations under the Exchange Notes. No appraisals of any of the collateral
have been prepared in connection with the Exchange Offer. Moreover, the amount
to be received upon such a sale would be dependent upon numerous factors,
including the condition, age and useful life of the collateral at the time of
such sale, as well as the timing and manner of such sale. By its nature, all or
some of the collateral will be illiquid and may have no readily ascertainable
market value. Accordingly, there can be no assurance that the collateral, if
saleable, can be sold in a short period of time.
A significant portion of the Company's assets consist of leasehold
improvements, and most of the Company's assets are located on leaseholds.
Because leasehold improvements may be deemed to be a part of either the real
property covered by the lease (which real property is not owned by the Company)
or the Company's real estate leasehold interests (which interests are not
included in the collateral available for the Notes), there can be no assurances
as to whether or to what extent such assets would be available as collateral
security for the Exchange Notes. Moreover, the ability of the Collateral Agent
to obtain possession of collateral located on leaseholds may be subject to
conflicting claims of landlords. The Company believes, however, that the
realizable value of such leasehold interests upon a liquidation of the Company
would not be material.
To the extent third parties hold Permitted Liens (as defined herein),
such third parties may have rights and remedies with respect to the property
subject to such Permitted Liens that, if exercised, could adversely affect the
value of the collateral. Given the intangible nature of certain of the
collateral, any such sale of such collateral separately from the Company as a
whole may not be feasible. Additionally, the inclusion of the Company's fixtures
in the collateral securing the Exchange Notes will be limited by the extent to
which such fixtures (a) are deemed not to be personal property, and (b) any
applicable state laws would, for purposes of perfecting security interests with
respect thereto, require that the Collateral Agent effectuates certain filings
in applicable real estate land records. The ability of the Company to grant a
security interest in certain collateral is limited by legal or other logistical
considerations. Moreover, the ability of the holders of Exchange Notes to
realize upon the collateral is limited by the terms of one or more intercreditor
agreements relating to any Eligible Credit Facility, including, without
limitation, the Revolving Credit Facility, and, to the extent of any fee
interest in real estate, the Liens relating to the McDonald's Obligations.
Additionally, such rights to realize upon such collateral may be subject to
certain bankruptcy law limitations in the event of a bankruptcy. See "-- Certain
Bankruptcy Limitations."
The Company is permitted to form new Subsidiaries and to transfer all
or a portion of the collateral to one or more of its Subsidiaries; provided that
the Company's rights to transfer collateral to DZ Party and the Limited
Investment Subsidiaries (as defined) will be restricted, and each of the
Company's Subsidiaries (other than DZ Party and the Limited Investment
Subsidiaries), will be required to execute a guarantee of the Company's
obligations under the Exchange Notes and the Indenture and a security agreement
granting to the Collateral Agent a security interest in substantially all of the
assets of such Subsidiary (other than real estate leasehold interests and
certain real property, fixtures and leasehold improvements); provided that such
security interest would be subordinate to any security interest in such assets
securing any indebtedness outstanding under any Eligible Credit Facility,
including, without limitation, the Revolving Credit Facility. See "-- Certain
Covenants -- Subsidiary Guarantees."
Subject to the restrictions on incurring Indebtedness and Liens set
forth herein, the Company and its Subsidiaries will have the right to grant (and
suffer to exist) Purchase Money Liens against fixed assets of the Company or
such Subsidiaries and to acquire any such assets subject to Purchase Money
Liens. The Collateral Agent's Liens are intended to be, and shall be, at all
times automatically subordinated in priority to all such Purchase Money Liens.
68
<PAGE>
The collateral release provisions of the Indenture permit the release
of collateral without substitution of collateral of equal value under certain
circumstances, including asset sales made in compliance with the Indenture. The
Net Cash Proceeds of such Asset Sales, to the extent not utilized to repay any
Indebtedness secured by the Assets sold or reinvested in Replacement Assets (as
defined herein) and, after application of all or any portion of such Net Cash
Proceeds towards the repurchase of Existing Notes in accordance with the terms
of the Existing Notes Indenture, will be required to be utilized to make an
offer to purchase a portion of the Exchange Notes. See "--Asset Sales."
Notwithstanding anything herein to the contrary, neither the Company
nor any of its Subsidiaries (other than DZ Party and Limited Investment
Subsidiaries) will encumber any asset or property of the Company or such
Subsidiaries or suffer to exist any Lien thereon, other than as expressly
permitted herein.
So long as no Event of Default shall have occurred and be continuing,
and subject to certain terms and conditions in the Indenture, the Existing Notes
Indenture, any Eligible Credit Facility (including, without limitation, the
Revolving Credit Facility), the Collateral Agreements and the Intercreditor
Agreements (as defined), the Company will be entitled to receive all cash
dividends, interest and other payments made upon or with respect to the capital
stock of any Subsidiary and to exercise any voting, consensual rights and other
rights pertaining to such collateral pledged by it. Upon the occurrence and
during the continuance of an Event of Default, (a) all rights of the Company to
exercise such voting, consensual rights, or other rights shall cease upon notice
from the Trustee, and all such rights shall become vested in the Collateral
Agent, which, to the extent permitted by law, shall have the sole right to
exercise such voting, consensual rights or other rights, (b) all rights of the
Company to receive all cash dividends, interest and other payments made upon or
with respect to the collateral shall cease, and such cash dividends, interest
and other payments shall be paid to the Collateral Agent, and (c) the Collateral
Agent may sell the collateral or any part thereof in accordance with and subject
to the terms of the Collateral Agreements; provided, however, that (i) while
Indebtedness is outstanding under any Eligible Credit Facility (including,
without limitation, the Revolving Credit Facility), rights of the holders of the
Notes and the Collateral Agent will be subordinated to the Liens of such
Eligible Credit Facility (including, without limitation, the Revolving Credit
Facility) and subject to the terms of the New Intercreditor Agreements (as
defined herein) and (ii) while the McDonald's Obligations are outstanding,
rights of holders of the Exchange Notes and the Collateral Agent with respect to
certain of the Company's owned real property will be surbordinated to the Liens
of McDonald's Corporation. All funds distributed under the Collateral Agreements
and received by the Collateral Agent for the ratable benefit of the holders of
the Exchange Notes will be distributed by the Collateral Agent in accordance
with the provisions of the Indenture.
Upon the full and final payment and performance of all obligations of
the Company under the Indenture and the Exchange Notes, the Collateral
Agreements will terminate and the pledged collateral will be released.
Escrowed Interest Account
In order to secure the Company's obligations under the Exchange Notes,
the Company deposited in the Escrowed Interest Account held by the Trustee
pursuant to the terms and conditions of the Indenture and the Escrow Agreement
(as defined) certain Pledged Securities (as defined) acquired by the Company
upon consummation of the offering of the Note Units with a portion of the net
proceeds of the Private Notes in an amount equal to approximately $2.8 million.
Immediately prior to any of the scheduled Interest Payment Dates
through August 1, 1999, the Company may either, (i) deposit with the Trustee
from funds otherwise available to the Company cash sufficient to pay the
interest scheduled to be paid on such date, or (ii) direct the Trustee to
release from the Escrowed Interest Account proceeds sufficient to pay interest
then due on the Notes. In the event the Company exercises the former option, the
Company may direct the Trustee to release a like amount of proceeds from the
Escrowed Interest Account for the benefit of the Company. In the event that the
Company optionally redeems Exchange Notes with the net proceeds of a Primary
Offering, the Company may direct the Trustee to release from the Escrowed
Interest Account an amount of proceeds that bears the same proportion to the
aggregate value of the Escrowed Interest Account immediately prior to the
release of such proceeds as the aggregate principal amount of the Exchange Notes
so redeemed by the Company bears to the aggregate principal amount of Exchange
Notes outstanding immediately prior to such redemption. The amount of
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proceeds that may be released by the Trustee to the Company in connection with
any such optional redemption shall be net of any costs, fees and expenses (such
as breakage fees) incurred to permit such release. Additional amounts may be
released from the Escrowed Interest Account in certain circumstances (provided
that no Event of Default has occurred and is continuing) in the event the
Escrowed Interest Account is overfunded in an amount equal to the extent of such
overfunding, or, in the event the Company makes a required interest payment
other than from proceeds in the Escrowed Interest Account, in an amount equal to
the extent of such payment.
Interest earned on the Pledged Securities will be added to the
Escrowed Interest Account. The Pledged Securities and Escrowed Interest Account
secure the repayment of the principal amount and premium, if any, on the
Exchange Notes.
Under the Escrow Agreement, after making the scheduled interest
payments on the Exchange Notes through August 1, 1999, all of the remaining
Pledged Securities, if any, will be released from the Escrowed Interest Account
and paid to the Company.
Intercreditor Agreements
Existing Intercreditor Agreement
On March 31, 1998, the Company entered into the Revolving Credit
Facility with Foothill Capital Corporation ("Foothill"), which qualifies as an
Eligible Credit Facility under the Existing Notes Indenture. See "Description of
Certain Indebtedness -- Revolving Credit Facility." Concurrently with entering
into the Revolving Credit Facility, Foothill and the Existing Notes Trustee
entered into an intercreditor agreement (the "Existing Notes Intercreditor
Agreement"), providing, among other things, that Foothill's security interests
in and liens on the collateral securing Indebtedness under the Revolving Credit
Facility are senior to the security interests and liens on such collateral
securing the obligations of the Company under the Existing Notes.
New Intercreditor Agreement
Pursuant to the Indenture, on July 17, 1998 the Trustee entered into a
new intercreditor agreement (the "New Intercreditor Agreement" and, together
with the Existing Notes Intercreditor Agreement and any amendment or amendments
thereto, the "Intercreditor Agreements") with Foothill and the Existing Notes
Trustee.
The New Intercreditor Agreement provides, among other things, that (i)
Foothill's security interests in and liens on the collateral securing
Indebtedness under the Revolving Credit Facility is senior to the security
interests and liens of the Collateral Agent in and on the collateral securing
Indebtedness under the Exchange Notes, and the security interests in and liens
on the collateral securing Indebtedness under the Exchange Notes are senior to
the security interests of the Existing Notes Trustee in such collateral, (ii)
during any insolvency proceedings, (A) Foothill and the Collateral Agent will
cooperate to give effect to the relative priority of their respective security
interests, and (B) the Collateral Agent and the Existing Notes Trustee will
cooperate to give effect to the relative priority of their respective security
interests, including, without limitation, with respect to any actions by the
Collateral Agent relating to "adequate protection" or the right to receive
post-petition interest with respect to claims arising out of Indebtedness under
the Exchange Notes, and (iii) decisions with respect to the applicable
collateral, including the time and method of any permitted disposition thereof,
will be made in accordance with and subject to the terms of each of the
Indenture, the Existing Notes Indenture, the Revolving Credit Facility and the
Intercreditor Agreements.
The New Intercreditor Agreement also provides that the Trustee, the
Existing Notes Trustee and Foothill will provide notices to each other with
respect to acceleration of the Exchange Notes, the Existing Notes or the
Indebtedness outstanding under the Revolving Credit Facility, as the case may
be.
If the Exchange Notes become due and payable prior to the stated
maturity thereof for any reason or are not paid in full at the stated maturity
thereof at a time during which Indebtedness is outstanding under the Revolving
Credit Facility, the Collateral Agent will not have the right to foreclose upon
the collateral that is subject to the security interest
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under the Revolving Credit Facility, or to take certain enforcement action
relating thereto, for a period of 180 days unless Foothill forecloses upon such
collateral. Thereafter, the Collateral Agent will have the right to foreclose
upon such collateral or to take such enforcement action relating thereto upon
instructions from the holders of a majority of the principal amount of Exchange
Notes then outstanding or, in the absence of such instructions, in such manner
as the Collateral Agent deems appropriate in its sole and absolute discretion.
Proceeds from the sale of collateral that is subject to the Revolving Credit
Facility will first be applied to repay Indebtedness outstanding under the
Revolving Credit Facility, if any, and thereafter will be paid to the Collateral
Agent. Subject to the terms of the New Intercreditor Agreement, any such
proceeds received by the Collateral Agent must be applied by the Collateral
Agent (x) first, to pay the expenses of any foreclosure and fees and other
amounts then payable to the Collateral Agent under the Indenture, (y) second, to
pay all amounts owing to the holders of the Exchange Notes and (z) thereafter,
to the Existing Notes Trustee (i) first, to pay the expenses of any foreclosure
and fees and other amounts then payable to the collateral agent under the
Existing Notes Indenture, (ii) second, to pay all amounts owing to the holders
of the Existing Notes and (iii) thereafter, to the Company or as may otherwise
be required by applicable law.
Pursuant to the Indenture and the Existing Indenture, the Company may
amend the Revolving Credit Facility or enter into another Eligible Credit
Facility that may increase the amount of advances available to the Company up to
$15.0 million. Upon such event, the Trustee, the Existing Note Trustee and the
Lender under such Eligible Credit Facility will enter into a new Intercreditor
Agreement on substantially the same terms as the New Intercreditor Agreement.
Guarantee
The full and prompt payment of the Company's payment obligations under
the Exchange Notes and the Indenture will be guaranteed, jointly and severally,
by all present and future Subsidiary Guarantors. Each Subsidiary Guarantor will
fully and unconditionally guarantee on a senior secured basis (secured initially
by certain of such Subsidiary Guarantor's assets, including cash, accounts
receivable, inventory, equipment, general intangibles, intellectual property
rights and certain other fixed assets (except real estate leasehold interests
existing on the date of the issuance of the Existing Notes and certain real
property, fixtures and leasehold improvements of such Subsidiary) (the
"Subsidiary Guarantee")), jointly and severally, to each Holder and the Trustee,
the full and prompt performance of the Company's obligations under the Indenture
and the Exchange Notes, including the payment of principal of and interest on
the Exchange Notes. Application of proceeds pursuant to the exercise of rights
and remedies under the Subsidiary Guarantees and the enforcement of rights and
remedies pursuant to the Subsidiary Security Agreements shall be subject to the
terms and conditions contained in the Intercreditor Agreements. The obligations
of each Subsidiary Guarantor are limited to the maximum amount which, after
giving effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to
its contribution obligations under the Indenture, will result in the obligations
of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. The net
worth of any Subsidiary Guarantor for such purpose shall include any claim of
such Subsidiary Guarantor against the Company for reimbursement and any claim
against any other Subsidiary Guarantor for contribution. Each Subsidiary
Guarantor may consolidate with or merge into or sell its assets to the Company
or another Subsidiary Guarantor without limitation, or with other Persons upon
the terms and conditions set forth in the Indenture. See "-- Certain Covenants
- -- Mergers, Consolidations and Sale of Assets" and "-- Asset Sales." In the
event all of the Capital Stock of a Subsidiary Guarantor is sold (including by
way of merger or consolidation) by the Company and the sale complies with the
provisions set forth in "-- Certain Covenants -- Asset Sales," the Subsidiary
Guarantee with respect to such Subsidiary Guarantor will be released.
Principal, Maturity and Interest
The Exchange Notes are limited in aggregate principal amount to $20.0
million and will mature on May 1, 2002. Interest will be payable on the Exchange
Notes in cash at the rate of 13 1/2% per annum, quarterly in arrears, on each
August 1, November 1, February 1 and May 1, commencing on February 1, 1999, to
holders of record on the immediately preceding July 15, October 15, January 15
and April 15. Cash interest will be computed on the basis of a
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360-day year comprised of twelve 30-day months. Interest on the Exchange Notes
will increase if the Company fails to fulfill its obligations under the
Registration Rights Agreement. See "-- Exchange Offer; Registration Rights." The
Exchange Notes will be payable both as to principal and interest at the office
or agency of the Company, or, at the option of the Company, payment of interest
may be made by check mailed to the holders of the Exchange Notes at their
respective addresses set forth in the register of holders of Exchange Notes.
Until otherwise designated by the Company, the Company's office or agency will
be the office of the Trustee maintained for such purpose.
Optional Redemption
The Exchange Notes are not entitled to any mandatory redemption or
sinking fund payments. Except as described below, the Exchange Notes are not
redeemable at the Company's option prior to August 1, 1999. Thereafter, the
Exchange Notes will be subject to redemption at the option of the Company, in
whole or in part, upon not less than 15 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount at maturity) set
forth below, plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the 12 month period beginning on August 1,
of the years indicated below through but not including the Maturity Date:
Year Percentage
- ---- ----------
1999 ..................................................... 113.000%
2000 ..................................................... 108.667%
2001 ..................................................... 104.333%
Notwithstanding the foregoing, the Company may redeem, at any time or
from time to time, up to 100% of the original principal amount of the Exchange
Notes at a redemption price equal to 100% of the principal amount thereof on the
redemption date, plus accrued interest thereon to the redemption date, with the
net proceeds of a Primary Offering; provided that such redemption shall occur
within 30 days of the date of the closing of such offering. If, prior to
December 31, 1999, the Company redeems 100% of the outstanding Exchange Notes
with the proceeds of a Qualified Offering, resulting in net proceeds to the
Company of at least $20.0 million and such redemption occurs within 30 days of
the date of the closing of such Qualified Offering, the originally issued Series
B Redeemable Warrants may be redeemed or canceled by the Company for no
additional consideration. Nothing in the Indenture, including the restrictions
on optional redemptions, limits the Company's right to make open market or
privately negotiated purchases of the Exchange Notes from time to time on or
after the first anniversary of the date hereof.
If fewer than all of the Exchange Notes are to be redeemed at any
time, selection of Exchange Notes for redemption will be made by the Trustee in
compliance with the requirements of the national securities exchange, if any, on
which the Exchange Notes are listed, or, if the Exchange Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee deems to be
fair and appropriate; provided that Notes of $1,000 or less may not be redeemed
in part. Notice of redemption will be mailed by first class mail at least 15
days but not more than 60 days before the redemption date to each holder to be
redeemed at such holder's registered address. If any Exchange Note is to be
redeemed in part only, the notice of redemption that relates to such Exchange
Note will state the portion of the principal amount thereof to be redeemed. A
new Exchange Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the holder thereof upon cancellation of the
original Exchange Note. On and after the date of redemption, interest will cease
to accrue on the Exchange Notes or portions of Exchange Notes called for
redemption.
Repurchase upon Change of Control
Upon the occurrence of a Change of Control, the Company will be
required to notify the Trustee in writing thereof and to offer to repurchase all
or any part (equal to $1,000 of principal at maturity or an integral multiple
thereof) of each holder's Exchange Notes pursuant to the offer described below
(the "Change of Control Offer") at a purchase price equal to 101% of the
principal amount thereof on the date of purchase, plus accrued interest thereon,
if any, through the date of purchase (the "Change of Control Payment"). Pursuant
to the Existing Notes Indenture, upon the occurrence of a Change of Control, the
Company will also be required to offer to repurchase all or any part of the
Existing Notes
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on substantially similar terms and conditions as those described herein. There
is substantial doubt whether the Company will have access to adequate funds to
purchase any or all of the Exchange Notes.
Within 40 days following any Change of Control, the Company shall mail
a notice to each holder stating: (1) that the Change of Control Offer is being
made pursuant to the covenant entitled "Limitation on Change of Control" in the
Indenture and that all Exchange Notes tendered will be accepted for payment; (2)
the purchase price and the purchase date, which shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"); (3) that any Exchange Note not tendered will continue to
accrue interest; (4) that, unless the Company defaults in the payment of the
Change of Control Payment, all Exchange Notes accepted for payment pursuant to
the Change of Control Offer shall cease to accrue interest on and after the
Change of Control Payment Date; (5) that holders electing to have any Exchange
Notes purchased pursuant to a Change of Control Offer will be required to
surrender the Exchange Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Exchange Notes completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the third
Business Day preceding the Change of Control Payment Date; (6) that holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Exchange Notes
delivered for purchase, and a statement that such holder is withdrawing his
election to have such Exchange Notes purchased; and (7) that holders whose
Exchange Notes are being purchased only in part will be issued new Exchange
Notes equal in principal amount to the unpurchased portion of the Exchange Notes
surrendered; provided that each Exchange Note purchased and each new Exchange
Note issued shall be in a principal amount of $1,000 or an integral multiple
thereof. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Exchange Notes in connection with a Change of Control. To the
extent that the provisions of any securities laws or regulations conflict with
the "Limitation on Change of Control" covenant of the Indenture, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Limitation on Change of
Control" covenant of the Indenture by virtue thereof.
On or before the Change of Control Payment Date, the Company will, to
the extent lawful, (1) accept for payment Exchange Notes or portions thereof
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Exchange Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Exchange Notes so accepted together with an
Officers' Certificate stating the amount of the Exchange Notes or portions
thereof tendered to the Company. The Paying Agent shall promptly mail to each
holder of the Exchange Notes so accepted payment in an amount equal to the
purchase price for such Exchange Notes, and the Trustee shall promptly
authenticate and mail to each holder a new Exchange Note equal in principal
amount to the unpurchased portion of the Exchange Notes surrendered, if any, to
the Change of Control Payment Date; provided that each such new Exchange Note
shall be in a principal amount of $1,000 or an integral multiple thereof. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
There can be no assurance that sufficient funds will be available at
the time of any Change of Control Offer to make required repurchases of the
Exchange Notes and the Existing Notes. The Company's failure to comply with the
covenant described above or the applicable covenant under the Existing Notes
Indenture, including failure to pay the repurchase price, will be an Event of
Default under the Indenture.
Certain Bankruptcy Limitations
The right of the Collateral Agent to repossess and dispose of the
collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against the Company or any of its Subsidiaries prior
to the Collateral Agent having repossessed and disposed of the collateral. Under
the Bankruptcy Code, a secured creditor such as the Collateral Agent is
prohibited from repossessing its security from a debtor in a bankruptcy case, or
from disposing of security repossessed from such debtor, without bankruptcy
court approval. Moreover, the Bankruptcy Code permits the debtor to continue to
retain and to use
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collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the Exchange Notes could be delayed following commencement of a
bankruptcy case, whether or when the Collateral Agent could repossess or dispose
of the collateral or whether or to what extent holders of the Exchange Notes
would be compensated for any delay in payment or loss of value of the collateral
through the requirement of "adequate protection."
Certain Covenants
Restricted Payments. The Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any distribution on account of the Company's or any of its Subsidiaries'
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Subsidiary or other Affiliate of the
Company (other than any such Equity Interests owned by the Company or any Wholly
Owned Subsidiary of the Company); (iii) voluntarily purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is pari passu with
or subordinated to the Exchange Notes; or (iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments") unless, at the time of
such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) immediately after giving effect to such transaction, on a
pro forma basis as if such transaction had occurred at the beginning
of the applicable four-quarter period, the Company would be permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant entitled "-- Incurrence of Additional Indebtedness and
Issuance of Preferred Stock" below; and
(c) the amount of such Restricted Payment, together with the
aggregate amount of all other Restricted Payments made by the Company
and its Subsidiaries after the date of the Indenture, is less than the
sum of (x) 25% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the
first quarter next succeeding the quarter ended June 30, 1998 to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, 100% of such deficit), plus (y) 100% of the
aggregate net cash proceeds received by the Company from the issuance
or sale of Equity Interests of the Company (other than Equity
Interests sold to a Subsidiary of the Company and other than
Disqualified Stock) since the date of the Indenture, plus (z) 100% of
the Net Cash Proceeds received by the Company from the issuance or
sale, other than to a Subsidiary of the Company, of any debt security
of the Company that has been converted into Equity Interests of the
Company (other than Disqualified Stock) since the date of the
Indenture. For purposes of this clause (c) the amount of any
Restricted Payment paid in property other than cash shall be the fair
market value of such property as determined reasonably and in good
faith by the Board of Directors of the Company.
If no Default or Event of Default shall have occurred and be
continuing, the foregoing provisions will not prohibit: (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Indebtedness or Equity Interests of the Company in exchange for, or solely
out of the proceeds
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of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any Disqualified
Stock); (iii) the redemption, repurchase or payoff of Purchase Money
Obligations; (iv) the redemption, repurchase or payoff of any Indebtedness with
proceeds of any Refinancing Indebtedness permitted to be incurred under "Certain
Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock"; (v)
the repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company held by any officer or employee of the Company
or its Subsidiaries; provided, however, that the aggregate amount of all such
repurchases, redemptions and other acquisitions and retirements under this
clause (v) on or after the date of the Indenture shall not exceed $1 million;
(vi) the voluntary purchase, redemption, defeasance or other acquisition or
retirement of all or any portion of the Indebtedness represented by the
McDonald's Documents with the Net Cash Proceeds of an Asset Sale that (A) is
permitted under the restriction on "Asset Sales" below and (B) relates solely to
collateral for the McDonald's Documents in the form of undeveloped real estate
not used or, in the reasonable judgment of the Board of Directors, useful in the
Company's business; (vii) the purchase, redemption, defeasance or other
acquisition or retirement of Warrants required by the terms of the Warrant
Agreement described below under "Description of Warrants -- Repurchase"; (viii)
distributions required under the Plan of Reorganization but only in the manner
and to the extent contemplated thereby; (ix) payments or distributions to
dissenting stockholders (it being understood that such dissenting stockholders
shall not include any Class 14 Interests (as defined in the Plan)) required by
applicable law pursuant to or in connection with a consolidation, merger or
Asset Sale that complies with all applicable provisions of the Indenture; (x)
the redemption or repurchase of Existing Notes in connection with a Change of
Control as provided for in the Existing Notes Indenture; (xi) the redemption,
prior to August 1, 1999 of up to 35% of the original principal amount of
Existing Notes with the proceeds of a Primary Offering in accordance with the
provisions contained in the Existing Notes Indenture; (xii) the payment, in
accordance with the terms of the Junior Preferred Stock, utilizing the proceeds
of a Primary Offering with net proceeds to the Company of not less than $20.0
million, of accrued and unpaid dividends on Junior Preferred Stock held by
holders thereof whose Junior Preferred Stock was converted into Common Stock,
either concurrently with, or prior to, the consummation of such Primary
Offering; (xiii) the redemption or repurchase of Existing Notes in connection
with an Asset Sale as provided for in the Existing Notes Indenture; and (xiv)
the purchase, redemption, defeasance or other acquisition or retirement of
Existing Warrants required by the terms of the Existing Warrant Agreement.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the "Restricted Payments" covenant were computed, which
calculations may be based upon the Company's latest available quarterly
financial statements.
Incurrence of Additional Indebtedness and Issuance of Preferred Stock.
The Company will not, and will not permit any of its Subsidiaries to, directly
or indirectly, create, incur, issue, assume, guaranty or otherwise become
directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness), and the Company will not issue
any Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of Preferred Stock; provided, however, that the Company may incur
Indebtedness or issue shares of Disqualified Stock, if (i) no Default or Event
of Default shall have occurred and be continuing or would occur as a consequence
thereof and (ii) the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional Indebtedness
is incurred or such Disqualified Stock is issued would have been at least equal
to 3.0:1, determined on a pro forma basis as if the additional Indebtedness had
been incurred, or the Disqualified Stock had been issued, as the case may be, at
the beginning of such four-quarter period.
Asset Sales. The Company will not, and will not permit any of its
Subsidiaries to, consummate an Asset Sale unless: (i) the Company or the
applicable Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale in an amount at least equal to the fair market value of the
assets sold or otherwise disposed of (as determined in good faith by the
Company's Board of Directors); (ii) at least 85% of the consideration received
by the Company or the Subsidiary, as the case may be, from such Asset Sale shall
be in the form of cash or Cash Equivalents and is received at the time of such
disposition; and (iii) upon the consummation of an Asset Sale, the Company
either (A) shall apply, or cause such Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 180 days of such Asset Sale either (1) to
repurchase or repay any Indebtedness secured by the assets involved in such
Asset Sale (including, without
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limitation, the Exchange Notes and the Existing Notes to the extent required by
the Existing Notes Indenture) together with a concomitant permanent reduction in
the amount of such Indebtedness (including a permanent reduction in the
committed amounts therefor in the case of any revolving credit facility so
repaid), (2) to make an investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in properties
and assets that will be used in the business of the Company and its Subsidiaries
as existing on the Effective Date or in businesses reasonably related thereto
("Replacement Assets"), or (3) a combination of repayment and investment
permitted by the foregoing clauses (iii)(A)(1) and (iii)(A)(2) or (B) shall (1)
within 150 days of such Asset Sale enter into a definitive written agreement
committing it, subject to no material conditions other than conditions customary
in such agreements, to make an investment in Replacement Assets within 270 days
of such Asset Sale and (2) apply, or cause such Subsidiary to apply, the Net
Cash Proceeds relating to such Asset Sale within 270 days of such Asset Sale to
an investment in Replacement Assets. On (i) the 181st day after an Asset Sale,
or (ii) such earlier date as the Board of Directors of the Company or of such
Subsidiary determines to apply the Net Cash Proceeds relating to such Asset Sale
as set forth in clauses (iii)(A)(1), (iii)(A)(2) and (iii)(A)(3) of the
immediately preceding sentence, or (iii) if a definitive written agreement
relating to an investment in Replacement Assets was entered into within 150 days
of such Asset Sale, on the 271st day after such Asset Sale or such earlier date
on which such definitive written agreement is for any reason terminated (each, a
"Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
that has not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clause (iii)(A) or (iii)(B) of the immediately preceding sentence
(each, a "Net Proceeds Offer Amount") shall be applied by the Company or such
Subsidiary to make an offer to purchase (the "Net Proceeds Offer"), on a date
(the "Net Proceeds Offer Payment Date") not less than 60 nor more than 90 days
following the applicable Net Proceeds Offer Trigger Date, from all holders of
Notes on a pro rata basis that amount of Exchange Notes equal to the Net
Proceeds Offer Amount at a price equal to 100% of the aggregate principal amount
of the Exchange Notes to be purchased, plus accrued and unpaid interest thereon,
if any, to the date of purchase; provided, however, that if at any time any
noncash consideration received by the Company or any Subsidiary of the Company,
as the case may be, in connection with any Asset Sale is converted into or sold
or otherwise disposed of for cash (other than interest received with respect to
any such noncash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder, and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount
equal to or in excess of $5 million resulting from one or more Asset Sales (at
which time, the entire unutilized Net Proceeds Offer Amount, and not just the
amount in excess of $5 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under "-- Merger, Consolidation or Sale of
Assets" below, the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of this covenant
with respect to such deemed sale as if it were an Asset Sale. In addition, the
fair market value of such properties and assets of the Company or its
Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for
purposes of this covenant.
Subject to the deferral of the Net Proceeds Offer Trigger Date, each
notice of a Net Proceeds Offer will be mailed to the record holders of Exchange
Notes as shown on the register of holders within 25 days following the Net
Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with
the procedures set forth in the Indenture. Upon receiving notice of the Net
Proceeds Offer, holders may elect to tender their Exchange Notes in whole or in
part in integral multiples of $1,000 in exchange for cash. To the extent holders
properly tender Exchange Notes in an amount exceeding the aggregate Net Proceeds
Offer Amount, Exchange Notes of tendering holders will be purchased on a pro
rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Exchange Notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Limitation on Asset Sale" provisions of the Indenture, the Company shall comply
with the
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applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Limitation on Asset Sales" provisions of the
Indenture by virtue thereof.
Limitations on Issuances and Sales of Capital Stock of Subsidiaries.
The Company will not cause or permit any of its Subsidiaries to issue or sell
any Capital Stock (other than to the Company or to a Wholly Owned Subsidiary of
the Company) or permit any Person (other than the Company or a Wholly Owned
Subsidiary of the Company) to own or hold any Capital Stock of any Subsidiary of
the Company or any Lien or security interest therein; provided, however, such
covenant shall not prohibit the disposition (by sale, merger or otherwise) of
all of the Capital Stock of a Subsidiary of the Company; provided that any Net
Cash Proceeds therefrom are applied in accordance with the covenants described
under "-- Asset Sales."
Liens. The Indenture provides that neither the Company nor any of its
Subsidiaries may, directly or indirectly, incur any Lien, except Permitted
Liens, against or upon any property or assets now owned or hereafter acquired by
the Company or any of its Subsidiaries, or any income or profits therefrom, or
assign or convey any right to receive income or profits therefrom.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrances or restrictions on the ability of any such
Subsidiary to (a) pay dividends or make any other distributions to the Company
or any of its Subsidiaries (A) on such Subsidiary's Capital Stock or (B) with
respect to any other interest or participation in, or measured by, its profits,
or pay any Indebtedness owed to the Company or any of its Subsidiaries or (b)
make loans or advances to the Company or any of its Subsidiaries or (c) transfer
any of its properties or assets to the Company or any of its Subsidiaries,
except for such encumbrances or restrictions existing under or by reasons of (1)
applicable law; (2) the Indenture and Exchange Notes; (3) customary
non-assignment provisions of any contract or any lease governing a leasehold
interest of any Subsidiary of the Company; (4) agreements existing on the Issue
Date to the extent and in the manner such agreements are in effect on the Issue
Date; or (5) an agreement governing Indebtedness incurred to refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clause (2) or (4) above; provided, however, that the provisions relating to such
encumbrance or restriction contained in any such Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2) or (4).
Merger, Consolidation or Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets to, another corporation, Person or entity unless:
(i) the Company is the surviving corporation, or the entity or the person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or person formed by or surviving any such consolidation or merger (if
other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made assumes all the obligations
of the Company under the Collateral Agreements, the Registration Rights
Agreement, the Warrant Agreement, the Intercreditor Agreements and all
obligations of the Company under the Exchange Notes and the Indenture, pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction (including giving effect to any
Indebtedness and Acquired Debt incurred or expected to be incurred in connection
with or in respect of such transaction and to any assumption required by clause
(ii) above) no Default or Event of Default exists; (iv) the Company or any
corporation formed by or surviving any such consolidation or merger, or to which
such sale, assignment, transfer, lease conveyance or other disposition will have
been made (A) will have Consolidated Net Worth (immediately after the
transaction but prior to any purchase accounting adjustments resulting from the
transaction) equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Indenture and
will have a Fixed Charge Coverage Ratio, determined on a pro forma basis,
greater than or equal to the Fixed Charge Coverage Ratio of the Company
immediately
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prior to the transaction; and (v) the Company or the entity or Person formed by
or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been made
shall have delivered to the Trustee an officer's certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and any supplemental indenture
required in connection with such transaction comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company, the Capital Stock of which constitutes all or substantially all of the
properties and assets of the Company, shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
The Indenture provides that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes, the Collateral Agreements, the
Intercreditor Agreements, the Registration Rights Agreement and the Warrant
Agreement with the same effect as if such surviving entity had been named as
such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Subsidiary Guarantee is to be released in accordance with the terms of the
Guarantee and the Indenture in connection with any transaction made in
compliance with the provisions of "-- Asset Sales") will not, and the Company
will not cause or permit any Subsidiary Guarantor to, consolidate with or merge
with or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets, other than the Company or any
other Subsidiary Guarantors unless: (i) the entity formed by or surviving any
such consolidation or merger (if other than the Subsidiary Guarantor), or to
which such disposition shall have been made, is a corporation organized and
existing under the laws of the United States, any state thereof or the District
of Columbia; (ii) such entity assumes by supplemental indenture all of the
obligations of the Subsidiary Guarantor on the Subsidiary Guarantee; (iii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iv) immediately after giving
effect to such transaction and the use of any net proceeds therefrom on a pro
forma basis, the Company could satisfy the provisions of clause (iv) of the
first paragraph of this covenant. Any merger or consolidation of a Subsidiary
Guarantor with and into the Company (with the Company being the surviving
entity) or another Subsidiary Guarantor need only comply with clause (iv) of the
first paragraph of this covenant.
Limitations on Transactions with Affiliates. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
or permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any services) with, or for the benefit of, any of its Affiliates
(each an "Affiliate Transaction"), other than (x) Affiliate Transactions
permitted under the next succeeding paragraph and (y) Affiliate Transactions on
terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the Company or such Subsidiary. All
Affiliate Transactions (and each series of related Affiliate Transactions which
are similar or part of a common plan) involving aggregate payments or other
property with a fair market value in excess of $2 million shall be approved by a
majority of the disinterested members of the Board of Directors of the Company,
such approval to be evidenced by a Board Resolution stating that such Board of
Directors has determined that such transaction complies with the foregoing
provisions. If the Company or any such Subsidiary enters into an Affiliate
Transaction (or a series of related Affiliate Transactions that are similar or
part of a common plan) that involves an aggregate fair market value of more than
$5 million, the Company shall, prior to the consummation thereof, obtain a
favorable opinion as to the fairness of such transaction or series of related
transactions to the Company from a financial point of view from an Independent
Financial Advisor and deliver such opinion to the Trustee.
The restrictions set forth in the preceding paragraph shall not apply
to: (i) reasonable fees and compensation paid to, and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or any
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Subsidiary as determined in good faith by the Company's Board of Directors or
senior management; (ii) transactions exclusively between or among the Company
and any of its Wholly Owned Subsidiaries or exclusively between or among such
Wholly Owned Subsidiaries, provided such transactions are not otherwise
prohibited by the Indenture; and (iii) Restricted Payments not prohibited by the
Indenture.
Subsidiary Guarantees. Each Subsidiary Guarantor shall: (i) execute
and deliver to the Collateral Agent a supplemental indenture in a form
reasonably satisfactory to the Collateral Agent pursuant to which such
Subsidiary Guarantor shall unconditionally guarantee on a senior secured basis
(secured initially by certain of such Subsidiary Guarantor's assets, including
cash, accounts receivable, inventory, equipment, general intangibles,
intellectual property rights and certain other fixed assets (except real
property, real estate leasehold interests, certain fixtures and leasehold
improvements) all of the Company's obligations under the Exchange Notes and the
Indenture; (ii) take all necessary action to cause the Lien on such collateral
in favor of the Collateral Agent to remain in full force and effect at all
times; (iii) deliver to the Collateral Agent an opinion of counsel that such
supplemental indenture and any other documents required to comply with clause
(ii) above have been duly authorized, executed and delivered by such Subsidiary
Guarantor, and the supplemental indenture and each such other document
constitutes a legal, valid binding and enforceable obligation of such Subsidiary
Guarantor; and (iv) take such further action and execute and deliver such other
documents specified in the Indenture or otherwise reasonably requested by the
Collateral Agent to effectuate the foregoing. The Company may transfer, in any
one transaction or a series of related transactions, any collateral to any
Subsidiary Guarantor if such transferee Subsidiary Guarantor shall have complied
with the requirements of clauses (i) through (iv) above; provided that the
guarantee referred to in clause (i) above shall be secured by, in addition to
any collateral existing in such Subsidiary Guarantor, the collateral so
transferred.
Impairment of Security Interest. Subject to the New Intercreditor
Agreements and the Subordination Agreement, neither the Company nor any of its
Subsidiaries will take or omit to take any action that would adversely affect or
impair the Security Interests in favor of the Trustee, on behalf of itself and
the holders of the Exchange Notes, with respect to the Collateral, the
Subsidiary Collateral, the Pledged Collateral or the Pledged Subsidiary
Collateral. Neither the Company nor any of its Subsidiaries shall grant to any
Person, or permit any Person to retain (other than the Trustee), any interest
whatsoever in the Collateral, the Subsidiary Collateral, the Pledged Collateral
or the Pledged Subsidiary Collateral other than Liens on certain of the
Collateral securing an Eligible Credit Facility and Permitted Liens. Neither the
Company nor any of its Subsidiaries will enter into any agreement that requires
the proceeds received from any sale of Collateral, the Subsidiary Collateral,
the Pledged Collateral or the Pledged Subsidiary Collateral to be applied to
repay, redeem, defease or otherwise acquire or retire any Indebtedness of any
Person, other than as permitted by the Indenture, the Exchange Notes, the New
Intercreditor Agreements, the Subordination Agreement, the McDonald's Documents
and the Collateral Agreements.
Conduct of Business. Neither the Company nor any of its Subsidiaries
will engage in any businesses other than the business of operating family
entertainment centers or any activity related or ancillary thereto.
Reports. So long as any Notes are outstanding, the Company will
furnish to the Holders of Exchange Notes all quarterly and annual financial
information and other reports filed with the Commission pursuant to the Exchange
Act and, whether or not the Company is required to file any financial
information with the Commission, will furnish to the Holders and to prospective
purchasers of the Exchange Notes, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act for so long
as is required for an offer or sale of the Exchange Notes under Rule 144A. From
and after the date of effectiveness of any registration statement filed with the
Commission with respect to the Exchange Notes, the Company will file with the
Commission such Forms 10-Q and 10-K and any other information required to be
filed by it. The Company will provide a copy of the Registration Rights
Agreement and the Warrant Agreement to prospective purchasers upon request.
Key Man Life Insurance. The Company shall, so long as the Exchange
Notes are outstanding, maintain life insurance upon the life of the Company's
current Chief Executive Officer, and any successor chief executive officer of
the Company or other senior executive officer of the Company performing similar
functions, with the death benefit thereunder payable to the Company in an amount
not less than $10.0 million. The Company shall at all times retain all
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the incidents of ownership of such insurance and shall not borrow upon or
otherwise impair its right to receive the proceeds of such insurance.
Real Estate Mortgages and Filings. On or prior to the Effective Date
and at no cost or expense to the Trustee or the Holders:
(a) the Company shall utilize its best efforts to deliver to
the Trustee fully executed counterparts of Mortgages in form and
substance reasonably acceptable to the Initial Purchaser and its
counsel for all real property owned in fee by the Company scheduled to
the Indenture and made a part thereof; provided, however, that the
Company can not provide assurances to the holders of the Exchange
Notes that it will be able to provide security interests in any real
property on which McDonald's Corporation has a prior lien
(individually and collectively, the "Premises"); provided further
that, to the extent the Trustee obtains a security interest in any
such Premises, such security interests will be subordinated to first
mortgage liens in favor of McDonald's Corporation;
(b) in the event the Trustee obtains any such Mortgage, the
Trustee shall have received commitments for Mortgage Title Insurance
Policies from a company, in form and substance reasonably acceptable
to the Initial Purchaser and its counsel, insuring the Liens of such
Mortgages as valid and enforceable Liens on the real estate collateral
described in such Mortgages and related to each of the covered
Premises;
(c) in the event the Trustee obtains any such Mortgage, the
Company shall deliver to the Trustee, with respect to each of the
covered Premises, such other documents, instruments, filings, surveys,
local counsel opinions, certificates and agreements as the Trustee
shall reasonably request; and
(d) the Company shall use its best efforts to cooperate with
the Trustee and the Existing Notes Trustee to effect the priority of
the application of proceeds from the exercise of the Trustee's rights
and remedies under the New Intercreditor Agreement with respect to the
Trustee's security interests in and liens on the real property of the
Company.
Leasehold Mortgages and Filings. The Company and each of its
Subsidiaries shall use commercially reasonable efforts to deliver Mortgages
substantially in the form attached to the Indenture with respect to the
Company's leasehold interests in the premises (the "Leased Premises") occupied
by the Company pursuant to leases of new store properties entered into after the
date of issuance of the Existing Notes (collectively, the "Leases," and
individually, a "Lease"). Prior to the effective date of any Lease, the Company
and such Subsidiaries shall provide to the Trustee all of the items described in
the "Real Estate Mortgages and Filings" covenant of the Indenture and in
addition shall provide an agreement substantially in the form attached to the
Indenture and executed by the lessor of the Lease, whereby the lessor consents
to the Mortgage. The Company and such Subsidiaries shall perform all of their
obligations required hereunder at their sole cost and expense.
Rating of Exchange Notes. The Company shall cooperate with the Initial
Purchaser at any time or from time to time for a period of 18 months after the
Issue Date to obtain a rating for the Exchange Notes from at least one
nationally recognized rating agency and to keep a rating with respect to the
Exchange Notes continuously in effect through the Maturity Date.
Payments for Consent. Neither the Company nor any of its Subsidiaries
(including, for this purpose only, DZ Party and all Permitted Investment
Subsidiaries) will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Exchange Notes for, or as inducement to, any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Exchange Notes unless
such consideration is offered to be paid or agreed to be paid to all holders of
Exchange Notes then outstanding that consent, waive or agree to amend any of
such terms or provisions in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
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Noteholder Designation of Directors. From and after the Issue Date
until the earlier of (i) the Maturity Date or (ii) the date on which all
principal and interest (including any Additional Interest) on all of the
outstanding Exchange Notes have been paid in full, (a) the Company will take
such action as shall be necessary in accordance with applicable law and its
certificate of incorporation and by-laws so that the Board of Directors of the
Company is comprised at all times of at least two directors initially designated
by the Initial Purchaser, and thereafter, to be replaced or redesignated by the
Trustee or the Holders of not less than 20% of the aggregate principal amount of
Exchange Notes then outstanding (any such nominee being a "Noteholder
Representatives"), (b) upon the occurrence of an Event of Default and at the
written request of the Trustee or the Holders of at least 25% of the then
outstanding Exchange Notes, the Company will take or cause to be taken such
actions as shall be necessary in accordance with applicable law and its
certificate of incorporation and by-laws, including to use its best efforts to
effectuate any necessary resignations by members of its Board of Directors, to
reconstitute the Board of Directors of the Company immediately following such
Event of Default such that Noteholder Representatives constitute a majority of
the members of the Board of Directors and (c) prior to a Primary Offering, the
Company will use its best efforts to cause, and will cooperate with the Warrant
Agent to cause, each Person (including holders of Warrant Shares) who becomes a
holder of Common Stock after the Issue Date to execute, as promptly as
practicable after the date on which such Person acquires such shares of Common
Stock, a voting or similar agreement among certain stockholders of the Company,
in form and substance acceptable to the Initial Purchaser (the "Stockholders'
Agreement"), pursuant to which, among other things, such Person will agree to
vote its shares of Common Stock in a manner so as to give effect to the
provisions set forth in clauses (a) and (b) of this covenant.
Prior to the Issue Date, the Company and the holders of not less than
6 2/3% of the outstanding Voting Common Stock (provided that the Company will
use its best efforts to cause each holder of 1% or more of the outstanding
Voting Common Stock to execute such agreement) will take all action necessary to
cause all such holders of Voting Common Stock as of the Issue Date to execute
the Stockholders' Agreement, which provides that such stockholders agree to vote
their shares of Voting Common Stock in a manner that will give effect to the
provisions set forth in this covenant. Prior to a Primary Offering the Company
has agreed to take such actions as are necessary to cause Persons who become
holders of not less than 66 2/3% of the outstanding Voting Common Stock to
execute (provided that the Company will use its best efforts to cause each
holder of 1% or more of the outstanding Voting Common Stock to execute such
agreement), on or prior to the date on which such Persons acquire shares of
Voting Common Stock, counterparts of the Stockholders' Agreement.
Appointment of Chief Operating Officer. The Company, acting through
its Board of Directors, will, within 30 days after the Issue Date, take all
action necessary to appoint a Chief Operating Officer or retain an independent
specialist turnaround firm to fill such function, in either case satisfactory to
the Noteholder Representatives.
Approval of Bankruptcy Filings. The Stockholders' Agreement will
provide that the Company will not, and will not permit any Significant
Subsidiary of the Company, to (i) file a voluntary case or proceeding under any
applicable bankruptcy law with respect to the Company or any Significant
Subsidiary of the Company, (ii) consent to the appointment of a custodian on the
Company's behalf for substantially all of either of their respective assets,
(iii) consent to or acquiesce in, or permit any Significant Subsidiary of the
Company to consent to or acquiesce in, the institution of a bankruptcy or an
insolvency proceeding against the Company or any Significant Subsidiary of the
Company, as applicable, or (iv) make any general assignment or permit any
Significant Subsidiary of the Company to make any general assignment, for the
benefit of creditors, unless any such action described in clauses (i) through
(iv) has been approved by the vote of a majority of the members of the Board of
Directors of the Company, including the unanimous consent of the Noteholder
Representatives.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event
of Default:
(i) for any Interest Payment Date occurring on or prior to
August 1, 1999, the Company fails to pay interest on any Exchange
Notes when the same become due and payable, and for any interest
payment Date occurring after August 1, 1999, the Company fails to pay
interest on any
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Exchange Notes when the same becomes due and payable and the Default
continues for a period of 10 days;
(ii) default by the Company in payment of principal (or
premium, if any) on any Exchange Notes at maturity, upon redemption,
by acceleration or otherwise (including the failure to make a payment
to purchase Exchange Notes tendered pursuant to a Change of Control
Offer or a Net Proceeds Offer);
(iii) failure by the Company or any of its Subsidiaries (in
each case, to the extent a party to the Collateral Agreements) to
comply with any of its other agreements or covenants in, or provisions
of, the Indenture, the Exchange Notes or any of the Collateral
Agreements (to the extent such default of the Company, directly or
indirectly, adversely affects (or with respect to any such Subsidiary,
materially adversely affects) the Security Interests in the Collateral
or the rights and benefits of the holders under the Indenture or the
Exchange Notes), which default continues for a period of 30 days after
the Company has received written notice specifying the default;
(iv) default under (after giving effect to any applicable
grace periods or any extension of any maturity date) any mortgage,
indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness of the Company or
any of its Subsidiaries (the payment of which is guaranteed by the
Company or any Subsidiary) whether such Indebtedness now exists, or is
created after the date of the Indenture, if (a) either (A) such
default results from the failure to pay principal of or interest on
such Indebtedness or (B) as a result of such default the maturity of
such Indebtedness may be accelerated, and (b) the principal amount of
such Indebtedness, together with the principal amount of any other
such Indebtedness with respect to which a default (after the
expiration of any applicable grace period or any extension of the
maturity date) has occurred, or the maturity of which may be so
accelerated, exceeds $2 million in the aggregate, and the Default
continues for a period of ten days after the Company has received
written notice specifying the default;
(v) failure by the Company or any of its Subsidiaries to pay
final judgments (other than any judgment as to which a reputable
insurance company has accepted full liability in writing (excluding
the Company's self insured retention)) aggregating in excess of $2
million, which judgments are not stayed within 60 days after their
entry;
(vi) certain events of bankruptcy or insolvency with respect
to the Company, any Subsidiary Guarantor or any of the Company's
Subsidiaries; and
(vii) any Subsidiary Guarantee for any reason ceases to be in
full force and effect or becomes or is declared to be null and void,
unenforceable or invalid or any Subsidiary Guarantor denies its
obligations under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Exchange
Notes may by written notice declare all the Exchange Notes to be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, all outstanding
Exchange Notes will become immediately due and payable without further action or
notice. Holders may not enforce the Indenture or the Exchange Notes except as
provided in the Indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding Exchange Notes may direct the
Trustee in its exercise of any trustee power. The Trustee may withhold from
holders of the Exchange Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the
Exchange Notes then outstanding, by written notice to the Trustee, may on behalf
of the holders of all the Exchange Notes (a) waive any existing Default or Event
of Default and its consequences under the Indenture except a continuing Default
or Event of Default in the payment of
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interest on, or the principal of, the Exchange Notes, or (b) rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default (except nonpayment of
principal or interest that has become due solely because of the acceleration)
have been cured or waived.
No Personal Liability of Directors, Officers, Employees and Stockholders.
No past, present or future director, officer, employee, incorporator
or stockholder of the Company or any Subsidiary Guarantor, as such, shall have
any liability for any obligations of the Company or any Subsidiary Guarantor
under the Exchange Notes, the Indenture, the Warrant Agreement, the Registration
Rights Agreement or any Collateral Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creations. Each holder by
accepting an Exchange Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Exchange Notes.
Such waiver may not be effective to waive certain liabilities under the federal
securities laws, and it is the view of the Commission that such a waiver is
against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Exchange Notes, except for (i) the rights of holders to receive payments in
respect of the principal of, premium, if any, and interest on the Exchange Notes
when such payments are due, (ii) the Company's obligations with respect to the
Exchange Notes concerning issuing temporary Exchange Notes, registration of
Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the
maintenance of an office or agency for payments, (iii) the rights, powers,
trust, duties and immunities of the Trustee and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Exchange Notes. In the event Covenant Defeasance
occurs, certain events (not including nonpayment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance
(i) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the holders, cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the Exchange Notes of
the stated date for payment thereof or on the applicable redemption date, as the
case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that the holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Company or any of its Subsidiaries is a
party to or by which the Company or any of its Subsidiaries is a party or by
which it or any of their property or assets is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the deposit
was not made by the Company with the intent of
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preferring the holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (vii) the Company shall have delivered to the Trustee an
Officer's Certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with; (viii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; and (ix) certain customary conditions precedent are
satisfied.
Possession, Use and Release of Collateral
Unless an Event of Default shall have occurred and be continuing, the
Company shall have the right to remain in possession and retain exclusive
control of the collateral securing the Exchange Notes (other than as set forth
in the Collateral Agreements), to freely operate the collateral and to collect,
invest and dispose of any income therefrom.
Release of Collateral. Releases of collateral may be made in
accordance with the terms of the Intercreditor Agreements and the Existing
Intercreditor Agreement. In addition, upon compliance by the Company with the
conditions set forth below in respect of any release of items of collateral, and
upon delivery by the Company to the Collateral Agent of an opinion of counsel to
the effect that such conditions have been met, the Collateral Agent will release
the Released Interests (as hereinafter defined) from the Lien of the Collateral
Agreements and reconvey the Released Interests to the Company.
Asset Sale Release. The Company has the right to obtain a release of
items of collateral (the "Released Interests") subject to an Asset Sale upon
compliance with the condition that the Company deliver to the Collateral Agent
the following:
(a) A notice from the Company requesting the release of
Released Interests: (i) describing the proposed Released Interests;
(ii) specifying the value of such Released Interests on a date within
60 days of such notice (the "Valuation Date"); (iii) stating that the
purchase price received is at least equal to the fair market value of
the Released Interests; (iv) stating that the release of such Released
Interests would not be expected to interfere with the Collateral
Agent's ability to realize the value of the remaining collateral and
will not impair the maintenance and operation of the remaining
collateral; and (v) certifying that such Asset Sale complies with the
terms and conditions of the Indenture with respect thereto;
(b) An Officers' Certificate of the Company stating that: (i)
such Asset Sale covers only the Released Interests and complies with
the terms and conditions of the Indenture with respect to Asset Sales;
(ii) all Net Cash Proceeds from the sale of any of the Released
Interests will be applied pursuant to the provisions of the Indenture
in respect of Asset Sales; (iii) there is no Default or Event of
Default in effect or continuing on the date thereof, the Valuation
Date or the date of such Asset Sale; (iv) the release of the
collateral will not result in a Default or Event of Default under the
Indenture; and (v) all conditions precedent in the Indenture relating
to the release in question have been or will be complied with; and
(c) The Net Cash Proceeds and other noncash consideration
from the Asset Sale required to be delivered to the Collateral Agent
pursuant to the Indenture.
Transfer and Exchange
A holder may transfer or exchange Exchange Notes in accordance with
the Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Exchange Note selected for redemption in whole or in part pursuant to the
Indenture, except the unredeemed portion of any Note being redeemed in part.
Also, the Company is not required to transfer or exchange any Note commencing at
the opening of business 15 days before the day of any selection of
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Exchange Notes to be redeemed and ending at the close of business on such day of
selection. The registered holder of an Exchange Note will be treated as the
owner of such Exchange Note for all purposes.
Amendment, Supplement and Waiver
Except as provided in the next succeeding paragraph, the Indenture or
the Exchange Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Exchange Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Exchange Notes) and any existing Default or Event of Default
or compliance with any provision of the Indenture or the Exchange Notes may be
waived with the consent of the holders of a majority in principal amount of the
then outstanding Exchange Notes (including consents obtained in connection with
a tender offer or exchange offer for Exchange Notes).
Without the consent of each holder affected, an amendment or waiver
may not (with respect to any Exchange Notes held by a non-consenting holder of
the Exchange Notes): (i) reduce the principal amount of Exchange Notes whose
holders must consent to an amendment, supplement or waiver; (ii) reduce the
principal of, or the premium on, or change the fixed maturity of any Exchange
Note or alter the provisions with respect to the redemption of the Exchange
Notes or alter the provisions with respect to repurchases or redemptions of the
Exchange Notes with Net Cash Proceeds from Asset Sales or upon a Change of
Control; (iii) reduce the rate of or change the time for payment of interest,
including default interest, on any Exchange Note; (iv) waive a Default or Event
of Default in the payment of principal of or premium, if any, or interest on any
Exchange Note (other than a Default in the payment of an amount due as a result
of an acceleration, where such acceleration is rescinded pursuant to the
Indenture); (v) make any Exchange Note payable in money other than that stated
in the Exchange Notes; (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Exchange Notes
to receive payments of principal of or interest on the Exchange Notes; (vii)
waive a redemption payment with respect to any Exchange Note; or (viii) modify
or change any provision of the Indenture affecting the ranking of the Exchange
Notes in a manner which adversely affects the holders of Exchange Notes.
Notwithstanding the foregoing, without the consent of any holder of
Exchange Notes, the Company may amend or supplement the Indenture or the
Exchange Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Exchange Notes in addition to or in place of certificated
Exchange Notes, to provide for the assumption of the Company's obligations to
holders of the Exchange Notes in the case of a merger or consolidation, to make
any change that would provide any additional rights or benefits to the holders
of the Exchange Notes or that does not adversely affect the legal right under
the Indenture of any such holder, or to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided that, if it acquires any conflicting interest, it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign as Trustee.
The holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent person in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any holder of the Exchange Notes, unless such holder shall
have offered to the Trustee an indemnity satisfactory to it against any loss,
liability or expense.
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Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definitions are
provided.
"Acquired Debt" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, excluding
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any specified Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management of policies of such specified Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, however, that beneficial ownership of 10% or more of the aggregate
voting power of the voting securities of a Person shall be deemed to be control.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Subsidiaries (including any Sale and Leaseback Transaction) to any Person
other than the Company or a Wholly Owned Subsidiary of the Company of (a) any
Capital Stock of any Subsidiary of the Company; or (b) any other property or
assets of the Company or any Subsidiary of the Company other than in the
ordinary course of business; provided, however, that Asset Sales shall not
include (i) a transaction or series of related transactions for which the
Company or its Subsidiaries receive aggregate consideration of less than
$500,000 and (ii) the sale, lease, conveyance, disposition or other transfer of
all or substantially all of the assets of the Company as permitted under "--
Merger, Consolidation or Sale of Assets."
"Bankruptcy Law" or "Code" means Title 11, U.S. Code or any similar
federal, state or foreign law for the relief of debtors.
"Board of Directors" means, as to any Person, the board of directors
of such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution delivered to the Trustee and certified by the secretary or an
assistant secretary of such Person to have been duly adopted by the Board of
Directors of such Person and to be in full force and effect on the date of such
certification.
"Capital Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and any and all warrants, options and rights with respect
thereto, including, without limitation, each class of common stock and preferred
stock, partnership interests and other indicia of ownership of such Person.
"Cash Equivalents" means: (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by any agency or instrumentality thereof and backed by the full faith and
credit of the United States of America; (ii) commercial paper rated the highest
grade by Moody's Investors Service, Inc. and Standard & Poor's Ratings Services
and maturing not more than one year from the date of creation thereof; (iii)
time deposits with, and certificates of deposit and bankers' acceptances issued
by, any bank having capital surplus and undivided profits aggregating at least
$500 million and maturing not more than one year from the date of creation
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thereof; (iv) repurchase agreements that are secured by a perfected security
interest in an obligation described in clause (i) and are with any bank
described in clause (iii); (v) money market accounts with any bank having
capital surplus and undivided profits aggregating at least $500 million; (vi)
readily marketable direct obligations issued by any state of the United States
of America or any political subdivision thereof having one of the two highest
rating categories obtainable from either Moody's Investors Service, Inc. or
Standard & Poor's Ratings Services; and (vii) money market funds investing only
in U.S. Government Obligations.
"Change of Control" means the occurrence of one or more of the
following events:
(i) any Person or Group (as defined below) other than the
Permitted Holder is or becomes the direct or indirect beneficial owner
(as defined below) of more than 50% of the Voting Stock of the
Company;
(ii) any Person or Group other than the Permitted Holder is
or becomes the direct or indirect beneficial owner of more than 50% of
the interests or participations in, or measured by the net income of,
the Company;
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all or
substantially all of the assets of the Company to any Person or Group,
together with any Affiliates thereof (whether or not otherwise in
compliance with the provisions of the Indenture) that is not
beneficially owned or controlled, directly or indirectly, by the
Permitted Holder;
(iv) the Permitted Holder ceases to have the right or
ability, by voting power, control, contract or otherwise, to control a
majority of the Board of Directors of the Company other than in the
event of the exercise by the Trustee or at least 25% of the Holders of
their right pursuant to the terms of the Indenture, following the
occurrence of an Event of Default, to designate Noteholder
Representatives such that a majority of the directors constituting the
Board of Directors of the Company are Noteholder Representatives; or
(v) a Change of Control under the Existing Notes Indenture.
The terms "beneficially own," "beneficial owner" and "Group" shall
have the meanings ascribed to such terms in Sections 13(d) and 14(d) of the
Exchange Act; provided, however, that, for the purposes of this definition of
"Change of Control" only, any Person or Group other than the Permitted Holder
shall be deemed to be the current beneficial owner of any shares of Voting Stock
of the Company, or any interests or participations in, or measured by the
profits of, the Company, that are issuable upon the exercise of any option,
warrant or similar right, or upon the conversion any convertible security, in
either case owned by such Person or Group without regard to whether such option,
warrant or convertible security is currently exercisable or convertible or will
become convertible or exercisable within 60 days if the exercise or conversion
price thereof at the time of grant was lower than the fair market value of the
underlying security at the time of grant.
"Collateral" shall have the meaning assigned to such term in the
Security Agreement.
"Collateral Agent" shall have the meaning assigned to such term in the
Security Agreement.
"Collateral Agreements" means, collectively, the Escrow Agreement, the
Pledge Agreement, the Subsidiary Pledge Agreements, the Security Agreement, the
Subsidiary Security Agreements and the Trademark Assignment, in each case, as
the same may be in force from time to time.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or nonvoting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
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"Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period plus (without
duplication) (a) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing Consolidated Net Income), (b) provision for taxes based on
income or profits, to the extent such provision for taxes was included in
computing Consolidated Net Income, (c) consolidated interest expense of such
Person for such period, whether paid or accrued (including deferred financing
costs, noncash interest payments and the interest component of capital lease
obligations), to the extent such expense was deducted in computing Consolidated
Net Income, (d) accretion of deferred rent expense under the McDonald's Rent
Deferral Secured Notes, to the extent such expense was deducted in computing
Consolidated Net Income, and (e) depreciation and amortization (including
amortization of goodwill and other intangibles) for such period, to the extent
such depreciation or amortization was deducted in computing Consolidated Net
Income, in each case, on a consolidated basis and determined in accordance with
GAAP.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that: (i) the Net Income of any Person that is not a Subsidiary or that
is accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid to the referent
Person or a Wholly Owned Subsidiary thereof; (ii) the Net Income of any Person
that is a Subsidiary (other than a Subsidiary of which at least 80% of the
Capital Stock having ordinary voting power for the election of directors or
other governing body of such Subsidiary is owned by the referent Person directly
or indirectly through one or more Subsidiaries) shall be included only to the
extent of the amount of dividends or distributions paid to the referent Person
or a Wholly Owned Subsidiary thereof; (iii) for the purpose of determining
whether the Company may make a Restricted Payment under clause (c) of the
"Restricted Payments" covenant only, the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded; and (iv) the cumulative effect of a change in
accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person, the sum of
(i) the consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries plus (ii) the respective amounts reported on such
Person's most recent balance sheet with respect to any series of preferred stock
(other than Disqualified Stock) that by its terms is not entitled to the payment
of dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of (a) any cash received by such Person upon issuance of such preferred
stock and (b) the fair market value of any noncash consideration received by
such Person upon issuance of such preferred stock, provided that such value has
been determined in good faith by a nationally recognized investment bank, less
(x) all write-ups, subsequent to the date of the Indenture, in the book value of
assets owned by such Person or a consolidated Subsidiary of such Person, other
than (a) write-ups resulting from foreign currency translations and (b)
write-ups upon the acquisition of assets acquired in a transaction to be
accounted for by purchase accounting under GAAP, (y) all investments in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except, in
each case, a Permitted Investment), and (z) all unamortized debt discount and
expense and unamortized deferred financing charges (except such amounts arising
from the issuance of the Exchange Notes), all of the foregoing determined in
accordance with GAAP.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event known to the Company or that should have
been known to the Company after due inquiry that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the
Maturity Date.
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"DZ Party" means DZ Party, Inc., a Delaware corporation.
"Eligible Credit Facility" means one or more credit facilities (and
any permitted refinancing or replacement thereof) between the Company and one or
more Lenders, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time
as permitted herein, which credit facility or facilities (and any permitted
refinancing or replacement thereof) (i) has or have terms and conditions
(including with respect to applicable interest rates and fees) customary for
similar facilities extended to borrowers comparable to the Company, (ii)
collectively, do not permit the Company to incur Indebtedness thereunder at any
time outstanding in excess of $15.0 million in the aggregate principal amount,
and (iii) may be secured by certain assets of the Company, subject to the terms
and conditions of an intercreditor agreement between the Trustee and the Lender
or Lenders providing such Eligible Credit Facility, in each case, substantially
in the form attached to the Indenture.
"Eligible Credit Facility Intercreditor Agreement" means an agreement
or agreements between the Trustee and one or more Lenders, substantially in the
form set forth in the Indenture, to be entered into in connection with the
Company and such Lender or Lenders entering into an Eligible Credit Facility.
"Equity Interests" means Capital Stock or warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Escrow Agreement" means the Escrow and Security Agreement, dated as
of even date herewith, between the Company and the Trustee, substantially in the
form attached to the Indenture, as amended and supplemented from time to time in
accordance with its terms.
"Escrow Funds" means approximately $2.8 million of net proceeds from
the sale of Units to be deposited in the Escrowed Interest Account (pursuant to
the terms of the Escrow Agreement) to, among other things, pay interest on the
Exchange Notes that accrues and is unpaid from the Issue Date through and
including the Interest Payment Date on August 1, 1999.
"Escrowed Interest Account" means one or more accounts established
with or on behalf of the Trustee pursuant to the terms of the Escrow Agreement
for the deposit of the Escrow Funds and the Pledged Securities.
"Exchange Offer" means the offer made in this Prospectus by the
Company pursuant to the Registration Rights Agreement, to exchange for any and
all of the Private Notes a like aggregate principal amount of Exchange Notes.
"Existing Notes" means the $85.0 million aggregate principal amount of
the Company's 13 1/2% Senior Secured Notes due 2002.
"Existing Notes Indenture" means the Indenture, dated as of July 22,
1997, by and among the Company, the Subsidiary Guarantors named therein and
State Street Bank and Trust Company, as trustee.
"Existing Notes Intercreditor Agreement" means the intercreditor
agreement, dated as of March 31, 1998, between the Existing Notes Trustee and
Foothill Capital Corporation.
"Existing Notes Trustee" means State Street Bank and Trust Company and
any permitted successor thereto.
"Existing Warrant Agreement" means the Warrant Agreement dated as of
July 22, 1997 between the Company and the Existing Notes Trustee, as Warrant
Agent, pursuant to which the Existing Warrants were issued, as amended and
supplemented from time to time in accordance with its terms.
"Existing Warrants" means the warrants to purchase shares of the
Company's common stock, par value $0.01 per share, issued by the Company
contemporaneously with the Existing Notes pursuant to the terms of the Existing
Warrant Agreement.
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"Fixed Charge Coverage Ratio" means, with respect to any Person for
any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Fixed Charges of such Person for such period. In the event that
the Company or any of its Subsidiaries incurs, assumes, guarantees, repays,
repurchases or redeems any Indebtedness (other than revolving credit borrowings)
or issues or redeems Preferred Stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the event for which the calculation of the Fixed Charge Coverage Ratio is
made, then the Fixed Charge Coverage Ratio (both the numerator and the
denominator therein) shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee, repayment, repurchase or redemption of
Indebtedness, or such issuance or redemption of Preferred Stock, as if the same
had occurred at the beginning of the applicable period; provided that pro forma
effect shall be given to repayments, repurchases or redemptions of Indebtedness
or Preferred Stock only to the extent such Indebtedness or Preferred Stock is
permanently retired (and, in the case of the Exchange Notes, surrendered to the
Trustee for cancellation). For purposes of making the computation referred to
above, in the event that acquisitions, divestitures, mergers or consolidations
have been made by the Company or any of its Subsidiaries subsequent to the
commencement of the four-quarter period over which the Fixed Charge Coverage
Ratio is being calculated, but prior to the event for which the calculation of
the Fixed Charge Ratio is being made, then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such acquisitions, divestitures,
mergers and consolidations as if such transactions had occurred at the beginning
of the applicable period.
"Fixed Charges" means, with respect to any Person for any period, the
sum of (a) consolidated interest expense of such Person for such period, whether
paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income (including amortization of noncash interest payments and
the interest component of capital leases but excluding amortization of deferred
financing fees) and (b) the product of (i) all dividend payments, whether paid
in cash, assets, securities or otherwise, in the case of a Person that is a
Subsidiary of the Company, on any series of preferred stock of such Person, and
all dividend payments in respect of any series of preferred stock of the
Company, whether paid in cash, assets, securities or otherwise (other than
dividends payable in additional shares of the preferred stock on which such
dividends are paid), times (ii) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect on the date of the Indenture.
"Holder" or "holder" means the Person in whose name a Note is
registered on the Registrar's books.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
pursuant to capital leases) or representing any Interest Swap Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing Indebtedness (other than Interest Swap
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, and also includes, to the extent not otherwise
included, the guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, by such
Person in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any of the
items which would be included within this definition.
"Independent Financial Advisor" means an investment banking firm (i)
which does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect financial interest in the Company or any of its
Subsidiaries and (ii) which, in the judgment of the Board of Directors of the
Company, is otherwise independent and qualified to perform the task for which it
is to be engaged.
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"Interest Swap Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the form of loans
(including direct or indirect guarantees), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Issue Date" means July 17, 1998, the date of original issuance of the
Private Notes under the Indenture.
"Junior Preferred Stock" means, collectively, the 80,000 shares of the
Company's Series A Junior Cumulative Preferred Stock, liquidation preference
$25.00 per share, and the 340,000 shares of the Company's Series B Junior
Cumulative Preferred Stock, liquidation preference $25.00 per share, issued on
the Issue Date.
"Lender" means a Person that is not an Affiliate of the Company and is
a lender in an Eligible Credit Facility.
"Lien" means, with respect to any asset, mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction,
excluding true lease and consignment filings).
"Limited Investment Subsidiary" means, with respect to the Company or
any Subsidiary of the Company, any corporation, partnership, joint venture,
association or other business entity in which the Company or any Subsidiary of
the Company (i) has at any time made an Investment permitted by clause (viii) of
the definition of Permitted Investment and (ii) has not at any time made any
other Investment.
"Maturity Date" means May 1, 2002.
"McDonald's" means McDonald's Corporation, a Delaware corporation, and
its successors and assigns.
"McDonald's Collateral" means those certain 14 parcels of real
property and related fixtures, including, without limitation, any proceeds
thereof and subject to McDonald's Senior Liens (as hereinafter defined).
"McDonald's Documents" means the agreement to indemnify as set forth
in the Agreement and Plan of Merger, dated as of August 30, 1994, among
Discovery Zone, Inc., Discovery Zone International, Inc., Leaps & Bounds, Inc.
and McDonald's; the McDonald's Secured Note (as hereinafter defined); and the
McDonald's Rent Deferral Secured Notes (as defined herein).
"McDonald's Rent Deferral Secured Notes" means secured promissory
notes issued on July 22, 1997 by the Company in favor of McDonald's pursuant to
the Plan of Reorganization, which notes represent the restructuring of rent
deferrals that McDonald's granted to the Company while in Chapter 11 in an
estimated aggregate principal amount of $265,000.
"McDonald's Secured Note" means the secured promissory note issued on
July 22, 1997 by the Company in favor of McDonald's pursuant to the Plan of
Reorganization, which note represents restructured secured claims against the
Company in an estimated aggregate principal amount of up to $4.6 million.
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"McDonald's Senior Liens" means the first priority liens of McDonald's
on the McDonald's Collateral, as set forth in the first mortgages, deeds of
trust and/or deeds to secure debt, which liens secure, among other things, the
payment of the McDonald's Secured Note, the McDonald's Rent Deferral Secured
Notes and certain other obligations that may arise under (i) the agreement to
indemnify as set forth in the Agreement and Plan of Merger, dated as of August
30, 1994, among Discovery Zone, Inc., Discovery Zone International, Inc., Leaps
& Bounds, Inc. and McDonald's Corporation, and (ii) the Stipulation and Order
Between Debtors and McDonald's Corporation Providing for the Resolution,
Settlement and Compromise of Disputes and for Rent Deferrals and Allowance of
Certain Claims, entered by the United States Bankruptcy Court for the District
of Delaware on November 18, 1996.
"Mortgages" means the mortgages, deeds of trust, deeds to secure debt
or other similar documents securing liens on the Premises and/or the Leased
Premises, as well as the other collateral secured by and described in the
mortgages, deeds of trust, deeds to secure debt or other similar documents.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) received by the Company or any of its Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayment of Indebtedness
that is required to be repaid in connection with such Asset Sale and (d)
appropriate amounts to be provided by the Company or any Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP, excluding, however, any gain
(but not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions), and
excluding any extraordinary gain (but not loss), together with any related
provisions for taxes on such extraordinary gain (but not loss).
"New Intercreditor Agreements" means, collectively, (i) one or more
Eligible Credit Facility Intercreditor Agreements (or, if applicable, an
amendment to the Existing Notes Intercreditor Agreement), to be entered into on
or after the Issue Date, between the Trustee and one or more Lenders (including,
without limitation, Foothill Capital Corporation) and (ii) the Notes
Intercreditor Agreement.
"Non-U.S. Person" means a Person who is not a U.S. Person, as defined
in Regulation S.
"Notes Intercreditor Agreement" means the intercreditor agreement to
be entered into on the Issue Date between the Trustee and the Existing Notes
Trustee.
"Obligations" means any principal, premium, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the chief executive
officer, the president, any vice president, the chief financial officer, the
treasurer, the controller or the secretary of such Person, or any other officer
designated by the Board of Directors to serve in a similar capacity.
"Permitted Holder" means Birch Acquisition L.L.C. so long as such
entity is directly or indirectly controlled by Martin S. Davis or, in the event
of his death, by Greg S. Feldman.
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"Permitted Indebtedness" means each of the following:
(a) Indebtedness incurred by the Company or its Subsidiaries
in connection with or arising out of Sale and Leaseback Transactions,
Capital Lease Obligations or Purchase Money Obligations; provided that
the aggregate principal amount at any one time outstanding of all such
Sale and Leaseback Transactions, Capital Lease Obligations and
Purchase Money Obligations does not exceed $5 million;
(b) Indebtedness of the Company represented by the Notes
(whether incurred on the Issue Date or in connection with the Exchange
Offer);
(c) Indebtedness owed by the Company to any of its Wholly
Owned Subsidiaries for so long as such Indebtedness is held by a
Wholly Owned Subsidiary of the Company, in each case subject to no
Lien; provided that (i) any such Indebtedness of the Company is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the Exchange Notes and
(ii) if as of any date any Person other than a Wholly Owned Subsidiary
of the Company owns or holds any such Indebtedness or any such Person
holds a Lien in respect of such Indebtedness, such date shall be
deemed the date of incurrence of Indebtedness not constituting
Permitted Indebtedness of the Company;
(d) Indebtedness of a Wholly Owned Subsidiary of the Company
to the Company or to a Wholly Owned Subsidiary of the Company for so
long as such Indebtedness is held by the Company or a Wholly Owned
Subsidiary of the Company and, if such Indebtedness from the Company
to any Subsidiary exceeds $500,000 in aggregate principal amount,
evidenced by a written promissory note or other instrument in form and
substance reasonably satisfactory to the Trustee, in each case subject
to no Lien held by a Person other than the Company or a Wholly Owned
Subsidiary of the Company; provided that if, as of any date any Person
other than the Company or a Wholly Owned Subsidiary of the Company
owns or holds such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the date of incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of
such Indebtedness;
(e) the incurrence by the Company and its Subsidiaries of
Indebtedness issued in exchange for, or the proceeds of which are
contemporaneously used to extend, refinance, renew, replace, or refund
(collectively, "Refinance") Permitted Indebtedness referred to in
clauses (a), (b) and (c) above and clause (i) below and outstanding
Indebtedness incurred in accordance with the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant (other than
pursuant to this definition of Permitted Indebtedness, except to the
extent provided in clauses (a), (b) and (c) thereof) (the "Refinancing
Indebtedness"); provided, however, that (i) the principal amount of
such Refinancing Indebtedness shall not exceed the principal amount of
Indebtedness so refinanced (plus the amount of reasonable expenses
incurred in connection therewith); (ii) the Refinancing Indebtedness
shall rank in right of payment no more senior (and at least as
subordinated) to the Notes than did the Indebtedness being refinanced;
(iii) if the Indebtedness being refinanced is Indebtedness of the
Company, then such Refinancing Indebtedness shall be Indebtedness
solely of the Company; (iv) such Refinancing Indebtedness shall have a
Weighted Average Life longer, and a stated maturity which is later
than, that of the Indebtedness being refinanced; and (v) the
Indebtedness so refinanced is permanently retired (and, in the case of
the Notes, surrendered to the Trustee for cancellation);
(f) Interest Swap Obligations of the Company covering
Indebtedness of the Company or any of its Subsidiaries and Interest
Swap Obligations of any Subsidiary covering Indebtedness of such
Subsidiary; provided, however, that such Interest Swap Obligations are
entered into to protect the Company and its Subsidiaries from
fluctuations in interest rates on Indebtedness incurred in accordance
with the Indenture to the extent the notional principal amount of such
Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(g) Indebtedness of the Company outstanding on the Issue Date
pursuant to the McDonald's Secured Note, the McDonald's Rent Deferral
Secured Notes (including Indebtedness resulting from future rent
deferrals to the extent and in the manner contemplated by the
McDonald's Rent Deferral Secured Notes as in
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effect on the Issue Date) and the Pre-petition Tax Payables, as
reduced by the amount of any prepayments permitted by the Indenture or
scheduled amortization payments when actually paid or by any permanent
reductions thereof;
(h) other Indebtedness of the Company in an aggregate amount
not to exceed $15 million at any one time outstanding, which
Indebtedness may include Indebtedness evidenced by an Eligible Credit
Facility; and
(i) Indebtedness of the Company represented by the Existing
Notes and in an aggregate principal amount not to exceed $85 million.
"Permitted Investments" means: (i) Investments by the Company or any
of its Subsidiaries in any Person that is, or will become immediately after such
Investment, a Wholly Owned Subsidiary of the Company or that will merge or
consolidate into the Company or a Wholly Owned Subsidiary of the Company, (ii)
Investments in the Company by any Subsidiary of the Company; provided that any
Indebtedness evidencing such Investment is unsecured and subordinated, pursuant
to a written agreement, to the Company's obligations under the Exchange Notes
and the Indenture; (iii) investments in cash and Cash Equivalents; (iv) Interest
Swap Obligations entered into in the ordinary course of the Company's or its
Subsidiaries' businesses and otherwise in compliance with the Indenture; (v)
Investments in securities of trade creditors or customers received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers solely in exchange for a claim
against any such trade creditor or customer; (vi) Investments in the Exchange
Notes; (vii) Investments in the Existing Notes; (viii) Investments made by the
Company or its Subsidiaries as a result of an Asset Sale made in compliance with
the "Asset Sales" covenant; and (ix) other Investments in joint ventures,
corporations, limited liability companies or partnerships formed by the Company,
which joint ventures, corporations, limited liability companies or partnerships
engage in businesses which are the same as, or similar or related to, the
business of the Company as contemplated by this Prospectus; provided, however,
that the amount which may be invested pursuant to this clause (ix) shall not
exceed, in the 12-month period commencing on the Issue Date, $500,000 and in any
successive 12-month period commencing on the Issue Date thereafter, $500,000
plus any cumulative, unutilized portion of such amounts which could have been
invested pursuant to this clause (ix) during any of the prior 12-month periods.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or
claims either (a) not delinquent or (b) contested in good faith by
appropriate proceedings and as to which the Company or its
Subsidiaries shall have set aside on its books such reserves as may be
required pursuant to GAAP;
(ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such
reserve or other appropriate provision, if any, as shall be required
by GAAP shall have been made in respect thereof;
(iii) Renovation Liens;
(iv) Liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or to secure
the performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed
money);
(v) judgment Liens not giving rise to an Event of Default so
long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such
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judgment shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(vi) easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Subsidiaries;
(vii) any interest or title of a lessor under any Capital
Lease Obligation; provided that such Liens do not extend to any
property or assets which are not leased property subject to such
Capital Lease Obligation;
(viii) Purchase Money Liens of the Company or any Subsidiary
of the Company acquired in the ordinary course of business; provided,
however, that (A) the related Purchase Money Obligation shall not
exceed the cost of such property or assets and shall not be secured by
any property or assets of the Company or any Subsidiary of the Company
other than the property and assets so acquired and (B) the Lien
securing such Indebtedness shall be created within 90 days of such
acquisition;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumbered documents and other
property relating to such letters of credit and products and proceeds
thereof;
(x) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual, or warranty
requirements of the Company or any of its Subsidiaries, including
rights of offset and setoff;
(xi) Liens securing Interest Swap Obligations, which Interest
Swap Obligations relate to Indebtedness that is otherwise permitted
under the Indenture;
(xii) Liens securing Acquired Debt incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness"
covenant; provided that (A) such Liens secured such Acquired Debt at
the time of and prior to the incurrence of such Acquired Debt by the
Company or a Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such
Indebtedness by the Company or a Subsidiary of the Company and (B)
such Liens do not extend to or cover any property or assets of the
Company or of any of its Subsidiaries other than the property or
assets that secured the Acquired Debt prior to the time such
Indebtedness became Acquired Debt of the Company or a Subsidiary of
the Company and are no more favorable to the lien holders than those
securing the Acquired Debt prior to the incurrence of such Acquired
Debt by the Company or a Subsidiary of the Company;
(xiii) Liens existing on the Issue Date, including without
limitation, Liens securing the Existing Notes and Liens securing the
McDonald's Obligations, but only to the extent such Liens are in
effect on the Issue Date;
(xiv) Liens securing Indebtedness of the Company under an
Eligible Credit Facility;
(xv) Liens in favor of the Company or a Wholly Owned
Subsidiary of the Company on assets of any Subsidiary of the Company;
and
(xvi) Liens securing Refinancing Indebtedness which is
incurred to refinance any Indebtedness which has been secured by a
Lien permitted under the Indenture and which has been incurred in
accordance with the provisions of the Indenture; provided, however,
that such Liens (a) are no less favorable to the Holders and are not
more favorable to the lien holders with respect to such Liens than the
Liens in respect of the Indebtedness being refinanced and (b) do not
extend to or cover any property or assets of the Company or any of its
Subsidiaries not securing the Indebtedness so refinanced.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan of Reorganization" means the Third Amended Joint Plan of
Reorganization of Discovery Zone, Inc., dated March 11, 1997, as amended.
"Pledge Agreement" means the Pledge Agreement, dated as of even date
herewith, between the Company and the Trustee, substantially in the form
attached to the Indenture, as amended or supplemented from time to time in
accordance with its terms.
"Pledged Collateral" shall have the meaning assigned to such term in
the Pledge Agreement.
"Pledged Securities" means the U.S. Government Obligations to be
purchased by the Company and held in the Escrowed Interest Account in accordance
with the Escrow Agreement.
"Pledged Subsidiary Collateral" shall have the meaning ascribed to
such term in the Subsidiary Pledge Agreements.
"Preferred Stock" means, with respect to any Person, any Capital Stock
of such Person or its Subsidiaries in respect of which a holder thereof is
entitled to receive payment upon dissolution or otherwise before any payment may
be made with respect to any other Capital Stock of such Person or its
Subsidiaries.
"Pre-petition Tax Payables" means pre-petition tax claims restructured
pursuant to the Plan of Reorganization as pre-petition tax payables having an
estimated aggregate maximum principal amount of up to $5.0 million, which claims
have maturities of up to six years from the original date of assessment, require
principal payments in equal installments and accrue simple interest at 10% per
annum from the issue date with respect to the Existing Notes.
"Primary Offering" means an underwritten public offering of Qualified
Capital Stock of the Company pursuant to a registration statement filed with and
declared effective by the Commission pursuant to the Securities Act (other than
a registration statement on Form S-8 or otherwise relating to equity securities
under any employee benefit plans) or pursuant to an exemption from the
registration requirements thereof.
"Purchase Agreement" means the Purchase Agreement relating to the
purchase and sale of the Units, entered into among the Company and the Initial
Purchaser.
"Purchase Money Liens" means (i) Liens to secure or securing Purchase
Money Obligations permitted to be incurred under the Indenture and (ii) Liens to
secure Refinancing Indebtedness incurred solely to refinance Purchase Money
Obligations, provided that such Refinancing Indebtedness is incurred no later
than six (6) months after the satisfaction of such Purchase Money Obligations
and such Lien extends to or covers only the asset or property securing the
Purchase Money Obligations being refinanced.
"Purchase Money Obligations" means Indebtedness representing, or
incurred to finance, the cost of acquiring any assets (including Purchase Money
Obligations of any other Person at the time such other Person is merged with or
into or is otherwise acquired by the Company or any of its Wholly Owned
Subsidiaries); provided that (i) the principal amount of such Indebtedness does
not exceed 100% of such cost, (ii) any Lien securing such Indebtedness does not
extend to or cover any other asset or property other than the asset or property
being so acquired and (iii) such Indebtedness is incurred, and any Liens with
respect thereto are granted, within 90 days of the acquisition of such property
or asset.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
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"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Qualified Offering" means a Primary Offering resulting in net
proceeds to the Company of at least $20 million, all or a portion of which are
used to redeem 100% of the Exchange Notes and such redemption occurs within 30
days of the date of the closing of such offering.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of even date herewith, between the Company and the Initial
Purchaser, as the same may be amended or modified from time to time in
accordance with the terms thereof.
"Regulation S" means Regulation S under the Securities Act, as such
regulation may be amended from time to time.
"Renovation Liens" means statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other
Liens imposed by law incurred in the ordinary course of business between July
29, 1997 and the Issue Date.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Rule 144A" means Rule 144A under the Securities Act.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party providing for
the leasing to the Company or a Subsidiary of the Company of any property,
whether owned by the Company or any Subsidiary of the Company at the Issue Date
or later acquired, which has been or is to be sold or transferred by the Company
or such Subsidiary to such Person or to any other Person from whom funds have
been or are to be advanced by such Person on the security of such Property.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Security Agreement" means the Security Agreement, dated as of even
date herewith, between the Company and the Trustee, as amended or supplemented
from time to time in accordance with its terms, substantially in the form
attached to the Indenture.
"Security Interests" means the Liens on the Collateral created by the
Indenture and the Collateral Agreements in favor of the Collateral Agent for the
benefit of the Collateral Agent and the Holders.
"Significant Subsidiary" means any Subsidiary which would be a
"significant subsidiary" as defined in Article One, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Subordination Agreement" means that certain subordination agreement
by and between the Collateral Agent and McDonald's Corporation, dated on or
after the Issue Date, substantially in the form attached to the Indenture.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person or a combination
thereof; provided, however, that the term "Subsidiary" shall not include DZ
Party or any Limited Investment Subsidiary.
"Subsidiary Collateral" shall have the meaning assigned to such term
in the Subsidiary Security Agreements.
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"Subsidiary Guarantees" means, individually, the guarantee and,
collectively, the guarantees given by the Subsidiary Guarantors pursuant hereto
or pursuant to supplemental indentures executed by Subsidiaries formed after the
Issue Date pursuant to which such Subsidiaries agree to be bound by the terms of
the Indenture.
"Subsidiary Guarantor" means each of Discovery Zone (Canada) Limited,
Discovery Zone (Puerto Rico), Inc., Discovery Zone Licensing, Inc. and all
future Subsidiaries of the Company other than (a) any Limited Investment
Subsidiary or (b) DZ Party.
"Subsidiary Pledge Agreements" means the Subsidiary Pledge Agreements
to be entered into between the Subsidiary Guarantors and the Trustee,
substantially in the form attached to the Indenture, as amended or supplemented
from time to time in accordance with its terms.
"Subsidiary Security Agreements" means, individually, the subsidiary
security agreement and, collectively, the subsidiary security agreements
executed by each Subsidiary Guarantor in favor of the Trustee on the Issue Date
and after the Issue Date in accordance with the Indenture, pursuant to which
such Subsidiary Guarantor grants a security interest in and lien on its
properties and assets as collateral security for the debts, liabilities and
obligations of such Subsidiary Guarantor under its Subsidiary Guarantee and the
Indenture, as the same may be amended or modified from time to time in
accordance with its terms.
"Trademark Assignment" means the Collateral Assignment of Patents,
Trademarks and Copyrights (Security Agreement), dated as of even date herewith,
by the Company and its Subsidiaries in favor of the Trustee, substantially in
the form attached to the Indenture, as amended and supplemented from time to
time in accordance with its terms.
"Trust Officer" means any officer of the Trustee assigned by the
Trustee to administer the Indenture or, in the case of a successor trustee, an
officer assigned to the department, division or group performing the corporation
trust work of such successor and assigned to administer the Indenture.
"U.S. Government Obligations" means non-callable direct obligations
of, and non-callable obligations guaranteed by, the United States of America for
the payment of which the full faith and credit of the United States of America
is pledged.
"U.S. Legal Tender" means such coin or currency of the United States
of America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Voting Stock" means, with respect to any Person, one or more classes
of the Capital Stock of such Person having general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of such Person (irrespective of whether or not at the time Capital
Stock of any other class or classes shall have or might have voting power by
reason of the happening of any contingency).
"Warrant Agreement" means the Warrant Agreement, dated as of even date
herewith, between the Company and the Trustee, as Warrant Agent, pursuant to
which the Warrants are issued, as amended and supplemented from time to time in
accordance with its terms.
"Warrants" means the warrants to purchase shares of the Company's
common stock, par value $0.00017 per share, comprising the Units and issued by
the Company contemporaneously with the Private Notes pursuant to the terms and
conditions of the Warrant Agreement.
"Weighted Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of the numbers of years from the date of determination to the date
of each successive scheduled principal payment of such Indebtedness multiplied
by the amount of such principal payment by (ii) the sum of all such principal
payments.
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"Wholly Owned Subsidiary" means, with respect to any Person, any
Subsidiary of such Person of which all the voting Capital Stock (other than
directors' qualifying shares) is owned by such Person or any Wholly Owned
Subsidiary of such Person.
Same-Day Settlement and Payment
Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearing-house or next-day funds. In contrast,
the Exchange Notes are expected to be eligible to trade in the PORTAL Market and
to trade in the Depository's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in the Exchange Notes will therefore be
required by the Depository to be settled in immediately available funds. No
assurance can be given as to the effect, if any, of such settlement arrangements
on trading activity in the Exchange Notes.
Registration Rights
Pursuant to the Registration Rights Agreement, the Company agreed, for
the benefit of the Holders, that it would use its best efforts, at its cost, to
consummate this Exchange Offer. In satisfaction of this obligation, the Company
is hereby offering the Exchange Notes in return for surrender of the Private
Notes. It is intended by the Company that the Exchange Offer will satisfy these
registration rights, which will terminate upon the consummation of the Exchange
Offer. For each Private Note surrendered to the Company pursuant to the Exchange
Offer, the Holder will receive an Exchange Note of equal principal amount at
maturity. Interest on each Exchange Note shall be calculated and paid in the
same manner as interest on the Private Notes so surrendered and exchanged
therefore.
Book-Entry, Delivery and Form
Exchange Notes issued in exchange for the Private Notes currently
represented by one or more fully registered global notes will be represented by
one or more fully registered global notes (collectively, the "New Global Note"),
and will be deposited upon issuance with the Depository or an agent of the
Depository and registered in the name of the Depository or a nominee of the
Depository (the "New Global Note Registered Owner"). Except as set forth below,
the New Global Note may be transferred, in whole and not in part, only to
another nominee of the Depository or to a successor of the Depository or its
nominee.
As described below under "-- Certified Exchange Notes," owners of
beneficial interests in a New Global Note may receive physical delivery of
certificated Exchange Notes only in the limited circumstances described therein.
The Exchange Notes are not issuable in bearer form.
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in the accounts of its Participants. The
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants or Indirect
Participants may beneficially own securities held by or on behalf of the
Depository only through the Participants or the Indirect Participants. The
ownership interests and transfer of ownership interests of such persons held by
or on behalf of the Depository are recorded on the records of the Participants
and Indirect Participants.
The Depository has also advised the Company that pursuant to
procedures established by it, (i) upon deposit of the New Global Note, the
Depository will credit the accounts of its Participants with portions of the
principal amount of the New Global Note representing the Exchange Notes issued
in exchange for the Private Notes that each such Participant has instructed the
Depository to surrender for exchange and (ii) ownership of such interests in the
New Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained
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by the Depository (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial interests
in the New Global Note).
Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Exchange Notes, including the New Global
Note, are registered as the owners thereof for the purpose of receiving payments
in respect of the principal of and premium, if any, and interest on any Exchange
Notes and for any and all other purposes whatsoever. Payments on any Exchange
Notes registered in the name of the New Global Note Registered Owner will be
payable by the Trustee to the New Global Note Registered Owner in its capacity
as the registered holder under the Indenture. Consequently, neither the Company,
the Trustee nor any agent of the Company or the Trustee has or will have any
responsibility or liability for (i) any aspect of the Depository's records or
the records of any Participant or Indirect Participant relating to or payments
made on account of beneficial ownership interests in the New Global Note, or for
maintaining, supervising or reviewing any of the Depository's records or records
of any Participant or Indirect Participant relating to the beneficial ownership
interests in the New Global Note or (ii) any other matter relating to the
actions and practices of the Depository or any of its Participants or Indirect
Participants. The Depository has advised the Company that its current practice,
upon receipt of any payment in respect of securities such as the Exchange Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depository unless the
Depository has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of the Depository,
the Trustee or the Company. Neither the Company nor the Trustee will be liable
for any delay by the Depository or any of its Participants or Indirect
Participants in identifying the beneficial owners of the Exchange Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from the New Global Note Registered Owner for all
purposes.
Certificated Exchange Notes
If (i) the Company notifies the Trustee in writing that DTC is no
longer willing or able to act as a depository and the Company does not appoint a
qualified successor within 90 days or (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Exchange Notes in
definitive form under the Indenture, then, upon surrender by the relevant Global
Holder of its Global Note, Certificated Exchange Notes will be issued to each
person that such Global Holder and DTC identify as the beneficial owner of the
related Notes. In addition, subject to certain conditions, any person having a
beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for Exchange Notes in the form of Certificated
Exchange Notes. Upon any such issuance, the Trustee is required to register such
Certificated Exchange Notes in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof) in fully registered
form.
None of the Company nor the Trustee shall be liable for any delay by
the related Global Holder or DTC in identifying the beneficial owners of the
related Exchange Notes, and each such person may conclusively rely on, and shall
be protected in relying on, instructions from such Global Holder or of DTC for
all purposes (including with respect to the registration and delivery, and the
respective principal amounts of the Exchange Notes to be issued).
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DESCRIPTION OF CAPITAL STOCK
General
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and By-laws authorize capital stock consisting
of 2,200,000,000 shares of voting Class A Common Stock, par value $.00017 per
share (the "Voting Common Stock"), 190,000,000 shares of nonvoting Class B
Common Stock, par value $.00017 per share (the "Nonvoting Common Stock" and,
together with the Voting Common Stock, the "Common Stock"), and 10,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The
following summaries of the material provisions of the Common Stock, Preferred
Stock and warrants exercisable into shares of Common Stock do not purport to be
complete and are subject to, and qualified by, the provisions of the Certificate
of Incorporation, Bylaws, the respective warrant agreement and to the applicable
provisions of the General Corporation Law of the State of Delaware (the "DGCL").
Unless otherwise indicated, all references herein to Common Stock are to shares
of Voting Common Stock.
Preferred Stock
Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and certain limitations prescribed by the
DGCL, the Board of Directors is expressly authorized to adopt resolutions to fix
the voting rights, if any, designations, powers, preferences and the relative
participations, optional or other rights, if any, and the qualifications,
limitations or restrictions of any unissued series of Preferred Stock, to fix
the number of shares constituting such series, and to increase or decrease the
number of shares of any such series (but not below the number of shares thereof
then outstanding), in each case without any further action or vote by the
stockholders. The issuance of shares of Preferred Stock or of rights to purchase
such shares, could have the effect of delaying, deferring or preventing a change
of control of the Company or an unsolicited acquisition proposal.
Cumulative Preferred Stock
General. In connection with the Unit Offerings on July 17, 1998, the
Company issued (i) 80 units (the "Series A Preferred Stock Units"), which
consisted of (a) $2.0 million stated value of the Company's 14 1/2% Series A
Senior Cumulative Preferred Stock (the "Series A Cumulative Preferred Stock")
and (b) 80 warrants (the "Series A Preferred Unit Warrants") to purchase, in the
aggregate, 170,533,397 shares of Common Stock (equal to 9.64% of the Common
Stock on a fully diluted basis before giving effect to future issuances of
options under the Company's Stock Incentive Plan) at an exercise price of
$.00017 per share and (ii) 340 units (the "Series B Preferred Stock Units"),
which consisted of (x) $8.5 million stated value of the Company's 14 1/2% Series
B Junior Cumulative Preferred Stock (the "Series B Cumulative Preferred Stock"
and together with the "Series A Cumulative Preferred Stock, the "Cumulative
Preferred Stock") and (y) 340 warrants (the "Series B Preferred Unit Warrants"
and together with the Series A Preferred Unit Warrants, the "Preferred Unit
Warrants") to purchase, in the aggregate, 724,766,937 shares of Common Stock
(equal to 40.96% of the Common Stock on a fully diluted basis before giving
effect to future issuances of options under the Company's Stock Incentive Plan)
at an exercise price of $.00017 per share.
On July 17, 1998, Birch Acquisition L.L.C. ("Birch"), as purchaser of
200 Series B Preferred Units, exercised 200 Series B Preferred Unit Warrants and
thereupon received 426,333,492 shares of Common Stock. In accordance with the
provisions of the warrant agreement, Birch paid an exercise price of $72,477 by
tendering shares of Series B Cumulative Preferred Stock with an equal amount of
stated value (approximately 2,899 shares). Such shares were thereupon canceled
by the Company.
Ranking. With respect to the payment of dividends and distributions
upon the liquidation, dissolution or winding-up of the Company, (i) the Series A
Preferred Stock ranks senior to all classes of equity securities of the Company
(including the Convertible Preferred Stock, the Series B Junior Preferred Stock
and the Common Stock) and
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(ii) the Series B Junior Preferred Stock ranks junior to the Series A Cumulative
Preferred Stock and the Convertible Preferred Stock, and senior to all other
classes of equity securities of the Company (including the Common Stock).
Liquidation Preference. Upon any liquidation, dissolution or
winding-up of the Company, holders of each series of Cumulative Preferred Stock
are entitled to be paid out of the assets of the Company available for
distribution an amount equal to the aggregate stated value of shares of
Cumulative Preferred Stock of such series then outstanding (the "Liquidation
Preference") equal to $25.00 per share for each series of Cumulative Preferred
Stock, before any distribution is made to the holders of securities ranking
junior in right of payment to such series. The aggregate Liquidation Preference
of all outstanding shares of Series A Cumulative Preferred Stock is $2.0
million. The aggregate Liquidation Preference of all outstanding shares of
Series B Cumulative Preferred Stock is approximately $8.4 million, after taking
into account the cancellation of shares of Series B Cumulative Preferred Stock
tendered by Birch in connection with its exercise of its Series B Preferred Unit
Warrants. If the assets of the Company available for distribution are
insufficient to pay the holders of the outstanding shares of each series
Cumulative Preferred Stock, then the holders of each series of Cumulative
Preferred Stock shall share ratably in such distribution of assets.
Dividends. Holders of each series of Cumulative Preferred Stock are
entitled to receive dividends on such Cumulative Preferred Stock at an annual
rate of 14.5% of the Liquidation Preference of the shares of Cumulative
Preferred Stock. All dividends are cumulative, whether or not earned or
declared, on a quarterly basis from the date of issuance and are payable
quarterly in arrears on August 1, November 1, February 1 and May 1 of each year,
commencing August 1, 1998. If any dividend (or portion thereof) payable on any
dividend payment date is not declared or paid in full on such dividend payment
date, the amount of such dividend that is payable and not paid will accumulate
at the dividend rate, compounding quarterly, until declared and paid in full.
Optional Redemption. Each series of Cumulative Preferred Stock is
subject to redemption by the Company, at any time and from time to time prior to
the Mandatory Redemption Date (as defined herein). The Company will have the
right to redeem, in whole or in part, the Cumulative Preferred Stock at a
redemption price equal to 100% of the Liquidation Preference, together with
accrued and unpaid dividends, if any, to the date of redemption.
Each series of Cumulative Preferred Stock is redeemable at the option
of the holders thereof upon the earlier to occur of a merger, a sale of
substantially all of the assets or Common Stock of the Company or any other
Change of Control, in each case, at a price equal 100% of the Liquidation
Preference, together with accrued and unpaid dividends, if any, to the date of
redemption.
Mandatory Redemption. Unless earlier redeemed or converted, each
series of Cumulative Preferred Stock must be redeemed, out of funds legally
available therefor, by the Company at a redemption price equal to 100% of the
Liquidation Preference, together with accrued and unpaid dividends, if any, to
November 1, 2002 (the "Mandatory Redemption Date").
Conversion. If the Company completes a Primary Offering that results
in net proceeds to the Company of at least $20.0 million, then simultaneous with
the closing of such offering, the Company may convert all or any portion of the
Cumulative Preferred Stock into shares of Common Stock, the value of which shall
be equal to the aggregate Liquidation Preference of the shares so converted;
provided that (i) the Company pays all accrued and unpaid dividends on the
series of Cumulative Preferred Stock to the date of conversion and (ii) a pro
rata amount of shares of any junior Preferred Stock shall also be converted.
Voting Rights. The holders of each series of Cumulative Preferred
Stock, in their capacity as holders of Cumulative Preferred Stock, will have no
voting rights; except that the Certificate of Incorporation provides that the
Company may not (i) amend the terms of the respective series of Cumulative
Preferred Stock, (ii) amend or repeal any provision of the Certificate of
Incorporation or By-Laws so as to adversely affect the specific rights,
preferences, privileges or powers of, or the restrictions provided for the
benefit of, the holders of such series of Cumulative Preferred Stock, (iii)
increase the authorized number of the applicable series of Cumulative Preferred
Stock or (iv) authorize any class or series of senior Preferred Stock, without
the affirmative vote or consent of the holders of shares constituting
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at least a majority of the outstanding Cumulative Preferred Stock, voting or
consenting, as the case may be, separately as one class.
Other Rights. Holders of Convertible Preferred Stock are entitled to
certain additional rights, in each case as set forth in and subject to the
provisions of the Certificate of Incorporation governing the powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions relating to the Convertible
Preferred Stock, including, but not limited to, the following: (i) the right to
approve Company transactions with affiliates of the Company (Series A Cumulative
Preferred Stock only) and (ii) subscription rights.
Convertible Preferred Stock
On July 22, 1997, the Company issued an aggregate of 1,000 shares of
Series A Convertible Redeemable Preferred Stock (the "Convertible Preferred
Stock"). In connection with the offering of the Series A Preferred Stock Units,
the holder of the Convertible Preferred Stock paid $1.0 million of the
consideration for the Series A Preferred Stock Units by tendering shares of
Convertible Preferred Stock having an equal amount of stated value
(approximately 66.667 shares), which shares were thereupon canceled by the
Company.
Ranking. With respect to the payment of dividends and distributions
upon the liquidation, dissolution or winding-up of the Company, the Convertible
Preferred Stock ranks junior in right of payment to the Series A Cumulative
Preferred Stock and senior in right of payment to all other outstanding equity
securities of the Company (including the Series B Cumulative Preferred Stock and
the Common Stock).
Conversion. The outstanding shares of Convertible Preferred Stock are
convertible into 1,112,184 shares of Common Stock (or 1,191.6260 shares of
Common Stock per share of Convertible Preferred Stock) at any time at the option
of the holders of Convertible Preferred Stock, subject to adjustment under
certain circumstances.
Liquidation Preference. Upon any liquidation, dissolution, or
winding-up of the Company, the holders of Convertible Preferred Stock, before
any distribution to the holders of securities junior in right of payment to the
Convertible Preferred Stock, are entitled to be paid out of the assets of the
Company available for distribution to its stockholders a Liquidation Preference
of $15,000 per share (or $14 million in the aggregate). If the assets of the
Company available for distribution to the holders of Convertible Preferred Stock
are insufficient to pay the holders of outstanding shares of Convertible
Preferred Stock, then the holders of Convertible Preferred Stock shall share
ratably in such distribution of assets.
Dividends. The holders of Convertible Preferred Stock are not entitled
to any dividends or other distributions. No dividends or distributions shall be
made by the Company on the Common Stock or other securities junior in right of
payment to the Convertible Preferred Stock without the written consent of all of
the holders of Convertible Preferred Stock, and then only if holders of
Convertible Preferred Stock receive a pro rata share of any and all such
dividends or distributions as if such shares of Convertible Preferred Stock had
been fully converted into shares of Common Stock.
Redemption Option. The Convertible Preferred Stock is redeemable at
the option of the holders thereof: (i) upon the earlier to occur of a merger,
sale of substantially all of the assets or Common Stock of the Company or any
other Change of Control; or (ii) upon 180 days' prior written notice (the
"Redemption Notice") from any holder of Convertible Preferred Stock at any time
62 months after the offering of the Existing Notes, in each case, at a price
equal to the greater of (A) an amount equal to the Liquidation Preference; and
(B) if there is no established market for the Common Stock on a national
securities exchange or other nationally recognized automated quotation system,
the fully converted value of the Convertible Preferred Stock based on the
appraised value of the Company as determined by a qualified independent
appraiser (selected by the Company and acceptable to the holders of Convertible
Preferred Stock) as of the date that is 90 days after the date of delivery of
the Redemption Notice and assuming that the Company had consummated an initial
public offering of Common Stock in which Wafra had participated on the date of
such Redemption Notice.
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Voting Rights and Board Representation. Holders of Convertible
Preferred Stock have voting rights with respect to any and all matters presented
to the Company's stockholders for their action or consideration. Such voting
rights are commensurate with the percentage of Common Stock into which such
shares of Convertible Preferred Stock are convertible, as if such shares of
Convertible Preferred Stock had been fully converted. Holders of the Convertible
Preferred Stock will vote together with holders of Common Stock as a single
class.
Other Rights. Holders of Convertible Preferred Stock are entitled to
certain additional rights, in each case as set forth in and subject to the
provisions of the Certificate of Incorporation governing the powers, preferences
and relative, participating, optional or other special rights and
qualifications, limitations or restrictions relating to the Convertible
Preferred Stock, including, but not limited to, the following: (i) the right to
approve Company transactions with affiliates of the Company; (ii) standard
anti-dilution protection upon the occurrence of certain events; (iii) preemptive
rights; (iv) the right to one demand that the Company register the Common Stock
issuable upon conversion of the Convertible Preferred Stock and use its best
efforts to cause a registration statement with respect thereto to become
effective; provided, however, that if less than all the shares of such Common
Stock are sold in such offering, the holders of Convertible Preferred Stock
shall be entitled to one additional demand to register all of the remaining
shares of such Common Stock (unless such shares of Common Stock represent less
than 5% of the fully diluted number of shares of such Common Stock, in which
case the Company may elect to effect a shelf registration statement (which will
remain effective for one year) in lieu of such additional demand registration);
and (v) all other applicable rights granted to the holders of Existing Warrants
and the Ten Year Warrants.
Common Stock
General
The Common Stock of the Company is divided into voting and nonvoting
classes. Except as otherwise provided herein or in the Certificate of
Incorporation of the Company, shares of Voting Common Stock and Nonvoting Common
Stock are identical in all respects and entitle the holders thereof to the same
rights, preferences and privileges, and are subject to the same qualifications,
limitations and restrictions.
There are approximately 1,000 holders of the 430,333,492 shares of
Voting Common Stock outstanding and no shares of Nonvoting Common Stock are
outstanding. The Company has reserved (i) 715,692 shares of Voting Common Stock
for issuance under the Company's Stock Incentive Plan, (ii) 805,154 shares of
Voting Common Stock for issuance upon exercise of the outstanding Existing
Warrants, (iii) 444,444 shares of Voting Common Stock for issuance upon exercise
of the Ten Year Warrants, (iv) 1,112,184 shares of Voting Common Stock for
issuance upon conversion of the outstanding Convertible Preferred Stock, (v)
866,990,443 shares of Voting Common Stock for issuance upon exercise of the
outstanding Note Warrants, and (vi) 468,966,842 shares of Voting Common Stock
for issuance upon exercise of the outstanding Preferred Unit Warrants. The
Company has also reserved shares of Nonvoting Common Stock for issuance to
certain holders who elect to have their warrants exercised into Nonvoting Common
Stock.
In addition the Company intends to reserve additional shares of Voting
Common Stock for issuance under the Company's Stock Incentive Plan which shares
shall represent up to a maximum of 10% of the shares of Common Stock after
giving effect to the Unit Offerings.
Voting
The holders of Voting Common Stock are entitled to one vote for each
share of Voting Common Stock on all matters voted upon by stockholders,
including the election of directors. Holders of shares of Nonvoting Common Stock
will have the right to vote one vote per share together with the Voting Common
Stock as one class on (i) any merger or consolidation of the Company with or
into another entity or entities, (ii) any sale of all or substantially all of
the Company's assets and (iii) any amendment to the Company's Certificate of
Incorporation; provided that holders of shares of Nonvoting Common Stock will
have the right to vote as a separate class on any merger or consolidation of the
Company with or into another entity or entities, or any recapitalization or
reorganization, in which shares of
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Nonvoting Common Stock would receive or be exchanged for consideration different
on a per share basis from consideration to be received with respect to or in
exchange for shares of Voting Common Stock or would otherwise be treated
differently from shares of Voting Common Stock in connection with such
transaction.
Dividends
Subject to the rights of holders of any then outstanding shares of
Preferred Stock, holders of the Voting Common Stock and the Nonvoting Common
Stock are entitled to dividends pro rata at the same rate per share of each
class of Common Stock as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. If the Board of Directors
declares or pays dividends in shares of Common Stock, the dividends payable to
holders of each class of Common Stock will be payable in shares of such class of
Common Stock. If dividends are declared or paid in the form of voting securities
of the Company other than Common Stock, the Company will make available to each
holder of Nonvoting Common Stock, at such holder's request, dividends consisting
of nonvoting securities (except as otherwise required by law) of the Company
which are otherwise identical to such voting securities and which are
convertible into such voting securities on the same terms as the Nonvoting
Common Stock is convertible into the Voting Common Stock. The Company currently
does not pay any dividends on the Common Stock.
Liquidation
Holders of the Common Stock are entitled to participate pro rata at
the same rate per share of each class of Common Stock in the net assets of the
Company upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any shares of Preferred Stock then
outstanding.
Pre-emptive Rights and Redemption
The Common Stock has no preemptive rights to purchase shares of
capital stock of the Company and is not subject to any redemption provisions.
All outstanding shares of Common Stock are fully paid and nonassessable. The
Common Stock does not trade on any established public trading market.
Conversion
Conversion of Nonvoting Common Stock. In connection with the
occurrence (or expected occurrence as described below) of any Conversion Event
(as defined herein), each holder of Nonvoting Common Stock will be entitled to
convert into an equal number of shares of Voting Common Stock any or all of such
holder's shares of Nonvoting Common Stock being (or expected to be) distributed,
disposed of or sold in connection with such Conversion Event. A "Conversion
Event" means (i) any public offering or public sale of securities of the Company
(including a public offering registered under the Securities Act and a sale
pursuant to Rule 144 under the Securities Act or any similar rule then in
force), (ii) any sale of securities of the Company to a person or group of
persons (within the meaning of the Exchange Act) if, after such sale, such
person or group of persons, in the aggregate, would own or control securities
with sufficient ordinary voting power to elect a majority of the Company's
directors (provided that such sale has been approved by the Company's Board of
Directors or a committee thereof), (iii) any sale of securities of the Company
to a person or group of persons (within the meaning of the Exchange Act) if,
after such sale, such person or group of persons, in the aggregate, would own or
control securities of the Company (excluding any Nonvoting Common Stock being
converted and disposed of in connection with such Conversion Event) with
sufficient ordinary voting power to elect a majority of the Company's directors,
(iv) any sale of securities of the Company to a person or group of persons
(within the meaning of the Exchange Act) if, after such sale, such person or
group of persons would not, in the aggregate, own, control or have the right to
acquire more than 2% of the then outstanding securities of any class of voting
securities of the Company and (v) a merger, consolidation or similar transaction
involving the Company if, after such transaction, a person or group of persons
(within the meaning of the Exchange Act), in the aggregate, would own or control
securities with sufficient ordinary voting power to elect a majority of the
surviving Company's directors (provided that such transaction has been approved
by the Company's Board of Directors or a committee thereof). Each holder of
Nonvoting Common Stock will be entitled to convert shares of Nonvoting Common
Stock in connection with
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any Conversion Event if such holder reasonably believes that such Conversion
Event will be consummated. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Voting Common Stock and
Nonvoting Common Stock, solely for the purpose of issuance upon the conversion
of the Nonvoting Common Stock and Voting Common Stock, respectively, such number
of shares of Nonvoting Common Stock and Voting Common Stock issuable upon the
conversion of all outstanding Voting Common Stock and Nonvoting Common Stock, as
the case may be.
Stock Splits
If the Company subdivides or combines the outstanding shares of one
class of Common Stock, the outstanding shares of the other class of Common Stock
will be proportionately subdivided or combined in a similar manner.
Amendments
No amendment or waiver of any provision of the Amended and Restated
Certificate of Incorporation is effective without the prior approval of the
holders of a majority of the then outstanding Nonvoting Common Stock voting as a
separate class.
Warrants
Note Warrants
In connection with the Unit Offerings on July 17, 1998, the Company
issued 20,000 Note Units, each consisting of (i) $1,000 principal amount of
Private Notes, (ii) 17 Series A Note Warrants, each entitling the holder thereof
to purchase 1,769.3683 shares of Common Stock at an exercise price of $.00017
per share and (iii) 17 Series B Note Warrants, each entitling the holder thereof
to purchase 780.6036 shares of Common Stock at an exercise price of $.00017 per
share. The number of shares of Common Stock issuable upon exercise of the Note
Warrants is subject to adjustment in certain instances described below. The
Series A Note Warrants and Series B Note Warrants entitle the holders thereof to
purchase an aggregate of 601,585,205 shares of Common Stock and 265,405,238
shares of Common Stock, respectively, representing in the aggregate
approximately 34% and 15%, respectively, of the Common Stock on a fully diluted
basis after giving effect to the Unit Offerings, but before giving effect to
future issuances of options under the Company's Stock Incentive Plan. The Series
B Note Warrants may be redeemed or canceled for no consideration in connection
with a Qualified Offering occurring on or prior to December 31, 1999. If the
Company redeems or cancels all of the Series B Note Warrants, the Series A Note
Warrants, assuming no exercise thereof, would then represent 40% of the
outstanding Common Stock on a fully diluted basis after giving effect to the
Unit Offerings, but before giving effect to such Qualified Offering and future
issuances of options under the Company's Stock Incentive Plan.
The Series A Note Warrants are exercisable at any time on or after the
date of issuance. The Series B Note Warrants are exercisable at any time after
December 31, 1999. Unless exercised, the Note Warrants will automatically expire
on August 1, 2007. Upon exercise of any Note Warrant, the holder of such Note
Warrant will be entitled to receive shares of Voting Common Stock specified in
such Note Warrant; provided, however, that if such holder is (i) a "bank holding
company" within the meaning of the Bank Holding Company Act of 1956, as amended
(the "BHC Act"), or non-bank subsidiary of such an entity or (ii) any entity
that, pursuant to Section 8(a) of the International Banking Act of 1978, as
amended, is subject to the provisions of the BHC Act or any non-bank subsidiary
of such an entity, then such holder will be entitled to receive shares of
Nonvoting Common Stock upon the exercise of such Note Warrant.
The Series A Note Warrants and the Series B Note Warrants are not
separately transferable from the Notes or each other until the earlier to occur
of (i) the commencement of the Exchange Offer or (ii) such earlier date as
Jefferies & Company, Inc., as Initial Purchaser of the Note Units, shall
determine. The Note Warrants were issued in registered form pursuant to a
warrant agreement dated as of July 17, 1998, between the Company and Firstar
Bank N.A., as warrant agent.
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Preferred Unit Warrants
In connection with the Unit Offerings on July 17, 1998, the Company
also issued (i) 80 Series A Preferred Stock Units, each consisting of (a)
$25,000 stated value of Series A Cumulative Preferred Stock and (b) one Series A
Preferred Unit Warrant entitling the holder thereof to purchase 2,131,667.4631
shares of Common Stock at an exercise price of $.00017 per share and (ii) 340
Series B Preferred Units, each consisting of (x) $25,000 stated value Series B
Cumulative Preferred Stock and (y) one Series B Preferred Unit Warrant entitling
the holder thereof to purchase 2,131,667.4631 shares of Common Stock at an
exercise price of $.00017 per share. The Preferred Unit Warrants entitle the
holders thereof to purchase an aggregate of 895,300,334 shares of Common Stock,
representing 50.6% of the Common Stock on a fully diluted basis after giving
effect to the Unit Offerings, but before giving effect to future issuances of
options under the Company's Stock Incentive Plan. The number of shares of Common
Stock issuable upon exercise of the Preferred Unit Warrants is subject to
adjustment in certain instances described below. The Preferred Unit Warrants are
exercisable at any time after the date of issuance and, unless exercised, will
automatically expire on August 1, 2007. The Preferred Unit Warrants were issued
in registered form pursuant to a warrant agreement dated as of July 17, 1998,
between the Company and Firstar Bank N.A., as warrant agent.
On July 17, 1998, Birch, as purchaser of 200 Series B Preferred Units,
exercised 200 Series B Preferred Unit Warrants and thereupon received
426,333,492 shares of Common Stock. In accordance with the provisions of the
warrant agreement, Birch paid the exercise price of $72,477 by tendering shares
of Series B Cumulative Preferred Stock with an equal amount of stated value
(approximately 2,899 shares), which shares were thereupon canceled by the
Company.
Ten Year Warrants
In connection with the Plan of Reorganization, the Company issued
approximately 444,444 units, each consisting of nine shares of Common Stock and
one Ten Year Warrant entitling the holder thereof to purchase one share of
Common Stock at an exercise price of $17.55 per share. The Ten Year Warrants
entitle the holders thereof to purchase an aggregate of 444,444 shares of Common
Stock. The number of Warrant Shares (as defined herein) and the exercise price
of the Ten Year Warrants are subject to adjustment in certain instances as
described below. The Common Stock and the Ten Year Warrants became separately
transferable on the Effective Date. The Ten Year Warrants are exercisable at any
time after the date of issuance and, unless exercised, will automatically expire
on July 29, 2007. The Ten Year Warrants were issued in registered form pursuant
to a warrant agreement, dated as of the Effective Date, between the Company and
State Street Bank and Trust Company, as warrant agent.
Existing Warrants
Upon emerging from Chapter 11, the Company issued approximately 85,000
Existing Units, each consisting of $1,000 principal amount of Existing Notes and
one Existing Warrant entitling the holder thereof to purchase 9.4724 shares of
Common Stock at an exercise price of $.01 per share. The Existing Warrants
entitle the holders thereof to purchase an aggregate of 805,154 shares of Common
Stock. The number of Warrant Shares and the exercise price of the Existing
Warrants are subject to adjustment in certain instances described below. The
Existing Notes and the Existing Warrants became separately transferable on the
date 45 days following the Effective Date. The Existing Warrants are exercisable
at any time after the date of issuance and, unless exercised, will automatically
expire on August 1, 2007. The Existing Warrants were issued in registered form
pursuant to a warrant agreement, dated as of July 22, 1997, between the Company
and State Street Bank and Trust Company, as warrant agent.
General
No fractional shares of Common Stock will be issued upon exercise of
the Ten Year Warrants, the Existing Warrants, the Note Warrants and the
Preferred Unit Warrants (collectively, the "Warrants"). The Company shall pay to
holders of the Warrants at the time of exercise an amount in cash equal to the
same fraction of the current market price of a share of Common Stock, less the
Exercise Price. The holders of the Warrants have no right to vote on matters
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submitted to the stockholders of the Company, have no right to receive dividends
and no right to receive notice of any meeting of the stockholders, consent to
any action of the stockholders, receive notice of any other stockholders
proceedings or any other rights as stockholders of the Company. The holders of
the Warrants are not entitled to share in the assets of the Company in the event
of liquidation, dissolution or the winding-up of the affairs of the Company.
Adjustments. If the Company (i) pays a dividend or makes a
distribution on its Common Stock in shares of its Common Stock or other shares
of its capital stock, (ii) subdivides its outstanding shares of Common Stock
into a greater number of shares, (iii) combines its outstanding shares of Common
Stock into a smaller number of shares or (iv) issues by reclassification of its
Common Stock any shares of its capital stock, then the number of shares of
Common Stock issuable upon exercise of the Warrant (the "Warrant Shares")
immediately prior to such action shall be proportionately adjusted so that the
holder of any Warrant thereafter exercised may receive the aggregate number and
kind of shares of capital stock of the Company that such holder would have owned
immediately following such action if such Warrant had been exercised immediately
prior to such action.
If the Company distributes to all holders of its Common Stock any of
its assets (including, but not limited to, cash), securities (other than capital
stock), or any rights or Warrants to purchase securities (including but not
limited to Common Stock) of the Company, the Company will make the same
distribution to holders of the Warrants as though, immediately prior to the
record date with respect to such distribution, each such holder owned the number
of shares of Common Stock such holder could have purchased upon the exercise of
the Warrants held by such holder.
Subject to certain exceptions set forth in the Warrant Agreement, if
the Company issues (i) shares of Common Stock for a consideration per share less
than the current market price per share or (ii) any securities convertible into
or exchangeable for Common Stock for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities that is
less than the current market price per share of Common Stock on the date of
issuance of such securities, the Company shall offer to sell to each holder of
Warrants, at the same price and on the same terms offered to all other
prospective buyers (provided that the holders of Warrants shall not be required
to buy any other securities in order to buy such Common Stock or convertible
securities), a portion of such Common Stock or convertible securities that is
equal to such holder's portion of the Common Stock then outstanding if
immediately prior thereto all the Warrants had been exercised. Each such holder
may elect to buy all or any portion of the Common Stock or convertible
securities offered or may decline to purchase any.
Notwithstanding the foregoing, no adjustment or action need be made
for (i) a change solely in the par value of the Common Stock; provided that the
Company shall not increase the par value to exceed the Exercise Price, (ii) the
conversion or exchange (other than pursuant to a reclassification), in any case
on a share-for-share basis, of Common Stock for non-voting stock for Common
Stock, (iii) shares of Common Stock (or options to purchase such shares) issued
to employees of the Company or any of its Subsidiaries pursuant to the stock
option plans or similar plans of the Company, to the extent that shares of
Common Stock or other securities issued or granted under such plans are issued
or granted at a price, or with an exercise price, that is no less than the fair
market value of the Common Stock at the date of grant and such grant or
issuance, together with all previous grants and issuances under all such plans,
represents 10% of the fully diluted Common Stock at the time of such grant or
issuance, or (iv) the exercise of the Warrants.
In case of certain consolidations or mergers of the Company, or the
sale of all or substantially all of the assets of the Company to another
corporation, each Warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which such holder would have been entitled as a result of such consolidation,
merger or sale had the Warrants been exercised immediately prior thereto.
Other Rights. The holders of the Existing Warrants, Note Warrants and
Preferred Unit Warrants have a number of other rights under the respective
warrant agreement pursuant to which their respective Warrants were issued,
including, but not limited to, tag along rights, repurchase rights and
registration rights.
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Certain Provisions of the Certificate of Incorporation and By-laws
Classification of the Board of Directors and Related Provisions
The Certificate of Incorporation provides that the Board of Directors
will consist of not less than eleven members unless such number is revised by a
unanimous vote of the Board of Directors, including, for as long as the Existing
Notes remain outstanding, the Noteholder Representatives (as defined herein).
Pursuant to the Stockholders' Agreement (as described below), Wellspring will
nominate four directors, Balfour will nominate one director, Wafra will nominate
one director and the trustee under the Existing Notes Indenture (the "Existing
Trustee"), or holders of not less than 25% of the Existing Notes then
outstanding, will nominate two directors (the "Noteholder Representatives"). One
member was nominated by the unsecured creditor's committee during the Company's
reorganization under Chapter 11 of the Bankruptcy Code. These directors have the
right to remain in office until successors are elected in accordance with the
terms of the Stockholders' Agreement, by holders of a plurality of the Common
Stock of the Company or until they are removed by the stockholders of the
Company, in either case in accordance with the Certificate of Incorporation,
By-laws and Stockholders' Agreement of the Company; provided, however, that the
director nominated by the unsecured creditors' committee will serve through at
least July 29, 2000. Subject to the rights of holders of any outstanding
Preferred Stock, vacancies on the Board of Directors may be filled only by the
Board of Directors or the Company's stockholders acting at an annual meeting. In
the event that a director serving as a representative of Wellspring resigns and
is not replaced prior to the next meeting of the Board of Directors, the
Noteholder Representatives will have the right to appoint a replacement at such
next meeting.
Pursuant to the terms of the Certificate of Incorporation, the Company
will not be permitted to file a petition under Chapter 11 of the Bankruptcy Code
without the unanimous approval of the Noteholder Representatives serving on the
Board of Directors. Any vote by the Board of Directors with respect to the
filing of a petition under Chapter 11 requires that a quorum of at least six
directors, including the two Noteholder Representatives, be present. In
connection with this provision under the Certificate of Incorporation,
Wellspring and its affiliates have pledged all of their shares of Common Stock
(including the shares of Common Stock issued upon the exercise by Birch of its
Series B Preferred Unit Warrants) (collectively, the "Pledged Stock") to the
Existing Trustee on behalf of the holders of the Existing Notes. In the event
that the Board of Directors files a petition under Chapter 11 without the
unanimous consent of the Noteholder Representatives in compliance with the
provisions set forth above with respect to the presence of a quorum, the
Certificate of Incorporation and the Stockholders' Agreement each provide that
the Existing Trustee may foreclose upon the Pledged Stock for the benefit of the
holders of the Existing Notes.
The Certificate of Incorporation further provides that, upon the
occurrence of an Event of Default under the Indenture, the Existing Notes
Trustee or the holders of at least 25% of the then outstanding Existing Notes
may require that the Company appoint such number of new directors to the Board
of Directors sufficient to ensure that, taken together with any director
resignations, the Noteholder Representatives, combined with such newly appointed
directors, constitute a majority of the Board of Directors.
Indemnification
The Certificate of Incorporation and By-laws provide that the Company
shall advance expenses to and indemnify each director and officer of the Company
to the fullest extent permitted by law.
Limitations on Directors' Liability
The Certificate of Incorporation provides that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL. These provisions do not limit the liability of directors under
federal securities laws and do not affect the availability of such equitable
remedies as an injunction or rescission based upon a director's breach of his or
her duty of care.
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Stockholders' Agreement
In connection with the Unit Offerings, the Company, the Existing Notes
Trustee and the holders of not less than 66 2/3% of the outstanding Voting
Common Stock entered into a stockholders' agreement, dated as of July 17, 1998,
(the "Stockholders' Agreement") pursuant to which each such stockholder has
agreed that, for so long as any of the Existing Notes remains outstanding, it
will cause the shares of Voting Common Stock held by it to be voted in favor of
electing the Noteholder Representatives to the Board of Directors of the
Company. In addition, the Company will not be permitted to file for bankruptcy
without a vote in favor of such filing by a majority of the Board of Directors
of the Company, including the unanimous consent of the Noteholder
Representatives. Furthermore, Wellspring and its affiliates bound by the
Stockholders' Agreement pledged their shares of Common Stock (including the
shares of Common Stock issued upon the exercise by Birch of its Series B
Preferred Unit Warrants) (collectively, the "Pledged Stock") to the Existing
Notes Trustee on behalf of holders of the Existing Notes, which pledge may, by
its terms, be foreclosed upon in the event that the Board of Directors files for
bankruptcy without the unanimous consent of the Noteholder Representatives. Each
stockholder subject to such pledge will be permitted to sell its Pledged Stock
provided that (i) the purchaser assumes the obligations of the selling
stockholder under the Stockholders' Agreement and (ii) no default has occurred
under the Existing Notes Indenture. In addition, upon the occurrence of an Event
of Default under the Existing Notes Indenture, the Existing Notes Trustee or the
holders of at least 25% of the then outstanding Existing Notes may require the
Company to appoint a sufficient number of directors to its Board of Directors,
as shall, together with any directors then acting as Noteholder Representatives,
constitute a majority of the Board of Directors. Furthermore, if any of the
directors nominated by Wellspring or its affiliates resigns and is not replaced
prior to the next succeeding meeting of the Board of Directors, the Noteholder
Representatives will have the right to appoint a replacement director prior to
such meeting.
Section 203 of the Delaware General Corporation Law
Section 203 of the DGCL prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value of 10% or more of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock,
unless: (i) the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired shares; (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it became an interested stockholder; or
(iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding voting
stock owned by disinterested stockholders at an annual or special meeting. A
Delaware corporation, pursuant to a provision in its certificate of
incorporation or by-laws, may elect not to be governed by Section 203 of the
DGCL. The Company did not make such an election, and, as a result, the Company
is subject to the provisions of Section 203 of the DGCL.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a description of certain indebtedness of the Company,
including the Revolving Credit Facility, certain pre-petition tax claims, the
McDonald's Secured Note, the McDonald's Rent Deferral Secured Notes and the
Existing Notes.
Private Notes and Exchange Notes
On July 17, 1998, the Company received approximately $20.0 million of
proceeds from the sale of $20.0 million aggregate principal amount of the
Private Notes. For a description of the material terms of the Private Notes, see
"Description of the Exchange Notes."
Existing Notes
In July 1997, the Company issued and sold $85.0 million aggregate
principal amount of Existing Notes. The net proceeds of the offering of the
Notes were used to (i) repay borrowings, claims and expenses incurred while
under Chapter 11, (ii) purchase securities, consisting of U.S. Treasury
Securities, that were placed in escrow and pledged as security for scheduled
interest payments on the Existing Notes through August 1, 1999 and (iii) finance
capital expenditures and provide for working capital and other general corporate
purposes. Interest on the Existing Notes is payable in cash quarterly in arrears
on each August 1, November 1, February 1 and May 1, commencing on August 1,
1997, and the principal amount of the Existing Notes is payable in full on
August 1, 2002.
The Existing Notes Indenture contains certain covenants which, among
other things, restrict the ability of the Company to pay dividends and make
other distributions, incur additional indebtedness, issue preferred stock, sell
or transfer certain of its assets, issue or sell any capital stock of its
Subsidiaries and place liens on its assets. In the event of a Change of Control,
holders of the Existing Notes will have the right to require the Company to
purchase all of their Existing Notes at a price equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest. The Existing Notes
are redeemable, at the option of the Company, at stated premiums over par on or
after August 1, 1999. In addition, up to 35% of the Existing Notes may be
redeemed at a premium over par prior to August 1, 1999 with the proceeds of one
or more Primary Offerings.
In March 1998, the Company completed a registered exchange of new
Existing Notes (with terms identical in all material respects to the originally
issued Existing Notes except with respect to limitations on transferability) for
all of the originally issued Existing Notes. The Company received no proceeds
from and recognized no profit on the exchange transaction, and no change in the
financial condition of the Company occurred as a result of such exchange
transaction.
Revolving Credit Facility
On March 31, 1998, the Company entered into the $10.0 million
Revolving Credit Facility with Foothill. The Revolving Credit Facility allows
the Company to borrow up to 133% of the trailing 12-month FunCenter contribution
(as described therein) derived from its 100 top performing FunCenters up to a
maximum principal amount of $10.0 million. Advances under the Revolving Credit
Facility bear interest at an annual rate equal to the prime rate (as defined in
such facility) plus 1%, plus certain fees. The Revolving Credit Facility will
mature, and all advances thereunder will become due and payable, on April 30,
2002, subject to automatic renewal for successive one-year periods upon
continuing compliance with the terms of such facility.
The Revolving Credit Facility contains covenants which, among other
things, restrict the ability of the Company to incur additional indebtedness,
place liens on its assets, pay dividends, make certain investments and make or
incur capital expenditures. In addition, the Company must maintain a Minimum
Aggregate Store Contribution (as such term is defined in the Revolving Credit
Facility) of (i) as of April 30, 1999, an amount equal to or greater than $5.0
million minus the lesser of (A) the Add Back Credit (as defined therein) or (B)
$1.0 million, and (ii) thereafter, equal
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to or greater than $5.0 million. The Company obtained from Foothill a waiver of
certain provisions of the Revolving Credit Facility that permitted it to
consummate the Unit Offerings.
The Revolving Credit Facility is secured by substantially all of the
Company's assets and has cross-default provisions with other obligations of the
Company, including the Exchange Notes. The Company has the right under the
Indenture and the Existing Indenture, as amended, to increase the Revolving
Credit Facility or obtain another Eligible Credit Facility for an additional
$5.0 million. In December 1998, the Company entered into an amendment to the
Revolving Credit Facility which increased the amount of borrowing availability
thereunder by $2.5 million for a total of $12.5 million which declines to $12.0
million on March 15, 1999. As of December 18, 1998, the Company had $8.5 million
of borrowings outstanding under the Revolving Credit Facility and had the
ability to borrow an additional $2.2 million, subject to $0.5 million of
outstanding letters of credit. The Company expects to have an additional $1.8
million of borrowing availability under the Revolving Credit Facility once
certain real estate collateral documents are completed.
Pre-petition Tax Claims
The pre-petition tax claims, which were restructured pursuant to the
Plan of Reorganization as "Pre-petition Tax Payables," have an estimated
aggregate principal amount of $5 million, subject to the final resolution of
federal, state and local tax audits for periods prior to March 25, 1996. The
claims originated as taxes assessed prior to the Company's filing under Chapter
11. The Pre-petition Tax Payables have maturities of up to six years from the
original date of assessment and require principal payments in equal annual
installments. The majority of the Pre-petition Tax Payables accrue simple
interest at 10% per annum (payable with each annual principal installment) from
the Effective Date. A small portion of the Pre-petition Tax Payables accrue
simple interest at 12% per annum (payable with each annual principal
installment) from the Effective Date (the "Alternative Pre-petition Tax
Payables"). Pre-petition tax claims held by the United States Internal Revenue
Service accrue interest in the manner specified in Code Sections 6621 and 6622.
The first payment on the majority of the Pre-petition Tax Payables is
payable one year after the Effective Date or, if the pre-petition tax claim is
not "allowed" by the Bankruptcy Court within one year after the Effective Date,
as soon as practicable after such claim becomes allowed. The first payment on
the Alternative Pre-petition Tax Payables is payable on the Effective Date or,
if the pre-petition tax claim is not "allowed" by the Bankruptcy Court on the
Effective Date, as soon as practicable after such claim becomes allowed.
Interest will be due and payable on the date on which each annual installment of
principal is due. The Company may elect to prepay, without penalty, all or any
portion of any pre-petition tax claim.
McDonald's Secured Note
The McDonald's Secured Rejection Note (the "McDonald's Secured Note")
represents restructured secured claims against the Company in an aggregate
original principal amount of $4.4 million. This note is payable in six equal
annual installments of $736,000 beginning on the first anniversary of the
Effective Date and thereafter on the five subsequent anniversaries of the
Effective Date, and accrues simple interest from the Effective Date on the
unpaid balance at an 11% annual interest rate. The current principal balance on
the McDonald's Secured Note is $3.7 million. The McDonald's Secured Note is
secured by mortgages on fourteen Company-owned parcels of real property.
The amount owing with respect to the McDonald's Secured Note may be
prepaid by the Company in full or in part at any time without penalty. In the
event that the Company sells any property that is subject to a valid and
enforceable mortgage held by McDonald's, the proceeds of such sale must be
immediately applied, to the extent available, to repay the principal amount and
any accrued and unpaid interest on the McDonald's Secured Note. The Company
currently is holding three properties mortgaged to McDonald's for sale with an
estimated aggregate market value in excess of $3.0 million.
The McDonald's Secured Note contains cross-defaults to any other debt
issued, or credit obtained, by the Company which has an aggregate principal
amount equal to or greater than $2.5 million. The Company would be in
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default on the McDonald's Secured Note if McDonald's were to terminate any two
subleases where McDonald's is the sublessor after the Company breached such
subleases.
McDonald's Rent Deferral Secured Notes
McDonald's also holds certain rent deferral notes payable by the
Company (the "McDonald's Rent Secured Deferral Notes" and, together with the
McDonald's Secured Note, the "McDonald's Obligations"), which represent
restructured rent deferrals which McDonald's granted to the Company during the
bankruptcy proceedings in an aggregate principal amount of $265,000 as of the
Effective Date. The principal amount of each McDonald's Rent Deferral Secured
Note is scheduled to increase by an amount equal to the rent deferral for each
month between the Effective Date and the termination of the sublease which gave
rise to the McDonald's secured claim with respect to such rent deferral. As with
the McDonald's Secured Note, the McDonald's Rent Deferral Secured Notes are
secured by mortgages on the same fourteen Company-owned parcels of real
property.
Each McDonald's Rent Deferral Secured Note will become due and payable
on the date on which the current term of the sublease giving rise to such
McDonald's Rent Deferral Secured Note expires, without giving effect to any
unexercised right to extend, or option to renew, such sublease.
Each McDonald's Rent Deferral Secured Note bears interest at a rate
equal to 11%. Interest is payable upon maturity or acceleration of each
McDonald's Rent Deferral Secured Note. On each anniversary of the Effective
Date, all accrued interest not previously paid or capitalized will be
capitalized and added to the outstanding principal amount of each McDonald's
Rent Deferral Secured Note. These Notes expire between August 31, 2002 and
December 31, 2004.
The scheduled rent deferrals on the McDonald's Rent Deferral Secured
Notes currently total $398,000 per year and, when combined with the principal
balance thereof at the Effective Date, total approximately $2.8 million over the
remaining lease term.
The McDonald's Rent Deferral Secured Notes contain cross-defaults to
any other debt issued, or credit obtained, by the Company, the aggregate
principal amount of which is equal to or greater than $2.5 million. The Company
would be in default on the McDonald's Rent Deferral Secured Notes if McDonald's
were to terminate any two subleases where McDonald's is the sublessor after the
Company breached such subleases. In addition, the McDonald's Rent Deferral
Secured Notes contain certain other standard terms, conditions and covenants.
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PLAN OF DISTRIBUTION
Except as described below, (i) a broker-dealer may not participate in
the Exchange Offer in connection with a distribution of the Exchange Notes, (ii)
such broker-dealer would be deemed an underwriter in connection with such
distribution and (iii) such broker-dealer would be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transactions. A broker-dealer may, however,
receive Exchange Notes for its own account pursuant to the Exchange Offer in
exchange for Private Notes if such Private Notes were acquired as a result of
market-making or other trading activities. Each such broker-dealer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer (other than an "affiliate" of the
Company) in connection with resales of any Exchange Notes received in exchange
for Private Notes that were acquired by such broker-dealer as a result of
market-making or other trading activities. The Company has agreed that, for a
period of up to 180 days after the closing of the Exchange Offer, it will make
this Prospectus, as amended or supplemented, available to any such broker-dealer
that requests copies of this Prospectus for use in connection with any such
resale.
The Company will not receive any proceeds from any sale of Exchange
Notes by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions or through the writing of options on the Exchange Notes,
or a combination of such methods of resale, at market prices prevailing at the
time of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. federal income
tax consequences of the exchange of the Private Notes for the Exchange Notes.
The discussion is based on provisions of the Code, its legislative history,
judicial authority, current administrative rulings and practice, and Treasury
Regulations. Legislative, judicial or administrative changes or interpretations
after the date hereof could alter or modify the validity of the statements and
conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect a holder of the Private Notes or the
Exchange Notes.
This discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to particular Holders in light of
their personal investment or tax circumstances or status, nor does it discuss
the U.S. federal income tax consequences to certain types of Holders subject to
special treatment under the U.S. federal income tax laws, such as financial
institutions, insurance companies, dealers in securities or foreign currency,
tax-exempt organizations, foreign corporations or nonresident alien individuals,
or persons holding Private Notes or Exchange Notes that are a hedge against, or
that are hedged against, currency risk or that are part of a straddle or
conversion transaction, or persons whose functional currency is not the U.S.
dollar. Moreover, the effect of any applicable state, local or foreign tax laws
is not discussed.
EACH HOLDER OF A PRIVATE NOTE THAT IS PARTICIPATING IN THE EXCHANGE
OFFER IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF SUCH HOLDER'S PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX
CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS, OF THE EXCHANGE OF THE PRIVATE NOTES FOR THE EXCHANGE NOTES
PURSUANT TO THE EXCHANGE OFFER.
Exchange Offer
The exchange of the Private Notes by any Holder for the Exchange Notes
pursuant to the Exchange Offer should not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes should not be considered
to differ materially in kind or in extent from the Private Notes. Rather, the
Exchange Notes received by any Holder should be treated as a continuation of the
Private Notes in the hands of such Holder. As a result, there should be no
federal income tax consequences to Holders exchanging the Private Notes for the
Exchange Notes pursuant to the Exchange Offer, and the federal income tax
consequences of holding and disposing of the Exchange Notes should be the same
as the federal income tax consequences of holding and disposing of the Private
Notes. In addition, a Holder's adjusted tax basis in the Exchange Notes will be
the same as its adjusted tax basis in the Private Notes exchanged therefor and
its holding period for the Private Notes will be included in its holding period
for the Exchange Notes. Further, the determination of gain on a sale or other
disposition of the Exchange Notes will be the same as for the Private Notes.
115
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company
by Shearman & Sterling, 599 Lexington Avenue, New York, New York.
EXPERTS
The consolidated financial statements of the Company at December 31,
1996 and 1997 and for the year ended December 31, 1996, the seven-month period
ended July 31, 1997, and the five-month period ended December 31, 1997, included
in this Prospectus, have been audited by Ernst & Young LLP, independent
certified public accountants, as stated in their report thereon appearing
elsewhere herein (which report contains an explanatory paragraph relating to the
Company's ability to continue as a going concern). Such consolidated financial
statements are included elsewhere herein in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The consolidated statements of operations and cash flows of the
Company as of December 31, 1995 and for the year then ended, included in this
Prospectus, have been so included in reliance on the report (which contains an
explanatory paragraph relating the ability of the Company to continue as a going
concern as described in Notes 10 and 16 to the consolidated financial statements
of the Company as of and for the year ended December 31, 1995) of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority of
said firm as experts in auditing and accounting.
116
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants for the years ended
December 31, 1997 and 1996..................................... F-2
Report of Independent Certified Public Accountants for the year ended
December 31, 1995.............................................. F-3
Consolidated Statements of Operations for the five-month period ended
December 31, 1997, the seven-month period ended July 31, 1997,
and the two years in the period ended December 31,
1996........................................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-5
Consolidated Statements of Cash Flows for the five-month period ended
December 31, 1997, the seven-month period ended July 31, 1997,
and the two years in the period ended December 31, 1996........ F-6
Consolidated Statements of Equity (Deficit) for the five-month period
ended December 31, 1997, the seven-month period
ended July 31, 1997, and the two years in the period
ended December 31, 1996........................................ F-8
Notes to Consolidated Financial Statements............................... F-9
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Statements of Operations for the
three-month periods ended September 30, 1998
and September 30, 1997......................................... F-34
Unaudited Condensed Consolidated Statements of Operations for the
nine-month periods ended September 30, 1998
and September 30, 1997......................................... F-35
Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997.............................. F-36
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1998
and September 30, 1997......................................... F-37
Notes to Unaudited Condensed Consolidated Financial Statements............ F-39
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Discovery Zone, Inc.
We have audited the accompanying consolidated balance sheet of Discovery Zone,
Inc. and subsidiaries as of December 31, 1997 (Successor Company) and the
related consolidated statements of operations, equity (deficit), and cash flows
for the seven-month period ended July 31, 1997 (Predecessor Company) and the
five-month period ended December 31, 1997 (Successor Company). We have also
audited the consolidated balance sheet of Discovery Zone, Inc. as of December
31, 1996 and the related consolidated statements of operations, equity
(deficit), and cash flows for the year then ended (Predecessor Company). Our
audits also included the accompanying financial statement schedule. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Discovery Zone,
Inc. and subsidiaries at December 31, 1997 (Successor Company) and the
consolidated results of their operations and their cash flows for the
seven-month period ended July 31, 1997 (Predecessor Company) and the five-month
period ended December 31, 1997 (Successor Company) as well as the consolidated
financial position at December 31, 1996 and the consolidated results of their
operations and their cash flows for the year then ended (Predecessor Company),
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Discovery Zone, Inc. will continue as a going concern. Since the date of
completion of our audit of the accompanying consolidated financial statements
and initial issuance of our report thereon dated April 3, 1998, the Successor
Company, as discussed in the third paragraph of Note 15, has experienced
continued operating losses and management believes that it will require
additional capital to continue funding operations and meet its obligations as
they come due. These conditions raise substantial doubt about the Successor
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in the third paragraph of Note 15. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
April 3, 1998, except for
the third paragraph of Note 15,
as to which the date is June 22, 1998
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and
Shareholders of Discovery Zone, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the results of
operations and cash flows of Discovery Zone, Inc. and its subsidiaries (the
"Company") for the year ended December 31, 1995 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts of
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Notes 10 and 16 (Note
references are to previously issued December 31, 1995 financial statements) to
the financial statements, the Company has suffered increasing operating cash
flow losses, is in default of certain indebtedness and has on March 25, 1995
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code. These events and circumstances raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 16 (Note reference is to
previously issued December 31, 1995 financial statements). The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 3 to the financial statements, in 1995, the
Company adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
PRICEWATERHOUSECOOPERS LLP
Miami, Florida
April 13, 1996
F-3
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------- -----------------------------------------------------
Five Months Seven Months
December 31, Ended July 31, Year Ended Year Ended
1997 1997 December 31, 1996 December 31, 1995
------------- -------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUE:
Company location sales ................................... $ 48,485 $ 82,537 $ 181,699 $ 257,839
Franchise related revenue ................................ -- -- 26 1,651
--------- --------- --------- ---------
Total revenue .......................................... 48,485 82,537 181,725 259,490
COST OF GOODS SOLD ......................................... 7,311 14,136 34,276 50,227
STORE OPERATING EXPENSE .................................... 44,189 59,267 140,486 185,587
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE .................................................. 10,244 11,160 40,779 58,201
DEPRECIATION AND AMORTIZATION .............................. 9,314 11,920 21,876 31,972
OTHER CHARGES .............................................. -- -- -- 360,803
RESTRUCTURING CHARGES ...................................... -- -- -- 11,357
--------- --------- --------- ---------
OPERATING LOSS ............................................. (22,573) (13,946) (55,692) (438,657)
OTHER INCOME (EXPENSE):
Interest expense (Note 1) ................................ (6,076) (3,249) (6,277) (12,226)
Interest income .......................................... 1,010 86 -- 323
Minority interest ........................................ -- -- -- 5,162
Other, net ............................................. (327) 73 (580) 153
--------- --------- --------- ---------
Total other expense, net ............................ (5,393) (3,090) (6,857) (6,588)
--------- --------- --------- ---------
LOSS BEFORE REORGANIZATION ITEMS,
INCOME TAX PROVISION, AND
EXTRAORDINARY ITEM ..................................... (27,966) (17,036) (62,549) (445,245)
REORGANIZATION ITEMS:
Professional fees ...................................... -- (6,164) (7,076) --
Loss on asset disposals ................................ -- -- (8,867) --
Unallocated reorganization value ....................... -- 24,829 -- --
Other, net ............................................. -- (7,082) (5,342) --
--------- --------- --------- ---------
Total reorganization items .......................... -- 11,583 (21,285) --
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX PROVISION
AND EXTRAORDINARY ITEM ................................. (27,966) (5,453) (83,834) (445,245)
INCOME TAX PROVISION ....................................... -- -- -- 4,000
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM ............................. (27,966) (5,453) (83,834) (449,245)
EXTRAORDINARY ITEM-GAIN ON
DISCHARGE OF DEBT ...................................... -- 332,165 -- --
--------- --------- --------- ---------
NET INCOME (LOSS) .......................................... (27,966) 326,712 (83,834) (449,245)
ACCRETION OF CONVERTIBLE
REDEEMABLE PREFERRED
STOCK TO REDEMPTION VALUE .............................. (97) -- -- --
--------- --------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS .................................... $ (28,063) $ 326,712 $ (83,834) $(449,245)
========= ========= ========= =========
Per common share -- basic and diluted:
Loss before extraordinary item ......................... $ (7.02) $ (0.09) $ (1.45) $ (8.30)
Extraordinary item-gain on discharge of debt ........... -- 5.75 -- --
--------- --------- --------- ---------
Net income (loss) ...................................... $ (7.02) $ 5.66 $ (1.45) $ (8.30)
========= ========= ========= =========
Weighted average number of common
shares outstanding ..................................... 4,000 57,705 57,691 54,139
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
---------------------- ----------------------
December 31, 1997 December 31, 1996
---------------------- ----------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 8,607 $ 3,326
Restricted cash and investments .............................. 13,036 --
Receivables, net ............................................. 750 1,338
Inventories .................................................. 1,739 2,038
Prepaid expenses ............................................. 2,289 1,085
Current deposits ............................................. 2,804 1,699
--------- ---------
TOTAL CURRENT ASSETS ...................................... 29,225 9,486
RESTRICTED CASH AND INVESTMENTS ......................................... 5,981 --
PROPERTY AND EQUIPMENT, net (Note 3) ................................... 131,352 110,381
LAND HELD FOR SALE ...................................................... 3,635 3,635
OTHER ASSETS, net ....................................................... 6,398 2,284
--------- ---------
TOTAL ASSETS .............................................. $ 176,591 $ 125,786
========= =========
LIABILITIES & EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable ............................................. $ 13,657 $ 7,518
Accrued liabilities .......................................... 9,049 7,780
Due to affiliate ............................................. -- 903
Accrued interest ............................................. 2,371 637
Current portion of long-term debt ............................ 1,102 --
Debtor-in-possession credit facility ......................... -- 22,448
--------- ---------
TOTAL CURRENT LIABILITIES ................................. 26,179 39,286
LONG-TERM DEBT ............................................... 87,091 4,666
OTHER LONG-TERM LIABILITIES .................................. 7,169 498
LIABILITIES SUBJECT TO COMPROMISE ....................................... -- 344,908
SERIES A CONVERTIBLE PREFERRED STOCK-- 1,000 shares
authorized, 1,000 shares issued and outstanding, redemption
value of $15,000 ................................................... 13,897 --
COMMITMENTS AND CONTINGENCIES
NON-REDEEMABLE PREFERRED STOCK, COMMON
STOCK AND OTHER EQUITY (DEFICIT):
Preferred stock (Predecessor Company) -- $.01 par value;
10,000,000 shares authorized, no shares outstanding ....... -- --
Common stock (Predecessor Company)-- $.01 par value;
100,000,000 shares authorized, 57,705,470 shares issued and
57,645,925 shares outstanding at December 31, 1996......... -- 577
Common stock (Successor Company)-- $.01 par value;
10,000,000 shares authorized, 4,000,000 shares issued and
outstanding at December 31, 1997 .......................... 40 --
Treasury stock (Predecessor Company)-- 59,545 shares at cost . -- (588)
Additional paid-in capital ................................... 70,063 291,925
Cumulative translation adjustment ............................ 118 62
Accumulated deficit .......................................... (27,966) (555,548)
--------- ---------
TOTAL NON-REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER EQUITY
(DEFICIT) ............................................. 42,255 (263,572)
--------- ---------
TOTAL LIABILITIES AND EQUITY (DEFICIT) .................... $ 176,591 $ 125,786
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------- -----------------------------------------------------
Five Months Seven Months
Ended Ended Year Ended Year Ended
December 31, 1997 July 31, 1997 December 31, 1996 December 31, 1995
----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ...................................... $ (27,966) $ 326,712 $ (83,834) $(449,245)
Adjustments to reconcile net income (loss) to net cash
used in operating activities before reorganization
items:
Reorganization items ............................. -- (11,583) 21,285 --
Plan administrative payments ..................... (5,391) (1,109) -- --
Extraordinary item-gain on discharge of debt ..... -- (332,165) -- --
Depreciation and amortization .................... 9,314 11,920 21,876 31,972
Amortization of debt discount and other
noncash interest charges ...................... 398 -- 1,383 5,863
Provision for bad debts .......................... -- -- 1,093 2,149
Other charges .................................... -- -- -- 360,803
Restructuring costs .............................. -- -- -- 11,357
Provision for deferred taxes ..................... -- -- -- 4,000
Loss on asset disposals .......................... -- -- 1,010 --
Changes in operating assets and liabilities, net
of effects from purchase transactions:
Receivables ...................................... (42) 630 (831) 6,463
Inventories ...................................... (425) 724 1,998 254
Prepaid expenses and current assets .............. (1,825) (484) (3,757) (3,830)
Accounts payable ................................. 4,779 814 8,792 (17,703)
Accrued liabilities .............................. 812 (3,182) (5,193) (9,954)
Other ............................................ 375 (108) -- (1,232)
--------- --------- --------- ---------
Net cash used in operating activities before
reorganization items ................................. (19,971) (7,831) (36,178) (59,103)
Reorganization items ................................... -- 11,583 (21,285) --
Adjustments to reconcile reorganization items to
cash provided by (used in) reorganization items:
Unallocated reorganization value ..................... -- (24,829) -- --
Loss on asset disposals .............................. -- -- 8,867 --
Write-off of deferred debt items ..................... -- -- 4,340 --
Accrued reorganization expenses ...................... (2,486) 10,118 2,615 --
Proceeds from sale of property and equipment ......... -- -- 1,753 --
--------- --------- --------- ---------
Net cash provided by (used in) reorganization items .... (2,486) (3,128) 3,710 --
--------- --------- --------- ---------
Net cash used in operating activities after
reorganization items ................................. (22,457) (10,959) (39,888) (59,103)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Cash used in acquisitions and investments, net ......... -- -- -- (5,300)
Expenditures for intangible and other assets, net ...... -- -- -- (4,344)
Minority interest in subsidiaries ...................... -- -- -- (3,186)
Purchases of property and equipment .................... (10,642) (567) (2,672) (51,732)
Proceeds from sale of property and equipment ........... -- 99 6,477 --
--------- --------- --------- ---------
Net cash provided by (used in) investing activities .... (10,642) (468) 3,805 (64,562)
</TABLE>
Continued on next page
F-6
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------- -----------------------------------------------------
Five Months Seven Months
Ended Ended Year Ended Year Ended
December 31, 1997 July 31, 1997 December 31, 1996 December 31, 1995
----------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Purchase of treasury stock ............................. $ -- $ -- $ -- $ (511)
Proceeds from issuance of long-term obligations ........ -- -- -- 626,200
Repayment of long-term obligations ..................... -- -- -- (544,411)
Net proceeds from debtor-in-possession credit
facilities ........................................... -- -- 22,448 --
Net repayment of debtor-in-possession credit
facilities ........................................... -- (22,448) -- --
Proceeds from Senior Secured Notes
with Warrants ........................................ -- 85,000 -- --
Proceeds from Redeemable Convertible
Preferred Stock ...................................... -- 15,000 -- --
Payment of financing costs ............................. (1,800) (4,569) -- --
Escrow of restricted cash .............................. -- (21,608) -- --
Proceeds from short-term borrowings .................... 276 276 7,500 --
Repayment of short-term borrowings ..................... (162) (158) (7,500) --
Advances from Birch Holdings LLC ....................... -- 2,500 -- --
Repayment of advances from Birch
Holdings, LLC ........................................ -- (2,500) -- --
Advances from affiliate, net ........................... -- -- 10,730 11,028
Proceeds from the exercise of options
and warrants ......................................... -- -- 282 29,423
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities ........................................... (1,686) 51,493 33,460 121,729
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .......................................... (34,785) 40,066 (2,623) (1,936)
Cash and cash equivalents, beginning of period ......... 43,392 3,326 5,949 7,885
--------- --------- --------- ---------
Cash and cash equivalents, end of period ............... $ 8,607 $ 43,392 $ 3,326 $ 5,949
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest ................................. $ 3,194 $ 3,340 $ 844 $ 3,021
========= ========= ========= =========
Cash paid for professional fees in connection
with Chapter 11 Proceedings........................... $ 1,331 $ 3,128 $ 5,461 $ --
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
DISCOVERY ZONE, INC.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Treasury
-------------------------- -------------------------- Additional
Paid-in
Shares Amount Shares Amount Capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............................ 48,723,115 $ 487 (5,058) $ (77) $ 260,282
Stock issued in acquisitions ......................... 200,000 2 -- -- 1,311
Stock issued on exercise of nonqualified stock
options .......................................... 1,377,855 14 -- -- 3,387
Stock issued on exercise of warrants ................. 7,234,500 72 -- -- 26,566
Treasury shares acquired ............................. -- -- (54,487) (511) --
Cumulative translation adjustment .................... -- -- -- -- --
Net loss ............................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 ............................ 57,535,470 575 (59,545) (588) 291,546
Stock issued on exercise of nonqualified stock
options .......................................... 170,000 2 -- -- 280
Cumulative translation adjustment .................... -- -- -- -- --
Net loss ............................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 ............................ 57,705,470 577 (59,545) (588) 291,826
Cumulative translation adjustment .................... -- -- -- -- --
Cancellation of old common shares and
elimination of existing stockholders' equity
upon emergence from bankruptcy ................... (57,705,470) (577) 59,545 588 (228,716)
Issuance of new common shares ........................ 4,000,000 40 -- -- --
Record value of warrants issued in connection
with exit financing ........................... -- -- -- -- 7,050
Net income ........................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at July 31, 1997 ................................ 4,000,000 40 -- -- 70,160
Cumulative translation adjustment .................... -- -- -- -- --
Accretion of convertible redeemable preferred -- -- -- -- (97)
stock to redemption value ......................
Cumulative translation adjustment .................... -- -- -- -- --
Net loss ............................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 ............................ 4,000,000 $ 40 -- $ -- $ 70,063
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Earnings Cumulative Total
(Accumulated Translation Equity
Warrants Deficit) Adjustment (Deficit)
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ...................... $ 715 $ (22,469) $ 25 $ 238,963
Stock issued in acquisitions ................... -- -- -- 1,313
Stock issued on exercise of nonqualified stock
options .................................... -- -- -- 3,401
Stock issued on exercise of warrants ........... (616) -- -- 26,022
Treasury shares acquired ....................... -- -- -- (511)
Cumulative translation adjustment .............. -- -- (116) (116)
Net loss ....................................... -- (449,245) -- (449,245)
--------- --------- --------- ---------
Balance at December 31, 1995 ...................... 99 (471,714) (91) (180,173)
Stock issued on exercise of nonqualified stock
options .................................... -- -- -- 282
Cumulative translation adjustment .............. -- -- 153 153
Net loss ....................................... -- (83,834) -- (83,834)
--------- --------- --------- ---------
Balance at December 31, 1996 ...................... 99 (555,548) 62 (263,572)
Cumulative translation adjustment .............. -- -- (30) (30)
Cancellation of old common shares and
elimination of existing stockholders' equity
upon emergence from bankruptcy ............. (99) 228,836 (32) --
Issuance of new common shares .................. -- -- -- 40
Record value of warrants issued in connection
with exit financing ..................... -- -- -- 7,050
Net income ..................................... -- 326,712 -- 326,712
--------- --------- --------- ---------
Balance at July 31, 1997 .......................... -- -- -- 70,200
Cumulative translation adjustment .............. -- --
Accretion of convertible redeemable preferred -- -- -- (97)
stock to redemption value ................
Cumulative translation adjustment .............. -- -- 118 118
Net loss ....................................... -- (27,966) -- (27,966)
--------- --------- --------- ---------
Balance at December 31, 1997 ...................... $ -- $ (27,966) $ 118 $ 42,255
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-8
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Discovery Zone, Inc. (the "Company") is the leading owner and operator
of pay-for-play children's entertainment centers ("FunCenters") in North America
with a national network of 205 FunCenters in 39 states, Puerto Rico and Canada.
The Company also operates two entertainment centers targeting adult customers,
under the "Block Party" name. The accompanying financial statements present the
consolidated financial position of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.
Discovery Zone, Inc. and its nineteen domestic subsidiaries
(collectively, the "Group") emerged from bankruptcy on July 29, 1997. The Group
had originally filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on March
25, 1996 (the "Petition Date"). While under Chapter 11, certain claims against
the Group at the Petition Date were stayed while the Company continued its
operations as a Debtor-in-Possession. These claims are reflected in the
Company's consolidated balance sheet as Liabilities Subject to Compromise as of
December 31, 1996. On July 18, 1997, the Bankruptcy Court approved the Company's
Joint Plan of Reorganization with Birch Holdings LLC ("Birch"), an affiliate of
Wellspring Associates, LLC ("Wellspring") which became effective on July 29,
1997 (the "Effective Date" or "Emergence Date").
The consolidated financial statements reflect accounting principles
and practices set forth in American Institute of Certified Public Accountants
Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," which provides guidance for financial
reporting by entities that have filed voluntary petitions for relief under, and
have reorganized in accordance with, the Bankruptcy Code.
In accordance with SOP 90-7, the Company did not accrue interest on
its pre-petition interest bearing obligations after the Petition Date as it was
unlikely such interest would be paid under the Plan. The amount of such
unaccrued contractual interest during the seven-month period ended July 31, 1997
and the year ended December 31, 1996 was approximately $9,176,000 and
$11,900,000, respectively.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain amounts in the 1995 and 1996 Consolidated Financial Statements
have been reclassified to conform with the 1997 presentation.
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
In November 1996, the Company filed with the Bankruptcy Court a Joint
Plan of Reorganization (the "Plan") with Birch which set forth a plan for
repaying or otherwise compensating the Company's creditors in order of relative
seniority of their respective claims while seeking to maintain the Company as a
going concern. On July 18, 1997, the Plan was approved by the requisite number
of creditors and confirmed by the Bankruptcy Court. The Plan became effective on
July 29, 1997 and the Company emerged from bankruptcy as of that date.
The Plan provided for (i) the payment in full of certain
administrative claims against the Company (those claims which arose after the
Petition Date), (ii) conversion of substantially all of the Company's
liabilities subject to compromise (excluding taxes payable, lease assumption
payments and certain other pre-petition liabilities permitted under the Plan) to
equity interests in the Company and (iii) cancellation of all of the
pre-petition equity interests in the
F-9
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
(Continued)
Company, as more fully described in the Plan. Birch had purchased certain of
these pre-petition claims from the original banks providing a credit facility to
the Company, resulting in ownership of 55.7% of the common stock of the
reorganized Company ("Common Stock").
Pursuant to the Plan, substantially all the Company's pre-petition
unsecured liabilities were converted to equity in exchange for units consisting
of nine shares of Common Stock and a ten-year warrant to purchase one share of
Common Stock at a price of $17.55 (the "Ten Year Warrants"). Such unsecured
creditors will receive 4,000,000 shares of Common Stock and Ten Year Warrants
exercisable for 444,444 shares of Common Stock. As a result of the transactions
which occurred on the Effective Date, indebtedness of $332,165,000 was
discharged, resulting in a gain, reflected as an extraordinary item in the
accompanying consolidated statements of operations. This gain is not recognized
for tax purposes to the extent the Company was insolvent at the date of
discharge. However, the Company's net operating loss carryforwards were reduced
by the amount of the gain.
In connection with its emergence from bankruptcy, the Company raised
$100 million through the issuance of $15 million of Convertible Redeemable
Preferred Stock ("Preferred Stock") and $85 million of 13.5% Senior Secured
Notes with Warrants, resulting in approximately $93.8 million of net proceeds to
the Company after deducting related offering costs (the "Exit Financing"). The
proceeds were used to repay the Company's debtor-in-possession credit facilities
(See Note 5) and certain bankruptcy administrative claims and reorganization
costs incurred in connection with the Company's emergence from bankruptcy and to
fund the Bond Interest Escrow Account, which is reflected as Restricted Cash and
Investments in the accompanying consolidated financial statements. The Senior
Secured Note holders also received warrants (the "Warrants") to purchase 805,154
shares of Common Stock at an exercise price of $.01 per share exercisable
through August 1, 2007, which represent approximately 12.5% of the fully diluted
shares of Common Stock after giving effect to the exercise of the Warrants and
the Ten Year Warrants and conversion of the Preferred Stock. A portion of the
proceeds from the Senior Secured Notes was allocated to the Warrants (see Note
6).
The Preferred Stock is convertible at any time into 1,191,626 shares
of Common Stock at an effective conversion price of $12.59 per common share,
representing approximately 18.5% of the fully diluted shares of Common Stock
after giving effect to the exercise of the Warrants and the Ten Year Warrants
and conversion of the Preferred Stock. The terms of the Preferred Stock include
a liquidation preference, the right to receive dividends, if paid, voting
rights, Board of Directors representation and redemption upon (i) the earlier to
occur of a merger, the sale of substantially all the Common Stock or assets of
the Company or other change of control, or (ii) 180 days' prior written notice
from any holder at any time 62 months after the Effective Date.
Approximately 3,157,000 shares of Common Stock are reserved for
issuance for the exercise of all warrants, and options and conversion of the
Preferred Stock.
During 1997 the Company implemented a broad cost reduction program
and, since the Effective Date, has begun implementing an extensive store
renovation program and brand repositioning strategy designed to increase
attendance and in-store spending. The Company intends to reposition the Company
from an indoor playground concept to an entertainment venue for children and
families that includes the addition of designated areas for laser tag, arts and
crafts, stage events and promotions with regularly changing activities and
events tied in to major entertainment properties and consumer products.
Subject to the Company's ability to generate positive cash flow from
operations, and availability of funds under the Company's Senior Secured Credit
Facility (see Note 15), the Company believes that its existing capital resources
will provide sufficient funds during 1998 to finance the Company's operations in
the ordinary course and to fund its
F-10
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) JOINT PLAN OF REORGANIZATION, EXIT FINANCING AND NEW BUSINESS STRATEGY
(Continued)
debt service requirements and the initial phase of its renovation program and
other capital expenditures. However, if the Company continues to generate
negative operating cash flow, less capital will be available for its renovation
program, which may, in turn, adversely impact implementation of the Company's
business strategy and thus, future operating results. In the event that the
results of its business strategy are not sufficient for the Company to generate
positive cash flow from operations, or take longer than expected to realize, or
if the Company's renovation program is delayed or costs more than expected, the
Company is likely to need additional financing for debt service, working capital
and later phases of the renovation program (see Note 15).
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of ninety days or less to be cash and cash equivalents. Such
investments are valued at quoted market prices.
Restricted Cash and Investments
Restricted cash and investments consists of U.S. treasury securities
purchased to fund the Bond Interest Escrow Account (See Note 2). The securities
are stated at cost plus accrued interest which approximates fair value.
Receivables
The Company has recorded a reserve for uncollectible accounts of
approximately $974,000 at December 31, 1996. There is no reserve for
uncollectible accounts at December 31, 1997. The Company believes that the
carrying amount of accounts receivable at December 31, 1997 and 1996
approximates the fair value at such date.
Inventories
Inventories, consisting primarily of facility operating supplies, food
and apparel items, are valued at lower of the cost (first in, first out) or
market.
Property and Equipment
Property and equipment is stated at cost. The Company is in the
process of finalizing the allocation of its reorganization value (see Note 4) to
property and equipment and identifiable intangible assets in accordance with SOP
90-7, which provides for reorganization value to be allocated to the Company's
assets in conformity with the procedures specified by Accounting Principles
Board Opinion No. 16, "Business Combinations," for transactions reported on the
basis of the purchase method. Depreciation and amortization expense is provided
using the straight-line method over the lesser of the estimated useful life of
the related assets or the lease term, excluding renewal options. Property and
equipment at December 31, 1997 and 1996 consists of the following (in
thousands):
F-11
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
------------ -----------
Life in Years 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Land ............................................ -- $ 8,164 $ 8,164
Building and improvements ....................... 20-40 8,811 9,190
Equipment, furniture and fixtures ............... 3-12 51,318 74,533
Leasehold improvements .......................... 1-14 29,563 42,094
Computer equipment and software ................. 3-5 3,778 7,705
Unallocated reorganization value (Note 4) ....... 24,829 --
Construction in progress ........................ 14,203 --
--------- ---------
140,666 141,686
Less accumulated depreciation and amortization .. (9,314) (31,305)
--------- ---------
Property and equipment, net ..................... $ 131,352 $ 110,381
========= =========
</TABLE>
Depreciation and amortization expense related to property and
equipment was approximately $9,314,000 for the five months ended December 31,
1997, $11,920,000 for the seven months ended July 31, 1997, $21,876,000 for the
year ended December 31, 1996 and $28,466,000 for the year ended December 31,
1995. Additions to property and equipment are capitalized and include cost to
design, acquire and install property and equipment, costs incurred in the
location, development and construction of new facilities, major improvements to
existing property and direct incremental costs incurred in the development of
management information systems.
In 1995, the Company elected early adoption of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of." This statement requires that long-lived
assets and certain identifiable intangibles, to be held and used by an entity,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In addition, this
statement requires that long-lived assets and certain identifiable intangibles
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Company completed its review of property and other assets in
accordance with SFAS No. 121 and adjusted the carrying values of those assets in
the fourth quarter of 1995. No further adjustments were made in 1996 or 1997.
Concurrent with the adoption of SFAS No. 121, the Company changed the
useful lives of its leasehold improvements to the lesser of the useful life or
term of the lease, excluding renewal options, effective in the fourth quarter of
1995. Effective January 1, 1996, the Company reduced the period of depreciation
for certain equipment, furniture and fixtures from its useful life to the lesser
of its useful life or the term of leases for locations at which these items are
placed. This change is an accounting change in the estimate of the useful lives
of property and equipment and is accounted for on a prospective basis beginning
January 1, 1996. The effect of this change was to increase 1996 depreciation
expense by approximately $6,096,000.
Land Held For Sale
The classification of land held for sale at December 31, 1997 and 1996
is based upon management's decision to dispose of certain parcels of undeveloped
land. The land is stated at the lower of historical cost or fair value less
costs to sell.
F-12
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In February 1998, the Company entered into a contract for the sale of
property in Littleton, Colorado. The Littleton property consists of two parcels,
of which one is improved with a FunCenter and the other is unimproved land. This
contract provides for the sale of such property for $4.2 million and allows the
Company to lease the FunCenter located thereon at an annual rental of $188,250,
plus scheduled escalations, for up to five years. This sale will reduce the
outstanding principal balance of the McDonald's Note to approximately $800,000,
and reduce the annual debt service on the McDonald's Note to approximately
$130,000 per year. The Littleton sale is scheduled to close in July 1998. There
can be no assurances that this sale will ultimately close or close on the
aforementioned terms or time period.
Intangible Assets
Prior to December 31, 1995, intangible assets consisted of the cost of
acquired businesses in excess of the market value of net intangible and
identifiable intangible assets acquired and the cost of territory rights
acquired. Territory rights included amounts paid to former franchises to
reacquire development rights in market areas previously granted to them under
area development agreements. The reacquisition of these territories gave the
Company the exclusive right to develop the markets with Company-owned facilities
or grant development rights to others, at its discretion. The cost in excess of
the market value of net tangible and identifiable intangibles and the cost of
territory rights were being amortized on a straight-line basis over 40 years.
Subsequent to an acquisition, the Company periodically evaluates
whether later events and circumstances have occurred that indicated the
remaining estimated useful life or cost of acquired businesses in excess of the
market value of net tangible and identifiable intangible assets acquired may
warrant revision or that the remaining balance of such costs may not be
recoverable. The Company uses an estimate of the Company's undiscounted net
income over the remaining life of the costs of acquired businesses in excess of
the market value of net tangible and identifiable intangible assets acquired in
measuring whether the costs are recoverable. Certain events and circumstances
occurred during 1995 that indicated that the carrying amounts of the cost of
acquired businesses in excess of the market value of net tangible and
identifiable intangible assets and the cost of territory rights acquired may not
be recoverable. Accordingly, the remaining carrying amounts relating to all of
the Company's intangible assets were written down to zero during the fourth
quarter of 1995.
F-13
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Amortization expense related to intangible assets was approximately
$3,506,000 in 1995.
Accrued Liabilities
Accrued liabilities included in current liabilities at December 31,
1997 and 1996 consists of the following (in thousands):
Successor Predecessor
Company Company
----------- ----------
1997 1996
----------- ----------
Accrued bankruptcy administrative claims and
reorganization costs ........................ $ 4,180 $ --
Accrued payroll and employee benefits.......... 1,961 851
Other ......................................... 2,908 6,929
----------- ----------
Total ......................................... $ 9,049 $ 7,780
=========== ==========
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
in banks and credit card receivables from credit card transaction processing
companies. The credit risk associated with cash and cash equivalents is
considered low due to the credit quality of the financial institutions.
Revenue Recognition
Revenue from Company-owned facilities is recognized at the time of
sale. Revenue from franchises is recognized when all material services or
conditions required under the Company's franchise agreement have been performed
by the Company.
Capitalized Interest
Interest costs have been capitalized on facility expenditures during
the construction period in accordance with SFAS No. 34, "Capitalization of
Interest Costs." Interests costs capitalized as an offset to interest expense
were approximately $197,000 in 1995.
Earnings (Loss) Per Common Share
In 1997, the Company adopted SFAS No. 128, "Earnings per Share" (EPS).
EPS amounts for all periods presented have been restated, where appropriate, to
conform to the SFAS No. 128 requirements. Earnings (loss) per common share is
calculated based on the weighted average number of common shares outstanding
during the period. Common equivalents outstanding, common shares issuable upon
assumed conversion of the Preferred Stock and other potentially dilutive
securities have not been included in the computation of diluted earnings (loss)
per share as their effect is antidilutive for all relevant periods presented.
Shares of Common Stock to be issued to unsecured creditors pursuant to the Plan
have been reflected as outstanding as of the Effective Date for purposes of
calculating the weighted
F-14
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
average common shares outstanding in the accompanying consolidated statement of
operations for the five-month period ended December 31, 1997.
Recently Issued Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income" is effective in 1998.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income. The adoption of this statement is not expected to result in a
significant change from the current required disclosures.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information" is effective in 1998. This statement abandons the "Industry Segment
Approach" in favor of the "Management Approach" for segment disclosure purposes.
Adoption of this statement will only effect the Company's disclosures.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of financial instruments included in the following categories:
Receivables consist primarily of credit card receivables which are
converted to cash within a short time after sales transactions are completed and
therefore are reported at approximate fair value.
Interest rates and terms for the 13.5% Senior Secured Notes, Secured
Rejection Note, and Secured Rent Deferral Notes were recently negotiated (see
Note 6). No significant events have occurred which would indicate the reported
amounts of these debt instruments would differ from fair value.
Convertible Redeemable Preferred Stock
Convertible Redeemable Preferred Stock (see Note 2) is carried at the
net consideration to the Company at time of issuance (fair value), increased by
periodic accretion to redemption value using the interest method. Redemption
accretion is effected by charges against retained earnings, or, in the absence
of retained earnings, paid-in capital.
Advertising Expense
The Company expenses costs of advertisements at the time the
advertisements are first shown or published. Advertising expense for the years
ended December 31, 1997 and 1996 was approximately $7,116,000 and $18,095,000,
respectively.
(4) FRESH START REPORTING
Upon emergence from its Chapter 11 proceedings, the Company adopted
fresh start reporting pursuant to the provisions of SOP 90-7. Although the
Emergence Date was July 29, 1997, the Company has recorded the effects of fresh
start reporting as of July 31, 1997. In accordance with SOP 90-7, assets and
liabilities have been restated as of July 31, 1997 to reflect the reorganization
value of the Company, which approximates their fair value at the Emergence Date.
In addition, the accumulated deficit of the Company through the Emergence Date
has been eliminated and the debt and capital structure of the Company has been
recast pursuant to the provisions of the Plan. Thus, the balance sheet as of
December 31, 1997 reflects a new reporting entity (the "Successor Company") and
is not comparable to prior periods (the "Predecessor Company"). Furthermore, the
accompanying consolidated statements of operations and cash
F-15
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) FRESH START REPORTING (Continued)
flows of the Predecessor Company reflect operations prior to the Emergence Date
and the effect of adopting fresh start reporting and are thus not comparable
with the results of operations and cash flows of the Successor Company.
The reorganization value of the Company's common equity of
approximately $70,200,000 was determined by the Company with the assistance of
financial advisors. These advisors (1) reviewed certain historical information
for recent years and interim periods; (2) reviewed certain internal financial
and operating data including financial projections; (3) met with senior
management to discuss operations and future prospects; (4) reviewed publicly
available financial data and considered the market values of public companies
deemed generally comparable to the operating business of the Company; (5)
considered certain economic and industry information relevant to the operating
business; (6) reviewed on five year forecast prepared by the Company; and, (7)
conducted such other analysis as appropriate. Based upon the foregoing, the
financial advisors developed a range of values for the Company as of the
Effective Date. In developing this valuation estimate the advisors, using rates
of 30% to 35%, discounted the Company's five year forecasted free cash flows and
an estimate of sales proceeds assuming the Company would be sold at the end of
the five year period within a range of comparable Company multiples.
The difference between the Company's reorganized value and a
revaluation of the Company's assets and liabilities resulted in a reorganization
item of approximately $24,829,000 which is included as an increase in net income
in the accompanying consolidated statement of operations for the seven month
period ended July 31, 1997 and as an increase in property and equipment in the
balance sheet at July 31, 1997. This reorganization item is included in property
and equipment at December 31, 1997, net of recorded amortization, as unallocated
reorganization value. This reorganization item will be allocated to specific
property and equipment assets and certain intangible assets after the Company
obtains appraisals of certain assets and completes a review of property and
equipment, all of which are currently in process.
The accumulated deficit of the Company at July 31, 1997 of
approximately $243,234,000, which included the effects of the reorganization
items and the extraordinary gain on discharge of debt, was reclassified to
additional paid-in capital.
The effects of the Plan, the Exit Financing, and fresh start reporting
on the Company's condensed consolidated balance sheet at July 31, 1997 are as
follows (in thousands):
F-16
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) FRESH START REPORTING (Continued)
<TABLE>
<CAPTION>
Pre- Discharge Exit Fresh Start Reorganized
Emergence of Financing Adjustments Balance
Balance Sheet Debt (1) (2) (3) Sheet
------------- ---------- ---------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................. $ 2,678 $ (33,811) $ 74,525 $ -- $ 43,392
Restricted cash and investments ............ 134 -- 10,414 -- 10,548
Receivables, net ........................... 708 -- -- -- 708
Inventories ................................ 1,314 -- -- -- 1,314
Prepaid expenses and other current assets .. 3,140 -- (569) 697 3,268
--------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS ................. 7,974 (33,811) 84,370 697 59,230
RESTRICTED CASH AND INVESTMENTS ................ -- -- 11,060 -- 11,060
PROPERTY AND EQUIPMENT, net .................... 98,929 -- -- 24,829 123,758
LAND HELD FOR SALE ............................. 3,635 -- -- -- 3,635
OTHER ASSETS, net .............................. 2,468 443 5,000 (1,592) 6,319
--------- --------- --------- --------- ---------
TOTAL ASSETS ......................... $ 113,006 $ (33,368) $ 100,430 $ 23,934 $ 204,002
========= ========= ========= ========= =========
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable ....................... $ 7,119 $ -- $ -- $ -- $ 7,119
Accrued liabilities .................... 10,506 (925) 1,630 8,341 19,552
Debtor-in-possession credit facility ... 30,895 (30,895) -- -- --
--------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES ......... 48,520 (31,820) 1,630 8,341 26,671
LONG-TERM DEBT ............................. 4,682 5,000 77,950 -- 87,632
OTHER LONG-TERM LIABILITIES ................ (813) -- -- 6,512 5,699
LIABILITIES SUBJECT TO COMPROMISE .............. 344,070 (338,713) -- (5,357) --
CONVERTIBLE REDEEMABLE
PREFERRED STOCK ............................ -- -- 13,800 -- 13,800
COMMON STOCK AND OTHER EQUITY
(DEFICIT):
Common stock (Predecessor Company) ......... 577 -- -- (577) --
Common stock (Successor Company) ........... -- -- -- 40 40
Treasury stock (Predecessor Company) ....... (588) -- -- 588 --
Additional paid-in capital ................. 291,925 -- 7,050 (228,815) 70,160
Cumulative translation adjustment .......... 32 -- -- (32) --
Accumulated deficit ........................ (575,399) 332,165 -- 243,234 --
--------- --------- --------- --------- ---------
TOTAL COMMON STOCK AND OTHER
EQUITY (DEFICIT) ........................... (283,453) 332,165 7,050 14,438 70,200
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND EQUITY ...................
(DEFICIT) .................................. $ 113,006 $ (33,368) $ 100,430 $ 23,934 $ 204,002
========= ========= ========= ========= =========
</TABLE>
(footnotes on next page)
F-17
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) FRESH START REPORTING (Continued)
- ----------
(1) To record the discharge or reclassification of pre-petition
obligations (liabilities subject to compromise) and
debtor-in-possession credit facilities pursuant to the Plan.
(2) To record the Exit Financing and related issuance costs.
(3) To record assets and liabilities at their fair value pursuant to fresh
start reporting and eliminate the existing accumulated deficit.
(5) DEBTOR-IN-POSSESSION CREDIT FACILITIES
Pursuant to a final Order of the Bankruptcy Court dated May 20, 1996,
the Discovery Zone Group was authorized to enter into a Revolving Credit
Agreement dated April 30, 1996 (the "Revolving Credit Agreement") among
Discovery Zone, Inc., as borrower, the other members of the Group, as
guarantors, and Madeleine LLC ("Madeleine"), as lender. Under the Revolving
Credit Agreement, Madeleine agreed to lend Discovery Zone up to the aggregate
principal amount of $17,000,000, inclusive of a $7,000,000 subfacility for the
issuance of letters of credit. Under the Revolving Credit Agreement, Madeleine
was granted (i) superpriority administrative expense claim status over
administrative expenses of the Group, (ii) first priority liens on and security
interests in all of the Group's owned and subsequently acquired unencumbered
assets, (iii) liens on and security interests senior to any liens on or security
interests in all owned or subsequently acquired unencumbered assets, other than
collateral securing certain permitted liens, and (iv) junior liens on and
security interests in collateral for such permitted liens. The Revolving Credit
Agreement was amended by the First Amendment, dated as of May 28, 1996, which
changed certain of the financial covenants contained in the Revolving Credit
Agreement.
In August 1996, the Group requested that Madeleine make available
additional funds to insure the Group sufficient liquidity to timely satisfy
their postpetition obligations during the months of September and October, 1996.
By motion dated August 16, 1996, the Discovery Zone Group requested authority
from the Bankruptcy Court to enter into a Second Amendment to the Revolving
Credit Agreement (the "Proposed Second Amendment"), which provided for, among
other things, an increase from $17,000,000 to $20,000,000 in the aggregate
principal amount of the loans available under the Revolving Credit Agreement and
an adjustment to certain of the financial covenants therein.
Both prior to and following the filing of the motion requesting
authority to enter into the Proposed Second Amendment, the Group conducted
discussions with other prospective lenders regarding the provision of additional
financing. These negotiations resulted in a commitment from Perry Partners L.P.
("Perry Partners") to provide financing on substantially the same terms as the
Revolving Credit Agreement, as amended by the Proposed Second Amendment, but up
to the aggregate principal amount of $25,000,000. Because of this opportunity to
obtain additional credit, the Group, with consent of Madeleine, withdrew the
motion requesting authority to enter into the Proposed Second Amendment.
By Order dated October 25, 1996, the Group obtained authority from the
Bankruptcy Court to enter into a Replacement Revolving Credit Agreement (the
"Replacement Credit Agreement"), among Discovery Zone Inc., as borrower, the
other members of the Group, as guarantors, and Perry Partners, as lender. Under
the Replacement Credit Agreement, Perry Partners agreed to lend Discovery Zone
up to the aggregate principal amount of $25,000,000, inclusive of a $7,000,000
subfacility for the issuance of letters of credit. Perry Partners was granted
(i) superpriority administrative expense claim status over administrative
expenses of the Group, (ii) first priority liens on and security interests in
all of the Group's owned or subsequently acquired unencumbered assets, (iii)
liens on and security interests
F-18
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) DEBTOR-IN-POSSESSION CREDIT FACILITIES (Continued)
senior to any liens on or security interests in all owned or subsequently
acquired unencumbered assets, other than collateral for certain permitted liens,
and (iv) junior liens on and security interests in collateral for such permitted
liens.
The Replacement Credit Agreement contained covenants similar to those
contained in the Revolving Credit Agreement, as amended by the Proposed Second
Amendment, including, among other things, the maintenance of certain financial
ratios, prohibition against the incurrence of certain additional indebtedness,
and prohibition against dividends. The Group used proceeds made available under
the Replacement Credit Agreement to repay in full all outstanding obligations
under the Revolving Credit Agreement, as amended by the First Amendment, and the
Revolving Credit Agreement, as amended, was terminated. Approximately
$16,250,000 of the $25,000,000 was used to satisfy all obligations under the
Revolving Credit Agreement.
During the fourth quarter of 1996, the Group determined that it would
require an additional $5,000,000 in postpetition financing to satisfy
obligations which would become due and payable during the first quarter of 1997.
By motion dated December 27, 1996, the Group requested authority from the
Bankruptcy Court to enter into a First Amendment to the Replacement Credit
Agreement (the "First Replacement Amendment") pursuant to which the aggregate
principal amount to be advanced to the Group by Perry Partners would be
increased from $25,000,000 to $30,000,000. By interim Order dated December 31,
1996, the amount which the Group was authorized to borrow from Perry Partners
was increased from $25,000,000 to $28,500,000. By final Order dated March 4,
1997, this amount was increased to $30,000,000.
At December 31, 1996, the Company had outstanding borrowings under the
Replacement Credit Facility of $22,448,000, bearing interest at prime plus 3.5%
(11.75% at December 31, 1996) payable monthly. The Replacement Credit Facility
also required payment of certain fees as defined in the agreement plus an amount
to be determined such that Perry Partners earned an internal rate of return,
determined on an annualized basis, of 21% on all borrowings (which return took
into account all interest and fees). This additional interest of approximately
$364,000 over fees and interest accrued at the stated rate was included as a
postpetition liability at December 31, 1996, and was due and payable upon
repayment of the loan.
At July 29, 1997, the Company had outstanding borrowings under the
Replacement Credit Facility of $28,395,000. Interest on those borrowings accrued
at prime plus 3.5% (11.75% at July 29, 1997) payable monthly. At the Effective
Date, additional fees and interest of $821,000 over interest accrued at the
stated rate were owed. Outstanding borrowings under the facility were repaid
upon the Company's emergence from bankruptcy with the proceeds of the Exit
Financing (See Note 2) and the facility was eliminated.
In June and July 1997, the Bankruptcy Court issued orders permitting
the Company to borrow $5,000,000 from Birch as permitted under the existing
Replacement Credit Facility. The facility bore interest at prime plus 3.5% and
required the payment of certain additional fees to Birch at such time as the
Company exited bankruptcy protection. The loan was unsecured; however,
borrowings under the loan agreement had superpriority administrative claim
status with respect to payment of administrative expenses under the Plan. The
Company borrowed $2,500,000 under this facility, which was repaid with interest
and fees of approximately $82,000 upon the Company's emergence from bankruptcy
with the proceeds from the Exit Financing and the facility was eliminated.
F-19
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following
(in thousands):
Successor Predecessor
Company Company
------------ -----------
1997 1996
------------ -----------
13.5% Senior Secured Notes due 2002, net of
unamortized discount of $6,652 (1) ........... $ 78,348 $ --
Secured Rejection Note (2) ...................... 4,416 4,666
Secured Rent Deferral Notes (2) ................. 429 --
Pre-petition tax claims (3) ..................... 5,000 --
---------- ----------
88,193 4,666
Less current portion ............................ (1,102) --
---------- ----------
Long-term debt .................................. $ 87,091 $ 4,666
========== ==========
At December 31, 1997, maturities of the Company's long-term debt are
as follows: $1,102,000 in 1998; $1,663,000 in 1999; $1,663,000 in 2000;
$1,663,000 in 2001; $86,708,000 in 2002; and $2,046,000 thereafter.
- -----------
(1) In connection with its exit financing to emerge from bankruptcy, the
Company issued $85,000,000 of 13.5% Senior Secured Notes due August 1,
2002 (the "Notes") and the Warrants. A value of $7,050,000 was
allocated to the Warrants based upon their estimated fair value at the
time of the issuance, representing the original issue discount on the
Notes and resulting in an effective interest rate on the Notes of
approximately 15.9%. The Notes are secured by substantially all the
assets of the Company and interest is payable quarterly in arrears
beginning November 1, 1997. A separate interest escrow account was
established with the trustee to fund interest payments on the Notes
through August 1, 1999. The interest escrow account balance totaled
approximately $19,017,000 at December 31, 1997, consisting of treasury
securities and accrued interest thereon, and is reflected as
restricted cash and investments in the Company's Consolidated Balance
Sheet.
The Notes contain restrictions on payment of dividends, additional
indebtedness, and cross-default provisions with other obligations of
the Company. Among other things, the Company is permitted to have
outstanding up to $10 million of senior secured indebtedness and up to
$5 million of new indebtedness arising from sale and leaseback
transactions, capital lease obligations, or purchase money
obligations.
(2) In connection with the 1994 acquisition of Leaps & Bounds, Inc.
("Leaps & Bounds") from the McDonald's Corporation ("McDonald's") (see
Note 8), the Company, through a wholly owned subsidiary, received fee
simple ownership of certain parcels of real property. Each parcel of
real property is encumbered by a mortgage or deed of trust in favor of
McDonald's, which serves to secure certain indemnity obligations owed
by the Company to McDonald's.
By Order dated November 16, 1996, the Group was granted authority by
the Bankruptcy Court to enter into, and perform under, a stipulation
with McDonald's (the "McDonald's Stipulation") which provides for a
global resolution of issues relating to, among other things, the
assumption and rejection of leases of property where McDonald's is the
sublessor and Leaps & Bounds is the sublessee (the "L&B Subleases");
rent deferrals which McDonald's will grant to Leaps & Bounds in
respect of certain assumed L&B Subleases; the treatment of secured
claims which McDonald's holds against the Group arising from the
rejection and assumption of the L&B Subleases, and future rent
deferrals to be granted in respect of certain of the L&B Subleases.
F-20
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) LONG-TERM DEBT (Continued)
The McDonald's Stipulation provided that Leaps & Bounds assume L&B
Subleases with respect to 21 FunCenters (the "Assumption Locations")
and reject the L&B Subleases with respect to 17 FunCenters, which the
Group also requested the Bankruptcy Court's authority to close. The
Group, upon Leaps & Bounds assuming the L&B Subleases for the
Assumption Locations, cured all unpaid rent and other charges under
these subleases pursuant to section 365(b) of the Bankruptcy Code,
which cure payments totaled approximately $528,000. McDonald's
rejection claims related to the 17 closed FunCenters currently totals
$4,416,000, and is evidenced by a six-year note payable requiring
annual principal payments of approximately $736,000 (the "Secured
Rejection Note"). The Secured Rejection Note bears interest at 11%
payable annually and matures in the year 2003.
McDonald's also granted the Company rent deferrals (the "Rent
Deferrals") under the L&B Subleases, which are evidenced by nine notes
due upon the expiration of each initial sublease term (the "Secured
Rent Deferral Notes"). The Rent Deferrals currently total
approximately $398,000 per year and, when combined with the initial
Emergence Date principal balance of approximately $266,000, will total
approximately $2,840,000 over the next seven years. The notes bear
interest at 11% per annum payable at maturity and have maturity dates
ranging from August 31, 2002 to December 31, 2004.
The Secured Rejection Note and the Secured Rent Deferral Notes are
secured by first mortgages or deeds of trust on fourteen properties
owned by the Company, including three undeveloped parcels of land with
a book value of $2,747,000 at December 31, 1997, which are included in
Land Held for Sale in the Company's Consolidated Balance Sheet, one of
which is under contract for sale for $4.2 million (See Note 3). The
notes contain certain cross-default provisions including
cross-defaults among themselves, with the McDonald's subleases and
with other indebtedness of the Company in excess of $2.5 million.
(3) The pre-petition tax claims (the "Tax Claims") represent taxes
assessed prior to the Company filing for bankruptcy and have an
estimated aggregate principal amount of $5,000,000. The Tax Claims
have maturities of up to six years from the original date of
assessment and require payment of principal amounts in equal annual
installments. The majority of the Tax Claims accrue simple interest at
10% per annum payable with each annual principal installment. The
remainder accrue interest at 12% per annum.
(7) LIABILITIES SUBJECT TO COMPROMISE
Under the Bankruptcy Code, certain claims against the Company arising
prior to the Petition Date were stayed. These pre-petition claims were
compromised under the Plan (See Note 2). At December 31, 1996, these
pre-petition liabilities were separately classified in the consolidated balance
sheet as liabilities subject to compromise and included the following (in
thousands):
F-21
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) LIABILITIES SUBJECT TO COMPROMISE (Continued)
Accounts payable ................................... $ 27,213
Accrued liabilities ................................ 27,446
Lease rejection claims ............................. 18,767
Note payable to affiliate (See Note 8) ............. 13,215
Other amounts payable to affiliate (See Note 9) .... 22,724
Priority tax claims (See Note 6) ................... 5,000
Payable under credit agreement with banks .......... 101,900
Subordinated convertible debt ...................... 128,643
-------------
Total liabilities subject to compromise ............ $ 344,908
=============
Accrued liabilities include amounts accrued for claims related to
lawsuits and other legal matters.
In accordance with the Bankruptcy Code, the members of the Group
sought court approval for the rejection of certain pre-petition executory
contracts and real property leases. Such lease rejections give rise to
pre-petition claims for damages pursuant to the Bankruptcy Code. The Group
rejected 91 real property leases during 1996 and 4 during 1997.
The Company entered into a $175,000,000 credit agreement on December
22, 1994 (the "Credit Facility") with a consortium of banks. On September 15,
1995, the Company became in default under the Credit Facility as a result of the
expiration of an amendment/waiver agreement entered into between the Company and
the lenders on June 30, 1995 which waived until September 15, 1995 certain
financial covenants contained in the credit agreement. As a result of the
expiration of the amendment/waiver agreement on September 15, 1995, the Company
became in default under certain financial covenants contained in the Credit
Facility and such default continued as of December 31, 1995.
Another event of default occurred under the Credit Facility on the
Petition Date when the Group filed voluntary petitions for relief under the
Bankruptcy Code with the Bankruptcy Court. Consequently, all unpaid principal
of, and accrued pre-petition interest on, amounts outstanding under the Credit
Facility became immediately due and payable. The payment of such debt and
accrued but unpaid interest thereon was prohibited during the pendency of the
Group's bankruptcy cases other than pursuant to a court order. At the Petition
Date, these amounts totaled $101,900,000 and were classified as liabilities
subject to compromise at December 31, 1996.
In October and November, 1993, the Company issued $293,250,000
aggregate principal amount at maturity of Liquid Yield Option Notes ("LYONs"), a
form of subordinated convertible debt, due October 14, 2013. Net proceeds, after
the underwriting discount, amounted to approximately $111,000,000. No periodic
interest payments were required on the LYONs. Each LYON had an issued price of
$391.06 and had principal amount due at maturity of $1,000 (representing a yield
to maturity of 4.75% per annum computed on a semiannual bond equivalent basis).
Each LYON was convertible into 13,845 shares of Common Stock, at the option of
the holder, at any time on or prior to maturity, was subordinated to all
existing and future Senior Indebtedness (as defined in the LYONs indenture
agreement, "Indenture") of the Company, and was redeemable on or after October
14, 1998, in whole or in part, at the option of the Company, for cash in an
amount equal to the issue price plus accrued original issue discount to the date
of redemption.
F-22
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) LIABILITIES SUBJECT TO COMPROMISE (Continued)
As a result of the Group's bankruptcy filing, the Company defaulted
under the Indenture governing the LYONs. Consequently, the original issue price
of the LYONs plus the accrued original issue discount of the LYONs (the
"Accreted Value") through the Petition Date was immediately payable. As of
December 31, 1996, the Accreted Value was $128,643,000 and at the Petition Date
this obligation became subject to compromise.
(8) BUSINESS COMBINATIONS, SALES AND DISPOSALS
On May 24, 1995, the Company purchased from a subsidiary of Viacom,
Inc. ("Viacom") substantially all assets pertaining to the operation of two
family entertainment centers operating under the name "Block Party". The
purchase price was $13,215,000 and was paid through the issuance of a
subordinated promissory note having a ten-year term (the "BFF Note"). Interest
on such note accrued at the one-month London Interbank Offered Rate ("LIBOR")
plus .75% and was payable quarterly. The principal of the note was payable in
varying annual amounts beginning in the fourth year. Under the purchase
agreement, the Company was assigned certain real and personal property leases
related to the operations of the entertainment facilities and assumed all
liabilities arising thereunder. See Note 9, Related Party Transactions, for a
further discussion of transactions with Viacom.
During the year ended December 31, 1995, the Company also acquired
businesses that own and operate indoor recreational facilities for children for
an aggregate of $5,300,000 in cash and 200,000 shares of common stock. All
businesses acquired during the year ended December 31, 1995 were accounted for
under the purchase method of accounting and are included in the consolidated
financial statements since the dates of acquisition.
On February 8, 1996, the Company sold all issued and outstanding stock
of two wholly-owned subsidiaries, I&S Consultants and VLT, Inc., which together
owned and operated The Enchanted Castle, a family entertainment facility located
in Lombard, Illinois for $2,800,000.
On March 8, 1996, the Company sold all issued and outstanding stock of
its Wright Entertainment Group subsidiary for $2,000,000.
During 1996, the Company closed 101 of its indoor entertainment
facilities resulting in a loss on asset disposals of approximately $8,867,000.
Proceeds from sale of property and equipment at these locations totaled
approximately $1,753,000.
The Company's consolidated results of operations for the year ended
December 31, 1995 prepared on an unaudited pro forma basis assuming businesses
acquired and accounted for as purchases in 1995 had occurred as of January 1,
1995 are as follows:
Revenues as reported .................................... $ 259,490
Revenue of purchased businesses for the period prior
to acquisition, net of eliminations .................. 3,170
---------
Pro forma revenue ....................................... $ 262,660
=========
Net loss as reported .................................... (449,245)
Net loss of purchased businesses for period prior to
acquisition .......................................... (238)
Adjustment for interest and goodwill amortization ....... (494)
---------
Pro forma loss .......................................... $(449,977)
=========
Loss per share as reported--basic and diluted ........... $ (8.30)
Effect of purchased businesses prior to acquisition ..... (0.01)
---------
Pro forma loss per share--basic and diluted ............. $ (8.31)
=========
F-23
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) BUSINESS COMBINATIONS, SALES AND DISPOSALS (Continued)
Business acquisitions and investments during the year ended December
31, 1995 which included the use of cash were accounted for as follows:
Property and equipment .................................. $ 1,276
Intangibles ............................................. 31,657
Other assets ............................................ 16
Working capital deficiency, excluding cash acquired ..... (956)
Long-term obligations ................................... (13,215)
Other noncurrent liabilities ............................ (13,478)
---------
$ 5,300
=========
Business acquisitions during the year ended December 31, 1995 which
involved the issuance of the Company's common stock, $.01 par value were
accounted for as follows:
Intangibles ............................................. $ 1,313
=========
Common stock issuance allocated to: $ 2
Common stock ............................................ 1,311
----------
Additional paid-in capital .............................. $ 1,313
=========
(9) RELATED PARTY TRANSACTIONS
On September 2, 1994, the Company acquired Blockbuster Children's
Amusement Corporation, Tumble For Fun Limited Partnership and Blockbuster
Children's Amusement Canada Corporation (collectively, the "Blockbuster
Entities") from Blockbuster Fun & Fitness Holding Corporation, an indirect
wholly-owned subsidiary of Blockbuster Entertainment Corporation ("BEC"), prior
to BEC's merger with Viacom. The Company paid to BEC as consideration for the
acquisition 4,624,597 shares of common stock. At the time of acquisition, the
Blockbuster Entities owned 60 franchised Discovery Zone facilities and certain
franchised territories in the United States and Canada. Separately, on September
2, 1994, BEC, through its indirect wholly-owned subsidiary, Blockbuster
Discovery Investment, Inc., exercised its option to purchase from the former
partners of DKB Investments, L.P. (which was at the time the largest stockholder
of the Company, "DKB"), a number of shares of common stock sufficient to
increase BEC's indirect equity ownership in the Company to 49.9%. Pursuant to
the merger of BEC into Viacom, Viacom succeeded to BEC's equity ownership
interest in the Company. At the time of these transactions, Donald F. Flynn, who
was then Chairman of the Board and Chief Executive Officer of the Company, was a
director of BEC, and H. Wayne Huizenga, who was then Chairman of the Board and
Chief Executive Officer of BEC, and John J. Melk, who was then a director of
BEC, were directors of the Company.
On May 24, 1995 (the "MSA Effective Date"), a Management Services
Agreement ("MSA") between the Company and Viacom became effective, providing for
the services of Viacom's division, Blockbuster Entertainment Group
("Blockbuster"), in connection with the overall coordination and supervision of
the business of the Company and the day-to-day operations and business affairs
of the Company. Responsibility for management of the Company beyond the scope of
Viacom's services under the MSA was placed with a Special Committee of the Board
of Directors of the Company (the "Special Committee"), consisting of the
independent directors, Messrs. McGrath and Muething. On the MSA Effective Date,
all members of the Board of Directors except Steven R. Berrard and Donald F.
Flynn resigned (including H. Wayne Huizenga, George D. Johnson, Jr., James R.
Jorgensen, John T. Melk, Peer Pedersen and Gerald F. Seegers). The MSA had an
initial term of five years and thereafter could be extended automatically for
one year
F-24
<PAGE>
DISCOVERY ZONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) RELATED PARTY TRANSACTIONS (Continued)
renewal periods unless terminated by either party on six months' prior notice.
In payment for the management services to be provided under the MSA, the Company
was required to pay Viacom a quarterly fee equal to the actual costs, fees,
expenses, and reimbursements of the services provided, and a fair and reasonable
allocation of overhead expenses incurred by Viacom in providing such services,
during the preceding calendar quarter. In addition, on the MSA Effective Date,
the Company issued to Viacom 157,821 Series A Warrants, 157,821 Series B
Warrants, and 157,821 Series C Warrants. See Note 13, Warrants and Options, for
further discussion.
Also on the MSA Effective Date, the Company purchased from a
subsidiary of Viacom substantially all assets pertaining to the operation of two
family entertainment centers operating under the name "Block Party". As of
December 31, 1995, the Board of Directors of the Company was composed of Steven
R. Berrard, Frank J. Biondi, Jr., Phillippe P. Dauman, Donald F. Flynn, J. Brian
McGrath, John L. Muething and Sumner M. Redstone. Messrs Biondi, Dauman,
McGrath, Muething and Redstone were elected to the Board on May 24, 1995,
pursuant to the MSA. As of December 31, 1995, Messrs. Berrard, Biondi, Dauman
and Redstone were officers and/or directors of Viacom, which owned approximately
49% of the Company's outstanding common stock, and Messrs. Berrard, Biondi,
Dauman, McGrath, Muething and Redstone were directors of Spelling Entertainment
Group ("Spelling"), an affiliate of Viacom. In connection with his resignation
as Chief Executive Officer and a director of Viacom and as a director of
Spelling, Mr. Biondi resigned as a director of the Company on January 17, 1996.
Mr. Flynn resigned as Chairman of the Board of Directors of the Company on
February 27, 1996. In connection with his resignation as the Chief Executive
Officer of Blockbuster and as director of Viacom and Spelling, Mr. Berrard
resigned as the Chief Executive Officer and a director of the Company on March
19, 1996. Messrs. Dauman and Redstone resigned as directors of the Company on
March 24, 1996 and Mr. McGrath resigned as a director and as a member of the
Special Committee on March 27, 1996.
Donna R. Moore, then President and Chief Operating Officer of the
Company and Adam D. Phillips, Senior Vice President and General Counsel of
Blockbuster, were appointed to the Board of Directors of the Company on March
24, 1996. Dr. James M. Rippe was appointed to the Board of Directors of the
Company on June 20, 1996. At March 31, 1997, Donna R. Moore, John Muething, Dr.
James Rippe and Adam Phillips were the Company's directors.
On January 12, 1996, the Company received an interim working capital
loan of up to $10,000,000. This loan was guaranteed by Viacom and matured on
February 6, 1996. On February 6, 1996, the Company did not make its scheduled
repayment of the principal or accrued interest on the loan. The outstanding
principal on the loan was $7,500,000. On February 7, 1996, the principal amount
of $7,500,000 and accrued interest was paid to the lender by Viacom. As result
of its performance as guarantor, Viacom is subrogated to the lender's right to
receive payments of such amounts for the Company.
In summary, at December 31, 1996 the Company had a pre-petition amount
due to Blockbuster/Viacom, excluding the principal amount of the BFF Note, for
approximately $22,724,000, relating to $5,662,000 in reimbursements for
construction and other costs of certain subsidiaries of Blockbuster previously
incurred by Blockbuster, $6,998,000 in other operating costs paid by Blockbuster
on behalf of the Company, $7,527,000 in repayment of debt and accrued interest
thereon paid by Viacom on behalf of the Company, accrued interest of $748,000 on
the BFF Note and $1,789,000 due Blockbuster under the MSA. Viacom's ability to
receive such amounts was subject to the Group's bankruptcy proceedings.
Accordingly, these amounts were included in liabilities subject to compromise
and the Company's consolidated balance sheet at December 31, 1996.
In 1996, the Company incurred $3,724,000 of other obligations to
Blockbuster under the MSA including obligations to reimburse Blockbuster for
insurance and other costs on behalf of the Company, of which $1,424,000 was
incurred and $521,000 was paid after March 25,1996.
F-25
<PAGE>
DISCOVERY ZONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) RELATED PARTY TRANSACTIONS (Continued)
On May 7, 1997, the Bankruptcy Court issued an order providing for the
settlement of all of Viacom's pre- petition general unsecured claims against the
Group and all claims which the Group or any holders of claims against the Group
may hold against Viacom. Under the agreement and subsequent Bankruptcy Court
order, Viacom received no property for its pre-petition unsecured claims under
the Plan. In exchange for this treatment, the Group agreed to (i) satisfy in
full a claim which Iwerks Studios, Inc. held against the Group, and which was
guaranteed by Blockbuster, in the amount of $61,500, (ii) assume approximately
30 leases of the Group, which were guaranteed by Viacom, and assign them to
Blockbuster and (iii) pay Viacom's postpetition administrative claims for
expenses advanced by Viacom on behalf of the Group of approximately $991,000 and
obligations incurred under the MSA, subject to any setoff paid on behalf of
Viacom. In connection with this settlement, the MSA was terminated.
The Company subleased approximately 30,000 square feet of office space
from Blockbuster at an annual cost of approximately $600,000. A division of
Blockbuster occupied approximately 7,500 square feet of this space thereby
mitigating approximately $128,000 of the Company's cost. The Company terminated
its lease with Blockbuster and vacated the office space February 1, 1998.
The Company and a corporation owned by one of the Company's principal
stockholders were previously parties to a consulting arrangement, pursuant to
which the Company paid approximately $90,000 in 1995 for consulting and related
services. In addition, the Company paid to this corporation approximately
$59,000 in 1995 for the use of its private airplanes. Agreements between the
Company and this corporation for consulting services and use of airplanes were
terminated as of July 1, 1995. This principal stockholder is also a director of
Psychemedics Corporation ("Psychemedics"), a provider of drug testing services.
The Company entered into an agreement with Psychemedics for certain drug testing
services and paid Psychemedics approximately $186,000 and $468,000 during 1996
and 1995, respectively, for such services.
As required under the Plan, the Company reimbursed Birch approximately
$1,078,000 for its out-of-pocket expenses incurred in connection with sponsoring
the Plan.
An officer of Griffin Bacal, Inc. ("Griffin Bacal"), the Company's
advertising agency, serves as a director of the Successor Company. The Company
paid approximately $7,600,000 to Griffin Bacal for creative services and as
agent for the purchase of media from third parties during the year ended
December 31, 1997.
(10) INCOME TAXES
The federal statutory tax rate is reconciled to the Company's
effective tax rate for the noted periods as follows:
F-26
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(10) INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------- --------------------------------------------------------
Five Months Seven Months Year Year
Ended Ended Ended Ended
December 31, 1997 July 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Federal statutory rate (benefit) ....... (34.0)% (34.0)% (34.0)% (34.0)%
Change in valuation allowance .......... 34.0 % 34.0 % 34.0 % 35.0 %
Effective tax rate ..................... -- -- -- 1.0 %
========= ========= ======== ========
</TABLE>
Income tax provision for the following periods consists of (in thousands):
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
----------------- --------------------------------------------------------
Five Months Seven Months Year Year
Ended Ended Ended Ended
December 31, 1997 July 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Current ................................ $ -- $ -- $ -- $ --
Deferred ............................... -- -- -- 4,000
$ -- $ -- $ -- $ 4,000
======== ======== ========= ==========
</TABLE>
The primary components that comprise the deferred tax assets and
deferred tax liabilities at December 31, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
1997 1996
---------------- -------------
<S> <C> <C>
Net operating loss carryforwards .............................. $ 66,000 $ 170,000
Difference between book and tax bases of acquired net assets .. 12,000 18,500
Noncurrent asset reevaluations ................................ 85,000 86,500
Other assets .................................................. 10,000 6,000
Other liabilities ............................................. (16,000) (19,500)
--------- ---------
Net deferred tax asset before valuation allowance ............. 157,000 261,500
Valuation allowance ........................................... (157,000) (261,500)
--------- ---------
Net deferred tax asset ........................................ $ -- $ --
========= =========
</TABLE>
The valuation allowance totaled approximately $209,000,000 at December
31, 1995. The valuation allowance increased approximately $52,500,000 and
$164,800,000 in 1996 and 1995, respectively, and decreased approximately
$104,500,000 in 1997 due to a reduction in net operating loss carryovers related
to the cancellation of indebtedness of the Company upon emergence from
bankruptcy. The Company has net operating loss carryforwards for federal tax
purposes totaling approximately $178,000,000 which will expire as follows:
$127,000,000 in 2011 and $51,000,000 in 2012. As a result of its reorganization
under Chapter 11, the Company is treated as having experienced an ownership
change under Internal Revenue Code Section 382. Under Section 382, the Company's
ability to offset income in each post-reorganization taxable year by its
remaining NOLs and built-in losses (including depreciation and amortization
deductions of any portion of the Company's basis in assets with built-in losses)
is limited to an amount not to exceed the aggregate value of the Company's
common stock immediately before such change in control (taking into account in
such
F-27
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(10) INCOME TAXES (Continued)
calculation, however, any increase in value resulting from any surrender or
cancellation of creditors' claims in connection with the Plan) multiplied by the
long-term tax-exempt rate published monthly by the Internal Revenue Service.
Based on this calculation, the Company's use of approximately $137,000,000 of
NOLs is limited to approximately $4,000,000 per year.
The federal income tax net operating loss carryforwards described
above are not binding on the Internal Revenue Service and may be subject to
adjustments which may be substantial in magnitude. In accordance with SOP 90-7,
any realization of the benefit from tax net operating loss carryforwards
subsequent to the effective date of the Company's Plan of Reorganization will
result in an increase to equity.
(11) OTHER CHARGES
Certain of the Company's FunCenters generated increasing operating
cash flow losses or marginal operating cash flows during 1995 and in the first
quarter of 1996. These circumstances, in addition to the circumstances requiring
the Group to file voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code, indicated that the carrying amounts related to these FunCenters
may not be recoverable. Accordingly, management reviewed the intangibles,
property and equipment related to these FunCenters for recoverability in
accordance with SFAS No. 121 and determined that certain assets were impaired.
For each FunCenter, the Company tested for impairment by computing the sum of
the estimated future operating cash flows (undiscounted and without interest
charges) and comparing that result to its carrying value. If such sum was less
than the carrying value of the FunCenter's assets, an impairment condition was
considered to exist and an impairment loss was recognized. The impairment loss
recognized was measured as the amount by which the carrying amount exceeded the
fair value of the FunCenter's assets.
The estimate of fair value was determined using the present values of
each FunCenter's estimated future operating cash flows. The Company recognized
impairment losses in the fourth quarter of 1995 of approximately $306,212,000
resulting primarily from the write down of intangibles, leasehold improvements,
and equipment. Management's judgment is necessary to estimate future operating
cash flows. Accordingly, actual results could vary from such estimates.
In the second quarter of 1995, the Company recognized other charges
relating to the reduction in carrying values of certain assets that management
believed would not have continuing benefit under its new business plan. Such
reduction would not have been materially different from the charges that would
have resulted from the application of SFAS No. 121. These charges, which totaled
approximately $44,002,000, resulted primarily from the write down of certain
entertainment facility equipment and, to a lesser extent, the write down of
property and equipment related to the relocation of the Company's headquarters.
Additionally, in the second quarter of 1995, the Company recognized
other charges of approximately $10,589,000 related to the provision of
additional lease commitment reserves on certain previously closed entertainment
facilities because of the inability to terminate leases on favorable terms.
(12) RESTRUCTURING COSTS
In connection with the change in management effected by the MSA and
the relocation of its headquarters offices from Chicago, Illinois to Fort
Lauderdale, Florida, the Company recognized certain restructuring costs in the
second quarter of 1995. These restructuring costs consisted of employee
termination benefits of approximately $7,903,000 and facility lease termination
costs of approximately $3,454,000. The Company expected, and accrued the cost
of, the termination of approximately 300 management and administrative employees
in this regard. At
F-28
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(12) RESTRUCTURING COSTS (Continued)
December 31, 1995, the majority of such employees had been terminated and costs
of approximately $6,579,000 had been paid and charged against the accrued
liability. The Company completed all material aspects of the aforementioned
restructuring by March 31, 1996.
(13) WARRANTS AND OPTIONS
On May 11, 1995, the Company received approximately $26,700,000 from
the Company's former Chairman and certain members of his family in connection
with the exercise of warrants, which were exchanged for an aggregate of
7,234,500 shares of common stock. The Company used the proceeds from the
exercise of these warrants to reduce debt.
On the MSA Effective Date, the Company issued to Viacom 157,821 Series
A Warrants, 157,821 Series B Warrants and 157,821 Series C Warrants. The Series
A, Series B and Series C Warrants were to vest on the first, second and third
anniversaries of the MSA Effective Date, respectively. All such vested warrants
were to become exercisable on or after December 16, 1998, although such
exercisability was to be accelerated in certain circumstances. Each warrant
entitled Viacom to purchase one share of Series A Preferred Stock of the
Company. The exercise prices for the Series A, Series B and Series C Warrants
per share of the common stock into which the Series A Preferred Stock was
convertible were $10.375, $11.931 and $14.317, respectively.
In April 1993, the Company adopted a stock option plan (the "1993
Plan"), whereby up to 6,000,000 shares of common stock may be granted to key
employees, consultants and directors of the Company. In addition, in July 1995,
the Company adopted the 1995 Long-Term Management Incentive Plan (the "1995
Plan") pursuant to which up to 3,000,000 shares of common stock may be granted
to certain key employees and consultants of the Company. Options granted under
the 1993 Plan and the 1995 Plan are nonqualified and were granted at a price
equal to the fair market value at the date of grant. No options were granted
under the 1995 Plan.
In connection with the MSA, all shares available for future grant and
all options granted and outstanding relating to the Company's directors under
the 1993 Plan were canceled if not exercised prior to the MSA Effective Date.
Additionally, the vesting of all non-director employee options outstanding at
the MSA Effective Date was accelerated to a date not later than November 24,
1995.
Pursuant to the Plan all options and warrants and the 1993 Plan and
1995 Plan were canceled as of the Effective Date.
As part of the Plan, a new stock option plan was established. Pursuant
to certain executive employment contracts, options to purchase 536,845 shares of
Common Stock have been granted to senior executives of the Company at an
exercisable price of $11.88 per share. One third of the options presently
granted vest on each January 1 of 1998, 1999 and 2000. In addition, such options
vest in their entirety upon the incurrence of a "Change in Control" as defined
in the Plan. A total of 715,692 shares of Common Stock have been reserved for
issuance under the Company's new stock option plan.
F-29
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(13) WARRANTS AND OPTIONS (Continued)
<TABLE>
<CAPTION>
Successor Predecessor
Company Company
--------------- -------------------------------------------------
Five Months Seven Months Year Year
Ended Ended Ended Ended
December 31, July 31, December 31, December 31,
1997 1997 1996 1995
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period ............. -- 2,754,802 2,924,802 3,805,191
Granted ................................................ 536,845 -- -- 794,861
Exercised .............................................. -- -- (170,000) (1,377,855)
Canceled ............................................... -- (2,754,802) -- (297,395)
---------- ---------- ---------- ----------
Options outstanding at end of period ................... 536,845 -- 2,754,802 2,924,802
========== ========== ========== ==========
Weighted average exercise price of options at
beginning of period ............................... -- $ 10.47 $ 7.92
Weighted average exercise price of options exercised ... -- $ 1.66 $ 2.47
Range of exercise prices of options outstanding
at end of period .................................. $ 11.88 $1.67 to 24.63 $1.67 to $24.63
Weighted average exercise price of options
outstanding at end of period ...................... $ 11.88 $ 11.01 $ 10.47
Vested options at end of period ........................ -- 2,754,802 2,924,802
Options available for future grants at end of period ... 178,847 129,351 29,351
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
Future minimum lease payments, under noncancelable operating leases as
of December 31, 1997, are as follows (in thousands):
1998 ...................................................... $25,555
1999 ...................................................... 24,567
2000 ...................................................... 23,478
2001 ...................................................... 22,488
2002 ...................................................... 21,804
Thereafter ................................................ 38,123
-----------
$ 156,015
===========
The Company is also obligated under a three-year operating lease
agreement to pay a per capita license fee for laser tag equipment. This
agreement requires the Company to pay 20 cents per attendee at its FunCenters
for the first 9 million attendees; 18 cents per attendee for the next 9 million
attendees; and 16 cents for each attendee thereafter. Because the agreement is
based upon attendance, the exact payment in each of the three years cannot be
determined.
Rental expense for operating leases during the years ended December
31, 1997, 1996, and 1995 amounted to approximately $34,455,000, $41,137,000 and
$52,716,000, respectively.
F-30
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(14) COMMITMENTS AND CONTINGENCIES (Continued)
During the fourth quarter of 1997 the Company began an extensive
FunCenter renovation program designed to broaden their entertainment offerings,
upgrade their facilities and give a "new look." During the first phase of this
program, the Company renovated approximately 60% of its FunCenters through March
1998 and expects during the next phase, to complete renovations of an additional
15% of its FunCenters by the end of 1998. Through March 31, 1998, the Company
also completed the conversion of approximately 80% of its FunCenters to permit
the sale of Pizza Hut items and renovated approximately 25% of its locations to
offer new weekday programs under the "DZU" brand name. The estimated cost for
these renovations and advance purchases through March 31, 1998 is approximately
$24 million, of which approximately $15 million has been paid or accrued as of
December 31, 1997 and approximately $3 million relates to advance purchases for
future renovation. These costs exclude approximately $3 million of excess
billings from general contractors which the Company intends to dispute.
From time to time, the Company is a party to a number of lawsuits and
other legal matters, including claims relating to injuries which allegedly
occurred at the Company's facilities and to alleged employment discrimination. A
portion of these claims may be covered by insurance. Management has estimated
the potential liabilities resulting from such claims which arose subsequent to
the Petition Date and which are not covered by insurance to be approximately
$3,347,000 at December 31, 1997 and $1,849,000 at December 31, 1996. These
amounts were recorded in accrued liabilities and other long-term liabilities in
the Company's consolidated balance sheets based on management estimates of the
tendering of future payments. Because these amounts represent estimates, it is
reasonably possible that a change in these estimates may occur in the future.
(15) SUBSEQUENT EVENTS
During the first quarter of 1998, the Company substantially completed
Phase One of its capital plan to renovate its FunCenters, add new attractions,
and broaden their entertainment offerings, including the addition of designated
areas for lasertag, arts and crafts, stage events and promotional activities.
Approximately 60% of the Company's FunCenters were renovated pursuant to this
plan. The Company also completed the conversion of its food service operations
to offer Pizza Hut products in approximately 80% of its FunCenters (see Note
14).
On March 31, 1998, the Company entered into a $10 million Senior
Secured Revolving Credit Facility (the "Facility") with Foothill Capital
Corporation, as permitted under the Notes. The Facility bears interest at prime
plus 1% plus certain fees, and allows for the Company to borrow 133% of trailing
twelve month FunCenter contributions (as defined therein) for its top 100
performing FunCenters, up to a maximum loan principal amount of $10 million. The
Facility contains restrictions on additional indebtedness, capital expenditures,
dividends, is secured by substantially all of the Company's assets and has
cross-default provisions with other obligations of the Company. $2.0 million of
the Facility is reserved for resolution of certain disputes in connection with
the Company's renovation program (see Note 14).
Effective July 29, 1997, the Company emerged from bankruptcy with a
brand repositioning, operating and financing strategy. These strategies were
executed and, although they were partially effective, additional steps must be
taken to both eliminate losses from operations and raise additional capital to
ensure the Company continues as a going concern. The Company's new operating
strategy calls for a number of cost-cutting and revenue enhancing initiatives,
including an extensive FunCenter renovation program, a revamped marketing and
promotional campaign, the successful repositioning of the Company's brand image
with its target customers, and an enhanced hiring and training program for store
managers in order to attract and retain qualified people who are capable of
implementing the new operating strategy. The new finance strategy calls for
raising additional capital through a private placement. Management believes
raising this capital is required to fund the next phase of planned FunCenter
renovations as well as to fund the revised operating strategy and meet related
obligations as they come due. The consolidated financial statements do not
include
F-31
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONSOLIDATED STATEMENTS (Continued)
(15) SUBSEQUENT EVENTS (Continued)
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from this uncertainty.
(16) SUMMARIZED COMBINED FINANCIAL INFORMATION
The following sets forth summarized combined financial information of
Discovery Zone (Canada) Limited (formerly Discovery Zone Children's Amusement
Canada Corporation) and Discovery Zone (Puerto Rico), Inc., which are subsidiary
guarantors under the Senior Secured Note financing secured by the Company in
connection with its emergence from bankruptcy (See Notes 2 and 6). Separate
financial statements of these subsidiary guarantors are not included as the
subsidiaries guarantee the Senior Secured Notes on a full, unconditional, and
joint and several basis and are wholly-owned subsidiaries of the Company.
Non-guarantor subsidiaries under the financing are inconsequential.
Successor Predecessor
Company Company
--------------- -------------------
December 31, December 31,
1997 1996
--------------- --------------------
Current assets .............. $ 233 $ 682
Noncurrent assets ........... 3,124 3,925
Current liabilities ......... 257 144
Noncurrent liabilities ...... 8,158 9,627
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
Net revenue ................. $ 4,931 $ 6,637 $ 7,991
Operating expenses .......... 5,688 7,561 12,018
Net loss .................... (542) (753) (4,001)
F-32
<PAGE>
DISCOVERY ZONE, INC.
Valuation and Qualifying Accounts
Schedule II
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions Amounts Balance at
Beginning Charged to Written End
of Year Expense Off of Year
Description ---------------- --------------- ------------- --------------
- -------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
1995 .............................. $ 36 $ 2,149 $ -- $ 2,185
1996 .............................. 2,185 1,093 2,304 974
1997 .............................. 974 -- 974 --
RESERVE FOR OBSOLESCENCE
1995 .............................. 259 766 -- 1,025
1996 .............................. 1,025 -- 1,025 --
1997 .............................. -- -- -- --
</TABLE>
F-33
<PAGE>
DISCOVERY ZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
--------------------------------------- --------------
Three months Two months One Month
Ended Ended Ended
September 30, 1998 September 30, 1997 July 31, 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
REVENUE ............................................ $ 28,384 $ 20,080 $ 11,241
COST OF GOODS SOLD ................................. 4,724 3,060 1,537
STORE OPERATING EXPENSES ........................... 25,311 16,756 8,715
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE ......................................... 7,463 4,142 2,084
DEPRECIATION AND AMORTIZATION ...................... 5,884 3,982 1,705
--------- --------- ---------
OPERATING LOSS ..................................... (14,998) (7,860) (2,800)
OTHER INCOME (EXPENSE):
Interest, net ................................... (4,177) (2,644) (649)
Other, net ...................................... 389 34 41
--------- --------- ---------
Total other expense, net ..................... (3,788) (2,610) (608)
--------- --------- ---------
LOSS BEFORE REORGANIZATION ITEMS AND
EXTRAORDINARY ITEM .............................. (18,786) (10,470) (3,408)
REORGANIZATION ITEMS:
Professional fees ............................... -- -- (2,477)
Unallocated reorganization value ................ -- -- 24,829
Other, net ...................................... -- -- (6,663)
--------- --------- ---------
Total reorganization items ................... -- -- 15,689
--------- --------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........ (18,786) (10,470) 12,281
EXTRAORDINARY ITEM - GAIN ON DISCHARGE OF
DEBT ............................................ -- -- 332,165
--------- --------- ---------
NET INCOME (LOSS) .................................. (18,786) (10,470) 344,446
ACCRETION OF REDEEMABLE
PREFERRED STOCK TO REDEMPTION VALUE ............. (126) (36) --
DIVIDENDS ON 14.5% CUMULATIVE PREFERRED
STOCK ........................................... (319) -- --
--------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS .................................... $ (19,231) $ (10,506) $ 344,446
========= ========= =========
Per common share - basic and diluted:
Income (loss) before extraordinary item ......... $ (0.05) $ (2.63) $ 0.21
Extraordinary item - gain on discharge of debt .. -- -- 5.76
--------- --------- ---------
Net income (loss) ............................... $ (0.05) $ (2.63) $ 5.97
========= ========= =========
Weighted average number of common shares outstanding 356,189 4,000 57,705
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
DISCOVERY ZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
--------------------------------------- --------------
Nine months Two months Seven Months
Ended Ended Ended
September 30, 1998 September 30, 1997 July 31, 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
REVENUE ............................................ $ 98,595 $ 20,080 $ 82,537
COST OF GOODS SOLD ................................. 15,895 3,060 14,136
STORE OPERATING EXPENSES ........................... 78,445 16,756 59,267
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE ......................................... 20,207 4,142 11,160
DEPRECIATION AND AMORTIZATION ...................... 16,654 3,982 11,920
--------- --------- ---------
OPERATING LOSS ..................................... (32,606) (7,860) (13,946)
OTHER INCOME (EXPENSE):
Interest, net ................................... (11,050) (2,644) (3,163)
Other, net ...................................... 442 34 73
--------- --------- ---------
Total other expense, net ........................... (10,608) (2,610) (3,090)
--------- --------- ---------
LOSS BEFORE REORGANIZATION ITEMS, INCOME TAX
PROVISION AND EXTRAORDINARY ITEM ................ (43,214) (10,470) (17,036)
REORGANIZATION ITEMS:
Professional fees ............................... -- -- (6,164)
Unallocated reorganization value ................ -- -- 24,829
Other, net ...................................... -- -- (7,082)
--------- --------- ---------
Total reorganization items ................... -- -- 11,583
--------- --------- ---------
LOSS BEFORE INCOME TAX PROVISION AND
EXTRAORDINARY ITEM .............................. (43,214) (10,470) (5,453)
INCOME TAX PROVISION ............................... (125) -- --
--------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM ..................... (43,339) (10,470) (5,453)
EXTRAORDINARY ITEM - GAIN ON DISCHARGE
OF DEBT ......................................... -- -- 332,165
--------- --------- ---------
NET INCOME (LOSS) .................................. (43,339) (10,470) 326,712
ACCRETION OF REDEEMABLE
PREFERRED STOCK TO REDEMPTION VALUE ............. (234) (36) --
DIVIDENDS ON 14.5% CUMULATIVE PREFERRED
STOCK ........................................... (319) -- --
--------- --------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS .................................... $ (43,892) $ (10,506) $ 326,712
========= ========= =========
Per common share - basic and diluted:
Loss before extraordinary item .................. $ (0.36) $ (2.63) $ (0.09)
Extraordinary item - gain on discharge of debt .. -- -- 5.75
--------- --------- ---------
Net income (loss) .............................. $ (0.36) $ (2.63) $ 5.66
========= ========= =========
Weighted average number of common shares outstanding 122,686 4,000 57,705
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
DISCOVERY ZONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Successor Company
-------------------------------------
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 2,527 $ 8,607
Restricted cash and investments ............................................. 13,868 13,036
Receivables, net ............................................................ 776 750
Inventories ................................................................. 1,891 1,739
Prepaid expenses and other current assets ................................... 3,642 5,093
--------- ---------
TOTAL CURRENT ASSETS ...................................................... 22,704 29,225
RESTRICTED CASH AND INVESTMENTS ................................................ -- 5,981
PROPERTY AND EQUIPMENT, NET .................................................... 110,220 131,352
LAND HELD FOR SALE ............................................................. 3,635 3,635
TRADEMARK, NET ................................................................. 15,911 --
OTHER ASSETS, NET .............................................................. 8,617 6,398
--------- ---------
TOTAL ASSETS .............................................................. $ 161,087 $ 176,591
========= =========
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 11,099 $ 13,657
Accrued liabilities ......................................................... 10,724 11,116
Note payable and capital lease obligation ................................... 423 304
Current portion of long-term debt ........................................... 944 1,102
--------- ---------
TOTAL CURRENT LIABILITIES ................................................. 23,190 26,179
LONG-TERM DEBT ................................................................. 107,343 87,091
OTHER LONG-TERM LIABILITIES .................................................... 8,393 7,169
SERIES A CONVERTIBLE PREFERRED STOCK - 1,000
shares authorized, 993 and 1,000 shares issued and outstanding,
and redemption value of $14,000 and $15,000 at September 30,
1998 and December 31, 1997, respectively .................................... 13,122 13,897
14.5% CUMULATIVE PREFERRED STOCK - Series A Senior
Cumulative Preferred - 80,000 shares authorized, issued and outstanding at
September 30, 1998, and Series B Senior Cumulative Preferred - 340,000 shares
authorized, 337,101 shares
issued and outstanding at September 30, 1998 ................................ 10,510 --
COMMON STOCK AND OTHER EQUITY (DEFICIT):
Common stock - $.01 par value, 10,000,000 shares authorized, 4,000,000 shares
issued and outstanding at December 31, 1997, and Common Stock - $0.00017 par
value, 2,400,000,000 shares authorized, 430,333,492 shares issued and
outstanding at September 30, 1998 ........................................... 73 40
Additional paid-in capital ..................................................... 69,649 70,063
Cumulative translation adjustment .............................................. 112 118
Accumulated deficit ............................................................ (71,305) (27,966)
--------- ---------
TOTAL COMMON STOCK AND OTHER EQUITY
(DEFICIT) ................................................................... (1,471) 42,255
--------- ---------
TOTAL LIABILITIES AND EQUITY (DEFICIT) ...................................... $ 161,087 $ 176,591
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
DISCOVERY ZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
---------------------------------------- --------------
Nine Months Two Months Seven Months
Ended Ended Ended
September 30, 1998 September 30, 1997 July 31, 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (43,339) $ (10,470) $ 326,712
Adjustments to reconcile net income (loss) to net cash used by
operating activities before Reorganization items:
Reorganization items ........................................ -- -- (11,583)
Extraordinary item-- gain on discharge of debt .............. -- -- (332,165)
Depreciation and amortization ............................... 16,654 3,982 11,920
Amortization of debt discount and other noncash interest
charges .................................................. 1,941 383 --
Plan administrative payments ................................ (183) -- (1,109)
Changes in operating assets and liabilities:
Receivables .............................................. (26) (42) 630
Inventories .............................................. (152) 185 724
Prepaid expenses and other current assets ................ (1,451) (4,862) (484)
Restricted cash and investments .......................... 7,964 -- --
Accounts payable ......................................... (94) (1,044) 814
Accrued liabilities ...................................... 1,319 (921) (3,182)
Other .................................................... (70) (121) (70)
--------- --------- ---------
Net cash used by operating activities before reorganization items (14,535) (12,910) (7,831)
Reorganization items ........................................ -- -- 11,583
Adjustments to reconcile reorganization items to cash used by
reorganization items:
Unallocated reorganization value ......................... -- -- (24,829)
Accrued reorganization expenses .......................... (525) -- 10,118
--------- --------- ---------
Net cash used by reorganization items .................... (525) -- (3,128)
--------- --------- ---------
Net cash used by operating activities after reorganization items . (15,060) (12,910) (10,959)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (14,865) (723) (567)
Proceeds from sale of property and equipment ..................... -- -- 99
--------- --------- ---------
Net cash used by investing activities ............................ (14,865) (723) (468)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment of debtor-in-possession credit facilities .......... -- -- (22,448)
Proceeds from Senior Secured Notes with Warrants ................. -- -- 85,000
Proceeds from Preferred Stock Issuance ........................... 9,500 -- 15,000
Proceeds from Senior Collateralized Notes with Warrants .......... 20,000 -- --
Increase in McDonald's Rent Deferral Note ........................ -- 66 --
Payment of McDonald's Secured Rejection Note ..................... (736) -- --
Payment of financing costs ....................................... (2,052) -- (4,569)
Escrow of restricted cash ........................................ (2,815) -- (21,608)
Proceeds from short-term borrowings .............................. 139 410 276
Repayment of short-term borrowings ............................... (191) -- (158)
Advances from Birch Holdings LLC ................................. -- -- 2,500
Repayment of advances from Birch Holdings LLC .................... -- -- (2,500)
--------- --------- ---------
Net cash provided by financing activities ........................ 23,845 476 51,493
--------- --------- ---------
Net increase (decrease) in cash .................................. (6,080) (13,157) 40,066
Cash and cash equivalents, beginning of period ................... 8,607 43,392 3,326
--------- --------- ---------
Cash and cash equivalents, end of period ......................... $ 2,527 $ 30,235 $ 43,392
========= ========= =========
</TABLE>
F-37
<PAGE>
DISCOVERY ZONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
(In thousands)
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
---------------------------------------- --------------
Nine Months Two Months Seven Months
Ended Ended Ended
September 30, 1998 September 30, 1997 July 31, 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 9,185 $ 291 $ 3,340
========= ========= =========
Cash paid for professional fees in connection with
Chapter 11 proceeding $ 1,194 $ 143 $ 3,128
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Discovery Zone, Inc. (the "Company") is the leading owner and operator
of pay-for-play children's entertainment centers ("FunCenters") in North
America, with a national network of 199 FunCenters in 39 states, Puerto Rico and
Canada. The Company also operates two entertainment centers targeting adult
customers, under the "Block Party" name.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. However,
the Company believes that the disclosures contained herein are adequate to make
the information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the Company's 1997
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K/A.
Discovery Zone, Inc. and its nineteen domestic subsidiaries
(collectively, the "Group") emerged from bankruptcy on July 29, 1997. The Group
had originally filed voluntary petitions for protection under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on March
25, 1996 (the "Petition Date"). While in Chapter 11, certain claims against the
Group at the Petition Date were stayed while the Company continued its
operations as a Debtor- in-Possession. On July 18, 1997, the Bankruptcy Court
approved the Company's Joint Plan of Reorganization with Birch Holdings LLC
("Birch"), which became effective on July 29, 1997 (the "Effective Date" or
"Emergence Date").
As a result of the reorganization proceedings, the unaudited condensed
consolidated financial statements and notes thereto were subject to material
uncertainties, the outcome of which were not then determinable. The Company's
unaudited condensed consolidated financial statements for periods prior to the
Effective Date were prepared on a going concern basis and do not include any
adjustments for the effect of any changes which were made in connection with the
Company's recapitalization or operations resulting from a plan of
reorganization.
The unaudited condensed consolidated financial statements reflect
accounting principles and practices set forth in American Institute of Certified
Public Accountants Statement of Position ("SOP") 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," which provides guidance
for financial reporting by entities that have filed voluntary petitions for
relief under, and have reorganized in accordance with, the Bankruptcy Code.
In accordance with SOP 90-7, the Company did not accrue interest on
its prepetition interest bearing obligations during bankruptcy as it was
unlikely such interest would be paid under the Plan. The amount of such
unaccrued contractual interest incurred prior to the effective date during the
three- and nine-month periods ended September 30, 1997 was approximately
$1,326,000 and $9,176,000, respectively.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
F-39
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION (Continued)
The financial statements reflect, in the opinion of management, all
adjustments, which are of a normal recurring nature, and those adjustments
required to adopt fresh-start reporting as described below which are necessary
to present fairly the Company's financial position and results of operations.
Capitalized terms have the meanings defined throughout the Notes to Condensed
Consolidated Financial Statements.
The Company's FunCenters typically experience seasonal fluctuations in
their revenues, with generally higher revenues occurring in the first quarter of
the year due to the fact that many of the Company's facilities are located in
cold weather regions where children are unable to play outside during this time
of the year. Operating results of interim periods are not necessarily indicative
of results that may be expected for the year ending December 31, 1998.
Certain amounts in the 1997 Condensed Consolidated Financial
Statements have been reclassified to conform with the 1998 presentation.
(2) JOINT PLAN OF REORGANIZATION AND EXIT FINANCING
In November 1996, the Company filed with the Bankruptcy Court a Joint
Plan of Reorganization (the "Plan") with Birch, which set forth a plan for
repaying or otherwise compensating the Company's creditors in order of relative
seniority of their respective claims while seeking to maintain the Company as a
going concern. On July 18, 1997, the Plan was approved by the requisite number
of creditors in each class and confirmed by the Bankruptcy Court. The Plan
became effective on July 29, 1997, and the Company emerged from bankruptcy as of
that date.
The Plan, among other things, provided for (i) the payment in full of
certain administrative claims against the Company (those claims which arose
after the Petition Date); (ii) conversion of substantially all of the Company's
liabilities subject to compromise (excluding taxes payable, lease assumption
payments and certain other prepetition liabilities permitted under the Plan) to
an equity interest in the Company, and (iii) cancellation of all of the
prepetition equity interests in the Company, all as more fully described in the
Plan. Birch had purchased certain prepetition claims from the original banks
providing a credit facility to the Company, resulting in ownership of 55.7% of
the common stock of the reorganized Company ("Common Stock").
Pursuant to the Plan, substantially all the Company's prepetition
unsecured liabilities were converted to equity in exchange for units consisting
of nine shares of Common Stock and a ten-year warrant to purchase one share of
Common Stock at a price of $17.55 (the "Ten Year Warrants"). The Company
reserved 4,000,000 shares of Common Stock for issuance to such unsecured
creditors and 444,444 shares of Common Stock were reserved for issuance in
connection with the Ten Year warrants.
In connection with its emergence from bankruptcy, the Company raised
$100 million through the issuance of $15 million of Convertible Redeemable
Preferred Stock ("Preferred Stock") and $85 million of 13.5% Senior Secured
Notes with Warrants, resulting in $93.8 million of net proceeds to the Company
after deducting related offering costs (the "Exit Financing"). The proceeds were
used to repay the Company's debtor-in-possession credit facilities and certain
bankruptcy administrative claims and reorganization costs incurred in connection
with the Company's emergence from bankruptcy and to fund the Bond Interest
Escrow Account, which is included in Restricted Cash and Investments in the
accompanying condensed consolidated balance sheets. The Senior Secured Note
holders also received warrants (the "Warrants") to purchase 805,154 shares of
Common Stock at $.01 per share exercisable through August 1, 2007, which at the
time of issuance represented approximately 12.5% of the fully diluted shares of
Common Stock after giving effect to the exercise of the Warrants and the Ten
Year Warrants and conversion of the Preferred Stock. A portion of the proceeds
from the Senior Secured Notes was allocated to the Warrants (see Note 5).
F-40
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(2) JOINT PLAN OF REORGANIZATION AND EXIT FINANCING (Continued)
The Preferred Stock is convertible at any time into 1,191,626 shares
of Common Stock at an effective conversion price of $12.59 per common share. At
the time of issuance, the Preferred Stock represented approximately 18.5% of the
fully diluted shares of Common Stock after giving effect to the exercise of the
Warrants and the Ten Year Warrants. The terms of the Preferred Stock include a
liquidation preference, the right to receive dividends, if paid, voting rights,
Board of Directors representation and redemption upon (i) the earlier to occur
of a merger, the sale of substantially all the Common Stock or assets of the
Company or other change of control, or (ii) 180 days' prior written notice from
any holder at any time 62 months after the Effective Date.
As part of the Plan, a stock option plan was established. Pursuant to
certain executive employment contracts, options to purchase shares of Common
Stock have been granted to senior executives of the Company at an exercise price
of $11.88 per share. A total of 715,692 shares of Common Stock are reserved for
issuance under the Company's stock option plan.
(3) FRESH START REPORTING
Upon emergence from its Chapter 11 proceedings, the Company adopted
fresh start reporting pursuant to the provisions of SOP 90-7. In accordance with
SOP 90-7, assets and liabilities were restated as of July 31, 1997 to reflect
the reorganization value of the Company, which approximates their fair value at
the Emergence Date. In addition, the accumulated deficit of the Company through
the Emergence Date was eliminated and the debt and capital structure of the
Company was recast pursuant to the provisions of the Plan. Thus, the
accompanying condensed consolidated statements of operations and cash flows for
periods prior to the Company's emergence from bankruptcy (the "Predecessor
Company") are not comparable to the results of operations and cash flows of the
Company subsequent to emergence from bankruptcy and the adoption of fresh start
reporting (the "Successor Company").
A reorganization value of the Company's common equity of approximately
$70,200,000 was determined by the Company with the assistance of financial
advisors. These advisors (1) reviewed certain historical information for recent
years and interim periods; (2) reviewed certain internal financial and operating
data, including financial projections; (3) met with senior management to discuss
operations and future prospects; (4) reviewed publicly available financial data
and considered the market value of public companies deemed generally comparable
to the Company's operating business; (5) considered certain economic and
industry information relevant to the operating business; (6) reviewed a
five-year forecast prepared by the Company; and (7) conducted such analyses as
appropriate. Based upon the foregoing, the financial advisors developed a range
of values for the Company as of the Effective Date. In developing this valuation
estimate the advisors, using rates of 30% to 35%, discounted the Company's
five-year forecasted free cash flows and an estimate of sales proceeds assuming
the Company would be sold at the end of the five-year period within a range of
comparable Company multiples.
The difference between the Company's reorganized value and a
revaluation of the Company's assets and liabilities resulted in an unallocated
reorganization value of approximately $24,829,000, which was included in
property and equipment in the consolidated balance sheet at December 31, 1997,
net of recorded amortization. During the second quarter of 1998, the Company
completed its allocation of reorganization value as required under fresh start
reporting, pursuant to which approximately $17,226,000 of such amount was
attributed to the Company's trademarks and the balance remained as property and
equipment. This allocation was based on a review of the Company's property and
equipment and an appraisal of the Company's trademarks.
(4) SENIOR COLLATERALIZED NOTES AND 14.5% CUMULATIVE PREFERRED STOCK
On July 17, 1998 the Company completed a $29.5 million financing from
the sale of $10.5 million of 14.5% Cumulative Preferred Stock (the "New
Preferred Stock") resulting in proceeds of $9.5 million (see below)
F-41
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(4) SENIOR COLLATERALIZED NOTES AND 14.5% CUMULATIVE
PREFERRED STOCK (Continued)
and $20 million of aggregate principal amount of 13.5% Senior Collateralized
Notes due 2002 ("New Notes"), both together with warrants to purchase
approximately 99.6% of the fully diluted Common Stock for a nominal purchase
price. The offering resulted in net proceeds to the Company of approximately $27
million after costs and expenses. The proceeds of the offering (i) were used to
repay outstanding borrowings under the Company's Senior Facility, (ii) were used
to purchase $2.8 million of U.S. Treasury Securities that were placed in escrow
and pledged as security for scheduled interest payments through August 1, 1999
on the New Notes and (iii) are available for working capital, capital
expenditures and other general corporate purposes, including previously incurred
costs associated with the Company's renovation program and operating losses. In
addition, $1 million of existing Preferred Stock was exchanged for $1 million of
New Preferred Stock.
The New Preferred Stock was issued in an aggregate liquidation
preference of $10.5 million, a mandatory redemption date of November 1, 2002 and
accumulates dividends at an annual rate of 14.5%, compounded quarterly.
Purchasers of the New Preferred Stock, which consisted primarily of existing
common and preferred stockholders, also received warrants to purchase an
aggregate of 50.6% of the fully diluted Common Stock for a nominal exercise
price.
The terms of the New Notes are substantially the same as the Company's
existing 13.5% Senior Secured Notes due August 1, 2002 (the "Senior Secured
Notes"), rank pari passu in right of repayment and are due May 1, 2002. The
priority of claims on the collateral securing the Senior Secured Notes is
subordinated to the priority of claims on the collateral securing the New Notes.
Purchasers of the New Notes also received two series of warrants to purchase
approximately 49% of the fully diluted Common Stock for a nominal exercise
price. If the Company redeems the New Notes prior to the end of 1999 and meets
certain other conditions, a portion of these warrants, aggregating approximately
9% of the fully diluted Common Stock, will be redeemed or canceled at no
additional cost to the Company. The Company obtained the required consents to
issue the New Notes from holders of the Senior Secured Notes and to increase the
Senior Facility to $15 million. The Company is obligated to register the New
Notes within six months of issuance.
In connection with this financing, the Company increased the number of
shares of Common Stock authorized for issuance to 2.4 billion and changed its
par value from $.01 per share to $.00017 per share, and a holder of the New
Preferred Stock exercised warrants to purchase 426,333,492 shares of Common
Stock. At September 30, 1998, approximately 1.8 billion shares of Common Stock
were reserved for issuance in connection with the exercise of all warrants,
options and preferred stock conversions.
(5) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Successor Company
--------------------------------------------
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Senior Secured Revolving Credit Facility (a) $ -- $ --
13.5% Senior Collateralized Notes due 2002 (b) 19,900 --
13.5% Senior Secured Notes due 2002, net of
unamortized discount of $5,864 and $6,652 at September 30,
1998 and December 31, 1997, respectively (c) 79,136 78,348
Secured Rejection Note (d) 3,680 4,416
Secured Rent Deferral Notes (d) 729 429
Prepetition Tax Claims (e) 4,842 5,000
---------- ----------
108,287 88,193
Less current portion (944) (1,102)
---------- ----------
Long-term debt $ 107,343 $ 87,091
========== ==========
</TABLE>
F-42
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) LONG-TERM DEBT (Continued)
(a) On March 31, 1998, the Company entered into a $10 million Senior
Secured Revolving Credit Facility (the "Senior Facility") with
Foothill Capital Corporation as permitted under the Senior Secured
Notes (as defined herein). The Senior Facility bears interest at prime
plus 1%, plus certain fees, and allows for the Company to borrow 133%
of trailing twelve-month FunCenter contribution (as defined therein)
for its top 100 performing FunCenters, up to a maximum loan principal
amount of $10 million. The Senior Facility contains restrictions on
additional indebtedness, capital expenditures and dividends, is
secured by substantially all of the Company's assets and has
cross-default provisions with other obligations of the Company. Up to
$2.0 million of the Senior Facility is reserved for resolution of
certain disputes or letters of credit in connection with the Company's
renovation program (see Note 8).
(b) During July 1998, the Company issued $20,000,000 of 13.5% Senior
Collateralized Notes due May 1, 2002 (the "Senior Collateralized
Notes"), and Warrants. The Senior Collateralized Notes are secured by
substantially all the assets of the Company and interest is payable
quarterly beginning August 1, 1998. A value of $100,000 was allocated
to the warrants based upon their appraised value at the time of
issuance, representing the original issue discount on the Senior
Collateralized Notes. A separate interest escrow was established with
the trustee to fund interest payments through August 1, 1999. The
interest escrow account balance totaled approximately $2,815,000,
consisting of treasury securities and accrued interest thereon, at
September 30, 1998.
The Senior Collateralized Notes contain restrictions on additional
indebtedness and cross-default provisions with other obligations of
the Company.
(c) In connection with its exit financing to emerge from bankruptcy, the
Company issued $85,000,000 of 13.5% Senior Secured Notes due August 1,
2002 (the "Private Senior Secured Notes") and the Warrants. A value of
approximately $7,050,000 was allocated to the Warrants based upon
their estimated fair value at the time of the issuance, representing
the original issue discount on the Private Senior Secured Notes. The
Private Senior Secured Notes are secured by substantially all the
assets of the Company and interest is payable quarterly beginning
November 1, 1997. A separate interest escrow account was established
with the trustee to fund interest payments through August 1, 1999. The
interest escrow account balance totaled approximately $11,053,000,
consisting of treasury securities and accrued interest thereon, at
September 30, 1998.
The Company consummated an offer to exchange $85,000,000 aggregate
principal amount of its 13.5% Senior Secured Notes due 2002 (the
"Exchange Senior Secured Notes"), which have been registered under the
Securities Act of 1933 pursuant to a Registration Statement on Form
S-4, for $85,000,000 aggregate principal amount of the outstanding
Private Senior Secured Notes (the Private Senior Secured Notes,
together with the Exchange Senior Secured Notes, the "Senior Secured
Notes").
The Senior Secured Notes contain restrictions on additional
indebtedness and cross-default provisions with other obligations of
the Company. Among other things, the Company is permitted to have
outstanding up to $10 million of senior secured indebtedness and up
to $5 million of new indebtedness arising from sale and leaseback
transactions, capital lease obligations, or purchase money
obligations. Consents from the holders of the Senior Secured Notes
were obtained to modify certain of these restrictions in connection
with the offering of the Senior Collateralized Notes and 14.5%
Cumulative Preferred Stock discussed in Note 4.
F-43
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(5) LONG-TERM DEBT (Continued)
(d) The McDonald's Secured Rejection Note had a principal amount of
$4,416,000 at the Emergence Date and is evidenced by a six-year note
payable requiring annual principal payments of approximately $736,000.
The Secured Rejection Note bears interest at 11% payable annually.
The Company's obligations to repay certain rent deferrals granted by
McDonald's pursuant to the McDonald's Stipulation are evidenced by
nine notes due upon the expiration of each initial sublease term (the
"Secured Rent Deferral Notes"). The rent deferrals currently total
$398,196 per year and, when combined with the initial Emergence Date
principal balance of approximately $266,000, will total approximately
$2,567,000 over the next seven years. The notes bear interest at 11%
per annum payable at maturity and have maturity dates ranging from
August 31, 2002 to December 31, 2004.
The Secured Rejection Note and the Secured Rent Deferral Notes are
secured by first mortgages or deeds of trust on fourteen properties
owned by the Company, including three undeveloped parcels of land with
a book value of $2,747,000 at September 30, 1998, which are included
in Land Held for Sale in the Company's Consolidated Balance Sheet. The
notes contain certain cross-default provisions, including any
cross-default in excess of $2.5 million, among themselves, with the
McDonald's subleases or with other indebtedness of the Company.
(e) The prepetition tax claims (the "Tax Claims") represent taxes assessed
prior to the Company filing for bankruptcy and have an estimated
aggregate principal amount of $5 million. The Tax Claims have
maturities of up to six years from the original date of assessment and
require payment of principal amounts in equal annual installments. The
majority of the Tax Claims accrue simple interest at 10% per annum
payable with each annual principal installment. The remainder accrue
interest at 12% per annum.
(6) LOSS PER COMMON SHARE
Loss per common share is calculated based upon the weighted average
number of common shares outstanding during the periods presented. Common
equivalents outstanding during the period and common shares issuable upon
assumed conversion of the Preferred Stock and other potentially dilutive
securities have not been included in the computation of diluted loss per share
as their effect is antidilutive for all relevant periods presented. Shares of
Common Stock to be issued to unsecured creditors pursuant to the Plan have been
reflected as outstanding as of the Effective Date for purposes of calculating
the weighted average common shares outstanding in the accompanying unaudited
condensed consolidated statement of operations for the two-month period ended
September 30, 1997 and the three- and nine-month periods ended September 30,
1998.
(7) RELATED PARTY TRANSACTIONS
An officer of Griffin Bacal, Inc. ("Griffin Bacal"), the Company's
advertising agency, serves as a director of the Successor Company. The Company
paid approximately $2,465,000 and $6,605,000 to Griffin Bacal for creative
services and as agent for purchase of media from third parties during the three-
and nine-month periods ended September 30, 1998, respectively.
(8) COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 1997, the Company began an extensive
FunCenter renovation program to broaden their entertainment offerings and
upgrade their facilities, which was broader in scope and costlier than
originally planned. During the first phase of this program, the Company
renovated approximately 60% of its
F-44
<PAGE>
DISCOVERY ZONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES (Continued)
FunCenters. To date, the Company also completed the conversion of approximately
75% of its FunCenters to permit the sale of Pizza Hut items and renovated
approximately 25% of its locations to offer new weekday programs under the "DZU"
brand name. Through October 31, 1998, the Company has incurred or committed to
incur approximately $28 million in connection with these programs, including
excess billings from general contractors which the Company has disputed, of
which approximately $3.4 million remains unpaid.
From time to time, the Company is a party to lawsuits and other legal
matters, including claims relating to injuries which allegedly occurred at the
Company's facilities and to alleged employment discrimination. A portion of
these claims may be covered by insurance. Management has estimated the potential
liabilities resulting from such claims, which arose subsequent to the Petition
Date, and which are not covered by insurance, to be approximately $4,337,000 at
September 30, 1998 and $3,347,000 at December 31, 1997. These amounts are
recorded in accrued liabilities and other long-term liabilities in the
accompanying condensed consolidated balance sheets. Because these amounts
represent estimates, it is reasonably possible that a change in these estimates
may occur in the future.
F-45
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the affairs of the Company since such date.
------------------
TABLE OF CONTENTS
Page
Available Information.....................................................5
Forward-Looking Statements................................................5
Prospectus Summary........................................................6
Risk Factors.............................................................20
The Exchange Offer.......................................................28
Use of Proceeds..........................................................36
Selected Historical Financial Data.......................................37
Management's Discussion and Analysis of
Financial Condition and Results of Operations..........................39
Business.................................................................48
Management...............................................................57
Principal Stockholders...................................................64
Certain Transactions with Affiliates.....................................66
Description of Exchange Notes............................................67
Description of Capital Stock............................................101
Description of Certain Indebtedness.....................................111
Plan of Distribution ...................................................114
Certain U.S. Federal Income Tax Considerations..........................115
Legal Matters...........................................................116
Experts.................................................................116
Index to Financial Statements...........................................F-1
================================================================================
Offer to Exchange
13 1/2% Senior Collateralized Notes due 2002
for all outstanding
13 1/2% Senior Collateralized Notes due 2002
($20,000,000 principal amount
outstanding)
of
DISCOVERY ZONE, INC.
December 23, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article Eight Section 2(a) of the Registrant's Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), provides that
each person who was or is made a party or is threatened to be made a party to or
is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she, or a person of whom he or she is the legal representative,
is or was a director or officer of the Registrant or is or was serving at the
request of the Registrant as a director or officer of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Registrant to the fullest extent authorized by the General
Corporation Law of the State of Delaware against all expense, liability and loss
(including attorneys' fees, judgments, fines, amounts paid or to be paid in
settlement, and excise taxes or penalties arising under the Employee Retirement
Income Security Act of 1974) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of his or
her heirs, executors and administrators; provided, however, that the Registrant
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors.
Article Eight Section 2(c) of the Registrant's Certificate of
Incorporation provides that the right to indemnification conferred in the
Certificate of Incorporation shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, By-law, agreement, vote of stockholders or
disinterested directors or otherwise.
Article Eight Section 2(d) of the Registrant's Certificate of
Incorporation further provides that the Registrant may maintain insurance, at
its expense, to protect itself and any director or officer of the Registrant or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Registrant would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware.
Section 145 of the Delaware General Corporation Law makes provision
for the indemnification of officers and directors in terms sufficiently broad to
indemnify officers and directors of the Company under certain circumstances from
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act.
See Item 22 of this Registration Statement regarding the position of
the Securities and Exchange Commission on indemnification for liabilities
arising under the Securities Act.
Item 21. Exhibits and Financial Statement Schedules
See Index to Exhibits
Item 22. Undertakings
1. The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
II-1
<PAGE>
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
2. The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding; or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
offering thereof.
3. The Registrant undertakes to register securities pursuant to Rule
415 under the Securities Act and the Registrant undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement: (a) to include any prospectus required by section
10(a)(3) of the Securities Act; (b) to reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and (c) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement. The Registrant further undertakes, that for purposes of determining
any liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. The Registrant further undertakes to
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of such
offering.
4. The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim of indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
5. The undersigned Registrant hereby undertakes that, for the purposes
of determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
6. The Registrant undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Registration Statement, including information contained
in documents filed subsequent to the effective date of the registration
statement through the date of responding to the request, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means.
7. The Registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction that was not the subject of
and included in the registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, the
undersigned Registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Elmsford, New York on December 22, 1998.
DISCOVERY ZONE, INC.
By: /s/ Chet Obieleski
------------------------------------
Name: Chet Obieleski
Title: Chief Executive Officer,
Chief Operating Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Chet Obieleski Director, Chief Executive
- ------------------------------ Officer, Chief Operating December 22, 1998
Chet Obieleski Officer and President
* Director December 22, 1998
- ------------------------------
Martin S. Davis
* Director December 22, 1998
- ------------------------------
David L. Eaton
* Director December 22, 1998
- ------------------------------
Greg S. Feldman
* Director December 22, 1998
- ------------------------------
Jason B. Fortin
/s/ Scott Johnson Director December 22, 1998
- ------------------------------
Scott Johnson
* Director December 22, 1998
- ------------------------------
David J. Kass
* Director December 22, 1998
- ------------------------------
Mary McGrath
* Director December 22, 1998
- ------------------------------
L.G. Schafran
II-3
<PAGE>
Name Title Date
---- ----- ----
* Director December 22, 1998
- ------------------------------
Christopher R. Smith
* Director December 22, 1998
- ------------------------------
Paul D. Kurnit
/s/ Robert G. Rooney Senior Vice President,
- ------------------------------ Chief Financial and December 22, 1998
Robert G. Rooney Administrative Officer
* Vice President and December 22, 1998
- ------------------------------ Controller
Leighton J. Weiss
* By: /s/ Robert G. Rooney
- ------------------------------
Robert G. Rooney
Attorney-in-fact
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
+1.1 Purchase Agreement, dated July 9, 1998, between the
Registrant and Jefferies & Company, Inc. (the "Initial
Purchaser").
++2.1 The Third Amended Joint Plan of Reorganization of the
Registrant, dated March 11, 1997.
+++2.2 Agreement and Plan of Merger, dated as of July 28, 1997,
between Discovery Zone Children's Amusement Corporation and
the subsidiaries of the Registrant listed therein.
+++2.3 Agreement and Plan of Merger, dated as of July 29, 1997,
between the Registrant and Discovery Zone Children's
Amusement Corporation.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated By-laws of the Registrant.
++++4.1 First Supplemental Indenture, dated as of July 17, 1998,
among the Registrant, the guarantors named therein and State
Street Bank and Trust Company.
++++4.2 Indenture, dated as of July 17, 1998, among the Registrant,
as issuer, Discovery Zone (Canada) Limited, Discovery Zone
(Puerto Rico), Inc. and Discovery Zone Licensing, Inc., as
guarantors (the "Subsidiary Guarantors") and Firstar Bank of
Minnesota, N.A., as trustee.
+4.3 Form of Exchange Note (included in Exhibit 4.2).
++++4.4 Registration Rights Agreement, dated as of July 17, 1998,
between the Registrant and the Initial Purchaser.
4.5 Warrant Agreement, dated as of July 17, 1998, between the
Registrant and Firstar Bank of Minnesota, N.A., as warrant
agent (the "Warrant Agent"), relating to the Series A Note
Warrants and the Series B Note Warrants.
++++4.6 Warrant Agreement, dated as of July 17, 1998, between the
Registrant and the Warrant Agent, relating to the Series A
Preferred Unit Warrants.
++++4.7 Warrant Agreement, dated as of July 17, 1998, between the
Registrant and the Warrant Agent, relating to the Series B
Preferred Unit Warrants.
++++4.8 Escrow and Security Agreement, dated as of July 17, 1998,
between the Registrant, as pledgor, and Firstar Bank of
Minnesota, N.A., as trustee and security agent.
++++4.9 Pledge Agreement, dated as of July 17, 1998, between the
Registrant and the Firstar Bank of Minnesota, N.A., as
collateral agent (the "Collateral Agent").
++++4.10 Subsidiary Pledge Agreement, dated as of July 17, 1998,
between the Subsidiary Guarantors and the Collateral Agent.
<PAGE>
4.11 Security Agreement, dated as of July 17, 1998, between the
Registrant and the Collateral Agent.
4.12 Subsidiary Security Agreement, dated as of July 17, 1998,
among the Subsidiary Guarantors and the Collateral Agent.
4.13 Collateral Assignment of Patents, Trademarks and Copyrights,
dated as of July 17, 1998, among the Registrant, as assignor,
the Subsidiary Guarantors, as assignors and Firstar Bank of
Minnesota, N.A., as assignee.
++++4.14 Intercreditor Agreement, dated as of July 17, 1998, between
Foothill Capital Corporation and the Firstar Bank of
Minnesota, N.A., as trustee and collateral agent.
++++4.15 Intercreditor Agreement, dated as of July 17, 1998, between
Firstar Bank of Minnesota, N.A., as collateral agent, and
State Street Bank and Trust Company, as collateral agent.
5.1 Opinion and Consent of Shearman & Sterling regarding validity
of the Exchange Notes.
10.1 Purchase Agreement, dated as of July 13, 1998, among the
Registrant, Birch Holdings, Birch Acquisition, Wafra
Acquisition Fund 6, L.P. and Wafra Fund Management Ltd.,
relating to the Series A Preferred Stock Units.
10.2 Purchase Agreement, dated as of July 13, 1998, among the
Registrant, Birch Acquisition, DZ Investors L.L.C. and
Jefferies & Company, Inc., relating to the Series B Preferred
Stock Units.
+++10.3 Purchase Agreement, dated July 15, 1997, between the
Registrant and Jefferies & Company, Inc.
+++10.4 Indenture, dated as of July 22, 1997, among Registrant, as
issuer, Discovery Zone Limited, Discovery Zone (Puerto Rico),
Inc. and Discovery Zone Licensing, Inc., as guarantors (the
"Existing Guarantors") and State Street Bank and Trust
Company, as trustee (the "Existing Trustee").
+++10.5 Registration Rights Agreement, dated as of July 22, 1997,
between the Registrant and Jefferies & Company, Inc.
+++10.6 Warrant Agreement, dated as of July 22, 1997, between the
Registrant and State Street Bank and Trust Company, as
warrant agent.
+++10.7 Escrow and Security Agreement, dated as of July 22, 1997,
among the Registrant, as pledgor, Jefferies & Company, Inc.,
and the Existing Trustee, as collateral agent.
+++10.8 Pledge Agreement, dated as of July 22, 1997, between the
Registrant and the Existing Trustee, as collateral agent.
+++10.9 Security Agreement, dated as of July 22, 1997, between the
Registrant and the Existing Trustee, as collateral agent.
+++10.10 Subsidiary Pledge Agreement, dated as of July 22, 1997,
between the Existing Guarantors and the Existing Trustee, as
collateral agent.
+++10.11 Subsidiary Security Agreement, dated as of July 22, 1997,
between the Existing Guarantors and the Existing Trustee, as
collateral agent.
ii
<PAGE>
+++10.12 Collateral Assignment of Patents, Trademarks and Copyrights,
dated as of July 22, 1997, among the Registrant, as assignor,
the Existing Guarantors, as assignors and the Existing
Trustee, as assignee.
+++10.13 Assignment and License Agreement, dated as of July 29, 1997,
among the Registrant, as assignor, the Existing Guarantors,
as assignors, and DZ Party, Inc., as assignee.
+++10.14 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Hamilton County,
Ohio.
+++10.15 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Cook County,
Illinois.
+++10.16 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Cobb County,
Georgia.
+++10.17 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Franklin County,
Ohio.
+++10.18 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Macomb County,
Michigan.
+++10.19 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Anoka County,
Minnesota.
+++10.20 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Philadelphia
County, Pennsylvania.
+++10.21 The Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
between the Company, as mortgagor and the Existing Trustee,
as mortgagee, related to property located in Marion County,
Indiana.
+++10.22 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and the Existing Trustee, as beneficiary, relating to
property located in Dallas County, Texas.
+++10.23 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and the Existing Trustee, as beneficiary, relating to
property, located in Bexar County (San Antonio), Texas.
+++10.24 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and the Existing Trustee, as beneficiary, relating to
property located in Tarrant County, Texas.
iii
<PAGE>
+++10.25 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and the Existing Trustee, as beneficiary, relating to
property located in Bexar County (Leon Valley), Texas.
+++10.26 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Kenneth W. Pearson, as
trustee and the Existing Trustee, as beneficiary, relating to
property located in Fort Bend County, Texas.
+++10.27 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, Chicago Title Insurance
Company, as trustee and the Existing Trustee, as beneficiary,
relating to property located in Clark County, Washington.
+++10.28 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, The Public Trustee of
Arapahoe County, Colorado, as trustee and the Existing
Trustee, as beneficiary, relating to property located in
Arapahoe County, Colorado.
+++10.29 The Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, dated as of July 29, 1997,
among the Registrant, as grantor, The Public Trustee of
Douglas County, Colorado, as trustee and the Existing
Trustee, as beneficiary, relating to property located in
Douglas County, Colorado.
++++++10.30 Open-end Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing (Amended and Restated), dated as
of July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property
located in Hamilton County, Ohio.
++++++10.31 Amended and Restated Mortgage, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property
located in Cook County, Illinois.
++++++10.32 Amended and Restated Deed to Secure Debt and Security
Agreement, dated as of July 29, 1997, between the Registrant,
as mortgagor and McDonald's Corporation, as mortgagee,
relating to property in Cobb County, Georgia.
++++++10.33 Open-end Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing (Amended and Restated), dated as
of July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property
located in Franklin County, Ohio.
++++++10.34 Amended and Restated Mortgage, dated as of July 29, 1997,
between the Registrant, as mortgagor and McDonald's
Corporation, as mortgagee, relating to property located in
Macomb County, Michigan.
++++++10.35 Amended and Restated Mortgage, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property
located in Anoka County, Minnesota.
++++++10.36 Amended and Restated Open-end Mortgage, Assignment of Leases
and Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property in
Philadelphia County, Pennsylvania.
iv
<PAGE>
++++++10.37 Amended and Restated Mortgage, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, between the Registrant, as mortgagor and
McDonald's Corporation, as mortgagee, relating to property in
Marion County, Indiana.
++++++10.38 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor, Kenneth W.
Pearson, as trustee and McDonald's Corporation, as
beneficiary, relating to property located in Bexar County
(San Antonio), Texas.
++++++10.39 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor, Kenneth W.
Pearson, as trustee and McDonald's Corporation, as
beneficiary, relating to property located in Tarrant County,
Texas.
++++++10.40 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor, Kenneth W.
Pearson, as trustee and McDonald's Corporation, as
beneficiary, relating to property located in Bexar County
(Leon Valley), Texas.
++++++10.41 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor (borrower),
McDonald's Corporation, as grantee (lender) and Chicago Title
Insurance Company, as grantee (trustee), relating to property
located in Clark County, Washington.
++++++10.42 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor, The Public
Trustee of Arapahoe County, Colorado, as trustee and
McDonald's Corporation, as beneficiary, relating to property
located in Arapahoe County, Colorado.
++++++10.43 Amended and Restated Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
July 29, 1997, among the Registrant, as grantor, The Public
Trustee of Douglas County, Colorado, as trustee and
McDonald's Corporation, as beneficiary, relating to property
located in Douglas County, Colorado.
++++++10.44 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Hamilton County, Ohio.
++++++10.45 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Cook County, Illinois.
++++++10.46 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Cobb County, Georgia.
++++++10.47 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Franklin County, Ohio.
v
<PAGE>
++++++10.48 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Macomb County, Michigan.
++++++10.49 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Anoka County, Minnesota.
++++++10.50 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Philadelphia County, Pennsylvania.
++++++10.51 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Marion County, Indiana.
++++++10.52 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Bexar County (San Antonio), Texas.
++++++10.53 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Tarrant County, Texas.
++++++10.54 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Bexar County (Leon Valley), Texas.
++++++10.55 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Clark County, Washington.
++++++10.56 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Arapahoe County, Colorado.
++++++10.57 Subordination Agreement, dated as of July 29, 1997, among the
Registrant, the Existing Trustee, for itself and as
collateral agent, and McDonald's Corporation, related to
property located in Douglas County, Colorado.
++++++10.58 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in
Independence, Missouri.
++++++10.59 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in Royal
Palm, Florida.
++++++10.60 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in
Cincinnati, Ohio.
++++++10.61 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in
Greenfield, Wisconsin.
vi
<PAGE>
++++++10.62 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in Webster,
Texas.
++++++10.63 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in Houston,
Texas.
++++++10.64 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in
Manchester, Missouri.
++++++10.65 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in Rancho
Cucomonga, California.
++++++10.66 Secured Rent Deferral Note of McDonald's Corporation, dated
as of July 29, 1997, related to property located in Amherst,
New York.
++++++10.67 Secured Rejection Note of McDonald's Corporation, dated as of
July 29, 1997.
+++++++10.68 Loan and Security Agreement, dated as of March 31, 1998,
between the Registrant and Foothill Capital Corporation
("Foothill").
10.69 Amendment No. 1 to the Loan and Security Agreement, dated as
of July 17, 1998, between the Registrant and Foothill.
10.70 Amendment No. 2 to the Loan and Security Agreement, dated
as of December 18, 1998 between the Registrant and Foothill.
+++++++10.71 General Continuing Guaranty, dated as of March 31, 1998,
among Discovery Zone (Canada) Limited, Discovery Zone (Puerto
Rico), Inc. and Discovery Zone Licensing, Inc., as guarantors
(the "Foothill Guarantors"), in favor of Foothill.
+++++++10.72 Security Agreement, dated as of March 31, 1998, between the
Foothill Guarantors and Foothill.
+++++++10.73 Stock Pledge Agreement, dated as of March 31, 1998, between
the Registrant and Foothill.
+++++++10.74 Trademark Security Agreement, dated as of March 31, 1998,
among the Registrant, Discovery Zone Licensing, Inc. and
Foothill.
+++++++10.75 Intercreditor Agreement, dated as of March 31, 1998, between
Foothill and the Existing Trustee, as collateral agent.
++++++10.76 Employment Agreement, dated as of August 1, 1997, between the
Registrant and Robert G. Rooney.
++++++10.77 Employment Agreement, dated as of August 1, 1997, between the
Registrant and Sharon L. Rothstein.
10.78 Consulting Agreement, dated as of August 26, 1998, between
Carl Marks Consulting Group, LLC and the Registrant.
++++++10.79 1997 Stock Incentive Plan.
+++++++++10.80 1998 Stock Incentive Plan.
12.1 Statements regarding computation of ratios.
++++++++16.1 Letter re change in certifying accountant.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent public accountants
of the Registrant.
vii
<PAGE>
23.2 Consent of PricewaterhouseCoopers LLP, independent public
accountants of the Registrant.
23.3 Consent of Shearman & Sterling (included in Exhibit 5.1).
+24.1 Power of Attorney
25.1 Statement of Eligibility of the Trustee, on Form T-1.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Exchange Agent Agreement.
- --------------------------------
+ Previously filed.
++ Incorporated by reference from the Current Report on Form 8-K
of the Registrant, dated July 9, 1997.
+++ Incorporated by reference from the Registration Statement on
Form S-4 of the Registrant, dated November 19, 1997.
++++ Incorporated by reference from the Quarterly Report on Form
10-Q of the Registrant for the quarter ended June 30, 1998.
+++++ Incorporated by reference from Amendment No. 3 to the
Registration Statement on Form S-4 of the Registrant, dated
January 28, 1998.
++++++ Incorporated by reference from Amendment No. 1 to the
Registration Statement on Form S-4 of the Registrant, dated
December 9, 1997.
+++++++ Incorporated by reference from the Annual Report on Form 10-K
of the Registrant for the year ended December 31, 1997.
++++++++ Incorporated by reference from the Current Report on Form 8-K
of the Registrant, dated June 3, 1996.
+++++++++ Incorporated by reference from the Registrant's Definitive Proxy
Statement on Schedule 14A, dated December 11, 1998.
viii
RESTATED CERTIFICATE OF INCORPORATION
OF
DISCOVERY ZONE, INC.
DISCOVERY ZONE, INC. a corporation organized and existing
under the laws of the State of Delaware (hereinafter referred to as the
"Corporation"), hereby certifies as follows:
(1) The name of the Corporation is Discovery Zone, Inc. The
original Certificate of Incorporation of the Corporation was filed on
April 21, 1993. The name under which the Corporation was originally
incorporated was also "Blockbuster Children's Amusement Corporation."
(2) This Restated Certificate of Incorporation
("Certificate") further restates in its entirety the Certificate of
Incorporation of the Corporation.
(3) Pursuant to Section 245 of the General Corporation Law
of the State of Delaware, the text of the Certificate of Incorporation
is hereby restated to read in its entirety as follows:
ARTICLE I
The name of the Corporation is Discovery Zone, Inc.
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is The Corporation Trust Center, 1209 Orange Street in the
City of Wilmington, County of New Castle. The name of the Corporation's
registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any
lawful act or activity for which corporations may be organized and incorporated
under the General Corporation Law of the State of Delaware.
ARTICLE IV
SECTION 1. Authorized Capital. The total number of shares of
capital stock which the Corporation has authority to issue is
2,400,000,000 shares, consisting of:
<PAGE>
2
(i) 10,000,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock");
(ii) 2,200,000,000 shares of Class A Common Stock, par
value $.00017 per share (the "Class A Common
Stock"); and
(iii) 190,000,000 shares of Class B Common Stock, par
value $.00017 per share (the "Class B Common
Stock").
The Class A Common Stock and the Class B Common Stock are
hereafter collectively referred to as the "Common Stock." Immediately
upon the effectiveness of this amendment to Article IV of the
Certificate of Incorporation, each outstanding share of the
Corporation's common stock, par value $.01 per share, shall without
further action by the Corporation or the holder thereof be
reclassified, changed and converted into one share of Class A Common
Stock.
SECTION 2. Common Stock. Except as otherwise provided in this
Section 2 or as otherwise required by applicable law, all shares of
Class A Common Stock and Class B Common Stock shall be identical in
all respects and shall entitle the holders thereof to the same rights,
preferences and privileges, subject to the same qualifications,
limitations and restrictions, as set forth herein.
(A) Voting Rights. Except as otherwise provided in
this Section 2, or as otherwise required by applicable law, the
holders of Class A Common Stock shall be entitled to one vote per
share and shall have the exclusive right to vote for the election of
directors and on all matters to be voted on by the stockholders of the
Corporation, and the holders of Class B Common Stock shall have no
right to vote on any matters to be voted on by the stockholders of the
Corporation; provided that the holders of Class B Common Stock shall
have the right to vote one vote per share together with the Class A
Common Stock as one class on (i) any merger or consolidation of the
Corporation with or into another entity or entities, (ii) any sale of
all or substantially all of the Corporation's assets and (iii) any
amendment to the Certificate; and provided further that the holders of
Class B Common Stock shall have the right to vote as a separate class
on any merger or consolidation of the Corporation with or into another
entity or entities, or any recapitalization or reorganization, in
which shares of Class B Common Stock would receive or be exchanged for
consideration different on a per share basis from the consideration to
be received with respect to or in exchange for the shares of Class A
Common Stock or would otherwise be treated differently from shares of
Class A Common Stock in connection with such transaction.
(B) Dividends. As and when dividends are declared or
paid in respect of shares of Common Stock, whether in cash, property
or securities of the Corporation,
<PAGE>
3
the holders of Class A Common Stock and the holders of Class B Common
Stock shall be entitled to receive such dividends pro rata at the same
rate per share of each class of Common Stock; provided that (i) if
dividends are declared or paid in shares of Common Stock, the
dividends payable to the holders of Class A Common Stock shall be
payable in shares of Class A Common Stock and the dividends payable to
the holders of Class B Common Stock shall be payable in shares of
Class B Common Stock and (ii) if the dividends consist of other voting
securities of the Corporation, the Corporation shall make available to
each holder of Class B Common Stock, at such holder's request,
dividends consisting of non-voting securities (except as otherwise
required by law) of the Corporation which are otherwise identical to
the voting securities and which are convertible into such voting
securities on the same terms as the Class B Common Stock is
convertible into the Class A Common Stock.
(C) Liquidation. The holders of the Class A Common
Stock and the holders of the Class B Common Stock shall be entitled to
participate pro rata at the same rate per share of each class of
Common Stock in all distributions to the holders of Common Stock in
any liquidation, dissolution or winding up of the Corporation.
(D) Conversion.
(i) Conversion of Class B Common Stock. (a) In
connection with the occurrence of any Conversion Event, each holder of
Class B Common Stock shall be entitled to convert into an equal number
of shares of Class A Common Stock any or all of the shares of such
holder's Class B Common Stock being (or expected to be) distributed,
disposed of or sold in connection with such Conversion Event.
(b) For purposes of this Subsection (D) of
Section 2, a "Conversion Event" shall mean (1) any public offering or
public sale of securities of the Corporation (including a offering
registered under the Securities Act of 1933, as amended (the
"Securities Act") and a sale by the holders thereof pursuant to Rule
144 under the Securities Act or any similar rule then in force), (2)
any sale of securities of the Corporation to a person or group of
persons (within the meaning of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) if, after such sale, such person or group of
persons in the aggregate would own or control securities (provided
that such sale has been approved by the Corporation's Board of
Directors or a committee thereof), (3) any sale of securities of the
Corporation to a person or group of persons (within the meaning of the
1934 Act) if, after such sale, such person or group of persons in the
aggregate would own or control securities of the Corporation
(excluding any Class B Common Stock being converted and disposed of in
connection with such Conversion Event) which possess in the aggregate
the ordinary voting power to elect a majority of the Corporation's
directors, (4) any sale of securities of the Corporation to a person
or group of persons (within the meaning of the 1934 Act) if, after
such sale, such person or group
<PAGE>
4
of persons would not, in the aggregate, own, control or have the right
to acquire more than 2% of the outstanding securities of any class of
voting securities of the Corporation, and (5) a merger, consolidation
or similar transaction involving the Corporation if, after such
transaction, a person or group of persons (within the meaning of the
1934 Act) in the aggregate would own or control securities
representing a majority of the Company's outstanding voting power
(provided that the transaction has been approved by the Corporation's
Board of Directors or a committee thereof). For purpose of this
Subsection (D) of Section 2, "person" shall include any natural person
and any corporation, partnership, limited liability company, joint
venture, trust, unincorporated organization and any other entity or
organization. The Corporation's directors shall use their best efforts
to ensure that holders of the Class B Common Stock receive shares of
non-voting common stock if, in connection with any merger,
consolidation or similar transaction involving the Corporation, shares
of capital stock are received by holders of Common Stock as
consideration in respect thereof.
(c) Each holder of Class B Common Stock
shall be entitled to convert shares of Class B Common Stock in
connection with any Conversion Event if such holder reasonably
believes that such Conversion Event shall be consummated, and a
written request for conversion from any holder of Class B Common Stock
to the Corporation stating such holder's reasonable belief that a
Conversion Event shall occur shall be conclusive and shall obligate
the Corporation to effect such conversion in a timely manner so as to
enable each such holder to participate in such Conversion Event. The
Corporation shall not cancel the shares of Class B Common Stock so
converted before the tenth day following such Conversion Event and
shall reserve such shares until such tenth day for reissuance in
compliance with the next sentence. If any shares of Class B Common
Stock are converted into shares of Class A Common Stock in connection
with a Conversion Event and such shares of Class A Common Stock are
not actually distributed, disposed of or sold pursuant to such
Conversion Event, such shares of Class A Common Stock shall be
promptly converted back into the same number of shares of Class B
Common Stock.
(ii) Conversion Procedure. (a) Unless
otherwise provided in connection with a Conversion Event of Class B
Common Stock, each conversion of shares of Class B Common Stock into
shares of Class A Common Stock shall be effected by the surrender of
the certificate or certificates representing the shares of Class B
Common Stock to be converted at the principal office of the
Corporation at any time during normal business hours, together with a
written notice by the holder of such Class B Common Stock stating that
such holder desires to convert the shares, or a stated number of the
shares, of Class B Common Stock represented by such certificate or
certificates into shares of Class A Common Stock. Unless otherwise
provided in connection with a Conversion Event, each conversion shall
be deemed to have been effected as of the close of business on the
date on which such certificate or certificates have been surrendered
and
<PAGE>
5
such notice has been received, and at such time the rights of the
holder of the converted Class B Common Stock, as such holder, shall
cease and the person or persons in whose name or names the certificate
or certificates for shares of Class A Common Stock are to be issued
upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Class A Common Stock represented
thereby.
(b) Promptly after the surrender of
certificates and the receipt of written notice, the Corporation shall
issue and deliver in accordance with the surrendering holder's
instructions (a) the certificate or certificates for the Class A
Common Stock issuable upon such conversion and (b) a certificate
representing any Class B Common Stock which was represented by the
certificate or certificates delivered to the Corporation in connection
with such conversion but which was not converted.
(c) The issuance of certificates for Class
A Common Stock upon conversion of Class B Common Stock shall be made
without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Corporation in
connection with such conversion and the related issuance of Class A
Common Stock.
(d) The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares
of Class A Common Stock, for the purpose of issuance upon the
conversion of the Class B Common Stock, such number of shares of Class
A Common Stock issuable upon the conversion of all outstanding Class B
Common Stock. All shares of Class A Common Stock which are so issuable
shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The
Corporation shall take all such actions as may be necessary to assure
that all such shares of Class A Common Stock may be so issued without
violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance
which shall be immediately transmitted by the Corporation upon
issuance).
(e) The Corporation shall not close its
books against the transfer of shares of Common Stock in any manner
which would interfere with the timely conversion of any shares of
Class B Common Stock. The Corporation shall assist and cooperate with
any holder of Common Stock required to make any governmental filings
or obtain any governmental approval prior to or in connection with any
conversion of Common Class B Stock hereunder (including, without
limitation, making any filings required to be made by the
Corporation).
(E) Stock Splits. If the Corporation in any manner
subdivides or combines the outstanding shares of one class of Common
Stock, the outstanding shares of
<PAGE>
6
the other class of Common Stock shall be proportionately subdivided or
combined in a similar manner.
(F) Registration of Transfer.. The Corporation shall
keep at its principal office (or such other place as the Corporation
reasonably designates) a register for the registration of shares of
Common Stock. Upon the surrender of any certificate representing
shares of any class of Common Stock at such place, the Corporation
shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such
class represented by the surrendered certificate, and the Corporation
forthwith shall cancel such surrendered certificate. Each such new
certificate shall be registered in such name and shall represent such
number of shares of such class as is requested by the holder of the
surrendered certificate and shall be substantially identical in form
to the surrendered certificate. The issuance of new certificates shall
be made without charge to the holders of the surrendered certificates
for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such issuance.
(G) Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder
shall be satisfactory) of the ownership and the loss, theft,
destruction or mutilation of any certificate evidencing one or more
shares of any class of Common Stock, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a
financial institution or other institutional investor its own
agreement shall be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of such
class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or
mutilated certificate.
(H) Notices. All notices referred to herein shall be
in writing, shall be delivered personally or by first class mail,
postage prepaid, and shall be deemed to have been given when so
delivered or mailed to the Corporation at its principal executive
offices and to any stockholder at such holder's address as it appears
in the stock records of the Corporation (unless otherwise specified in
a written notice to the Corporation by such holder).
(I) Amendment and Waiver. No amendment or waiver of
any provision of this Section 2 shall be effective without the prior
approval of the holders of a majority of the then outstanding Class B
Common Stock voting as a separate class.
SECTION 3. Preferred Stock. Shares of Preferred Stock may be
issued from time to time in one or more series. The Board of Directors
is hereby authorized to fix the
<PAGE>
7
voting rights, if any, designations, powers, preferences and the
relative, participation, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, of any unissued
series of Preferred Stock; and to fix the number of shares
constituting such series, and to increase or decrease the number of
shares of any such series (but not below the number of shares thereof
then outstanding). The Corporation shall be authorized to issue 1,000
shares of Series A Convertible Preferred Stock, par value $.01 per
share, the designations, powers, preferences and the relative,
participation, optional or other rights, if any, of which (in addition
to those set forth herein) are as set forth in the Certificate of
Designations attached hereto as Exhibit A.
Pursuant to the authority conferred by this Article IV,
the following series of Preferred Stock have been designated, each such
series consisting of such number of shares, with such voting powers and
with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof as are stated and expressed in the exhibit with
respect to such series attached hereto as specified below and
incorporated herein by reference:
Exhibit B: Series A Senior Cumulative Preferred Stock
Exhibit C: Series B Junior Cumulative Preferred Stock
ARTICLE V
Unless and except to the extent that the By-Laws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
To the fullest extent permitted by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any repeal or modification of this paragraph shall be prospective only and shall
not adversely affect any limitation, right or protection of a director of the
Corporation existing at the time of such repeal or modification.
ARTICLE VI
SECTION 1. Definitions. For purposes of this Article VI, the
following terms shall have the following meanings:
"Board of Directors" means the Board of Directors of the
Corporation.
"Indenture" means the Indenture, dated as of July 16, 1998
among the Corporation, certain subsidiaries of the Corporation named
therein and the Trustee.
<PAGE>
8
"Issue Date" means the original date of issuance of the
Notes.
"Maturity Date" means May 1, 2002, the maturity date of the
Notes.
"Noteholder Nominees" means individuals designated for
nomination to the Board of Directors by the Trustee or by the holders
of the Notes pursuant to the provisions of the Indenture, including
Additional Noteholder Nominees (as defined below).
"Notes" means the 13 1/2% Senior Collateralized Notes due
2002 of the Company in the aggregate principal amount of $20,000,000,
issued under the Indenture.
"Trustee" means Firststar Bank of Minnesota, in its capacity
as trustee under the Indenture and any successor trustee pursuant to
the provisions of the Indenture.
SECTION 2. Board of Directors. From and after the Issue date
and until the date on which all outstanding Notes have been paid in
full, the following provisions shall apply:
(i) From and after the Issue Date and until the
Stockholders' Agreement is terminated, the Board of Directors shall
consist of 11 directors; provided, however, that the number of
directors constituting the Board of Directors may be reduced to less
than 11 (but in any event not less than two directors), if the Board
of Directors so approves pursuant to a unanimous vote.
(ii) From and after the Issue Date and until the
Stockholders' Agreement is terminated, the Board of Directors of the
Corporation (the "Board of Directors") shall not adopt any new
provisions, or amend any existing provisions of its Amended and
Restated By-Laws, except, in either case, by a unanimous vote of the
directors of the Corporation.
SECTION 3. Approval of Bankruptcy Filings. The Corporation
shall not, and shall not permit any subsidiary of the Corporation to
(i) file a voluntary case or proceeding under any applicable
bankruptcy law with respect to the Corporation or any Subsidiary of
the Corporation, (ii) consent to the appointment of a custodian on the
Corporation's behalf for substantially all of the Corporation's or any
such subsidiary of the Corporation's assets, (iii) consent to,
acquiesce in, support, encourage, suggest or assist in, the
institution of a bankruptcy or insolvency proceeding against the
Corporation or any such subsidiary of the Corporation, as applicable,
or (iv) make any general assignment, or permit any such subsidiary of
the Corporation to make any general assignment, for the benefit of
creditors, unless any such action described in clauses (i) through
(iv) has been approved by a unanimous vote of the Board.
<PAGE>
9
ARTICLE VII
From and after the Issue Date and until the Stockholders'
Agreement is terminated, the Board of Directors shall not adopt any new
provisions, or amend any existing provisions of its Amended and Restated
Certificate of Incorporation without the unanimous consent of the shareholders;
provided that, if an event occurs as a result of which the Noteholder
Representatives constitute a majority of the Board of Directors, the Amended and
Restated Certificate of Incorporation may be amended by stockholders
representing a majority of the votes to be cast.
ARTICLE VIII
SECTION 1. Elimination of Certain Liability of Directors. A
director of the Corporation shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law of the State of
Delaware as the same exists of may hereafter be amended.
Any repeal or modification of the foregoing paragraph shall
not adversely affect any right or protection of a director of the Corporation
existing hereunder with respect to any act or omission occurring prior to such
repeal or modification.
SECTION 2. Indemnification and Insurance.
(a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, to
the fullest extent permitted by law, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines,
amounts paid or to be paid in settlement, and excise taxes or penalties arising
under the Employee Retirement Income Security Act of 1974) reasonably incurred
or suffered by such person in connection therewith and such indemnification
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure
<PAGE>
10
to the benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in paragraph (b) of this Section 2, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors. The
right to indemnification conferred in this Section shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the General Corporation Law of the State of Delaware requires,
the payment of such expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of the Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under
paragraph (a) of this Section 2 is not paid in full by the Corporation within
thirty days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any is required, has
been tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the General Corporation Law of the State
of Delaware for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Section shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-law, agreement, vote of
stockholders or disinterested directors or otherwise.
<PAGE>
11
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
ARTICLE IX
Intentionally Omitted.
ARTICLE X
Restrictions with respect to transfers of shares of capital
stock of the Corporation may be contained in the By-Laws of the Corporation, in
any agreement among some or all of the stockholders of the Corporation or in the
terms of such shares or of any agreement or securities providing for the
issuance of such shares.
ARTICLE XI
Preemptive rights to acquire shares of capital stock of the
Corporation may be contained in the By-Laws of the Corporation and in any
agreement among some or all of the stockholders of the Corporation including,
without limitation, the Stockholders' Agreement.
ARTICLE XII
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
<PAGE>
12
IN WITNESS WHEREOF, said Discovery Zone, Inc. has caused this
Certificate to be signed by Scott W. Bernstein, its Chief Executive Officer and
President, this 29th day of September, 1998.
DISCOVERY ZONE, INC.
By: /s/ Scott W. Bernstein
------------------------------------
Name: Scott W. Bernstein
Title: Chief Executive Officer
and President
<PAGE>
EXHIBIT A
SERIES A CONVERTIBLE PREFERRED STOCK
1. DESIGNATION AND AMOUNT. The Corporation is authorized to
issue shares of a series of preferred stock of the Corporation, which series
shall be designated "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting such Series A Preferred
Stock shall be 1,000.
2. DIVIDENDS.
(a) No dividends will be paid on the Series A Preferred
Stock.
(b) Notwithstanding the provisions of Section 2(a) above, for
so long as any shares of Series A Preferred Stock remain outstanding, the
Corporation shall not pay any dividend or other distribution, whether in cash or
other property, on any capital stock of the Corporation ranking on liquidation
junior in preference to the Series A Preferred Stock (collectively, the "Junior
Stock"), without the prior affirmative vote or written consent of (i) Wafra
Acquisition Fund 6, L.P. ("WAF-6"), for so long WAF-6 shall hold at least 1,000
shares of Series A Preferred Stock, and (ii) a majority of the holders of Series
A Preferred Stock at any time as WAF-6 shall hold less than 1,000 shares of
Series A Preferred Stock; provided that, if such vote or consent is given, (i)
with respect to dividends payable in cash, the holders of shares of Series A
Preferred Stock shall receive a pro rata share of any such dividend or other
distribution as if such shares of Series A Preferred Stock had been fully
converted into shares of Common Stock, par value $.01 per share (the "Common
Stock"), of the Corporation and (ii) with respect to dividends payable in shares
of capital stock of the Corporation, the Conversion Price (as defined in Section
5(b) below) shall be adjusted in accordance with the provisions of Section 6
below.
(c) Notwithstanding the provisions of Section 2(b) above,
following the consummation of a Qualified Initial Public Offering (as defined in
the Stock Purchase Agreement, dated as of July 21, 1997 (the "Stock Purchase
Agreement"), by and among the Corporation, Birch Holdings L.L.C. (together with
Birch Acquisition L.L.C. and each of their respective Related Parties, as such
term is defined in the Stock Purchase Agreement being collectively referred to
herein as "Birch") and WAF-6, the Corporation may declare a dividend or other
distribution in cash without the prior affirmative vote or written consent of
either (i) WAF-6, for so long as WAF-6 shall hold at least 1,000 shares of
Series A Preferred Stock, and (ii) a majority of the holders of shares of Series
A Preferred Stock, at any time as WAF-6 shall hold less than 1,000 shares of
Series A Preferred Stock, as the case may be; provided that the holders of
shares of Series A Preferred Stock shall receive a pro rata share of any such
dividend or other distribution as if such shares of Series A Preferred Stock had
been fully converted into shares of Common Stock.
A-1
<PAGE>
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of Series A Preferred
Stock shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, after and subject to the payment
in full of all amounts required to be distributed to the holders of any other
series of Preferred Stock of the Corporation ranking on liquidation prior and in
preference to the Series A Preferred Stock (such Preferred Stock being referred
to hereinafter as "Senior Preferred Stock") upon such liquidation, dissolution
or winding up, but before any payment shall be made to the holders of Junior
Stock, an amount equal to $15,000 per share plus dividends, if any, thereon
declared but unpaid (subject to adjustment in the event of any stock dividend,
stock split, stock distribution or combination with respect to such shares). If
upon any such liquidation, dissolution or winding up of the Corporation, the
remaining assets of the Corporation available for the distribution to its
stockholders after payment in full of amounts required to be paid or distributed
to holders of Senior Preferred Stock shall be insufficient to pay the holders of
the Series A Preferred Stock the full amount to which they shall be entitled,
the holders of Series A Preferred Stock and any class of stock ranking on
liquidation on a parity with the Series A Preferred Stock (the "Parity Stock"),
shall share ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amounts which would otherwise be
payable in respect to the shares held by the holders of Series A Preferred Stock
and the holders of Parity Stock upon such distribution if all amounts payable on
or with respect to said shares were paid in full.
(b) After the payment of all preferential amounts required to
be paid to the holders of Senior Preferred Stock, the holders of Series A
Preferred Stock and the holders of Parity Stock upon the dissolution,
liquidation or winding up of the Corporation, the holders of shares of Junior
Stock then outstanding shall be entitled to receive the remaining assets and
funds of the Corporation available for distribution to its stockholders.
(c) The merger or consolidation of the Corporation into or
with another corporation, the merger or consolidation of any other corporation
into or with the Corporation, or the sale, conveyance, mortgage, pledge or lease
of all or substantially all the assets of the Corporation shall not be deemed to
be a liquidation, dissolution or winding up of the Corporation for purposes of
this Section 3.
4. VOTING.
(a) Each issued and outstanding share of Series A Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which each such share is convertible (as adjusted from time to
time pursuant to Section 6 hereof), at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Except as provided by law, by
the provisions of paragraphs (b) and (c) of this Section 4 or by the provisions
establishing any
A-2
<PAGE>
other series of preferred stock of the Corporation, the holders of Series A
Preferred Stock and holders of any other outstanding preferred stock of the
Corporation shall vote together with the holders of Common Stock as a single
class.
(b) In addition to any other rights provided by law, the
Corporation shall not, without first obtaining the prior affirmative vote or
written consent of (i) WAF-6, for so long as WAF-6 shall hold at least 1,000
shares of Series A Preferred Stock, or (ii) a majority of the holders of shares
of Series A Preferred Stock, at any time as WAF-6 shall hold less than 1,000
shares of Series A Preferred Stock, as the case may be:
(i) Amend or repeal any provision of the Certificate of
Incorporation or the Corporation's By-Laws, if such action would alter
or adversely change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the holders of Series
A Preferred Stock or increase the number of shares of Series A
Preferred Stock authorized thereby; and
(ii) Enter into any transaction with Birch.
(c) The Corporation will not, and will not permit any of its
Subsidiaries (as defined in the Stock Purchase Agreement) to, directly or
indirectly, enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any services) with, or for the
benefit of, any of its officers, directors or beneficial owners of more than 10%
of the Common Stock then outstanding (each such Person, an "Affiliate," and each
such transaction, an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted pursuant to this paragraph and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's length basis from
a Person that is not an Affiliate of the Corporation or such Subsidiary.
Notwithstanding the provisions of Section 4(a) above and other than all
transactions between the Corporation and Birch which shall be subject to the
provisions of Section 4(b)(ii) above, all Affiliate Transactions and each series
of related Affiliate Transactions which are similar or part of a common plan,
involving aggregate payments or other property with a fair market value in
excess of $2,000,000 shall be approved by a majority of the disinterested
members of the Board or the board of directors of such Subsidiary, as the case
may be; such approval to be evidenced by a resolution stating that such board of
directors has determined that such transaction complies with the foregoing
provisions which shall be delivered to WAF-6 for so long as WAF-6 shall hold any
shares of Series A Preferred Stock. If the Corporation or any Subsidiary shall
enter into an Affiliate Transaction (or a series of related Affiliate
Transactions which are similar or part of a common plan) that involves an
aggregate fair market value of more than $5,000,000, the Corporation or such
Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to the Corporation from a financial point of view from an
Independent Financial Advisor (as defined in the Indenture, dated as of July 22,
1997 (the "Indenture"), by and among the Corporation, the
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Subsidiary Guarantors named therein and State Street Bank and Trust Company, as
Trustee (as used in this Certificate, all references to the Indenture refer to
the Indenture as in effect on the Closing Date (as defined in the Stock Purchase
Agreement), and are without regard to any subsequent amendment(s) thereto) and
deliver such opinion to WAF-6 for so long as WAF-6 shall hold any shares of
Series A Preferred Stock. Notwithstanding the foregoing, the restrictions set
forth in this Section 4(c) shall not apply to (i) reasonable fees and expenses
and compensation paid to, and any indemnity provided on behalf of, officers,
director, employees or consultants of the Corporation or any Subsidiary, as
determined in good faith by the Board or senior management of the Corporation,
and (ii) transactions exclusively between the Corporation and any wholly owned
Subsidiary or exclusively between or among any wholly owned Subsidiaries.
5. OPTIONAL CONVERSION.
(a) Each share of Series A Preferred Stock may be converted
at any time, at the option of the holders of the Series A Preferred Stock, in
the manner hereinafter provided, into fully-paid and nonassessable shares of
Common Stock, provided, however, that on any redemption of any Series A
Preferred Stock or any liquidation of the Corporation, the right of conversion
shall terminate at the close of business on the full business day next preceding
the date fixed for such redemption or for the payment of any amounts
distributable on liquidation to the holders of the Series A Preferred Stock.
(b) The initial conversion rate (the per share equivalent of
(i) 18.5% of the then outstanding shares of Common Stock on a fully diluted
basis, divided by (ii) 1,000) for the Series A Preferred Stock shall be
1,191.6260 shares of Common Stock for each one share of Series A Preferred Stock
surrendered for conversion. The applicable conversion rate and Conversion Price
from time to time in effect is subject to adjustment as hereinafter provided.
For purposes of this Section 5, the term "fully diluted" shall give effect to
the exercise of all warrants, stock options and stock appreciation rights in
respect of the Common Stock and other securities convertible into or
exchangeable for Common Stock (whether outstanding on the Issuance Date, granted
or reserved for granting or issuance), other than stock options or stock
appreciation rights in respect of Common Stock granted, reserved or available
for granting (the exercise of which would not result in dilution to WAF-6 in an
amount in excess of 10% as calculated on a fully diluted basis) under the
Corporation's 1997 Stock Incentive Plan (the "Stock Incentive Plan").
(c) The Corporation shall not issue fractions of shares of
Common Stock upon conversion of Series A Preferred Stock or scrip in lieu
thereof. If any fraction of a share of Common Stock would, except for the
provisions of this paragraph (b), be issuable upon conversion of any Series A
Preferred Stock, the Corporation shall in lieu thereof pay to the holders of the
Series A Preferred Stock an amount in cash equal to the current value of such
fraction, calculated to the nearest one-hundredth (1/100) of a share, to be
computed (i) if the Common Stock is listed on any national securities exchange
on the basis of the last sales price of the Common Stock on such exchange (or
the quoted closing bid price if there shall have been no sales) on the date of
conversion, or (ii) if the Common Stock shall not be listed, on the basis of
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the mean between the closing bid and asked prices for the Common Stock on the
date of conversion as reported by Nasdaq, and if there are not such closing bid
and asked prices, on the basis of the Fair Market Value (as determined in
Section 10 below) per share as determined in good faith after due inquiry by the
Board.
(d) Whenever the conversion rate shall be adjusted as
provided in Section 6 hereof, the Corporation shall forthwith file at each
office designated for the conversion of Series A Preferred Stock, a statement,
signed by the Chairman of the Board, the President, any Vice President or
Treasurer of the Corporation, showing in reasonable detail the facts requiring
such adjustment and the conversion rate that will be effective after such
adjustment. Promptly after delivery of such statement, the Corporation shall
also cause a notice setting forth any such adjustments to be sent by mail, first
class, postage prepaid, to each record holder of Series A Preferred Stock at his
or its address appearing on the stock register. If such notice relates to an
adjustment resulting from an event referred to in paragraph 6(g), such notice
shall be included as part of the notice required to be mailed and published
under the provisions of paragraph 6(g) hereof.
(e) In order to exercise the conversion privilege, the holder
of each share of Series A Preferred Stock shall surrender the certificate
representing such share, duly endorsed or assigned to the Corporation, or in
blank, at the principal office of the transfer agent (or if no transfer agent
shall be at the time appointed, then to the Corporation at its principal
office), and shall give written notice to the Corporation at such office that
they elect to convert the share represented by such certificate, or a specified
portion thereof. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such share of Series A Preferred Stock is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder or such holder's duly authorized attorney and an amount sufficient
to pay any transfer tax (or evidence reasonably satisfactory to the Corporation
demonstrating that such taxes have been paid). The Corporation shall pay any
issue and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock upon conversion of the Series A Preferred Stock;
provided, however, that the Corporation shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issue and
delivery of any shares of Common Stock issued and delivered upon conversion of
the Series A Preferred Stock to a person(s) with name(s) other than the name(s)
in which the Series A Preferred Stock is registered and the Corporation shall
not be required to issue or deliver such Common Stock unless or until the
person(s) requesting the issuance thereof shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid. The date of receipt by the transfer
agent or by the Corporation, as the case may be, of the certificate(s) and
notice shall be the conversion date. As soon as practicable after receipt of
such notice and the surrender of the certificate(s) for shares of Series A
Preferred Stock as aforesaid, the Corporation shall cause to be issued and
delivered at such office to the holders of the Series A Preferred Stock, as
applicable, or on its written order, certificate(s) for the number of full
shares of Common Stock issuable on such conversion in accordance with the
provisions hereof and cash
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as provided in paragraph (b) of this Section 5 in respect of any fraction of a
share of Common Stock otherwise issuable upon such conversion.
(f) The Corporation shall, at all times as any shares of
Series A Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purposes of effecting the conversion
of the Series A Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series A Preferred Stock. Before taking any action
which would cause an adjustment reducing the Conversion Rate below the then
existing par value of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock, the Corporation will take any corporate action which
may, in the opinion of its counsel, be necessary in order that the Corporation
may validly and legally issue fully-paid and nonassessable shares of such Common
Stock at such adjusted conversion rate.
(g) Upon any such conversion, no adjustment to the conversion
rate shall be made for accrued and unpaid dividends on the Series A Preferred
Stock surrendered for conversion or on the Common Stock so delivered.
(h) All shares of Series A Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall forthwith cease and terminate
except only the right of the holder thereof to receive shares of Common Stock in
exchange therefor and payment of any accrued and unpaid dividends thereon. Any
shares of Series A Preferred Stock so converted shall be retired and canceled
and shall not be reissued, and the Corporation may from time to time take such
appropriate action as may be necessary to reduce the then authorized number of
shares of Series A Preferred Stock accordingly.
6. ANTI-DILUTION PROVISIONS. The number and kind of shares
issuable upon the conversion of shares of Series A Preferred Stock shall be
subject to adjustment from time to time as follows:
(a) Stock Dividends. If, at any time after the Issuance Date,
(i) the Corporation shall pay a stock dividend or other distribution
payable in shares of capital stock of the Corporation or (ii) the
number of shares of Common Stock shall have been increased by a
subdivision or split-up of shares of Common Stock, then, on the date
of the payment of such dividend or distribution (retroactive to the
record date) or immediately after the effective date of subdivision or
split-up, as the case may be, the number of shares of Common Stock to
be delivered upon conversion of shares of Series A Preferred Stock
will be increased so that the holders of shares of Series A Preferred
Stock will be entitled to receive the number of shares of Common Stock
that such holders would have owned immediately following such action
had such shares of Series A Preferred Stock been converted immediately
prior thereto or, in the case of a stock dividend or other
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distribution payable in shares of capital stock of the Corporation,
prior to the record date for determination of shareholders entitled
thereto.
(b) Combination of Stock. If the number of shares of Common
Stock outstanding at any time after the Issuance Date shall have been
decreased by a combination of the outstanding shares of Common Stock,
then, immediately after the effective date of such combination, the
number of shares of Common Stock to be delivered upon conversion of
each share of Series A Preferred Stock will be decreased so that the
holders of shares of Series A Preferred Stock thereafter will be
entitled to receive the number of shares of Common Stock that such
holders would have owned immediately following such action had such
shares of Series A Preferred Stock been converted immediately prior
thereto.
(c) Reorganization, Etc. If any capital reorganization of the
Corporation, or any reclassification of the Common Stock, or any
consolidation of the Corporation with or merger of the Corporation
with or into any other person or any sale, lease or other transfer of
all or substantially all of the assets of the Corporation to any other
person, shall be effected in such a way that the holders of Common
Stock shall be entitled to receive stock, other securities or assets
(whether such stock, other securities or assets are issued or
distributed by the Corporation or another person) with respect to or
in exchange for Common Stock, then, upon conversion of each share of
Series A Preferred Stock, the holders of shares of Series A Preferred
Stock shall have the right to receive the kind and amount of stock,
other securities or assets receivable upon such reorganization,
reclassification, consolidation, merger or sale, lease or other
transfer by a holder of the number of shares of Common Stock that such
holders would have been entitled to receive upon conversion of such
shares of Series A Preferred Stock had such shares been converted
immediately before such reorganization, reclassification,
consolidation, merger or sale, lease or other transfer, subject to
adjustments (as determined in good faith by the Board) that shall be
as nearly equivalent as may be practicable to the adjustments provided
for in this Section 6.
(d) Stock and Rights Offering at Less than Fair Market Value.
(1) If at any time after the Issuance Date, the Corporation shall (x)
issue to holders of Common Stock, (y) issue or sell or (z) fix a
record date for the issuance to holders of its Common Stock of (A)
Common Stock or (B) rights, options or warrants entitling the holders
thereof to subscribe for or purchase Common Stock (or securities
convertible or exchangeable into or exercisable for Common Stock) (any
of the foregoing being referred to herein as "Convertible
Securities"), in any such case, at a price per share (or having a
conversion, exchange or exercise price per share) that is less than
Fair Market Value (as determined below) on the date of such issuance
or such record date, then, immediately after the date of such issuance
or sale or on such record date, the number of shares of Series A
Preferred Stock shall be increased so that the holders of shares of
Series A Preferred Stock thereafter will be entitled to receive the
number of shares of Common Stock determined
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by multiplying the number of shares of Common Stock such holders would
have been entitled to receive immediately before the date of such
issuance or sale or such record date, had such holders converted their
shares of Series A Preferred Stock immediately prior thereto by a
fraction, the numerator of which will be the number of shares of
Common Stock outstanding on such date plus the number of additional
shares of Common Stock offered for subscription or purchase (or into
which the Convertible Securities so offered are initially convertible
or exchangeable or exercisable, as the case may be), and the
denominator of which will be the number of shares of Common Stock
outstanding on such date plus the number of shares of Common Stock
that the aggregate offering price of the total number of shares so
offered for subscription or purchase (or the aggregate initial
conversion price, exchange price or exercise price of the Convertible
Securities, as the case may be, so offered) would purchase at such
Fair Market Value.
(2) If at any time after the Issuance Date, the Corporation
shall distribute to all holders of Common Stock any shares of capital
stock of the Corporation (other than Common Stock) or evidences of its
indebtedness or assets (excluding cash dividends or cash distributions
paid from retained earnings of the Corporation) or rights or warrants
to subscribe for or purchase any of its securities (excluding those
referred to in Section 6(d)(1) above) (any of the foregoing being
referred to herein as "Securities"), then in each such case, unless
the Corporation elects to reserve shares or other units of such
Securities for distribution to the holders of shares of Series A
Preferred Stock upon conversion thereof so that, in addition to the
shares of Common Stock issuable upon conversion thereof, such holders
will receive upon such conversion the amount and kind of such
Securities that such holders would have received if the holders had,
immediately prior to the record date for the distribution of the
Securities, converted the Series A Preferred Stock, then the number of
shares of Common Stock issuable upon conversion shall be increased so
that the holders thereafter shall be entitled to receive the number of
shares of Common Stock determined by multiplying the number of shares
of Common Stock such holders would have been entitled to receive
immediately before such record date, had the holders converted the
Series A Preferred Stock immediately prior thereto, by a fraction, the
numerator of which shall be the Fair Market Value per share of the
Common Stock on such record date, and the denominator of which shall
be such Fair Market Value per share of Common Stock minus the then
fair market value (as reasonably determined in good faith by an
independent appraiser) of the portion of the Securities so distributed
applicable to one share of Common Stock.
(e) Above Fair Market Value Repurchases of Common Stock. If,
at any time or from time to time after the Issuance Date, the
Corporation or any Subsidiary thereof shall repurchase, by self-tender
offer or otherwise, any shares of Common Stock of the Corporation (or
any Convertible Security) at a weighted average purchase price in
excess of the Fair Market Value thereof, on the Business Day (as
defined below) immediately prior to the earliest of (i) the date of
such repurchase, (ii) the commencement of an offer to repurchase or
(iii) the public announcement of either (such date being referred to
as the
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"Determination Date"), the number of shares of Common Stock issuable
upon conversion of the Series A Preferred Stock shall be increased so
that the holders of shares of Series A Preferred Stock thereafter will
be entitled to receive the number of shares of Common Stock determined
by multiplying the number of shares of Common Stock such holders would
have been entitled to receive before the Determination Date, had the
holders converted their shares of Series A Preferred Stock immediately
prior thereto, by a fraction, the numerator of which shall be the
product of (1) the number of shares of Common Stock outstanding
immediately prior to such Determination Date minus the number of
shares of Common Stock (or shares of Common Stock into which the
Convertible Securities are convertible or exchangeable or exercisable,
as the case may be) represented by the securities repurchased or to be
purchased by the Corporation or any Subsidiary thereof in such
repurchase and (2) the Fair Market Value of a share of Common Stock
immediately prior to such Determination Date, and the denominator of
which shall be (x) the product of (A) the number of shares of Common
Stock outstanding immediately prior to the Determination Date and (B)
the Fair Market Value of a share of Common Stock immediately prior to
such Determination Date minus (y) the sum of (1) the aggregate
consideration paid by the Corporation in connection with such
repurchase and (2) in the case of Convertible Securities, the
additional consideration required to be received by the Corporation
upon the conversion, exchange or exercise of such securities.
(f) If, at any time after the Issuance Date and for so long
as shares of Series A Preferred Stock shall continue to be
outstanding, the Corporation shall issue shares of Common Stock or
Convertible Securities to holders of Disputed Claims (as defined in
the Third Amended Plan of Reorganization, dated March 11, 1997) in
settlement of such Claims, in the aggregate, in excess of the amounts
set forth in Section 4.3(a)(i)(x) and Section 4.3(a)(vi) of the Stock
Purchase Agreement, then on the date of any such issuance, the number
of shares of Common Stock issuable upon conversion of the shares of
Series A Preferred Stock shall be increased so that the number of
shares of Common Stock issuable to the holder(s) of Series A Preferred
Stock on the date of any such issuance (after giving effect to any
such issuance) and the number of shares of such holder(s) as of the
Closing Date shall equal the same percentage of the total number of
shares of Common Stock outstanding, on a fully diluted basis (without
giving effect to the exercise of any options granted pursuant to the
Stock Incentive Plan). However, if the Corporation shall, in the
resolution of such Disputed Claim, issue less than all of the shares
set forth in Section 4.3(a)(i)(x) and Section 4.3(a)(vi) of the Stock
Purchase Agreement, the remaining shares may be distributed to the
holders of Common Stock without adjustment of the shares of Common
Stock issuable upon conversion of the shares of Series A Preferred
Stock pursuant to this Section 6.
(g) Carryover. Notwithstanding any other provision of this
Section 6, no adjustment shall be made to the number of shares of
Common Stock to be delivered to the holders of shares of Series A
Preferred Stock if such adjustment represents less than 1% of the
number of shares to be so delivered, but any lesser adjustment shall
be carried
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forward and shall be made at the time and together with the earlier to
occur of (i) the conversion of all or any portion of such holder's
shares of Series A Preferred Stock and (ii) the next subsequent
adjustment that, together with any adjustments so carried forward,
shall amount to 1% or more of the number of shares to be so delivered.
(h) No Adjustments for Certain Incentive Compensation or
Issuance of Series A Preferred Stock Shares. Notwithstanding any other
provision hereof, it is expressly understood that the Series A
Preferred Stock shall not be adjusted with respect to (a) Common Stock
or Convertible Securities, in any case, that may be issued to any of
the Corporation's officers or employees pursuant to any employee
benefit plan, stock incentive plan, bonus plan or employment
arrangement (including the Stock Incentive Plan) (each, a "Plan"), to
the extent that (A) such Common Stock, rights, options or warrants,
together with all such other Common Stock, rights, options or warrants
previously issued to any officers or employees of the Corporation
pursuant to any such Plan, represent 10% or less of the outstanding
Common Stock on a fully diluted basis (including the shares of Series
A Preferred Stock issued to WAF-6 on the Issuance Date), calculated as
of the Issuance Date and (B) the purchase, conversion, exchange or
exercise price per share of Common Stock, as the case may be, of each
such share of Common Stock, right, option, or warrant is not less than
the book value per share of Common Stock as of the Issuance Date,
without giving effect to the issuance and sale of the Warrants (as
defined in the Stock Purchase Agreement), or (b) the issuance of any
shares of Common Stock upon conversion thereof.
(i) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
6 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders
of shares of Series A Preferred Stock against impairment. Without
limiting the generality of the foregoing, the Corporation will not
increase the par value of any shares of Common Stock receivable on the
conversion of the Series A Preferred Stock above the amount payable
therefor on such conversion.
(j) The Corporation, in its sole discretion, shall have the
right at any time, or from time to time, to increase the number of
shares of Common Stock issuable upon the conversion of the Series A
Preferred Stock, including as it considers to be advisable in order
that any event treated for federal income tax purposes as a dividend
of stock or stock rights shall not be taxable to recipients.
(k) Other Adjustments. If any event occurs as to which the
foregoing provisions of this Section 6 are not strictly applicable or,
if strictly applicable, would not,
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in the good faith judgment of the Board, fairly protect the conversion
rights of the holder of shares of Series A Preferred Stock in
accordance with the essential intent and principles of this Section 6,
then the Board shall make such adjustments in the application of such
provisions, in accordance with such essential intent and principles,
as shall be reasonably necessary, in the good faith opinion of the
Board, to protect such purchase rights as aforesaid, but in no event
shall any such adjustment have the effect of adversely affecting the
holders of shares of Series A Preferred Stock.
7. OPTIONAL REDEMPTION.
(a) From and after the earliest to occur of (i) the sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the assets of the Corporation to any Person, in a single
transaction or series of related transactions; (ii) the consolidation or merger,
in a single transaction or series of related transactions, of the Corporation
with or into another Person pursuant to which the Corporation is not the
surviving entity; (iii) the consolidation or merger, in a single transaction or
series of related transactions, of the Corporation with or into another Person
pursuant to which the Corporation is the surviving entity (a "Forward Merger")
and (w) the shareholders of the Corporation immediately preceding such Forward
Merger will not continue to own at least a majority of the outstanding shares of
capital stock of the Corporation on a fully diluted basis following the
consummation of such Forward Merger, (x) as a direct or indirect result of such
Forward Merger, a Change of Control (as defined in the Indenture) shall have
occurred, (y) the net worth of the Corporation immediately following the
consummation of such Forward Merger shall not at least equal the net worth of
the Corporation immediately preceding such Forward Merger or (z) immediately
following the consummation of such Forward Merger, the Corporation would not be
permitted to incur any additional Indebtedness pursuant to Section 4.12 of the
Indenture; and (iv) the expiration of the sixty-second month following the date
of closing of the Offering (as defined in the Stock Purchase Agreement), the
holders of the Series A Preferred Stock may elect to cause the Corporation, upon
written notice given to the Corporation by the holders (the "Redemption
Notice"), to redeem all of the shares of the Series A Preferred Stock (to the
extent that such redemption shall not violate any applicable provisions of the
laws of the State of Delaware) at a price per share (subject to adjustment in
the event of any stock dividend, stock split, stock distribution or combination
with respect to such shares), plus an amount equal to any dividends declared but
unpaid thereon, equal to the greater of (x) $15,000 and (y) if the Common Stock
shall not at such time be listed on a national securities exchange or quoted on
Nasdaq, the value of the number of shares of Common Stock into which each share
of Series A Preferred Stock is then convertible based on the appraised value of
the Corporation as determined by a qualified Independent Appraiser reasonably
acceptable to the holders of the Series A Preferred Stock as of the 90th day
following the date of the Redemption Notice, which appraised value shall be
determined as though the Corporation had consummated an initial public offering
of Common Stock (in which WAF-6 had participated) on the date of such Redemption
Notice (such amount is hereinafter referred to as the "Redemption Price"). If
the Corporation is unable at any Redemption Date (as defined below) to redeem
any shares of Series A Preferred Stock then to be redeemed because
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such redemption would violate the applicable laws of the State of Delaware, then
the Corporation shall redeem such shares as soon thereafter as redemption would
not violate such laws. Notwithstanding the foregoing, the provisions of this
Section 7 shall not apply in the event of an internal reorganization of the
Corporation involving only the Corporation and its wholly owned Subsidiaries
pursuant to which the Corporation is the surviving entity.
(b) The date fixed for any such redemption (the "Redemption
Date") shall be the first business day which is at least 180 days after the date
of delivery of the Redemption Notice. On or prior to each Redemption Date, the
holders of the Series A Preferred Stock shall surrender their certificate(s)
representing such shares to the Corporation, in the manner and at the place
designated in the Redemption Notice, and thereupon the Redemption Price of such
shares shall be payable to the holders of the Series A Preferred Stock and each
surrendered certificate shall be canceled. From and after the Redemption Date,
unless there shall have been a default in payment of the Redemption Price, all
rights of the holders of the Series A Preferred Stock designated for redemption
in the Redemption Notice as holders of Series A Preferred Stock (except the
right to receive the Redemption Price without interest upon surrender of their
certificate(s)) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(c) Except as provided in paragraph (a) above, the
Corporation shall have no right to redeem the shares of Series A Preferred
Stock. Shares of Series A Preferred Stock so redeemed shall be permanently
retired, shall no longer be deemed outstanding and shall not under any
circumstances be reissued, and the Corporation may from time to time take such
appropriate corporate action as may be necessary to reduce the authorized Series
A Preferred Stock accordingly. Nothing herein contained shall prevent or
restrict the purchase by the Corporation, from time to time either at public or
private sale, of the whole or any part of the Series A Preferred Stock at such
price or prices as the Corporation may determine, subject to the provisions of
applicable law.
8. SUBSCRIPTION RIGHT.
(a) If at any time after the date hereof the Corporation
proposes to issue, other than in an underwritten offering, equity securities of
any kind (the term "equity securities" shall include for these purposes any
warrants, options or other rights to acquire equity securities and debt
securities convertible into equity securities of the Corporation (except for any
issuances under any stock incentive or other similar plan of the Corporation
hereafter created and approved by the Board)), then the Corporation shall:
(i) give at least five business days' advance written notice
to the holders of the Series A Preferred Stock setting forth in
reasonable detail: (1) the designation and all of the terms and
provisions of the securities proposed to be issued (the "Proposed
Securities"), including, where applicable, the voting powers,
preferences and relative
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participating, optional or other special rights, and the
qualification, limitations or restrictions thereof and interest rate
and maturity; (2) the price and other terms of the proposed sale of
such securities; (3) the amount of such securities proposed to be
issued; and (4) such other information as may be reasonably required
in order to evaluate the proposed issuance; and
(ii) offer to sell to the holders of the Series A Preferred
Stock a portion of the Proposed Securities equal to a percentage
determined by dividing (x) the number of shares of Common Stock
issuable upon conversion of the Series A Preferred Stock then held by
all holders of the Series A Preferred Stock, by (y) the total number
of Common Shares then outstanding on a fully diluted basis (without
giving effect to the exercise of any options granted under the Stock
Incentive Plan).
(b) The holders of the Series A Preferred Stock shall have
the option to accept such offer as to any or all of the shares so offered within
10 days after receipt of such notice from the Corporation. To the extent that
the Corporation offers two or more Proposed Securities in units, the holders of
the Series A Preferred Stock must purchase such units as a whole and will not be
given the opportunity to purchase only one of the Proposed Securities
constituting such unit.
(c) Upon the expiration of the offering period described
above, the Corporation shall be free to sell such Proposed Securities that the
holders of the Series A Preferred Stock have not elected to purchase during the
90 days following such expiration on terms and conditions no more favorable to
the purchasers thereof than those offered to the holders of the Series A
Preferred Stock. Any Proposed Securities offered or sold by the Corporation
after such 90-day period must be reoffered to the holders of the Series A
Preferred Stock pursuant to this Section 8. The election by the holders of the
Series A Preferred Stock not to exercise their subscription rights under this
Section 8 in any one instance shall not affect their right (other than in
respect of a reduction in its percentage of holdings of capital stock of the
Corporation) as to any subsequent issuance of Proposed Securities by the
Corporation. Any sale of Proposed Securities by the Corporation without first
giving the holders of the Series A Preferred Stock the rights described in this
Section 8 shall be void and of no force and effect.
(d) The rights and obligations of this Section 8 shall
terminate on the date the Common Stock is quoted on Nasdaq or listed on any
national securities exchange.
9. REPURCHASE RIGHT.
(a) If (A) the Corporation, in a single transaction or series
of related transactions, (i) sells, assigns, transfers, leases, conveys or
otherwise disposes of all or substantially all of the assets of the Corporation
to any Person; (ii) consolidates or merges with or into another Person and the
Corporation is not the surviving entity; or (iii) consummates a Forward Merger
and (w) the shareholders of the Corporation immediately preceding such
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Forward Merger will not continue to own at least a majority of the outstanding
shares of capital stock of the Corporation on a fully diluted basis following
the consummation of such Forward Merger, (x) as a direct or indirect result of
such Forward Merger, a Change of Control (as defined in the Indenture) shall
have occurred, (y) the net worth of the Corporation immediately following the
consummation of such Forward Merger shall not at least equal the net worth of
the Corporation immediately preceding such Forward Merger, or (z) immediately
following the consummation of such Forward Merger, the Corporation would not be
permitted to incur any additional Indebtedness pursuant to Section 4.12 of the
Indenture, and (B) the consideration payable in respect of any event described
in the immediately preceding clause (i), (ii) or (iii) does not consist solely
of cash (a "Repurchase Event"), the Corporation shall offer to repurchase (a
"Repurchase Offer"), in accordance with the procedures set forth in this Section
9, all shares of Series A Preferred Stock or shares of Common Stock issuable
upon conversion thereof at the per share Fair Market Value of the Common Stock
issuable upon conversion thereof (the "Repurchase Price"). The Corporation
shall, subject to the provisions described in this Section 9, be required to
purchase all of the shares of Series A Preferred Stock or Common Stock issuable
upon conversion thereof properly tendered pursuant to a Repurchase Offer and not
withdrawn. Notwithstanding the foregoing, the provisions of this Section 9 shall
not apply in the event of an internal reorganization of the Corporation
involving only the Corporation and its wholly owned Subsidiaries pursuant to
which the Corporation is the surviving entity.
(b) The Repurchase Offer shall remain open for at least 20
Business Days and until the close of business on the fifth Business Day prior to
the Repurchase Date (as hereinafter defined).
(c) Not later than the 30th day following the occurrence of a
Repurchase Event, the Corporation shall mail to each holder of shares of Series
A Preferred Stock or shares of Common Stock issuable upon conversion thereof a
notice (the "Repurchase Notice") stating, among other things:
(1) that a Repurchase Event has occurred and that such holder
has the right to require the Corporation to repurchase such holder's
shares, or portion thereof, at the Repurchase Price;
(2) any information regarding such Repurchase Event required
to be furnished under applicable federal and State securities laws,
rules and regulations;
(3) a purchase date (the "Repurchase Date"), which shall be
on a Business Day and no earlier than 30 days nor later than 60 days
after the occurrence of a Repurchase Event;
(4) that any shares of Series A Common Stock not tendered or
accepted for payment shall be subject to appropriate adjustment as
required by Section 6 hereof; and
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(5) the instructions a holder must follow in order to have
shares of Series A Preferred Stock or shares of Common Stock issuable
upon conversion thereof repurchased in accordance with this Section 9.
No failure of the Corporation to give the foregoing notice
shall limit any right of any holder right to exercise a repurchase right
hereunder.
(d) To exercise the repurchase right, the holder must
deliver, on or before the fifth calendar day prior to the Repurchase Date
(provided that the Repurchase Notice shall have been delivered to each holder at
least ten calendar days prior to the Repurchase Date), written notice of the
Corporation (or an agent designated by the Corporation for such purpose) of the
exercise of such repurchase right, together with the holders certificates with
respect to which the right is being exercised, duly endorsed for transfer.
(e) On the Repurchase Date, the Corporation shall (i) accept
for payment shares of Series A Preferred Stock or shares of Common Stock
issuable upon conversion thereof tendered pursuant to the Repurchase Notice,
(ii) appoint a depository or paying agent, deposit with such depository or
paying agent money sufficient to pay the Repurchase Price of all shares of
Series A Preferred Stock or shares of Common Stock issuable upon conversion
thereof so tendered and (iii) deliver to the holders of shares of Series A
Preferred Stock or shares of Common Stock issuable upon conversion thereof so
accepted together with an Officers' Certificate stating the shares tendered to
the Corporation. The depository, the Corporation or the paying agent, as the
case may be, shall promptly mail to the holders whose shares are so accepted
payment in an amount equal to the Repurchase Price, and the Corporation shall
promptly issue and mail to holders new Series A Preferred Stock or Common Stock
certificates, as the case may be, representing the tendered but unpurchased
number of shares of Series A Preferred Stock or Common Stock, as applicable. The
Corporation will publicly announce the results of the Repurchase Offer on or as
soon as practicable after the Repurchase Date.
(f) The Corporation, to the extent applicable and if required
by law, will comply with the Securities Exchange Act of 1934, as amended, and
any other federal and state securities laws, rules and regulations that may then
be applicable to any offer by the Corporation to purchase the shares of Series A
Preferred Stock or shares of Common Stock issuable upon conversion thereof
pursuant to the provisions of this Section 9.
10. DEFINITIONS. As used in this Certificate, the following
terms shall have the following respective meanings:
"Business Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions
in The City of New York are authorized or obligated by law or
executive order to be closed.
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"Fair Market Value" means, with respect to any share of
Common Stock, as of the date of determination:
(a) If the Common Stock is listed or admitted for
trading on a national securities exchange or stock market
(including, if applicable, the Nasdaq Stock Market), the Fair
Market Value shall be the average of the closing sales prices
for the 30 consecutive trading days ended immediately
preceding the date in question of the Common Stock on the
principal national securities exchange on which the Common
Stock is listed or admitted for trading; or, if not quoted on
any national securities exchange or stock market, the average
of the highest reported bid and lowest reported asked
quotation during the 30 consecutive trading days immediately
preceding the date in question; or
(b) If the Common Stock is not so listed or admitted to
unlisted trading privileges or if such a sale is not made on
at least 25 of such days, the Fair Market Value shall be as
reasonably determined in good faith by the Board (which
determination shall be reasonably described in the written
notice delivered to the holder of shares of Series A
Preferred Stock) or, if an objection is made to such
determination by a Qualifying Holder of shares of Series A
Preferred Stock (as defined below) in accordance with the
following sentence, as determined by a qualified Independent
Appraiser in accordance with the following sentence. In the
event that any Qualifying Holder of shares of Series A
Preferred Stock shall object to the determination of the
Board of the Fair Market Value by delivering written notice
to the Corporation within ten Business Days following the
receipt by such Qualifying Holder of shares of Series A
Preferred Stock of such determination of the Board, the Fair
Market Value shall instead be determined by a qualified
Independent Appraiser reasonably acceptable to the holders of
the Series A Preferred Stock. The term "Qualifying Holder of
shares of Series A Preferred Stock" shall include any holder
of shares of Series A Preferred Stock that, at the time of
any objection to the determination of the Board of the Fair
Market Value, beneficially owns, together with its
Affiliates, at least 10% of the Common Stock on a fully
diluted basis. The determination of the Board of the Fair
Market Value shall be binding and conclusive if no objection
is made to such determination by a Qualifying Holder of
shares of Series A Preferred Stock. The fees and expenses of
any qualified Independent Appraiser determining the Fair
Market Value shall be borne by the Corporation and the
determination by such qualified Independent Appraiser of the
Fair Market Value shall be binding and conclusive.
"Independent Appraiser" means any nationally recognized
investment banking or accounting firm (other than any investment
banking firm or accounting firm having a significant ongoing
relationship in the Corporation or any of its Affiliates at the time
of the appraisal) selected in good faith by the Board.
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"Person" means an individual, corporation, partnership,
association, trust, joint venture, unincorporated organization, other
entity or group (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended).
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EXHIBIT B
SERIES A SENIOR CUMULATIVE PREFERRED STOCK
1. DESIGNATION AND AMOUNT.
The shares of such senior cumulative preferred stock shall be
designated "14 1/2% Series A Senior Cumulative Preferred Stock" (the "Series A
Senior Preferred Stock"), par value $.01 per share, liquidation preference of
$25.00 per share (the "Liquidation Preference"). The number of shares
constituting such Series A Senior Preferred Stock shall be 80,000.
2. RANKING.
(a) With respect to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or winding up of the
affairs of the Corporation, the Series A Senior Preferred Stock shall rank:
(i) senior and prior to (A) the Class A Voting Common
Stock, par value $.00017 per share (the "Voting Common
Stock") of the Corporation and the Class B Nonvoting Common
Stock, par value $.00017 per share (the "Nonvoting Common
Stock" and together with the Voting Common Stock, the "Common
Stock") of the Corporation, (B) the 14 1/2% Series B Junior
Redeemable Preferred Stock, par value $.01 per share,
liquidation preference $25.00 per share (the "Series B Junior
Preferred Stock") of the Corporation, (C) the Series A
Convertible Preferred Stock (the "Convertible Preferred
Stock") of the Corporation and (D) any other series or class
of the Corporation's capital stock that (x) expressly ranks
junior to the Series A Senior Preferred Stock with respect to
the payment of dividends, repurchases, redemptions and rights
upon liquidation, dissolution or winding up of the affairs of
the Corporation or (y) does not expressly provide that it
ranks senior to or on a parity with the Series A Senior
Preferred Stock as to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation (collectively,
the "Junior Preferred Stock"), if any;
(ii) pari passu with any class or series of capital
stock ranking on a parity with the Series A Senior Preferred
Stock with respect to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation ("Parity
Preferred Stock"), if any; and
(iii) junior to any class or series of capital stock
expressly ranking senior and prior to the Series A Senior
Preferred Stock with respect to the payment of
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dividends, repurchases and rights upon liquidation,
dissolution or winding up of the affairs of the Corporation
("Senior Preferred Stock"); if any.
3. DIVIDENDS.
(a) Holders of the Series A Senior Preferred Stock will be
entitled to receive, when, as and if declared by the Board, out of funds legally
available therefor, dividends on the Series A Senior Preferred Stock at an
annual rate of 14 1/2% of the Accumulated Value (equivalent to a quarterly rate
of 3.625% of the Accumulated Value calculated as of the preceding Dividend
Payment Date) per share of Series A Senior Preferred Stock. Dividends on shares
of Series A Senior Preferred Stock shall be fully cumulative, compounding
quarterly (whether or not declared) and shall accrue and accumulate from the
most recent date to which dividends have been paid in full or, if no dividends
have been paid, from the date of original issuance of the shares of Series A
Senior Preferred Stock, and shall be payable in cash quarterly in arrears, when,
as and if declared by the Board out of funds legally available for the payment
of dividends on February 1, May 1, August 1 and November 1 of each year (each, a
"Dividend Payment Date"), commencing August 1, 1998 except that, if any Dividend
Payment Date is not a Business Day (as defined in Section 13 hereof), then the
Dividend Payment Date shall be on the first succeeding Business Day. Each
dividend shall be paid to the holders of record of shares of Series A Senior
Preferred Stock as they appear on the stock register of the Corporation at the
close of business on such record dates (each, a "Dividend Payment Record Date"),
as shall be fixed by the Board, which date shall be not more than 60 days nor
fewer than 10 days preceding each Dividend Payment Date for which the Board has
declared that dividends will be paid. Dividends payable for any partial dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends on account of arrears for any past dividend periods may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on a date, not exceeding 60 days nor fewer than 10 days
preceding the date on which dividends in arrears will be paid, as may be fixed
by the Board. For purposes of this Certificate of Designations, "Accumulated
Value" means the Liquidation Preference plus any accumulated and unpaid
dividends (whether or not declared) on the shares of Series A Senior Preferred
Stock that are not declared and paid in cash as of the Dividend Payment Date
preceding the date of determination.
(b) If at any time the Corporation issues or has outstanding
any class or series of Senior Preferred Stock, no dividends shall be paid or
declared and set apart for payment on, and no purchase, redemption or other
acquisition shall be made by the Corporation of, any shares of Series A Senior
Preferred Stock or Parity Preferred Stock unless and until all accrued and
unpaid dividends on the shares of any such Senior Preferred Stock have been paid
or declared and set apart for payment.
(c) No dividends shall be paid or declared and set apart for
payment on any shares of Common Stock, Series B Junior Preferred Stock,
Convertible Preferred Stock or Junior Preferred Stock unless and until all
accrued and unpaid dividends on the shares of Series A Senior Preferred Stock
shall have been paid in full. No shares of Common Stock, Series B Junior
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Preferred Stock, Convertible Preferred Stock or any Junior Preferred Stock shall
be repurchased, redeemed (whether by way of mandatory or optional redemption) or
otherwise acquired by the Corporation until all shares of Series A Senior
Preferred Stock have been repurchased or redeemed by the Corporation and all
accrued and unpaid dividends thereon have been paid in full.
(d) Unless and until all accrued but unpaid dividends in
respect of prior dividend payment periods on the shares of Series A Senior
Preferred Stock and any Parity Preferred Stock at such time outstanding have
been paid in full or a sum sufficient for such payment is declared and set
apart, all accrued dividends upon the shares of the Series A Senior Preferred
Stock or Parity Preferred Stock shall be declared pro rata with respect to all
the shares of Series A Senior Preferred Stock and Parity Preferred Stock then
outstanding, so that the amounts of dividends, if any, declared on the shares of
Series A Senior Preferred Stock and Parity Preferred Stock shall in all cases
bear to each other the same proportion that, at the time of such declaration,
all accrued but unpaid dividends in respect of prior dividend payment periods on
the shares of Series A Senior Preferred Stock and the shares of Parity Preferred
Stock, respectively, bear to each other. In addition, no shares of Parity
Preferred Stock shall be repurchased, redeemed (whether by way of mandatory or
optional redemption) or otherwise acquired unless the shares of Series A Senior
Preferred Stock are concurrently repurchased or redeemed on a pro rata basis.
4. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) The liquidation value of the shares of Series A Senior
Preferred Stock, in case of the voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, shall be the
Liquidation Preference of $25.00 per share, plus an amount equal to the accrued
and unpaid dividends thereon, whether or not declared, to the payment date (the
"Liquidation Value").
(b) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, the holders of shares of Series A
Senior Preferred Stock (i) shall not be entitled to receive the Liquidation
Value of the shares held by them until payment in full or provision has first
been made for the payment of all claims of creditors (unless expressly
subordinated to the Series A Senior Preferred Stock) of the Corporation and the
liquidation preference, and any accrued and unpaid dividends thereof, on any
shares of Senior Preferred Stock shall have been paid in full and (ii) shall be
entitled to receive the Liquidation Value of such shares held by them (x) in
preference to and in priority over any distributions in respect of the shares of
Common Stock, the Series B Junior Preferred Stock, the Convertible Preferred
Stock and any Junior Preferred Stock and (y) ratably and on a pari passu basis
with any shares of Parity Preferred Stock. Upon payment in full of the
Liquidation Value, the holders of shares of Series A Senior Preferred Stock
shall not be entitled to any further participation in any distribution of assets
by the Corporation. Subject to clause (i) above, if the assets of the
Corporation are not sufficient to pay in full the Liquidation Value payable to
the holders of shares of Series A Senior Preferred Stock and the liquidation
preference, and any accrued and unpaid dividends in respect
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thereof payable to the holders of shares of any Parity Preferred Stock, the
holders of all such shares shall share ratably in accordance with the respective
preferential amounts payable on such shares in any distribution.
(c) Neither a consolidation or merger of the Corporation with
or into any other entity, nor a merger of any other entity with or into the
Corporation, nor a sale or transfer of all or any part of the Corporation's
assets or cash, securities or other property shall be considered a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Section 4.
5. VOTING. The holders of shares of Series A Senior Preferred
Stock shall have no voting rights whatsoever, except for any voting rights to
which they may be entitled under the laws of the State of Delaware, and except
as follows:
(a) Without first obtaining the prior affirmative vote or
written consent of the holders of a majority of the shares of Series A Senior
Preferred Stock, the Corporation shall not:
(i) alter any provision of the Series A Senior Preferred
Stock or this Certificate of Designations;
(ii) amend or repeal any provision of the Certificate of
Incorporation or the Corporation's By-Laws, if such action would alter
or adversely change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the holders of Series
A Senior Preferred Stock or increase the number of shares of Series A
Senior Preferred Stock authorized thereby or authorize any class or
series of Senior Preferred Stock; or
(iii) enter into any transaction with Birch (defined
below), except for transactions with Birch that are expressly
contemplated in agreements (other than where such agreements expressly
require such consent) between the Corporation and Birch in effect on
or prior to the date of issuance of the Series A Senior Preferred
Stock (the "Issue Date").
(b) The Corporation will not, and will not permit any of its
Subsidiaries (as defined in the Series A Preferred Unit Purchase Agreement,
dated as of July 13, 1998 (the "Series A Preferred Unit Purchase Agreement") by
and among the Corporation, Birch Holdings L.L.C. (together with Birch
Acquisition L.L.C. and each of their respective Related Parties, as such term is
defined in the Series A Preferred Unit Purchase Agreement, being collectively
referred to herein as "Birch"), Wafra Acquisition Fund 6, L.P. ("WAF-6") and
Wafra Fund Management Ltd. ("WFML")) to, directly or indirectly, enter into or
permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any services) with, or for the benefit of, any of its officers,
directors or beneficial owners of more than 10% of the Common Stock then
outstanding (each such
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Person, an "Affiliate," and each such transaction, an "Affiliate Transaction"),
other than (x) Affiliate Transactions permitted pursuant to this paragraph and
(y) Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time on
an arm's length basis from a Person that is not an Affiliate of the Corporation
or such Subsidiary. Other than all transactions between the Corporation and
Birch which shall be subject to the provisions of Section 5(b)(iii) above, all
Affiliate Transactions and each series of related Affiliate Transactions which
are similar or part of a common plan, involving aggregate payments or other
property with a fair market value in excess of $2,000,000 shall be approved by a
majority of the disinterested members of the Board or the board of directors of
such Subsidiary, as the case may be; such approval to be evidenced by a
resolution stating that such board of directors has determined that such
transaction complies with the foregoing provisions which shall be delivered to
WAF-6 and WFML, for so long as WAF-6 or WFML shall hold any shares of Series A
Senior Preferred Stock, and to permitted transferees, successors and assigns of
WAF-6 or WFML for so long as such parties are the holders of at least 25% of the
outstanding shares of Series A Senior Preferred Stock. If the Corporation or any
Subsidiary shall enter into an Affiliate Transaction (or a series of related
Affiliate Transactions which are similar or part of a common plan) that involves
an aggregate fair market value of more than $5,000,000, the Corporation or such
Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain
a favorable opinion as to the fairness of such transaction or series of related
transactions to the Corporation from a financial point of view from an
Independent Financial Advisor (as defined in the Indenture, dated as of July 16,
1998 (the "Indenture"), by and among the Corporation, the Subsidiary Guarantors
named therein and Firststar Bank of Minnesota, as Trustee, (as used in this
Certificate, all references to the Indenture refer to the Indenture as in effect
on the Issue Date and are without regard to any subsequent amendment(s) thereto)
and deliver such opinion to WAF-6 and WFML, for so long as WAF-6 or WFML shall
hold any shares of Series A Senior Preferred Stock. Notwithstanding the
foregoing, the restrictions set forth in this Section 5(b) shall not apply to
(i) reasonable fees and expenses and compensation paid to, and any indemnity
provided on behalf of, officers, directors, employees or consultants of the
Corporation or any Subsidiary, as determined in good faith by the Board or
senior management of the Corporation, and (ii) transactions exclusively between
the Corporation and any wholly owned Subsidiary or exclusively between or among
any wholly owned Subsidiaries.
6. REDEMPTION AT THE OPTION OF THE CORPORATION.
(a) The Corporation, at the option of the Board, may, subject
to the provisions of Section 6(f) hereof, redeem at any time or from time to
time, all or any part of the outstanding shares of Series A Senior Preferred
Stock at a redemption price equal to 100% of the Liquidation Preference,
together with accrued and unpaid dividends (whether or not declared) to the date
of redemption.
(b) In the event that fewer than all the outstanding shares
of Series A Senior Preferred Stock are to be redeemed, the shares to be redeemed
shall be selected pro rata or by lot
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or by any other method as may be determined by the Board in its sole discretion
to be equitable, provided that only whole shares shall be selected for
redemption.
(c) In the event the Corporation shall redeem shares of
Series A Senior Preferred Stock, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than thirty (30) nor more
than sixty (60) days prior to the redemption date, to each record holder of the
shares to be redeemed, at such holder's address as the same appears on the books
of the Corporation. Each such notice shall state: (i) the redemption date; (ii)
the total number of shares of Series A Senior Preferred Stock to be redeemed
and, if fewer than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from such holder; (iii) the redemption
price; (iv) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price and (v) that dividends on the
shares to be redeemed will cease to accrue on such redemption date.
(d) If notice shall have been given as provided in Section
6(c) and the Corporation shall have provided moneys at the time and place
specified for the payment of the redemption price pursuant to such notice, then
from and after the redemption date, dividends on the shares of Series A Senior
Preferred Stock so called for redemption shall cease to accrue, such shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price without interest) shall cease. Upon surrender
(in accordance with the notice) of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board shall so require and
the notice shall so state), such shares shall be redeemed by the Corporation at
the redemption price set forth in Section 6(a). In case fewer than all of the
shares represented by any such certificate are to be redeemed, a new certificate
shall be issued representing the unredeemed shares, without cost to the holder
thereof.
(e) Shares of Series A Senior Preferred Stock redeemed
pursuant to Sections 6, 7 or 8 hereof shall be permanently retired, shall no
longer be deemed outstanding and shall not under any circumstances be reissued,
and the Corporation may from time to time take such appropriate corporate action
as may be necessary to reduce the authorized Series A Senior Preferred Stock
accordingly.
(f) Notwithstanding the provisions of Sections 6, 7 or 8,
unless the full cumulative dividends on all outstanding shares of Senior
Preferred Stock or Parity Preferred Stock shall have been paid or
contemporaneously are declared and paid through the last Dividend Payment Date
no shares of Series A Senior Preferred Stock may be redeemed pursuant to
Sections 6, 7 or 8 hereof, and the Corporation shall not purchase or otherwise
acquire any shares of Series A Senior Preferred Stock.
7. REDEMPTION AT THE OPTION OF THE HOLDERS.
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(a) Subject to the provisions of Section 6(f) hereof, from
and after the earliest to occur of (i) the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets of the
Corporation to any Person, in a single transaction or series of related
transactions; (ii) the consolidation or merger, in a single transaction or
series of related transactions, of the Corporation with or into another Person
pursuant to which the Corporation is not the surviving entity or (iii) the
consolidation or merger, in a single transaction or series of related
transactions, of the Corporation with or into another Person pursuant to which
the Corporation is the surviving entity (a "Forward Merger") and (w) the
shareholders of the Corporation immediately preceding such Forward Merger will
not continue to own at least a majority of the outstanding shares of capital
stock of the Corporation on a fully diluted basis following the consummation of
such Forward Merger, (x) as a direct or indirect result of such Forward Merger,
a Change of Control (as defined in the Indenture) shall have occurred, (y) the
net worth of the Corporation immediately following the consummation of such
Forward Merger shall not at least equal the net worth of the Corporation
immediately preceding such Forward Merger or (z) immediately following the
consummation of such Forward Merger, the Corporation would not be permitted to
incur any additional Indebtedness pursuant to Section 4.12 of the Indenture, the
holders of the Series A Senior Preferred Stock may elect to cause the
Corporation, upon written notice given to the Corporation by the holders (a
"Redemption Notice"), to redeem all or a portion of the shares of Series A
Senior Preferred Stock held by such holders (to the extent that such redemption
shall not violate any applicable provisions of the laws of the State of
Delaware) at a redemption price equal to 100% of the Liquidation Preference,
together with accrued and unpaid dividends (whether or not declared) to the
Holder Redemption Date (as defined below). If the Corporation is unable at any
Holder Redemption Date to redeem any shares of Series A Senior Preferred Stock
then to be redeemed because such redemption would violate the applicable
provisions of the laws of the State of Delaware or any rights of any Senior
Preferred Stock or any covenants or other obligations of the Corporation under
the Indenture or the indenture dated as of July 22, 1997 (the "Existing
Indenture") among the Corporation, the Subsidiary Guarantors named therein and
State Street Bank and Trust Company, then the Corporation shall redeem such
shares as soon thereafter as redemption would not violate such laws, rights or
covenants. Notwithstanding the foregoing, the provisions of this Section 7 shall
not apply in the event of an internal reorganization of the Corporation
involving only the Corporation and its wholly owned Subsidiaries pursuant to
which the Corporation is the surviving entity.
(b) The date fixed for any such redemption pursuant to
Section 7(a) (the "Holder Redemption Date") shall be the first Business Day
which is at least 30 days after the date of delivery of the redemption notice to
the Corporation. On or prior to each Holder Redemption Date, the holders of
Series A Senior Preferred Stock which have given the Corporation a Redemption
Notice shall surrender their certificate(s) representing such shares to the
Corporation, in the manner and at the place to be designated by the Corporation,
and thereupon the redemption price of such shares shall be payable to such
holders of Series A Senior Preferred Stock and each surrendered certificate
shall be canceled. From and after the Holder Redemption Date, unless there shall
have been a default in payment of the redemption price, all rights of the
holders of
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Series A Senior Preferred Stock designated for redemption in the Redemption
Notice as holders of Series A Senior Preferred Stock (except the right to
receive the redemption price without interest upon surrender of their
certificate(s)) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
8. MANDATORY REDEMPTION. (a) Subject to the provisions of
Section 6(f) hereof, all shares of Series A Senior Preferred Stock shall be
redeemed on November 1, 2002 (the "Mandatory Redemption Date") at a redemption
price equal to 100% of the Liquidation Preference, together with accrued and
unpaid dividends (whether or not declared) to the Mandatory Redemption Date.
(b) Written notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than thirty (30) nor more than
sixty (60) days prior to the Mandatory Redemption Date, to each record holder of
the shares of Series A Senior Preferred Stock, at such holder's address as the
same appears on the books of the Corporation. Such notice shall state: (i) the
redemption date; (ii) that all outstanding shares of Series A Senior Preferred
Stock are to be redeemed; (iii) the redemption price; (iv) the place or places
where certificates for such shares are to be surrendered for payment of the
redemption price and (v) that dividends on the shares to be redeemed will cease
to accrue on such Mandatory Redemption Date. On or prior to each Mandatory
Redemption Date, the holders of the Series A Senior Preferred Stock shall
surrender their certificate(s) representing such shares to the Corporation, in
the manner and at the place to be designated by the Corporation, and thereupon
the redemption price of such shares shall be payable to the holders of the
Series A Senior Preferred Stock and each surrendered certificate shall be
canceled. From and after the Mandatory Redemption Date, unless there shall have
been a default in payment of the redemption price, all rights of the holders of
the Series A Senior Preferred Stock (except the right to receive the redemption
price without interest upon surrender of their certificate(s)) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
(c) If the Corporation is unable at the Mandatory Redemption
Date to redeem any shares of Series A Senior Preferred Stock then to be redeemed
because such redemption would violate the applicable provisions of the laws of
the State of Delaware or any rights of any Senior Preferred Stock or any
covenants or other obligations of the Corporation under the Indenture or the
Existing Indenture, then (i) the Corporation shall redeem such shares of Series
A Senior Preferred Stock as soon thereafter as redemption would not violate such
laws, rights or covenants and (ii) until all of the shares of Series A Senior
Preferred Stock shall have been redeemed in full and all accrued and unpaid
dividends thereon (whether or not declared) have been paid in full, the holders
of the Series A Senior Preferred Stock, shall have the option (in their sole
discretion), in addition to any other rights such holders may have, voting
separately as a class, to appoint up to two (2) directors (inclusive of any
directors which the holders of the shares
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of Series A Senior Preferred Stock shall have the right to appoint under the
Series A Senior Preferred Unit Purchase Agreement ) to the Corporation's Board
of Directors.
9. CONVERSION AT THE OPTION OF THE CORPORATION.
(a) If the Corporation completes a Qualified Initial Public
Offering (as defined in the Series A Senior Preferred Unit Purchase Agreement)
that results in the Corporation receiving net proceeds (gross proceeds of the
offering less underwriters' discounts and commissions) of not less than $20.0
million then, simultaneously with the closing of the Qualified Initial Public
Offering, the Corporation may, at its option, convert all or any portion of the
outstanding shares of Series A Senior Preferred Stock into an amount of
fully-paid nonassessable shares of Common Stock, the value of which shall be
equal to the aggregate Liquidation Preference of the shares of Series A Senior
Preferred Stock to be converted. For the purposes of such conversion, the value
of the shares of Common Stock shall be equal to the price per share of Common
Stock paid by the public in the Qualified Initial Public Offering.
Notwithstanding the foregoing, no shares of Series A Senior Preferred Stock
shall be converted pursuant to this Section 9(a) unless (x) the Corporation
shall have paid to each holder of Series A Senior Preferred Stock in full, in
cash all accrued and unpaid dividends (whether or not declared) to the
conversion date on the shares of Series A Senior Preferred Stock to be so
converted, (y) a pro rata amount of shares of Series B Junior Preferred Stock
and any other Junior Preferred Stock shall have been or simultaneously be so
converted and (z) any requirements of the HSR Act (defined below) shall have
been complied with.
(b) The Corporation shall not issue fractions of shares of
Common Stock upon conversion of any shares of Series A Senior Preferred Stock.
If any fraction of a share of Common Stock would be otherwise issuable upon
conversion of shares of Series A Senior Preferred Stock under Section 9(a), the
Corporation shall pay to such holders of Series A Senior Preferred Stock in lieu
thereof an amount in cash equal to the value of such fraction, calculated to the
nearest one-hundredth (1/100) of a share of Common Stock.
(c) In the event that fewer than all the outstanding shares
of Series A Senior Preferred Stock are to be converted, the shares to be so
converted shall be selected pro rata or by lot or by any other method as may be
determined by the Board in its sole discretion to be equitable, provided that
only whole shares shall be selected for conversion.
(d) In the event the Corporation shall elect to convert
shares of the Series A Senior Preferred Stock pursuant to this Section 9, notice
of such conversion shall be given by first class mail, postage prepaid, mailed
not less than thirty (30) days prior to the conversion date, to each record
holder of the shares to be converted, at such holder's address as the same
appears on the books of the Corporation. Each such notice shall state: (i) the
conversion date; (ii) the total number of shares of Series A Senior Preferred
Stock to be converted and, if fewer than all the shares held by such holder are
to be converted, the number of such shares to be converted from such holder;
(iii) the number of shares of Common Stock (or cash in lieu of fractional shares
of
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Common Stock pursuant to paragraph (b) above) into which such holder's shares of
Series A Senior Preferred Stock will be converted or an explanation of the
method by which such number of shares of Common Stock (or cash) will be
determined on the conversion date; (iv) the place or places where certificates
for such shares are to be surrendered in exchange for shares of Common Stock and
(v) that dividends on the shares of Series A Senior Preferred Stock to be
converted will cease to accrue on such conversion date.
(e) The holder of each share of Series A Senior Preferred
Stock called for conversion shall surrender the certificate representing such
share, duly endorsed or assigned to the Corporation, or in blank, at the
principal office of the transfer agent set forth in the notice of conversion (or
if no transfer agent shall be at the time appointed, then to the Corporation at
the place set forth in the notice. Unless the shares of Common Stock issuable on
conversion are to be issued in the same name as the name in which such share of
Series A Senior Preferred Stock is registered, each share surrendered for
conversion shall be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or such holder's duly authorized
attorney and an amount sufficient to pay any transfer tax (or evidence
reasonably satisfactory to the Corporation demonstrating that such taxes have
been paid). The Corporation shall pay any issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock upon
conversion of the Series A Senior Preferred Stock; provided, however, that the
Corporation shall not be required to pay any tax or taxes which may be payable
in respect of any transfer involved in the issue and delivery of any shares of
Common Stock issued and delivered upon conversion of the Series A Senior
Preferred Stock to a person(s) with name(s) other than the name(s) in which the
Series A Senior Preferred Stock is registered and the Corporation shall not be
required to issue or deliver such Common Stock unless or until the person(s)
requesting the issuance thereof shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation that
such tax has been paid. As soon as practicable after the surrender of the
certificate(s) for shares of Series A Senior Preferred Stock as aforesaid, the
Corporation shall cause to be issued and delivered to the holders of the Series
A Senior Preferred Stock, or on its written order, certificate(s) for the number
of full shares of Common Stock issuable on such conversion in accordance with
the provisions hereof and cash as provided in paragraph (b) of this Section 9 in
respect of any fraction of a share of Common Stock otherwise issuable upon such
conversion.
(f) From and after the conversion date, dividends on the
shares of the Series A Senior Preferred Stock so called for conversion shall
cease to accrue, such shares shall no longer be deemed to be outstanding, and
all rights with respect to such shares, including the rights, if any, to receive
notices and to vote, shall forthwith cease and terminate except only the right
of the holder thereof to receive shares of Common Stock in exchange therefor and
payment of any accrued and unpaid dividends thereon to the conversion date. Any
shares of Series A Senior Preferred Stock so converted shall be retired and
canceled and shall not be reissued, and the Corporation may from time to time
take such appropriate action as may be necessary to reduce the then authorized
number of shares of Series A Senior Preferred Stock accordingly.
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(g) The Corporation agrees that, in each case where the
conversion of shares of Series A Senior Preferred Stock into share of Common
Stock pursuant to this section may require the prior compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), from and after the date (the "HSR Date") on which any of WAF-6, WFML, or
any of their respective Affiliates, successors or permitted transferees (any of
such parties, a "HSR Holder") notifies the Corporation that compliance is so
required under the HSR Act prior to such conversion or exercise, as the case may
be, the Corporation and any such HSR Holders shall use their respective best
efforts to cause the termination of all waiting periods under the HSR Act, in
respect of such conversion of Series A Senior Preferred Stock or issuance of
such Common Stock. The Corporation shall pay all fees and expenses of the
Holders incurred in compliance with this Section, including their respective
reasonable legal fees and expenses and all filing fees required by the HSR Act.
The Corporation shall provide each Holder with all such information in respect
of the Corporation as such Holder may request to enable such Holders to
determine whether the conversion of shares of Series A Senior Preferred Stock or
issuance of such Common Stock may require compliance with the HSR Act.
10. SUBSCRIPTION RIGHT.
(a) If at any time after the date hereof, the Corporation
proposes to issue, other than in an underwritten offering, equity securities of
any kind (the term "equity securities" shall include for these purposes any
warrants, options or other rights to acquire equity securities and debt
securities convertible into equity securities of the Corporation (except for any
issuances under any employee stock incentive or other similar plan of the
Corporation hereafter created and approved by the Board)), then the Corporation
shall:
(i) give at least ten Business Days' advance written notice
to the holders of the Series A Senior Preferred Stock setting forth in
reasonable detail: (1) the designation and all of the terms and
provisions of the securities proposed to be issued (the "Proposed
Securities") including, where applicable, the voting powers,
preferences and relative participating, optional or other special
rights, and the qualification, limitations or restrictions thereof and
interest rate and maturity; (2) the price and other terms of the
proposed sale of such securities; (3) the amount of such securities
proposed to be issued; and (4) such other information as may be
reasonably required in order to evaluate the proposed issuance; and
(ii) subject to the rights of the holders of any Senior
Preferred Stock, offer to sell to each holder of shares of Series A
Senior Preferred Stock an amount of Proposed Securities the value of
which (as determined by reference to the price per share in the
proposed offering) shall not be less than the aggregate Liquidation
Preference plus accrued and unpaid dividends thereon (whether or not
declared) of each holders's shares of Series A Senior Preferred Stock;
or in the event that the total purchase price of all the Proposed
Securities is less than the aggregate Liquidation Preference plus
accrued and unpaid dividends thereon (whether or not declared) of all
outstanding shares of Series A
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Senior Preferred Stock, the Corporation shall offer to sell to each
holder a pro rata amount of all the Proposed Securities.
(b) The holders of Series A Senior Preferred Stock shall have
the option to accept such offer as to any or all of the shares so offered within
10 days after receipt of such notice from the Corporation. To the extent that
the Corporation offers two or more Proposed Securities in units, the holders of
Series A Senior Preferred Stock must purchase such units as a whole and shall
not be given the opportunity to purchase only one of the Proposed Securities
constituting such unit.
(c) Upon the expiration of the offering period described in
this Section 10, the Corporation shall be free to sell such Proposed Securities
that the holders of Series A Senior Preferred Stock have not elected to purchase
during the 90 days following such expiration on terms and conditions no more
favorable to the purchasers thereof than those offered to the holders of the
Series A Senior Preferred Stock. Any Proposed Securities offered or sold by the
Corporation after such 90-day period must be reoffered to the holders of the
Series A Senior Preferred Stock pursuant to this Section 10. The election by the
holders of the Series A Senior Preferred Stock not to exercise their
subscription rights under this Section 10 in any one instance shall not affect
their right as to any subsequent issuance of Proposed Securities by the
Corporation. Any sale of Proposed Securities by the Corporation without first
giving the holders of the Series A Senior Preferred Stock the rights described
in this Section 10 shall be void and of no force and effect.
(d) The rights and obligations of this Section 10 shall
terminate on the date that the Common Stock is quoted on the NASDAQ National
Market or listed on any national securities exchange; provided that any rights
substantially similar to those contemplated by this Section 10 as may be granted
to any Parity Preferred Stock or Junior Preferred Stock shall also be
terminated.
11. REMEDIES CUMULATIVE.
No failure or delay on the part of the holders of the Series
A Senior Preferred Stock in the exercise of any power, right or privilege under
this Certificate of Designations shall impair such power, right or privilege or
be construed to be a waiver of any default or acquiescence therein, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this Certificate of Designations are
cumulative to and not exclusive of any rights or remedies otherwise available.
12. APPROVALS.
In the event the holders of Series A Senior Preferred Stock
shall have the right to approve any action, agreement (including, without
limitation, any modification, amendment or
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waiver thereof) or circumstances, such approval shall require the approval of
50% of the shares of Series A Senior Preferred Stock outstanding at such time,
unless otherwise agreed by the holders of such percentage of shares, provided,
however, that any shares of Series A Senior Preferred Stock held by Birch or the
Corporation, or any of their respective Affiliates, shall not be entitled to
vote on any matter otherwise presented to a vote of the holders of shares of
Series A Senior Preferred Stock.
13. DEFINITIONS. As used in this Certificate, the following
terms shall have the following respective meanings:
"Business Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in The City
of New York are authorized or obligated by law or executive order to be closed.
"Person" means an individual, corporation, limited liability
company, partnership, limited partnership, association, trust, joint venture,
unincorporated organization, other entity or group (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended).
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EXHIBIT C
SERIES B JUNIOR CUMULATIVE PREFERRED STOCK
1. DESIGNATION AND AMOUNT.
The shares of such junior cumulative preferred stock shall be
designated "14 1/2% Series B Junior Cumulative Preferred Stock" (the "Series B
Junior Preferred Stock"), par value $.01 per share, liquidation preference of
$25.00 per share (the "Liquidation Preference"). The number of shares
constituting such Series B Junior Preferred Stock shall be 340,000.
2. RANKING.
(a) With respect to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or winding up of the
affairs of the Corporation, the Series B Junior Preferred Stock shall rank:
(i) senior and prior to (A) the Class A Voting Common
Stock, par value $.00017 per share (the "Voting Common
Stock") of the Corporation and the Class B Nonvoting Common
Stock, par value $.00017 per share (the "Nonvoting Common
Stock" and together with the Voting Common Stock, the "Common
Stock") of the Corporation and (B) any other series or class
of the Corporation's capital stock that (x) expressly ranks
junior to the Series B Junior Preferred Stock with respect to
the payment of dividends, repurchases, redemptions and rights
upon liquidation, dissolution or winding up of the affairs of
the Corporation or (y) does not expressly provide that it
ranks senior to or on a parity with the Series B Junior
Preferred Stock as to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation ("Junior
Preferred Stock"), if any;
(ii) pari passu with any class or series of capital stock
ranking on a parity with the Series B Junior Preferred Stock
with respect to the payment of dividends, repurchases,
redemptions and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation ("Parity
Preferred Stock"), if any; and
(iii) junior to (A) the 14 1/2% Series A Senior Preferred
Stock of the Corporation (the "Series A Senior Preferred
Stock"), (B) the Series A Convertible Preferred Stock (the
"Convertible Preferred Stock") of the Corporation and (C) any
class or series of capital stock expressly ranking senior and
prior to the Series B Junior Preferred Stock with respect to
the payment of dividends, repurchases and rights upon
liquidation, dissolution, repurchases, redemptions or winding
up of the affairs of the Corporation ("Senior Preferred
Stock"); if any.
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3. DIVIDENDS.
(a) Holders of the Series B Junior Preferred Stock will be
entitled to receive, when, as and if declared by the Board, out of funds legally
available therefor, dividends on the Series B Junior Preferred Stock at an
annual rate of 14 1/2% of the Accumulated Value (equivalent to a quarterly rate
of 3.625% of the Accumulated Value calculated as of the preceding Dividend
Payment Date) per share of Series B Junior Preferred Stock. Dividends on shares
of Series B Junior Preferred Stock shall be fully cumulative, compounding
quarterly (whether or not declared) and shall accrue and accumulate from the
most recent date to which dividends have been paid in full or, if no dividends
have been paid, from the date of original issuance of the shares of Series B
Junior Preferred Stock, and shall be payable in cash quarterly in arrears, when,
as and if declared by the Board out of funds legally available for the payment
of dividends on February 1, May 1, August 1 and November 1 of each year (each, a
"Dividend Payment Date"), commencing August 1, 1998 except that, if any Dividend
Payment Date is not a Business Day (as defined in Section 13 hereof), then the
Dividend Payment Date shall be on the first succeeding Business Day. Each
dividend shall be paid to the holders of record of shares of Series B Junior
Preferred Stock as they appear on the stock register of the Corporation at the
close of business on such record dates (each, a "Dividend Payment Record Date"),
as shall be fixed by the Board, which date shall be not more than 60 days nor
fewer than 10 days preceding each Dividend Payment Date for which the Board has
declared that dividends will be paid. Dividends payable for any partial dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends on account of arrears for any past dividend periods may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
holders of record on a date, not exceeding 60 days nor fewer than 10 days
preceding the date on which dividends in arrears will be paid, as may be fixed
by the Board. For purposes of this Certificate of Designations, "Accumulated
Value" means the Liquidation Preference plus any accumulated and unpaid
dividends (whether or not declared) on the shares of Series B Junior Preferred
Stock that are not declared and paid in cash as of the Dividend Payment Date
preceding the date of determination.
(b) No dividends shall be paid or declared and set apart for
payment on, and no purchase, redemption or other acquisition shall be made by
the Corporation of, any shares of Series B Junior Preferred Stock or Parity
Preferred Stock unless and until all accrued and unpaid dividends on the shares
of Series A Senior Preferred Stock, the Convertible Preferred Stock or any such
Senior Preferred Stock have been paid or declared and set apart for payment.
(c) No dividends (other than dividends payable solely in
shares of Common Stock or Junior Preferred Stock) shall be paid or declared and
set apart for payment on any shares of Common Stock or Junior Preferred Stock
unless and until all accrued and unpaid dividends on the shares of Series B
Junior Preferred Stock shall have been paid in full. No shares of Common Stock
or any Junior Preferred Stock shall be repurchased, redeemed (whether by way of
mandatory or optional redemption) or otherwise acquired by the Corporation until
all shares of Series B Junior Preferred Stock have been repurchased or redeemed
and all accrued and unpaid dividends have been paid in full by the Corporation.
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(d) Unless and until all accrued but unpaid dividends in
respect of prior dividend payment periods on the shares of Series B Junior
Preferred Stock and any Parity Preferred Stock at such time outstanding have
been paid in full or a sum sufficient for such payment is declared and set
apart, all accrued dividends upon the shares of the Series B Junior Preferred
Stock or Parity Preferred Stock shall be declared pro rata with respect to all
the shares of Series B Junior Preferred Stock and Parity Preferred Stock then
outstanding, so that the amounts of dividends, if any, declared on the shares of
Series B Junior Preferred Stock and Parity Preferred Stock shall in all cases
bear to each other the same proportion that, at the time of such declaration,
all accrued but unpaid dividends in respect of prior dividend payment periods on
the shares of Series B Junior Preferred Stock and the shares of Parity Preferred
Stock, respectively, bear to each other. In addition, no shares of Parity
Preferred Stock shall be repurchased, redeemed (whether by way of mandatory or
optional redemption) or otherwise acquired unless the shares of Series B Junior
Preferred Stock are currently repurchased or redeemed on a pro rata basis.
4. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) The liquidation value of the shares of Series B Junior
Preferred Stock, in case of the voluntary or involuntary liquidation,
dissolution or winding-up of the affairs of the Corporation, shall be the
Liquidation Preference of $25.00 per share, plus an amount equal to the accrued
and unpaid dividends thereon, whether or not declared, to the payment date (the
"Liquidation Value").
(b) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, the holders of shares of Series B
Junior Preferred Stock (i) shall not be entitled to receive the Liquidation
Value of the shares held by them until payment in full or provision has first
been made for the payment of all claims of creditors (unless expressly
subordinated to the Series B Junior Preferred Stock) of the Corporation and the
liquidation preference, and any accrued and unpaid dividends thereof, on any
shares of the Series A Senior Preferred Stock, the Convertible Preferred Stock
or any Senior Preferred Stock shall have been paid in full and (ii) shall be
entitled to receive the Liquidation Value of such shares held by them (x) in
preference to and in priority over any distributions in respect of the shares of
Common Stock and any Junior Preferred Stock and (y) ratably and on a pari passu
basis with any shares of Parity Preferred Stock. Upon payment in full of the
Liquidation Value, the holders of shares of Series B Junior Preferred Stock
shall not be entitled to any further participation in any distribution of assets
by the Corporation. Subject to clause (i) above, if the assets of the
Corporation are not sufficient to pay in full the Liquidation Value payable to
the holders of shares of Series B Junior Preferred Stock and the liquidation
preference, and any accrued and unpaid dividends in respect thereof payable to
the holders of shares of any Parity Preferred Stock, the holders of all such
shares shall share ratably in accordance with the respective preferential
amounts payable on such shares in any distribution.
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(c) Neither a consolidation or merger of the Corporation with
or into any other entity, nor a merger of any other entity with or into the
Corporation, nor a sale or transfer of all or any part of the Corporation's
assets or cash, securities or other property shall be considered a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Section 4.
5. VOTING. The holders of shares of Series B Junior Preferred
Stock shall have no voting rights whatsoever, except for any voting rights to
which they may be entitled under the laws of the State of Delaware, and except
as follows:
Without first obtaining the prior affirmative vote or written
consent of the holders of a majority of the shares of Series B Junior Preferred
Stock, the Corporation shall not:
(i) alter any provision of the Series B Junior Preferred
Stock or this Certificate of Designations; or
(ii) amend or repeal any provision of the Certificate of
Incorporation or the Corporation's By-Laws, if such action would alter
or adversely change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the holders of Series
B Junior Preferred Stock or increase the number of shares of Series B
Junior Preferred Stock, Series A Senior Preferred Stock or Convertible
Preferred Stock authorized thereby or authorize a class or series of
Senior Preferred Stock.
6. REDEMPTION AT THE OPTION OF THE CORPORATION.
(a) The Corporation, at the option of the Board, may, subject
to the provisions of Section 6(f) hereof, redeem at any time or from time to
time, all or any part of the outstanding shares of Series B Junior Preferred
Stock at a redemption price equal to 100% of the Liquidation Preference,
together with accrued and unpaid dividends (whether or not declared) to the date
of redemption.
(b) In the event that fewer than all the outstanding shares
of Series B Junior Preferred Stock are to be redeemed, the shares to be redeemed
shall be selected pro rata or by lot or by any other method as may be determined
by the Board in its sole discretion to be equitable, provided that only whole
shares shall be selected for redemption.
(c) In the event the Corporation shall redeem shares of
Series B Junior Preferred Stock, notice of such redemption shall be given by
first class mail, postage prepaid, mailed not less than thirty (30) nor more
than sixty (60) days prior to the redemption date, to each record holder of the
shares to be redeemed, at such holder's address as the same appears on the books
of the Corporation. Each such notice shall state: (i) the redemption date; (ii)
the total number of shares of Series B Junior Preferred Stock to be redeemed
and, if fewer than all the shares held by such holder are to be redeemed, the
number of such shares to be redeemed from
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such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.
(d) If notice shall have been given as provided in Section
6(c) and the Corporation shall have provided moneys at the time and place
specified for the payment of the redemption price pursuant to such notice, then
from and after the redemption date, dividends on the shares of Series B Junior
Preferred Stock so called for redemption shall cease to accrue, such shares
shall no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price without interest) shall cease. Upon surrender
(in accordance with the notice) of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board shall so require and
the notice shall so state), such shares shall be redeemed by the Corporation at
the redemption price set forth in Section 6(a). In case fewer than all of the
shares represented by any such certificate are to be redeemed, a new certificate
shall be issued representing the unredeemed shares, without cost to the holder
thereof.
(e) Shares of Series B Junior Preferred Stock redeemed
pursuant to Sections 6, 7 or 8 hereof shall be permanently retired, shall no
longer be deemed outstanding and shall not under any circumstances be reissued,
and the Corporation may from time to time take such appropriate corporate action
as may be necessary to reduce the authorized Series B Junior Preferred Stock
accordingly.
(f) Notwithstanding the foregoing provisions of Sections 6, 7
or 8 hereof, no shares of Series B Junior Preferred Stock shall be repurchased,
redeemed (whether by way of mandatory or optional redemption) or otherwise
acquired by the Corporation until all shares of Series A Senior Preferred Stock
have been repurchased or redeemed and all accrued and unpaid dividends have been
paid in full by the Corporation.
7. REDEMPTION AT THE OPTION OF THE HOLDERS.
(a) Subject to the provisions of Section 6(f) hereof, from
and after the earliest to occur of (i) the sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the assets of the
Corporation to any Person, in a single transaction or series of related
transactions; (ii) the consolidation or merger, in a single transaction or
series of related transactions, of the Corporation with or into another Person
pursuant to which the Corporation is not the surviving entity or (iii) the
consolidation or merger, in a single transaction or series of related
transactions, of the Corporation with or into another Person pursuant to which
the Corporation is the surviving entity (a "Forward Merger") and (w) the
shareholders of the Corporation immediately preceding such Forward Merger will
not continue to own at least a majority of the outstanding shares of capital
stock of the Corporation on a fully diluted basis following the consummation of
such Forward Merger, (x) as a direct or indirect result of such Forward Merger,
a Change of Control (as defined in the Indenture) shall have occurred, (y) the
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net worth of the Corporation immediately following the consummation of such
Forward Merger shall not at least equal the net worth of the Corporation
immediately preceding such Forward Merger or (z) immediately following the
consummation of such Forward Merger, the Corporation would not be permitted to
incur any additional Indebtedness pursuant to Section 4.12 of the Indenture, the
holders of the Series B Junior Preferred Stock may elect to cause the
Corporation, upon written notice given to the Corporation by the holders (a
"Redemption Notice"), to redeem all or a portion of the shares of Series B
Junior Preferred Stock held by such holders (to the extent that such redemption
shall not violate any applicable provisions of the laws of the State of
Delaware) at a redemption price equal to 100% of the Liquidation Preference,
together with accrued and unpaid dividends (whether or not declared) to the
Holder Redemption Date (as defined below). If the Corporation is unable at any
Holder Redemption Date to redeem any shares of Series B Junior Preferred Stock
then to be redeemed because such redemption would violate the applicable
provisions of the laws of the State of Delaware or any rights of any Series A
Senior Preferred Stock or any Senior Preferred Stock or any covenants or other
obligations of the Corporation under the Indenture or the indenture dated as of
July 22, 1997 (the "Existing Indenture") among the Corporation, the Subsidiary
Guarantors named therein and State Street Bank and Trust Company, then the
Corporation shall redeem such shares as soon thereafter as redemption would not
violate such laws, rights or covenants. Notwithstanding the foregoing, the
provisions of this Section 7 shall not apply in the event of an internal
reorganization of the Corporation involving only the Corporation and its wholly
owned Subsidiaries pursuant to which the Corporation is the surviving entity.
(b) The date fixed for any such redemption pursuant to
Section 7(a) (the "Holder Redemption Date") shall be the first Business Day
which is at least 30 days after the date of delivery of the redemption notice to
the Corporation. On or prior to each Holder Redemption Date, the holders of
Series B Junior Preferred Stock which have given the Corporation a Redemption
Notice shall surrender their certificate(s) representing such shares to the
Corporation, in the manner and at the place to be designated by the Corporation,
and thereupon the redemption price of such shares shall be payable to such
holders of Series B Junior Preferred Stock and each surrendered certificate
shall be canceled. From and after the Holder Redemption Date, unless there shall
have been a default in payment of the redemption price, all rights of the
holders of Series B Junior Preferred Stock designated for redemption in the
Redemption Notice as holders of Series B Junior Preferred Stock (except the
right to receive the redemption price without interest upon surrender of their
certificate(s)) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
8. MANDATORY REDEMPTION. (a) Subject to the provisions of
Section 6(f) hereof, all shares of Series B Junior Preferred Stock shall be
redeemed on November 1, 2002 (the "Mandatory Redemption Date") at a redemption
price equal to 100% of the Liquidation Preference, together with accrued and
unpaid dividends (whether or not declared) to the Mandatory Redemption Date.
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(b) Written notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than thirty (30) nor more than
sixty (60) days prior to the Mandatory Redemption Date, to each record holder of
the shares of Series B Junior Preferred Stock, at such holder's address as the
same appears on the books of the Corporation. Such notice shall state: (i) the
redemption date; (ii) that all outstanding shares of Series B Junior Preferred
Stock are to be redeemed; (iii) the redemption price; (iv) the place or places
where certificates for such shares are to be surrendered for payment of the
redemption price and (v) that dividends on the shares to be redeemed will cease
to accrue on such Mandatory Redemption Date. On or prior to each Mandatory
Redemption Date, the holders of the Series B Junior Preferred Stock shall
surrender their certificate(s) representing such shares to the Corporation, in
the manner and at the place to be designated by the Corporation, and thereupon
the redemption price of such shares shall be payable to the holders of the
Series B Junior Preferred Stock and each surrendered certificate shall be
canceled. From and after the Mandatory Redemption Date, unless there shall have
been a default in payment of the redemption price, all rights of the holders of
the Series B Junior Preferred Stock (except the right to receive the redemption
price without interest upon surrender of their certificate(s)) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
(c) If the Corporation is unable at the Mandatory Redemption
Date to redeem any shares of Series B Junior Preferred Stock then to be redeemed
because such redemption would violate the applicable provisions of the laws of
the State of Delaware or any rights of any Senior Preferred Stock or any
covenants or other obligations of the Corporation under the Indenture or the
Existing Indenture, then the Corporation shall redeem such shares of Series B
Junior Preferred Stock as soon thereafter as redemption would not violate such
laws, rights or covenants.
9. CONVERSION AT THE OPTION OF THE CORPORATION.
(a) If the Corporation completes a Qualified Initial Public
Offering (as defined in the Series B Preferred Unit Purchase Agreement dated as
of July 13, 1998 between the Corporation and Birch Acquisition L.L.C., DZ
Investors L.L.C. and Jefferies & Company, Inc.) that results in the Corporation
receiving net proceeds (gross proceeds of the offering less underwriters'
discounts and commissions) of not less than $20.0 million then, simultaneously
with the closing date of the Qualified Initial Public Offering, the Corporation
may, at its option, convert all or any portion of the outstanding shares of
Series B Junior Preferred Stock into an amount of fully-paid nonassessable
shares of Common Stock, the value of which shall be equal to the aggregate
Liquidation Preference of the shares of Series B Junior Preferred Stock to be
converted. For the purposes of such conversion, the value of the shares of
Common Stock shall be equal to the price per share of Common Stock paid by the
public in the Qualified Initial Public Offering. Notwithstanding the foregoing,
no shares of Series B Junior Preferred Stock shall be converted pursuant to this
Section 9(a) unless (x) the Corporation shall have paid to each holder of Series
B Junior Preferred Stock in full, in cash all accrued and unpaid dividends
(whether or not declared) to the conversion date on the shares of Series B
Junior Preferred Stock to be so
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converted, (y) a pro rata amount of shares of any Junior Preferred Stock shall
have been or simultaneously be so converted and (z) any requirements of the HSR
Act (defined below) shall have been complied with.
(b) The Corporation shall not issue fractions of shares of
Common Stock upon conversion of any shares of Series B Junior Preferred Stock.
If any fraction of a share of Common Stock would be otherwise issuable upon
conversion of shares of Series B Junior Preferred Stock under Section 9(a), the
Corporation shall pay to such holders of Series B Junior Preferred Stock in lieu
thereof an amount in cash equal to the value of such fraction, calculated to the
nearest one-hundredth (1/100) of a share of Common Stock.
(c) In the event that fewer than all the outstanding shares
of Series B Junior Preferred Stock are to be converted, the shares to be so
converted shall be selected pro rata or by lot or by any other method as may be
determined by the Board in its sole discretion to be equitable, provided that
only whole shares shall be selected for conversion.
(d) In the event the Corporation shall elect to convert
shares of the Series B Junior Preferred Stock pursuant to this Section 9, notice
of such conversion shall be given by first class mail, postage prepaid, mailed
not less than thirty (30) days prior to the conversion date, to each record
holder of the shares to be converted, at such holder's address as the same
appears on the books of the Corporation. Each such notice shall state: (i) the
conversion date; (ii) the total number of shares of Series B Junior Preferred
Stock to be converted and, if fewer than all the shares held by such holder are
to be converted, the number of such shares to be converted from such holder;
(iii) the number of shares of Common Stock (or cash in lieu of fractional shares
of Common Stock pursuant to paragraph (b) above) into which such holder's shares
of Series B Junior Preferred Stock will be converted or an explanation of the
method by which such number of shares of Common Stock (or cash) will be
determined on the conversion date; (iv) the place or places where certificates
for such shares are to be surrendered in exchange for shares of Common Stock and
(v) that dividends on the shares of Series B Junior Preferred Stock to be
converted will cease to accrue on such conversion date.
(e) The holder of each share of Series B Junior Preferred
Stock called for conversion shall surrender the certificate representing such
share, duly endorsed or assigned to the Corporation, or in blank, at the
principal office of the transfer agent set forth in the notice of conversion (or
if no transfer agent shall be at the time appointed, then to the Corporation at
the place set forth in the notice. Unless the shares of Common Stock issuable on
conversion are to be issued in the same name as the name in which such share of
Series B Junior Preferred Stock is registered, each share surrendered for
conversion shall be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder or such holder's duly authorized
attorney and an amount sufficient to pay any transfer tax (or evidence
reasonably satisfactory to the Corporation demonstrating that such taxes have
been paid). The Corporation shall pay any issue and other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock upon
conversion of the Series B Junior Preferred Stock; provided,
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however, that the Corporation shall not be required to pay any tax or taxes
which may be payable in respect of any transfer involved in the issue and
delivery of any shares of Common Stock issued and delivered upon conversion of
the Series B Junior Preferred Stock to a person(s) with name(s) other than the
name(s) in which the Series B Junior Preferred Stock is registered and the
Corporation shall not be required to issue or deliver such Common Stock unless
or until the person(s) requesting the issuance thereof shall have paid to the
Corporation the amount of such tax or shall have established to the satisfaction
of the Corporation that such tax has been paid. As soon as practicable after the
surrender of the certificate(s) for shares of Series B Junior Preferred Stock as
aforesaid, the Corporation shall cause to be issued and delivered to the holders
of the Series B Junior Preferred Stock, or on its written order, certificate(s)
for the number of full shares of Common Stock issuable on such conversion in
accordance with the provisions hereof and cash as provided in paragraph (b) of
this Section 9 in respect of any fraction of a share of Common Stock otherwise
issuable upon such conversion.
(f) From and after the conversion date, dividends on the
shares of the Series B Junior Preferred Stock so called for conversion shall
cease to accrue, such shares shall no longer be deemed to be outstanding, and
all rights with respect to such shares, including the rights, if any, to receive
notices and to vote, shall forthwith cease and terminate except only the right
of the holder thereof to receive shares of Common Stock in exchange therefor and
payment of any accrued and unpaid dividends thereon to the conversion date. Any
shares of Series B Junior Preferred Stock so converted shall be retired and
canceled and shall not be reissued, and the Corporation may from time to time
take such appropriate action as may be necessary to reduce the then authorized
number of shares of Series B Junior Preferred Stock accordingly.
(g) The Corporation agrees that, in each case where the
conversion of shares of Series B Junior Preferred Stock into share of Common
Stock pursuant to this section may require the prior compliance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), from and after the date (the "HSR Date") on which any Holder of shares of
Series B Junior Preferred Stock notifies the Corporation that compliance is so
required under the HSR Act prior to such conversion or exercise, as the case may
be, the Corporation and any such Holders shall use their respective best efforts
to cause the termination of all waiting periods under the HSR Act, in respect of
such conversion of Series B Junior Preferred Stock or issuance of such Common
Stock. The Corporation shall pay all fees and expenses of the Holders incurred
in compliance with this Section, including their respective reasonable legal
fees and expenses and all filing fees required by the HSR Act. The Corporation
shall provide each Holder with all such information in respect of the
Corporation as such Holder may request to enable such Holders to determine
whether the conversion of shares of Series B Junior Preferred Stock or issuance
of such Common Stock may require compliance with the HSR Act.
10. SUBSCRIPTION RIGHT.
(a) If at any time after the date hereof, the Corporation
proposes to issue, other than in an underwritten offering, equity securities of
any kind (the term "equity securities"
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shall include for these purposes any warrants, options or other rights to
acquire equity securities and debt securities convertible into equity securities
of the Corporation (except for any issuances under any employee stock incentive
or other similar plan of the Corporation hereafter created and approved by the
Board)), then the Corporation shall:
(i) give at least ten Business Days' advance written notice
to the holders of the Series B Junior Preferred Stock setting forth in
reasonable detail: (1) the designation and all of the terms and
provisions of the securities proposed to be issued (the "Proposed
Securities") including, where applicable, the voting powers,
preferences and relative participating, optional or other special
rights, and the qualification, limitations or restrictions thereof and
interest rate and maturity; (2) the price and other terms of the
proposed sale of such securities; (3) the amount of such securities
proposed to be issued; and (4) such other information as may be
reasonably required in order to evaluate the proposed issuance; and
(ii) subject to the rights of the holders of any Senior
Preferred Stock, offer to sell to each holder of shares of Series B
Junior Preferred Stock an amount of proposed Securities the value of
which (as determined by reference to the price per share in the
proposed offering) shall not be less than the aggregate Liquidation
Preference plus accrued and unpaid dividends thereon (whether or not
declared) of each holders's shares of Series B Junior Preferred Stock;
or in the event that the total purchase price of all the Proposed
Securities is less than the aggregate Liquidation Preference plus
accrued and unpaid dividends thereon (whether or not declared) of all
outstanding shares of Series B Junior Preferred Stock, the Corporation
shall offer to sell to each holder a pro rata amount of all the
Proposed Securities.
(b) The holders of Series B Junior Preferred Stock shall have
the option to accept such offer as to any or all of the shares so offered within
10 days after receipt of such notice from the Corporation. To the extent that
the Corporation offers two or more Proposed Securities in units, the holders of
Series B Junior Preferred Stock must purchase such units as a whole and shall
not be given the opportunity to purchase only one of the Proposed Securities
constituting such unit.
(c) Upon the expiration of the offering period described in
this Section 10, the Corporation shall be free to sell such Proposed Securities
that the holders of Series B Junior Preferred Stock have not elected to purchase
during the 90 days following such expiration on terms and conditions no more
favorable to the purchasers thereof than those offered to the holders of the
Series B Junior Preferred Stock. Any Proposed Securities offered or sold by the
Corporation after such 90-day period must be reoffered to the holders of the
Series B Junior Preferred Stock pursuant to this Section 10. The election by the
holders of the Series B Junior Preferred Stock not to exercise their
subscription rights under this Section 10 in any one instance shall not affect
their right as to any subsequent issuance of Proposed Securities by the
Corporation. Any sale of Proposed Securities by the Corporation without first
giving the holders
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of the Series B Junior Preferred Stock the rights described in this Section 10
shall be void and of no force and effect.
(d) The rights and obligations of this Section 10 shall
terminate on the date that the Common Stock is quoted on the NASDAQ National
Market or listed on any national securities exchange; provided that any rights
substantially similar to those contemplated by this Section 10 as may be granted
to any Parity Preferred Stock or Junior Preferred Stock shall also be
terminated.
11. REMEDIES CUMULATIVE.
No failure or delay on the part of the holders of the Series
B Junior Preferred Stock in the exercise of any power, right or privilege under
this Certificate of Designations shall impair such power, right or privilege or
be construed to be a waiver of any default or acquiescence therein, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this Certificate of Designations are
cumulative to and not exclusive of any rights or remedies otherwise available.
12. APPROVALS.
In the event the holders of Series B Junior Preferred Stock
shall have the right to approve any action, agreement (including, without
limitation, any modification, amendment or waiver thereof ) or circumstances,
such approval shall require the approval of 50% of the shares of Series B Junior
Preferred Stock outstanding at such time, unless otherwise agreed by the holders
of such percentage of shares.
13. DEFINITIONS. As used in this Certificate, the following
terms shall have the following respective meanings:
"Business Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in The City
of New York are authorized or obligated by law or executive order to be closed.
"Person" means an individual, corporation, limited liability
company, partnership, limited partnership, association, trust, joint venture,
unincorporated organization, other entity or group (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended).
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AMENDED AND RESTATED BY-LAWS
of
DISCOVERY ZONE, INC.
-----------------------
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE -- The registered office of Discovery
Zone, Inc. (the "Corporation") shall be established and maintained at the office
of The Corporation Trust Company at The Corporation Trust Center, 1209 Orange
Street in the City of Wilmington, County of New Castle, State of Delaware, and
said Corporation Trust Company shall be the registered agent of the Corporation
in charge thereof.
SECTION 2. OTHER OFFICES -- The Corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors of the Corporation (the "Board of Directors") may from time
to time select or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS -- Annual meetings of stockholders for the
election of directors, and for such other business as may be stated in the
notice of the meeting, shall be held at such place, either within or without the
State of Delaware, and at such time and date as the Board of Directors, by
resolution, shall determine and as set forth in the notice of the meeting. If
the Board of Directors fails so to determine the time, date and place of
meeting, the annual meeting of stockholders shall be held at the registered
office of the Corporation on the first Tuesday in April. If the date of the
annual meeting shall fall upon a legal holiday, the meeting shall be held on the
next succeeding business day. At each annual meeting, the stockholders entitled
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to vote shall elect a Board of Directors and they may transact such other
corporate business as shall be stated in the notice of the meeting.
SECTION 2. SPECIAL MEETINGS -- Special meetings of the stockholders
for any purpose or purposes may be called by the President or the Secretary of
the Corporation, by resolution of the Board of Directors or by any Director
thereof.
SECTION 3. VOTING -- Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation (as the same may be amended
or restated from time to time, the "Certificate of Incorporation") and these
By-Laws may vote in person or by proxy, but no proxy shall be voted after three
years from its date unless such proxy provides for a longer period. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the meeting,
arranged in alphabetical order, with the address of each, and the number of
shares held by each, shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is entitled to be present.
SECTION 4. QUORUM -- Except as otherwise required by law, the
Certificate of Incorporation or these By-Laws, the presence, in person or by
proxy, of stockholders holding shares constituting a majority of the voting
power of the Corporation shall constitute a quorum at all meetings of the
stockholders. In case a quorum shall not be present at any meeting, a majority
in interest of the stockholders entitled to vote thereat, present in person or
by proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until the requisite amount of
stock entitled to vote shall be present. At any such adjourned meeting at which
the requisite amount of stock entitled to vote shall be represented, any
business may be transacted that might have been transacted at the meeting as
originally noticed, but only those stockholders entitled to vote at the meeting
as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof.
SECTION 5. NOTICE OF MEETINGS -- Written notice, stating the place,
date and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat, at his
or her address as it appears on the records of the Corporation, not less than
ten nor more than sixty days before the date of the meeting. No business other
than that stated in the notice shall be transacted at any meeting without the
unanimous consent of all the stockholders entitled to vote thereat.
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SECTION 6. ACTION WITHOUT MEETING -- Unless otherwise provided by the
Certificate of Incorporation, any action required or permitted to be taken at
any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted; provided that the stockholders shall not adopt any new
provisions, or amend any existing provisions of its Amended and Restated
Certificate of Incorporation or its Amended and Restated By-Laws at any special
meeting of stockholders other than by a unanimous consent of the directors.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND TERM -- The business and affairs of the
Corporation shall be managed under the direction of a Board of Directors which
shall consist of not less than three persons. The exact number of directors
shall initially be five and may thereafter be fixed from time to time by the
Board of Directors; provided, however, that the director nominated by the
Official Committee of Unsecured Creditors of the Corporation shall serve a term
of at least three (3) years, notwithstanding any assignment of any ownership
interest in the Corporation; provided further, however, that the directors (the
"Noteholder Representatives") nominated by the Trustee under the Indenture dated
as of July 15, 1998, among the Corporation, the Subsidiary Guarantors listed
therein and Firstar Bank of Minnesota, N.A., as trustee shall constitute a
separate class of directors for the purposes of certain votes. Directors shall
be elected at the annual meeting of stockholders and each director shall be
elected to serve until his or her successor shall be elected and shall qualify.
A director need not be a stockholder.
SECTION 2. RESIGNATIONS -- Any director may resign at any time. Such
resignation shall be made in writing, and shall take effect at the time
specified therein, and if no time be specified, at the time of its receipt by
the Chairman of the Board, the President or the Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 3. VACANCIES -- If the office of any director becomes vacant,
the remaining directors in the office, though less than a quorum, by a majority
vote, may appoint any qualified person to fill such vacancy, who shall hold
office for the unexpired term and until his or her successor shall be duly
chosen. Upon receipt by the Company of notice of any death, disability,
retirement, resignation or removal of any director which results in a vacancy,
the next scheduled meeting of the Board of Directors shall be delayed for a
reasonable period, not to exceed 30 days, so as to permit the designation of a
replacement director. If the office of any director becomes vacant and there
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are no remaining directors, the stockholders, by the affirmative vote of the
holders of shares constituting a majority of the voting power of the
Corporation, at a special meeting called for such purpose, may appoint any
qualified person to fill such vacancy.
SECTION 4. REMOVAL -- Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of the voting power entitled to
vote for the election of directors, at an annual meeting or a special meeting
called for the purpose, and the vacancy thus created may be filled, at such
meeting, by the affirmative vote of holders of shares constituting a majority of
the voting power of the Corporation; provided that directors in the class of
Bondholder Directors may not be removed except by the affirmative vote of a
majority of the class of Bondholder Directors.
SECTION 5. COMMITTEES -- The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more directors of the
Corporation; provided, however, that such committee shall consist of not less
than three persons. No committee may be formed without the affirmative vote of
the Noteholder Representatives.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these By-Laws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, subject to the same limitations on powers and
authority of the Board of Directors set forth in these Amended and Restated
By-Laws, and may authorize the seal of the Corporation to be affixed to all
papers which may require it.
SECTION 6. MEETINGS -- The newly elected directors may hold their
first meeting for the purpose of organization and the transaction of business,
if a quorum be present, immediately after the annual meeting of the
stockholders; or the time and place of such meeting may be fixed by consent of
all the Directors.
Directors must receive notice of regular meetings of the Board of
Directors not less than ten and not more than 60 days prior to such regular
meetings. Meetings may be held at such places and times as shall be determined
from time to time by resolution of the Board of Directors and set forth in the
notice to the directors of such meeting.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, the President or any director, or by the Secretary upon
on the written request of any director, on at least two days' notice to each
director given personally or by telegram or facsimile transmission (except that
notice to any director may be waived in writing by such director) and shall be
held at such place or places as may be determined by the Board of Directors, or
as shall be stated in the call of the meeting.
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Unless otherwise restricted by the Certificate of Incorporation or
these By-Laws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in any meeting of the Board of Directors
or any committee thereof by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
SECTION 7. QUORUM -- A majority of six Directors shall constitute a
quorum for the transaction of business. If at any meeting of the Board of
Directors there shall be less than a quorum of six directors present, a majority
of those present may adjourn the meeting from time to time until a quorum is
obtained, and no further notice thereof need by given other than by announcement
at the meeting which shall be so adjourned. The vote of the majority of the
Directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors unless the Certificate of Incorporation or these By-Laws
shall require the vote of a greater number.
SECTION 8. COMPENSATION -- Directors shall not receive any stated
salary for their services as directors or as members of committees; provided
that the Noteholder Representatives shall receive compensation of $3,000 per
quarter, plus out-of-pocket expenses. By resolution of the Board of Directors a
fixed fee and expenses of attendance may be allowed to all of the other
directors for attendance at each meeting. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity as an officer, agent or otherwise, and receiving compensation therefor.
SECTION 9. ACTION WITHOUT MEETING -- Any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if a written consent thereto is signed by all
members of the Board of Directors or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board of
Directors or such committee.
SECTION 10. CHAIRMAN OF THE BOARD - The Board of Directors shall
designate a member of the Board of Directors to act as the Chairman for one or
more meetings of the Board of Directors or may designate a member of the Board
of Directors to act as the Chairman of all meetings of the Board of Directors,
who shall preside at all meetings of the Board of Directors and shall have and
perform such other duties as may be assigned to him or her by the Board of
Directors, in which event, he or she shall be designated Chairman of the Board
of Directors of the Corporation. The Chairman of the Board shall have the power
to execute bonds, mortgages and other contracts on behalf of the Corporation,
and to cause the seal of the Corporation to be affixed to any instrument
requiring it, and when so affixed the seal shall be attested to by the signature
of the Secretary or the Treasurer or an Assistant Secretary or an Assistant
Treasurer.
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ARTICLE IV
OFFICERS
SECTION 1. OFFICERS -- The officers of the Corporation shall be a
President, one or more Vice Presidents, a Treasurer and a Secretary, all of whom
shall be elected by the Board of Directors and shall hold office until their
successors are duly elected and qualified. In addition, the Board of Directors
may elect such Assistant Secretaries and Assistant Treasurers as they may deem
proper. The Board of Directors may appoint such other officers and agents as it
may deem advisable, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors.
SECTION 2. INTENTIONALLY OMITTED
SECTION 3. PRESIDENT -- The President shall be the Chief Executive
Officer and/or Chief Operating Officer of the Corporation. He or she shall have
the general powers and duties of supervision and management usually vested in
the office of President of a corporation. The President shall have the power to
execute bonds, mortgages and other contracts on behalf of the Corporation, and
to cause the seal to be affixed to any instrument requiring it, and when so
affixed the seal shall be attested to by the signature of the Secretary or the
Treasurer or an Assistant Secretary or an Assistant Treasurer.
SECTION 4. VICE PRESIDENTS -- Each Vice President shall have such
powers and shall perform such duties as shall be assigned to him or her by the
Board of Directors.
SECTION 5. TREASURER -- The Treasurer shall be the Chief Financial
Officer of the Corporation. He or she shall have the custody of the Corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the Corporation. He or she shall deposit all
moneys and other valuables in the name and to the credit of the Corporation in
such depositaries as may be designated by the Board of Directors. He or she
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, the Chairman of the Board, or the President, taking proper vouchers
for such disbursements. He or she shall render to the Chairman of the Board, the
President and Board of Directors at the regular meetings of the Board of
Directors, or whenever they may request it, an account of all his or her
transactions as Treasurer and of the financial condition of the Corporation. If
required by the Board of Directors, he or she shall give the Corporation a bond
for the faithful discharge of his or her duties in such amount and with such
surety as the Board of Directors shall prescribe.
SECTION 6. SECRETARY -- The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and of the Board of Directors and
all other notices required by law or by these By-Laws, and in case of his or her
absence or refusal or neglect so to do, any such notice may be given by any
person thereunto directed by the Chairman of the Board or the President, or
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by the Board of Directors, upon whose request the meeting is called as
provided in these By-Laws. He or she shall record all the proceedings of the
meetings of the Board of Directors, any committees thereof and the stockholders
of the Corporation in a book to be kept for that purpose, and shall perform such
other duties as may be assigned to him or her by the Board of Directors, the
Chairman of the Board or the President. He or she shall have the custody of the
seal of the Corporation and shall affix the same to all instruments requiring
it, when authorized by the Board of Directors, the Chairman of the Board or the
President, and attest to the same.
SECTION 7. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES -- Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the Board of Directors.
ARTICLE V
MISCELLANEOUS
SECTION 1. CERTIFICATES OF STOCK -- A certificate of stock
shall be issued to each stockholder certifying the number of shares owned by
such stockholder in the Corporation. Certificates of stock of the Corporation
shall be of such form and device as the Board of Directors may from time to time
determine.
SECTION 2. LOST CERTIFICATES -- A new certificate of stock
may be issued in the place of any certificate theretofore issued by the
Corporation, alleged to have been lost or destroyed, and the Board of Directors
may, in its discretion, require the owner of the lost or destroyed certificate,
or such owner's legal representatives, to give the Corporation a bond, in such
sum as they may direct, not exceeding double the value of the stock, to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of any such certificate, or the issuance of any such
new certificate.
SECTION 3. TRANSFER OF SHARES -- The shares of stock of the
Corporation shall be transferable only upon its books by the holders thereof in
person or by their duly authorized attorneys or legal representatives, and upon
such transfer the old certificates shall be surrendered to the Corporation by
the delivery thereof to the person in charge of the stock and transfer books and
ledgers, or to such other person as the Board of Directors may designate, by
whom they shall be cancelled, and new certificates shall thereupon be issued. A
record shall be made of each transfer and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer. The Corporation shall be entitled to treat the holder of record
of any share or shares as the holder in fact thereof and shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, and shall not be liable for any registration or transfer of
shares which are registered or to be registered in the name of a fiduciary or
7
<PAGE>
the nominee of a fiduciary unless made with actual knowledge that a fiduciary or
nominee of a fiduciary is committing a breach of trust in requesting such
registration or transfer, or with knowledge of such facts that its participation
therein amounts to bad faith.
SECTION 4. STOCKHOLDERS RECORD DATE -- In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and which
record date: (1) in the case of determination of stockholders entitled to vote
at any meeting of stockholders or adjournment thereof, shall, unless otherwise
required by law, not be more than sixty nor less than ten days before the date
of such meeting; (2) in the case of determination of stockholders entitled to
express consent to corporate action in writing without a meeting, shall not be
more than ten days from the date upon which the resolution fixing the record
date is adopted by the Board of Directors; and (3) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (1) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
when no prior action of the Board of Directors is required by law, shall be the
first day on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in accordance with
applicable law, or, if prior action by the Board of Directors is required by
law, shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 5. DIVIDENDS -- Subject to the provisions of the Certificate
of Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon stock of the
Corporation as and when they deem appropriate. Before declaring any dividend
there may be set apart out of any funds of the Corporation available for
dividends, such sum or sums as the Board of Directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
Board of Directors shall deem conducive to the interests of the Corporation.
8
<PAGE>
SECTION 6. SEAL -- The corporate seal of the Corporation shall be in
such form as shall be determined by resolution of the Board of Directors. Said
seal may be used by causing it or a facsimile thereof to be impressed or affixed
or reproduced or otherwise imprinted upon the subject document or paper.
SECTION 7. FISCAL YEAR -- The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors.
SECTION 8. CHECKS -- All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or officers, or agent or agents,
of the Corporation, and in such manner as shall be determined from time to time
by resolution of the Board of Directors.
SECTION 9. NOTICE AND WAIVER OF NOTICE -- Whenever any notice is
required to be given under these By-Laws, personal notice is not required unless
expressly so stated, and any notice so required shall be deemed to be sufficient
if given by depositing the same in the United States mail, postage prepaid,
addressed to the person entitled thereto at his or her address as it appears on
the records of the Corporation, and such notice shall be deemed to have been
given on the day of such mailing. Notice to directors may also be given by
telegram or facsimile transmission. Stockholders not entitled to vote shall not
be entitled to receive notice of any meetings except as otherwise provided by
law. Whenever any notice is required to be given under the provisions of any
law, or under the provisions of the Certificate of Incorporation or of these
By-Laws, a waiver thereof, in writing and signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to such required notice.
ARTICLE VI
AMENDMENTS
The directors shall not adopt any new provisions, or amend any
existing provisions of these By-Laws.
9
================================================================================
DISCOVERY ZONE, INC.
----------------------
WARRANT AGREEMENT
----------------------
Dated as of July 17, 1998
Warrants to Purchase
Shares of Common Stock, Par Value $.00017 Per Share
Relating to the
Series B Preferred Units
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
ARTICLE I
ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
<S> <C> <C>
SECTION 1.1. Issuance of Warrants.................................................-1-
SECTION 1.2. Form of Warrant Certificates.........................................-2-
SECTION 1.3. Execution of Warrant Certificates....................................-2-
SECTION 1.4. Appointment of Warrant Agent.........................................-2-
SECTION 1.5. Authentications and Delivery.........................................-3-
SECTION 1.6. Temporary Warrant Certificates.......................................-3-
SECTION 1.7. Separation of Warrants and Series B Preferred Stock. ...............-4-
SECTION 1.8. Registrar and Warrant Register.......................................-4-
SECTION 1.9. Registration of Transfers and Exchanges..............................-4-
SECTION 1.10. Lost, Stolen, Destroyed, Defaced or Mutilated Warrant Certificates..-12-
SECTION 1.11. Offices for Exercise, etc...........................................-13-
ARTICLE II
DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE
SECTION 2.1. Duration of Warrants................................................-13-
SECTION 2.2. Exercise, Exercise Price, Settlement and Delivery...................-13-
SECTION 2.3. Cancellation of Warrant Certificates................................-16-
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.1. Enforcement of Rights...............................................-16-
SECTION 3.2. Tag-Along Rights....................................................-17-
SECTION 3.3. Exchange Rights of Holders..........................................-19-
SECTION 3.4. Repurchase Right....................................................-19-
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY-
<S> <C> <C>
SECTION 4.1. Payment of Taxes....................................................-21-
SECTION 4.2. Notice of Expiration Date...........................................-22-
SECTION 4.3. Reservation of Common Stock.........................................-22-
SECTION 4.4. Warrant Shares to be Duly Authorized and Issued, Fully Paid
and Nonassessable...................................................-22-
SECTION 4.5. Reports.............................................................-22-
SECTION 4.6. Private Placement Numbers...........................................-23-
SECTION 4.7. Right of Action.....................................................-23-
SECTION 4.8. Survival............................................................-23-
ARTICLE V
ADJUSTMENTS
SECTION 5.1. Adjustment of Exercise Price and Number of Warrant
Shares Issuable.....................................................-23-
SECTION 5.2. Fractional Interest.................................................-31-
SECTION 5.3. When Adjustment Not Required........................................-31-
SECTION 5.4. Treasury Stock......................................................-32-
SECTION 5.5. Notices to Warrant Agent and Holders................................-32-
ARTICLE VI
CONCERNING THE WARRANT AGENT
SECTION 6.1. Warrant Agent.......................................................-33-
SECTION 6.2. Conditions of Warrant Agent's Obligations...........................-33-
SECTION 6.3. Resignation and Appointment of Successor............................-37-
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Defined Terms.......................................................-38-
SECTION 7.2. Amendment...........................................................-41-
SECTION 7.3. Notices and Demands to the Company and Warrant Agent................-42-
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 7.4. Address for Notices to the Company and for Transmission
of Documents........................................................-42-
SECTION 7.5. Notices to Holders..................................................-43-
SECTION 7.6. Applicable Law......................................................-43-
SECTION 7.7. Obtaining of Governmental Approvals.................................-43-
SECTION 7.8. Persons Having Rights Under Agreement...............................-43-
SECTION 7.9. Headings............................................................-43-
SECTION 7.10. Counterparts........................................................-43-
SECTION 7.11. Inspection of Warrant Agreement.....................................-44-
SECTION 7.12. Successors..........................................................-44-
EXHIBITS
EXHIBIT A FORM OF WARRANT CERTIFICATE.........................................A-1
EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS.............................B-1
EXHIBIT C TRANSFEREE LETTER OF REPRESENTATION.................................C-1
</TABLE>
iii
<PAGE>
WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Warrant Agreement"), dated as of July
17, 1998 is executed and delivered by Discovery Zone, Inc., a Delaware
corporation (together with any successor thereto, the "Company") and Firstar
Bank of Minnesota, N.A., as warrant agent (together with any successor warrant
agent, the "Warrant Agent"), for the benefit of the holders (the "Holders") from
time to time of the Warrant Certificates (as hereinafter defined).
WHEREAS, the Company has entered into a purchase agreement dated
as of July 13, 1998 (the "Series B Preferred Unit Purchase Agreement") with
Birch Acquisition L.L.C. ("Birch"), DZ Investors L.L.C. ("DZ Investors") and
Jefferies & Company, Inc. ("Jefferies" and, together with Birch and DZ
Investors, the "Purchasers"), pursuant to which the Company has agreed, among
other things, to sell to Birch, DZ Investors and Jefferies, 200 units, 100 units
and 40 units, respectively (collectively, the "Series B Preferred Units"), each
consisting of (i) 1,000 shares of 14 1/2 % Series B Junior Cumulative Preferred
Stock, par value $.01 per share, liquidation preference $25.00 per share (the
"Series B Preferred Stock") of the Company and (ii) one detachable warrant (each
a "Warrant" and, collectively, the " Warrants" and the certificates evidencing
the Warrants being hereinafter referred to as the "Warrant Certificates") to
initially purchase 2,131,667.4631 shares of the Company's Class A Voting Common
Stock, $.00017 par value per share (the "Common Stock") at an initial exercise
price of $.00017 per share, subject to adjustment in accordance with the terms
hereof.
WHEREAS, the Warrants shall be separately transferable from the
Series B Preferred Stock on and after the Separation Date (as hereinafter
defined); and
NOW, THEREFORE, in consideration of the purchase of the Series B
Preferred Units by each Purchaser and for other valuable consideration, the
adequacy and receipt of which is hereby acknowledged, and for the purpose of
defining the respective rights and obligations of the Company, the Warrant Agent
and the Holders, the parties hereto agree as follows:
ARTICLE I
ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
SECTION 1.1. Issuance of Warrants. Each Warrant Certificate
shall, when countersigned by the Warrant Agent, evidence the number of Warrants
specified therein, and each Warrant evidenced thereby shall represent the right,
subject to the provisions contained herein and therein, to purchase from the
Company (and the Company shall issue and sell to such Holder) 2,131,667.4631
fully paid and non-assessable shares of Common Stock (the shares of Common Stock
purchasable upon exercise of a Warrant being hereinafter referred to as the
"Warrant Shares" and, where appropriate, such term shall also mean the other
securities or
<PAGE>
property purchasable and deliverable upon exercise of a Warrant as provided in
Article V) at the price specified herein and therein, in each case subject to
adjustment as provided herein and therein.
SECTION 1.2. Form of Warrant Certificates. The Warrant
Certificates will initially be issued either in global form (the "Global
Warrants") or in registered form as definitive Warrant certificates (the
"Definitive Warrants"). The Warrant Certificates evidencing the Global Warrants
or the Definitive Warrants to be delivered pursuant to this Warrant Agreement
shall be substantially in the form set forth in Exhibit A attached hereto, dated
the date on which countersigned. Such Global Warrants shall represent such of
the outstanding Warrants as shall be specified therein and each shall provide
that it shall represent the aggregate amount of outstanding Warrants from time
to time endorsed thereon and that the aggregate amount of outstanding Warrants
represented thereby may from time to time be reduced or increased, as
appropriate. Any endorsement of a Global Warrant to reflect the amount of any
increase or decrease in the amount of outstanding Warrants represented thereby
shall be made by the Warrant Agent and Depositary (as defined) in accordance
with instructions given by the Holder thereof. The Depository Trust Company
("DTC"), a New York corporation, shall act as the depository with respect to the
Global Warrants (the "Depositary") until a successor shall be appointed by the
Company. Upon written request, a Holder may receive from the Warrant Agent
Definitive Warrants as set forth in Section 1.9 hereof.
SECTION 1.3. Execution of Warrant Certificates. The Warrant
Certificates shall be executed on behalf of the Company by its President or any
Vice President and attested to by its Secretary or Assistant Secretary. Such
signatures may be the manual or facsimile signatures of the present or any
future such officers. Typographical and other minor errors or defects in any
such reproduction of any such signature shall not affect the validity or
enforceability of any Warrant Certificate that has been duly countersigned and
delivered by the Warrant Agent.
In case any officer of the Company who shall have signed any of
the Warrant Certificates shall cease to be such officer before the Warrant
Certificate so signed shall be countersigned and delivered by the Warrant Agent
or disposed of by the Company, such Warrant Certificate nevertheless may be
countersigned and delivered or disposed of as though the person who signed such
Warrant Certificate had not ceased to be such officer of the Company; and any
Warrant Certificate may be signed on behalf of the Company by such persons as,
at the actual date of the execution of such Warrant Certificate, shall be the
proper officers of the Company, although at the date of the execution and
delivery of this Warrant Agreement any such person was not such an officer.
SECTION 1.4. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the terms and conditions set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
-2-
<PAGE>
SECTION 1.5. Authentications and Delivery. Subject to the
immediately following paragraph of this Section 1.5, Warrant Certificates shall
be authenticated by manual signature and dated the date of authentication by the
Warrant Agent and shall not be valid for any purpose unless so authenticated and
dated. The Warrant Certificates shall be numbered and shall be registered in the
Warrant Register (as defined in Section 1.8 hereof).
Upon the receipt by the Warrant Agent of a written order of the
Company, which order shall be signed by its President or any Vice President and
attested to by its Secretary or Assistant Secretary and shall specify the amount
of Warrants to be authenticated, whether the Warrants are to be Global Warrants
or Definitive Warrants, the date of such Warrants and such other information as
the Warrant Agent may reasonably request, without any further action by the
Company, the Warrant Agent is authorized, upon receipt from the Company at any
time and from time to time of the Warrant Certificates, duly executed as
provided in Section 1.3 hereof, to authenticate the Warrant Certificates and
deliver them. Such authentication shall be by a duly authorized signatory of the
Warrant Agent (although it shall not be necessary for the same signatory to sign
all Warrant Certificates).
In case any authorized signatory of the Warrant Agent who shall
have authenticated any of the Warrant Certificates shall cease to be such
authorized signatory before the Warrant Certificate shall be disposed of by the
Company, such Warrant Certificate nevertheless may be delivered or disposed of
as though the person who authenticated such Warrant Certificate had not ceased
to be such authorized signatory of the Warrant Agent; and any Warrant
Certificate may be authenticated on behalf of the Warrant Agent by such persons
as, at the actual time of authentication of such Warrant Certificates, shall be
the duly authorized signatories of the Warrant Agent, although at the time of
the execution and delivery of this Warrant Agreement any such person is not an
authorized signatory.
The Warrant Agent's authentication on all Warrant Certificates
shall be in substantially the form set forth in Exhibit A hereto.
SECTION 1.6. Temporary Warrant Certificates. Pending the
preparation of the definitive Warrant Certificates, the Company may execute, and
the Warrant Agent shall authenticate and deliver, temporary Warrant
Certificates, which are printed, lithographed, typewritten or otherwise
produced, substantially of the tenor of the definitive Warrant Certificates in
lieu of which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Warrant
Certificates may determine, as evidenced by their execution of such Warrant
Certificates.
If temporary Warrant Certificates are issued, the Company will
cause definitive Warrant Certificates to be prepared without unreasonable delay.
After the preparation of definitive Warrant Certificates, the temporary Warrant
Certificates shall be exchangeable for definitive Warrant Certificates upon
surrender of the temporary Warrant Certificates at any office or agency
maintained by the Company for the purpose pursuant to Section 1.11 hereof.
Subject
-3-
<PAGE>
to the provisions of Section 4.1 hereof, such exchange shall be without charge
to the Holder. Upon surrender for cancellation of any one or more temporary
Warrant Certificates, the Company shall execute, and the Warrant Agent shall
authenticate and deliver in exchange therefor, one or more definitive Warrant
Certificates representing in the aggregate a like number of Warrants. Until so
exchanged, the Holder of a temporary Warrant Certificate shall in all respects
be entitled to the same benefits under this Warrant Agreement as a Holder of a
definitive Warrant Certificate.
SECTION 1.7. Separation of Warrants and Series B Preferred Stock.
The Warrants will be separately transferable from the Series B Preferred Stock
on July 17, 1998 (the "Separation Date").
SECTION 1.8. Registrar and Warrant Register. The Company will
keep, at the office or agency maintained by the Company for such purpose, a
register or registers in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of, and registration
of transfer and exchange of, Warrants as provided in this Article. Each Person
designated by the Company from time to time as a Person authorized to register
the transfer and exchange of the Warrants is hereinafter called, individually
and collectively, the "Registrar". Initially, Firstar Bank of Minnesota, N.A.
shall act as Registrar. Upon written notice to the Warrant Agent and any acting
Registrar, the Company may appoint a successor Registrar for such purposes.
The Company will at all times designate one Person (who may be
the Company and who need not be a Registrar) to act as repository of a master
list of names and addresses of the Holders (the "Warrant Register"). The Company
will act as such repository unless and until some other Person is, by written
notice from the Company to the Warrant Agent and the Registrar, designated by
the Company to act as such. The Company shall cause each Registrar to furnish to
such repository, on a current basis, such information as to all registrations of
transfer and exchanges effected by such Registrar, as may be necessary to enable
such repository to maintain the Warrant Register on as current a basis as is
practicable.
SECTION 1.9. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Definitive Warrants. When Definitive
Warrants are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants;
or
(ii) to exchange such Definitive Warrants for an equal
number of Definitive Warrants, the Warrant Agent shall register
the transfer or make the exchange as requested if the
requirements under this Warrant Agreement as set forth in this
Section 1.9 for such transactions are met; provided, however,
that the
-4-
<PAGE>
Definitive Warrants presented or surrendered for registration of
transfer or exchange:
(x) shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the
Company and the Warrant Agent, duly executed by the
Holder thereof or by its attorney, duly authorized
in writing and
(y) in the case of Warrants the offer and sale of which
has not been registered under the Securities Act,
and are presented for transfer or exchange prior to
(x) the date which is two years after the later of
the date of original issue (the "Issue Date") and
the last date on which the Company or any affiliate
of the Company was the owner of such Warrant, or
any predecessor thereto and (y) such later date, if
any, as may be required by any subsequent change in
applicable law (the "Resale Restriction Termination
Date"), such Warrants shall be accompanied, in the
sole discretion of the Company, by the following
additional information and documents, as
applicable:
(A) if such Warrant is being delivered to the
Warrant Agent by a Holder for
registration in the name of such Holder,
without transfer, a certification from
such Holder to that effect (in
substantially the form of Exhibit B
hereto); or
(B) if such Warrant is being transferred to a
qualified institutional buyer (as defined
in Rule 144A under the Securities Act) in
accordance with Rule 144A under the
Securities Act or pursuant to an
exemption from registration in accordance
with Rule 144 or Regulation S under the
Securities Act, a certification to that
effect (in substantially the form of
Exhibit B hereto); or
(C) if such Warrant is being transferred to
an institutional "accredited investor"
within the meaning of subparagraph
(a)(1), (a)(2), (a)(3) or (a)(7) of Rule
501 under the Securities Act, delivery of
a certification to that effect (in
substantially the form of Exhibit B
hereto) and a letter of representation
from the transferee in substantially the
form of Exhibit C hereto and an opinion
of counsel reasonably acceptable to the
Company to
-5-
<PAGE>
the effect that such transfer is in
compliance with the Securities Act; or
(D) if such Warrant is being transferred in
reliance on another exemption from the
registration requirements of the
Securities Act, a certification to that
effect (in substantially the form of
Exhibit B hereto) and an opinion of
counsel reasonably acceptable to the
Company to the effect that such transfer
is in compliance with the Securities Act.
(b) Restrictions on Transfer of a Definitive Warrant for a
Beneficial Interest in a Global Warrant. A Definitive Warrant may not be
transferred for a beneficial interest in a Global Warrant except upon
satisfaction of the requirements set forth below. Upon receipt by the Warrant
Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate
instruments of transfer, in form satisfactory to the Warrant Agent, together
with:
(i) certification, substantially in the form of Exhibit B
hereto, that such Definitive Warrant is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A under
the Securities Act) in accordance with Rule 144A under the
Securities Act; and
(ii) written instructions directing the Warrant Agent to
make, or to direct the Depositary to make, an endorsement on the
Global Warrant to reflect an increase in the aggregate amount of
the Warrants represented by the Global Warrant;
then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct
the Depositary to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Warrant Agent, the number of
Warrants represented by the Global Warrant to be increased accordingly. If no
Global Warrant is then outstanding, the Company shall issue and the Warrant
Agent shall authenticate a new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and
exchange of Global Warrants or beneficial interests therein shall be effected
through the Depositary, in accordance with this Section 1.9 and the procedures
of the Depositary therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a
Definitive Warrant.
(i) Any Person having a beneficial interest in a Global
Warrant may upon request transfer such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of written
instructions or such other form of instructions as is customary
for the Depositary from the Depositary or its nominee
-6-
<PAGE>
on behalf of any Person having a beneficial interest in a Global
Warrant and upon receipt by the Warrant Agent of a written order
or such other form of instructions as is customary for the
Depositary or the Person designated by the Depositary as having
such a beneficial interest containing registration instructions
and, in the case of any such transfer or exchange prior to the
Resale Restriction Termination Date, the following additional
information and documents:
(A) if such beneficial interest is being
transferred to the Person designated by the
Depositary as being the beneficial owner, a
certificate from such Person to that effect
(in substantially the form of Exhibit B
hereto); or
(B) if such beneficial interest is being
transferred to a qualified institutional
buyer (as defined in Rule 144A under the
Securities Act) in accordance with Rule 144A
under the Securities Act or pursuant to an
exemption from registration in accordance
with Rule 144 or Regulation S under the
Securities Act, a certification to that
effect from the transferee or transferor (in
substantially the form of Exhibit B hereto);
or
(C) if such beneficial interest is being
transferred to an institutional "accredited
investor" within the meaning of subparagraph
(a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501
under the Securities Act, delivery of a
certification to that effect (in
substantially the form of Exhibit B hereto),
a letter of representation from the
transferee in substantially the form of
Exhibit C hereto and an opinion of counsel
reasonably acceptable to the Company to the
effect that such transfer is in compliance
with the Securities Act; or
(D) if such beneficial interest is being
transferred in reliance on another exemption
from the registration requirements of the
Securities Act, a certification to that
effect (in substantially the form of Exhibit
B hereto) and an opinion of counsel
reasonably acceptable to the Company to the
effect that such transfer is in compliance
with the Securities Act,
then the aggregate amount of the Global Warrant will be
reduced by the Depositary or its custodian and, following
such reduction, the Company will execute and, upon receipt
of an authentication order in the form of an Officers'
Certificate (as hereinafter defined), the Warrant Agent
will authenticate and deliver to the transferee a
Definitive Warrant.
-7-
<PAGE>
(ii) Definitive Warrants issued in exchange for a
beneficial interest in a Global Warrant pursuant to Section
1.8(d) shall be registered in such names and in such authorized
denominations as the Depositary, pursuant to instructions from
its direct or indirect participants or otherwise, shall instruct
the Warrant Agent in writing. The Warrant Agent shall deliver
such Definitive Warrant to the Persons in whose names such
Warrants are so registered.
(e) Restrictions on Transfer and Exchange of Global Warrants.
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in Section 1.9(f)), a Global Warrant may not be transferred
as a whole except by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the Depositary
or by the Depositary or any such nominee to a successor Depositary or a nominee
of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of
Depositary. If at any time:
(i) the Depositary for the Warrants notifies the Company
that the Depositary is unwilling or unable to continue as
Depositary for the Global Warrant and a successor Depositary for
the Global Warrant is not appointed by the Company within 90 days
after delivery of such notice or
(ii) the Company, at its sole discretion, notifies the
Warrant Agent in writing that it elects to cause the issuance of
Definitive Warrants under this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate signed by two duly authorized officers of the Company (one
of whom must be the principal executive officer, principal financial officer or
principal accounting officer) (an "Officers' Certificate") requesting the
authentication and delivery of Definitive Warrants, will authenticate and
deliver Definitive Warrants, in an aggregate number equal to the aggregate
number of warrants represented by the Global Warrant, in exchange for such
Global Warrant.
(g) Legends.
(i) Except to the extent permitted by paragraph (ii) of
this Section 1.9(g), each Warrant Certificate evidencing the
Global Warrants and the Definitive Warrants (and all Warrants
issued in exchange therefor or substitution thereof) shall bear a
legend substantially to the following effect:
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS. NEITHER THIS WARRANT CERTIFICATE NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE
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REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE, BY ITS
ACCEPTANCE HEREOF, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THE WARRANTS
REPRESENTED BY THIS WARRANT CERTIFICATE PRIOR TO THE DATE WHICH IS TWO YEARS
AFTER THE LATER OF THE ORIGINAL ISSUE DATE OF THE WARRANTS REPRESENTED BY THIS
WARRANT CERTIFICATE AND THE LAST DATE ON WHICH DISCOVERY ZONE, INC. ("THE
COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THE WARRANTS
REPRESENTED BY THIS WARRANT CERTIFICATE (OR ANY PREDECESSOR OF SUCH WARRANTS OR
WARRANT CERTIFICATE) (THE "RESALE RESTRICTION TERMINATION DATE"), ONLY (A) TO
THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE WARRANTS REPRESENTED
BY THIS WARRANT CERTIFICATE ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A
PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND
SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7)
OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE WARRANTS REPRESENTED
BY THIS WARRANT CERTIFICATE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN
INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF
THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE WARRANT AGENT'S, AS APPLICABLE, RIGHT PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION REASONABLY
SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, AN ASSIGNMENT
IN THE FORM APPEARING ON THE OTHER SIDE OF THIS WARRANT CERTIFICATE IS COMPLETED
AND DELIVERED BY THE TRANSFEROR TO THE WARRANT AGENT. THIS LEGEND SHALL BE
REMOVED UPON THE REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION
DATE.
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THIS SECURITY IS SUBJECT TO A SERIES B PREFERRED UNIT PURCHASE AGREEMENT DATED
AS OF JULY 13, 1998 AMONG THE COMPANY, BIRCH ACQUISITION L.L.C., DZ HOLDINGS
L.L.C. AND JEFFERIES & COMPANY, INC., A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
Each Warrant Certificate (other than Warrant Certificate issued
to DZ Investors in connection with their purchase of Series B Preferred Units)
issued prior to the date on which all principal of and interest on the Company's
13 1/2 % Senior Collateralized Notes due 2002 (the "Notes") have been paid in
full, shall also bear the following legend on the face thereof:
PRIOR TO THE DATE ON WHICH THE STOCKHOLDER'S AGREEMENT (AS DEFINED BELOW) IS
TERMINATED, THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE EXERCISED FOR
SHARES OF THE COMPANY'S COMMON STOCK, PAR VALUE $.00017 PER SHARE ("COMMON
STOCK") UNLESS THE HOLDER THEREOF HAS EXECUTED A COUNTERPART OF THE
STOCKHOLDERS' AGREEMENT DATED AS OF JULY 17, 1998, AS AMENDED FROM TIME TO TIME,
BY AND AMONG THE COMPANY, FIRSTAR BANK OF MINNESOTA, N.A., AS TRUSTEE WITH
RESPECT TO THE COMPANY'S 13 1/2% SENIOR COLLATERALIZED NOTES DUE 2002, AND
CERTAIN HOLDERS OF THE COMPANY'S COMMON STOCK, A COPY OF WHICH AGREEMENT IS ON
FILE AT THE OFFICES OF THE COMPANY. ANY PURPORTED EXERCISE OF THE WARRANTS
REPRESENTED BY THIS CERTIFICATE WITHOUT COMPLIANCE WITH THE ABOVE REQUIREMENTS
SHALL BE VOID.
To the extent a Warrant Certificate evidences a Global Warrant,
such Warrant Certificate shall also bear the legend with respect thereto
substantially in the form set forth on Exhibit A hereto.
(ii) Upon any sale or transfer of a Warrant pursuant to
Rule 144 under the Securities Act in accordance with this Section
1.9 or an effective registration statement under the Securities
Act;
(A) in the case of any Warrant that is a
Definitive Warrant, the Warrant Agent shall
permit the Holder thereof to exchange such
Warrant for a Definitive Warrant that does
not bear the legend set forth above and
rescind any related restriction on the
transfer of such Warrant; and
(B) any such Warrant represented by a Global
Warrant shall not be subject to the
provisions set forth in (i) above (such
sales or transfers being subject only to the
provisions of Section 1.9(c) hereof);
provided, however, that with respect to any
request for an exchange of a Warrant that is
represented by a Global Warrant for a
Definitive Warrant that does not
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bear the legend set forth above, which
request is made in reliance upon Rule 144
under the Securities Act, the Holder thereof
shall certify in writing to the Warrant
Agent that such request is being made
pursuant to Rule 144 under the Securities
Act (such certification to be substantially
in the form of Exhibit B hereto).
(h) Cancellation and/or Adjustment of a Global Warrant. At such
time as all beneficial interests in a Global Warrant have either been exchanged
for Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant
shall be returned to or retained and canceled by the Warrant Agent. At any time
prior to such cancellation, if any beneficial interest in a Global Warrant is
exchanged for Definitive Warrants, redeemed, repurchased or canceled, the number
of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant by the Warrant Agent or the
Depositary to reflect such reduction.
(i) Obligations with Respect to Transfers and Exchanges of
Definitive Warrants.
(i) To permit registrations of transfers and exchanges,
the Company shall execute, at the Warrant Agent's request, and
the Warrant Agent shall authenticate Definitive Warrants and
Global Warrants.
(ii) All Definitive Warrants and Global Warrants issued
upon any registration of transfer or exchange of Definitive
Warrants or Global Warrants shall be the valid obligations of the
Company, entitled to the same benefits under this Warrant
Agreement as the Definitive Warrants or Global Warrants
surrendered upon the registration of transfer or exchange.
(iii) Prior to due presentment for registration of
transfer of any Warrant, the Warrant Agent and the Company may
deem and treat the Person in whose name any Warrant is registered
as the absolute owner of such Warrant, and neither the Warrant
Agent nor the Company shall be affected by notice to the
contrary.
(j) Payment of Taxes. The Company or the Warrant Agent may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any exchange or transfer pursuant
to this Section 1.9.
(k) Other Limitations. Without limiting any other provisions set
forth herein regarding transfers of Warrants, if a Holder is a Regulated Entity
(as defined below), such Holder may transfer Warrants only under the following
circumstances: (i) in a widely distributed public offering; (ii) in a transfer
pursuant to Rule 144 under the Securities Act of 1933, as amended, or any
similar rule then in force; (iii) in a transfer constituting two percent or less
(or such greater amount determined in accordance with clause (vii) below) of the
outstanding shares of the
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Common Stock (assuming that any outstanding shares of the Company's Class B
Non-Voting Common Stock, par value $.00017 per share (the "Non-Voting Common
Stock"), and all outstanding shares of the Company's Series A Convertible
Preferred Stock (the "Convertible Preferred Stock") were converted into shares
of Common Stock); (iv) in a transfer to a Person if such Person already owns or
has negotiated to purchase at least a majority of the outstanding shares of
Common Stock (assuming all outstanding shares of the Company's Non-Voting Common
Stock and Convertible Preferred Stock were converted into shares of Common
Stock); (v) in a transfer to the Company; (vi) in a transfer to an affiliate of
such Holder or to any other Regulated Entity; or (vii) in any method of transfer
determined by the Regulated Entity to be permissible under the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and any other applicable banking
regulations. "Regulated Entity" means (i) any entity that is a "bank holding
company" (as defined in Section 2(a) of the BHC Act) or any non-bank subsidiary
of such an entity and (ii) any entity, that pursuant to Section 8(a) of the
International Banking Act of 1978, as amended, is subject to the provisions of
the BHC Act or any non-bank subsidiary of such an entity.
SECTION 1.10. Lost, Stolen, Destroyed, Defaced or Mutilated
Warrant Certificates. Upon receipt by the Company and the Warrant Agent (or any
agent of the Company or the Warrant Agent, if requested by the Company) of
evidence satisfactory to them of the loss, theft, destruction, defacement, or
mutilation of any Warrant Certificate and of indemnity reasonably satisfactory
to them and, in the case of mutilation or defacement, upon surrender thereof to
the Warrant Agent for cancellation, then, in the absence of notice to the
Company or the Warrant Agent that such Warrant Certificate has been acquired by
a bona fide purchaser or holder in due course, the Company shall execute, and an
authorized signatory of the Warrant Agent shall manually authenticate and
deliver, in exchange for or in lieu of the lost, stolen, destroyed, defaced or
mutilated Warrant Certificate, a new Warrant Certificate representing a like
number of Warrants, bearing a number or other distinguishing symbol not
contemporaneously outstanding. Upon the issuance of any new Warrant Certificate
under this Section 1.10, the Company may require the payment from the Holder of
such Warrant Certificate of a sum sufficient to cover any tax, stamp tax or
other governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Warrant Agent and the
Registrar) in connection therewith. Every substitute Warrant Certificate
executed and delivered pursuant to this Section 1.10 in lieu of any lost, stolen
or destroyed Warrant Certificate shall constitute an additional contractual
obligation of the Company, whether or not the lost, stolen or destroyed Warrant
Certificate shall be at any time enforceable by anyone, and shall be entitled to
the benefits of (but shall be subject to all the limitations of rights set forth
in) this Warrant Agreement equally and proportionately with any and all other
Warrant Certificates duly executed and delivered hereunder. The provisions of
this Section 1.10 are exclusive with respect to the replacement of lost, stolen,
destroyed, defaced or mutilated Warrant Certificates and shall preclude (to the
extent lawful) any and all other rights or remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of lost, stolen, destroyed, defaced or mutilated Warrant
Certificates.
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The Warrant Agent is hereby authorized to authenticate and
deliver the new Warrant Certificates required pursuant to the provisions of this
Section 1.10.
SECTION 1.11. Offices for Exercise, etc. So long as any of the
Warrants remain outstanding, the Company will designate and maintain in the
continental United States: (a) an office or agency where the Warrant
Certificates may be presented for exercise, (b) an office or agency where the
Warrant Certificates may be presented for registration of transfer and for
exchange (including the exchange of temporary Warrant Certificates for
definitive Warrant Certificates pursuant to Section 1.6 hereof), and (c) an
office or agency where notices and demands to or upon the Company in respect of
the Warrants or of this Warrant Agreement may be served. The Company may from
time to time change or rescind such designation, as it may deem desirable or
expedient. The Company will give to the Warrant Agent written notice of the
location of any such office or agency and of any change of location thereof. The
Company hereby designates the corporate trust office of the Warrant Agent in New
York, New York (the "Warrant Agent Office"), as the initial agency maintained
for each such purpose.
ARTICLE II
DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE
SECTION 2.1. Duration of Warrants. Subject to the terms and
conditions established herein, the Warrants shall expire at 5:00 p.m., New York
City time on August 1, 2007 (the "Expiration Date"). Each Warrant may be
exercised on any Business Day (as hereinafter defined) on or after the
Exercisability Date (as hereinafter defined) and on or prior to the Expiration
Date.
Any Warrant not exercised before the close of business on the
Expiration Date relating to such Warrant shall become void, and all rights of
the Holder under the Warrant Certificate evidencing such Warrant and under this
Warrant Agreement shall cease.
SECTION 2.2. Exercise, Exercise Price, Settlement and Delivery.
(a) Subject to the provisions of this Warrant Agreement, each
Warrant Holder shall have the right to purchase from the Company on or after the
Separation Date (the "Exercisability Date") and on or prior to the Expiration
Date, up to 2,131,667.4631 fully paid and non-assessable Warrant Shares per each
Warrant such Holder owns, subject to adjustment in accordance with Article V
hereof, at the initial purchase price of $.00017 for each Warrant Share
purchased, subject to adjustment in accordance with Article V hereof (the
"Exercise Price").
(b) Warrants may be exercised, in whole or in part, on or after
the Exercisability Date by (i) surrendering at any Warrant Agent office the
Warrant Certificate evidencing such Warrants with the form of election to
purchase Warrant Shares set forth on the
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reverse side of the Warrant Certificate (the "Election to Exercise") duly
completed and signed by the registered Holder or Holders thereof or by the duly
appointed legal representative thereof or by a duly authorized attorney, (ii)
paying in full the Exercise Price for each such Warrant Share purchased and any
other amounts required to be paid pursuant to Section 4.1 hereof and (iii) other
than with respect to the Warrants acquired by DZ Investors in connection with
its purchase of the Series B Preferred Units, if such Warrant is being exercised
prior to the date on which the Stockholders' Agreement (as defined below) is
terminated, executing a counterpart of the Stockholders' Agreement by and among
the Company, the Trustee and certain holders of the Company's Common Stock and
Non-Voting Common Stock in substantially the form attached hereto as Exhibit D
(the "Stockholders' Agreement").
(c) Simultaneously with the exercise of each Warrant, payment in
full of the Exercise Price shall be made (i) in cash or by certified or official
bank check payable to the order of the Company, delivered to the office or
agency where the Warrant Certificate is being surrendered; or (ii) by delivery
of Warrant Certificates pursuant to Section 2.2(d); or (iii) by the surrender to
the Company for cancellation of shares of Series B Preferred Stock with an
aggregate liquidation preference together with accumulated and unpaid dividends
thereon (whether or not declared) equal to the aggregate Exercise Price for all
Warrant Shares issuable upon exercise of such Warrant. Subject to the provisions
of this Warrant Agreement, the rights represented by the Warrants shall be
exercisable at the election of the Holders thereof either in full at any time or
from time to time in part.
(d) In the event that any Holder of Warrant Certificates delivers
such Warrant Certificates to the Company and indicates on the Election to
Exercise that such Holder intends to exercise all, or any portion of, the
Warrants represented by such Warrant Certificate to satisfy its obligation to
pay the Exercise Price in respect thereof by virtue of the provisions of this
Section 2.2(d), such Holder shall become entitled to receive, instead of the
number of Warrant Shares such Holder would have received had the Exercise Price
been paid in cash pursuant to Section 2.2(c), a number of Warrant Shares in
respect of the exercises of such Warrants equal to the product of:
(A) the number of Warrant Shares issuable upon such
exercise of such Warrant Certificates (or, if only a portion of
such Warrant Certificates are being exercised, issuable upon the
exercise of such portion) multiplied by
(B) the quotient of:
(i) the difference of:
(X) the per share Fair Market Value of the
Common Stock at the time of such exercise; minus
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(Y) the Exercise Price at the time of such
exercise; divided by
(ii) the per share Fair Market Value of the Common
Stock at the time of such exercise.
For purposes of Rule 144 and Rule 144A under the Securities Act, the
Company and the Warrant Agent, on behalf of the Holders, hereby agree that the
exercise of any Warrants in accordance with this Section 2.2(d) shall be deemed
to be a conversion of such Warrants, pursuant to the terms of this Warrant
Agreement and the Warrants, into Warrant Shares.
(e) Upon such surrender of a Warrant Certificate and payment and
collection of the Exercise Price at any Warrant Agent Office, such Warrant
Certificate and payment shall be promptly delivered to the Warrant Agent. The
"Exercise Date" for a Warrant shall be the date when all of the items referred
to in the first sentence of paragraphs (b) and (c) of this Section 2.2 are
received by the Warrant Agent at or prior to 2:00 p.m., New York City time, on a
Business Day and the exercise of the Warrants will be effective as of such
Exercise Date. If any items referred to in the first sentence of paragraphs (b)
and (c) of this Section 2.2 are received after 2:00 p.m., New York City time, on
a Business Day, the exercise of the Warrants to which such item relates will be
effective on the next succeeding Business Day. Notwithstanding the foregoing, in
the case of an exercise of Warrants on the Expiration Date, if all of the items
referred to in the first sentence of paragraphs (b) and (c) of this Section 2.2
are received by the Warrant Agent at or prior to 5:00 p.m., New York City time,
on such Expiration Date, the exercise of the Warrants to which such items relate
will be effective on the Expiration Date.
(f) Upon the exercise of a Warrant in accordance with the terms
hereof, the receipt of a Warrant Certificate and payment of the Exercise Price,
the Warrant Agent shall: (i) cause an amount equal to the Exercise Price,
whether in cash, Warrant Certificates or shares of Series B Preferred Stock, to
be delivered or paid to the Company by crediting the same to the account
designated by the Company in writing to the Warrant Agent for that purpose; (ii)
in the case of a payment of the Exercise Price in cash, advise the Company
immediately by telephone of the amount so deposited to the Company's account and
promptly confirm such telephonic advice in writing; (iii) in the case of a
payment of the Exercise Price in Warrant Certificates or shares of Series B
Preferred Stock, advise the Company immediately by telephone of the number of
Warrant Certificates or the aggregate liquidation preference and accumulated and
unpaid dividends thereon (whether or not declared) of shares of Series B
Preferred Stock to be surrendered and promptly confirm such telephone advice in
writing; and (iv) as soon as practicable, advise the Company in writing of the
number of Warrants exercised in accordance with the terms and conditions of this
Warrant Agreement and the Warrant Certificates, the instructions of each
exercising Holder with respect to delivery of the Warrant Shares to which such
Holder is entitled upon such exercise, and such other information as the Company
shall reasonably request.
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(g) Subject to Section 5.2 hereof, as soon as practicable after
the exercise of any Warrant or Warrants in accordance with the terms hereof, the
Company shall issue or cause to be issued to or upon the written order of the
registered Holder evidencing such exercised Warrant or Warrants, a certificate
or certificates evidencing the Warrant Shares to which such Holder is entitled,
in fully registered form, registered in such name or names as may be directed by
such Holder pursuant to the Election to Exercise, as set forth on the reverse of
the Warrant Certificate. The Warrant Agent shall have no obligation to ascertain
the number of Warrant Shares to be issued with respect to the exercised Warrant
or Warrants. Such certificate or certificates evidencing the Warrant Shares
shall be deemed to have been issued and any Persons who are designated to be
named therein shall be deemed to have become the Holder of record of such
Warrant Shares as of the close of business on the Exercise Date. After such
exercise of any Warrant or Warrants, the Company shall also issue or cause to be
issued to or upon the written order of the registered Holder of such Warrant
Certificate, a new Warrant Certificate, countersigned by the Warrant Agent
pursuant to the Company's written instruction, evidencing the number of
Warrants, if any, remaining unexercised (unless such Warrants shall have
expired).
SECTION 2.3. Cancellation of Warrant Certificates. In the event
the Company shall purchase or otherwise acquire Warrants, the Warrant
Certificates evidencing such Warrants may thereupon be delivered to the Warrant
Agent, and if so delivered, shall be canceled by it and retired. The Warrant
Agent shall cancel all Warrant Certificates properly surrendered for exchange,
substitution, transfer or exercise. The Warrant Agent shall deliver all shares
of Series B Preferred Stock properly surrendered for exercise to the Company for
cancellation. The Warrant Agent shall destroy canceled Warrant Certificates held
by it and deliver a certificate of destruction to the Company. The Warrant Agent
shall account promptly to the Company with respect to Warrants exercised and
concurrently pay to the Company all money received, and deliver to the Company
all shares of Series B Preferred Stock received, by the Warrant Agent for the
purchase of Warrant Shares through the exercise of such Warrants.
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.1. Enforcement of Rights.
---------------------
(a) Notwithstanding any of the other provisions of this Warrant
Agreement, any Holder of Warrant Certificates or holder of Warrant Shares,
without the consent of the Warrant Agent, may, in and for its own behalf,
enforce, and may institute and maintain any suit, action or proceeding against
the Company suitable to enforce, its right to exercise the Warrant or Warrants
evidenced by its Warrant Certificate as provided in such Warrant Certificate and
in this Warrant Agreement.
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(b) Neither the Warrants nor any Warrant Certificate shall
entitle the Holders thereof to any of the rights of a holder of Common Stock,
including, without limitation, as applicable, the right to vote or to receive
any dividends or other payments or to consent or to receive notice as
stockholders in respect of the meetings of stockholders or for the election of
directors of the Company or to share in the assets of the Company in the event
of the liquidation, dissolution or winding up of the Company's affairs or any
other matter, or any rights whatsoever as stockholders of the Company.
SECTION 3.2. Tag-Along Rights. From and after the Issue Date
until the later of (A) the date of completion of a Public Equity Offering and
(B) the date on which the Common Stock is listed for trading on a national
securities exchange or is authorized for trading on any tier of the NASDAQ
National Market System (the "Tag-Along Period"), with respect to any proposed
sale, exchange, transfer or other disposition (collectively, a "Proposed
Transfer") of shares of Common Stock or Non-Voting Common Stock by Birch
Holdings L.L.C., Birch Acquisition L.L.C. or any of their Related Parties (any
such Persons being hereinafter referred to as a "Transferor") to a Person, other
than an Affiliate of Birch Holdings L.L.C. or Birch Acquisition L.L.C. (such
other Person being hereafter referred to as the "proposed purchaser"), each
Holder and each holder of Warrant Shares (individually, a "Tag Along Investor"
and, collectively, the "Tag-Along Investors") shall have the right (the
"Tag-Along Right") to require the Transferor, prior to consummation of the
Proposed Transfer, to include in the Proposed Transfer, on the same terms and at
the same price, up to the number of whole Warrant Shares owned by each such
Tag-Along Investor, or Warrants owned by each such Tag-Along Investor which are
exercisable for up to the number of whole Warrant Shares (provided that any Tag-
Along Investor electing to require the proposed Transferor to include Warrants
in such Proposed Transfer shall pay to the Transferor the aggregate Exercise
Price with respect to all such Warrants), equalling the sum of:
(i) the number derived by multiplying the total number of
shares of Common Stock and Non-Voting Common Stock the Transferor
proposes to transfer by a fraction, the numerator of which is the
total number of Warrant Shares owned by such Tag-Along Investor,
or which could then be acquired upon exercise of Warrants, by
such Tag-Along Investor, and the denominator of which is the sum
of (A) the total number of shares of Common Stock and Non-Voting
Common Stock owned by the Transferor, plus (B) the total number
of shares of Warrant Shares which are then outstanding, or which
could then be acquired upon exercise of Warrants, owned by all
Tag-Along Investors who delivered Tag-Along Notices (as defined
in Section 3.2(b) herein); and
(ii) any additional Warrant Shares, if any, such Tag-Along
Investor shall be entitled to transfer if any other Tag-Along
Investor has not elected to exercise its Tag-Along Right
hereunder (as determined pursuant to Section 3.2(c)).
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At all times during the Tag-Along Period, each of Birch
Acquisition L.L.C., Birch Holdings, L.L.C. and their respective Related Parties
and their respective successors (collectively, the "Birch Parties") will hold
their respective shares of Common Stock and Non-Voting Common Stock subject to
the Tag-Along Rights described herein, and their respective shares of Common
Stock and Non-Voting Common Stock will bear a legend indicating that they are
subject to the Tag-Along Rights described herein.
(a) Notice of Proposed Transfer. The Transferor and the Company
shall, not less than 20 nor more than 30 days prior to each Proposed Transfer,
notify, or cause to be notified, the Warrant Agent, each Holder and each holder
of Warrant Shares in writing (the "Sale Notice") of each such Proposed Transfer.
Such Sale Notice shall set forth: (i) the name of the Transferor and the number
of shares of Common Stock and Non-Voting Common Stock proposed to be
transferred, (ii) the proposed amount and form of consideration of any type and
character and terms and conditions of payment offered by such proposed purchaser
to the proposed Transferor or any of its affiliates and (iii) that the proposed
purchaser has been informed of the Tag-Along Right provided for in this Section
3.2 and has agreed to purchase shares of Common Stock and Non-Voting Common
Stock (and Warrant Shares) in accordance with the terms hereof.
(b) Exercise of Tag-Along Right. The Tag-Along Right may be
exercised by any Tag-Along Investor by delivery of a written notice (the
"Tag-Along Notice") to the Transferor along with delivery of a copy of the
written notice to the Warrant Agent within 10 days following receipt by the
Warrant Agent of the Sale Notice. The Tag-Along Notice shall state the amount of
shares of Warrant Shares that such Tag-Along Investor proposes to include in
such transfer to the proposed purchaser (as determined in this Section 3.2),
plus the amount of additional Warrant Shares, if any, that such Tag-Along
Investor would be willing to sell to the proposed purchaser in the event that
any of the other Tag-Along Investors elect not to exercise their Tag-Along
Rights in whole or in part.
(c) Additional Warrant Shares. The maximum amount of additional
Warrant Shares that each such Tag-Along Investor shall be entitled to sell, and
the proposed Transferor shall be required to include in the Proposed Transfer,
shall be determined by multiplying the total number of Warrant Shares, or
Warrant Shares which could be acquired upon exercise of Warrants, that Tag-Along
Investors could have elected to sell to the proposed purchaser but elected not
to so sell (as indicated in the Tag-Along Notices), by a fraction, the numerator
of which is the total number of Warrant Shares, or Warrant Shares which could be
acquired upon exercise of Warrants, owned by such Tag-Along Investors electing
to sell additional Warrant Shares and the denominator of which is the total
number of Warrant Shares, or Warrant Shares which could be acquired upon
exercise of Warrants, owned by all Tag-Along Investors who delivered Tag-Along
Notices.
(d) Limitations on Right of Transferor to Sell Common Stock and
Non-Voting Common Stock. In the event that the proposed purchaser does not
purchase Warrant Shares from the Tag-Along Investors on the same terms and
conditions as specified in the Sale Notice, then
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the Transferor shall not be permitted to sell any shares of Common Stock or
Non-Voting Common Stock to the proposed purchaser in the Proposed Transfer. If
no Tag-Along Notice is received during the 10-day period referred to above (or
if such Tag-Along Notices do not cover all the shares of Common Stock and
Non-Voting Common Stock proposed to be transferred), the Transferor shall have
the right, for a 45-day period after the expiration of the 10-day period
referred to above, to transfer the shares of Common Stock and Non-Voting Common
Stock specified in the Sale Notice (or the remaining shares of Common Stock and
Non-Voting Common Stock) on terms and conditions no more favorable than those
stated in the Tag-Along Notice and without regard to the Tag-Along Rights
described in this Section 3.2.
(e) Payment and Transfer of Warrant Shares. Any Warrant Shares
purchased from Tag-Along Investors hereunder shall be paid for in cash, at the
same price per share of Common Stock and Non-Voting Common Stock and upon the
same terms and conditions as such proposed transfer by the Transferor, it being
agreed, however, that (i) such terms and conditions do not include the making of
any representations and warranties, indemnities or other agreements other than
representations and warranties with respect to title of the Warrant Shares being
sold and authority to sell such Warrant Shares and indemnities related thereto,
(ii) no Tag-Along Investor shall, pursuant to any representation, warranty,
agreement or indemnity made in connection with a Proposed Transfer, be liable in
an amount to exceed the net proceeds received by such Tag-Along Investor in the
Proposed Transfer (without interest thereon) and (iii) no Tag- Along Investor
shall, in connection with any Proposed Transfer, have any liability in respect
of any representation, warranty, agreement or indemnity made by any other
Tag-Along Investor in connection with a Proposed Transfer. All payments to be
made to the Tag-Along Investors shall be made to the Warrant Agent on behalf of
the Tag-Along Investors as directed in writing by the Warrant Agent.
Notwithstanding any provision to the contrary in this Section 3.2, no Tag-Along
Investor shall be required to surrender or deliver Warrant Shares (or Warrant
Certificates representing Warrant Shares) to any Person (including, without
limitation, the proposed purchaser) as a condition precedent to exercise of a
Tag-Along Right hereunder; provided, however, that any such Tag-Along Investor
electing to exercise any Tag-Along Right hereunder shall, promptly after
consummation of a Proposed Transfer of Warrant Shares in accordance with this
Section 3.2(e), exercise all Warrants with respect to which a Tag-Along Right
has been exercised and request that Warrant Certificates (representing Warrant
Shares acquired upon exercise of such Warrants) be issued to such Tag-Along
Investor in accordance with the provisions of Article II hereof.
(f) Acknowledgment by Warrant Agent and the Company. The Company
agrees not to effect any transfer of shares of Common Stock or Non-Voting Common
Stock by any of the Birch Parties until the Company has received evidence
reasonably satisfactory to it and the Warrant Agent that the terms and
provisions of this Section 3.2 with respect to the exercise of any Tag-Along
Right, if applicable to such transfer, have been complied with in all respects.
SECTION 3.3. Exchange Rights of Holders. If either Birch Holdings
L.L.C., Birch Acquisition L.L.C. or any of their respective Related Parties that
are engaged primarily in the business of investing in equity securities of the
Company shall consummate a
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public or private offering of shares of Common Stock or Non-Voting Common Stock
or any security whether or not immediately convertible, exchangeable or
exercisable into Common Stock or Non-Voting Common Stock, the Holders and the
Holders shall have the right to convert the Warrants or Warrant Shares into such
number of shares of common stock of Birch Holdings L.L.C., Birch Acquisition
L.L.C. or such other entity, as the case may be, as have an equivalent Fair
Market Value to the Fair Market Value of the number of Warrant Shares
outstanding or issuable upon the exercise of outstanding Warrants as of the date
of such offering, as determined by an Independent Financial Advisor.
SECTION 3.4. Repurchase Right.
(a) If (A) the Company, in a single transaction or series of
related transactions, (i) sells, assigns, transfers, leases, conveys or
otherwise disposes of all or substantially all of the assets of the Company to
any Person; (ii) consolidates or merges with or into another Person and the
Company is not the surviving entity; or (iii) consolidates or merges with or
into another Person and the Company is the surviving entity (a "Forward Merger")
and (w) the shareholders of the Company immediately preceding such Forward
Merger will not continue to own at least a majority of the outstanding shares of
capital stock of the Company on a fully diluted basis following the consummation
of such Forward Merger, (x) as a direct or indirect result of such Forward
Merger, a Change of Control (as defined in the Indenture) shall have occurred,
(y) the net worth of the Company following the consummation of such Forward
Merger shall not at least equal the net worth of the Company immediately
preceding such Forward Merger, or (z) immediately following the consummation of
such Forward Merger, the Company would not be permitted to incur any additional
Indebtedness (as defined in the Indenture) pursuant to Section 4.12 of the
Indenture, and (B) the consideration payable in respect of any event described
in the immediately preceding clause (i), (ii) or (iii) does not consist solely
of cash (any such event, hereinafter, a "Repurchase Event"), then the Company
shall offer to repurchase (a "Repurchase Offer"), in accordance with the
procedures set forth in this Section 3.4, all Warrants at the per share Fair
Market Value of the Common Stock issuable upon exercise thereof, less the
Exercise Price (the "Repurchase Price"). The Company shall, subject to the
provisions described in this Section 3.4, be required to purchase all Warrants
properly tendered pursuant to a Repurchase Offer and not withdrawn.
Notwithstanding the foregoing, the provisions of this Section 3.4(a) shall not
apply in the event of an internal reorganization involving only the Company and
its wholly-owned subsidiaries pursuant to which the Company is the surviving
entity.
(b) The Repurchase Offer shall remain open for at least 20
Business Days and until the close of business on the fifth Business Day prior to
the Repurchase Date (as hereinafter defined).
(c) Not later than the 30th day following the occurrence of the
Repurchase Event, the Company shall mail to the Warrant Agent and to each Holder
a notice (the "Repurchase Notice") stating, among other things:
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(1) that a Repurchase Event has occurred and that such
Holder has the right to require the Company to repurchase such holder's
Warrants, or portion thereof, at the Repurchase Price;
(2) any information regarding such Repurchase Event
required to be furnished under applicable federal and state securities
laws, rules and regulations;
(3) a purchase date (the "Repurchase Date"), which shall
be on a Business Day and no earlier than 30 days nor later than 60 days
after the occurrence of a Repurchase Event;
(4) that any Warrant, or portion thereof, not tendered or
accepted for payment shall be subject to appropriate adjustment as
required by Section 5 of this Warrant Agreement, and continue in full
force and effect in accordance with this Warrant Agreement; and
(5) the instructions a Holder must follow in order to have
Warrants repurchased in accordance with this Section 3.4.
No failure of the Company to give the foregoing notice shall
limit any right to any Holder right to exercise a repurchase right hereunder.
(d) To exercise the repurchase right, the Holder must deliver, on
or before the fifth calendar day prior to the Repurchase Date, written notice of
the Company (or an agent designated by the Company for such purpose) of the
exercise of such repurchase right, together with the Warrant Certificates with
respect to which the right is being exercised, duly endorsed for transfer;
provided, however, that with respect to Warrants held of record by DTC, the
Company or its designated agent may accept as tendered for repurchase pursuant
to this Section 3.4 Warrants tendered by means of a book entry in accordance
with the normal procedures of DTC.
(e) On the Repurchase Date, the Company shall (i) accept for
payment Warrants or portions thereof tendered pursuant to the Repurchase Notice,
(ii) if the Company appoints a depository or Paying Agent, deposit with such
depository or Paying Agent money sufficient to pay the Repurchase Price of all
Warrants or portions thereof so tendered and (iii) deliver to the Warrant Agent
Warrants so accepted together with an Officers' Certificate stating the Warrants
or portions thereof tendered to the Company. DTC, the Company or the Paying
Agent, as the case may be, shall promptly mail to the Holders whose Warrants are
so accepted payment in an amount equal to the Repurchase Price, and the Warrant
Agent shall promptly authenticate and mail to Holders of Definitive Warrants new
Definitive Warrants equal in principal amount to any unpurchased portion of the
Definitive Warrant surrendered. The Company will publicly announce the results
of the Repurchase Offer on or as soon as practicable after the Repurchase Date.
For purposes of this Section 3.4, the Warrant Agent shall act as the Paying
Agent.
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(f) The Company, to the extent applicable and if required by law,
will comply with the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and any other federal and state securities laws, rules and regulations
that may then be applicable to any offer by the Company to purchase the Warrants
pursuant to the provisions of this Section 3.4.
ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY
SECTION 4.1. Payment of Taxes. The Company will pay all
documentary stamp taxes attributable to the initial issuance of Warrants and of
the Warrant Shares upon the exercise of Warrants and all documentary stamp taxes
attributable to the separation of the Warrants from the Series B Preferred Stock
on the Separation Date; provided, however, that the Company shall not be
required to pay any tax or other governmental charge which may be payable in
respect of any transfer involved in the issue of any Warrant Certificates or any
certificates for Warrant Shares in a name other than the registered Holder
surrendered upon the exercise of a Warrant. In any such case, the Company shall
not be required to issue or deliver such Warrant Certificate or certificate for
Warrant Shares unless or until the Person or Persons requesting issuance thereof
shall have paid to the Company the amount of such tax or other governmental
charge or shall have established to the satisfaction of the Company that such
tax or other governmental charge has been paid or an exemption is available
therefrom.
SECTION 4.2. Notice of Expiration Date. The Company will give
notice of the Expiration Date to all Holders of the then outstanding Warrants,
not less than 90 and not more than 120 days prior to the Expiration Date.
SECTION 4.3. Reservation of Common Stock. The Company covenants
and agrees that it will at all times cause to be reserved and kept available out
of its authorized and unissued shares of Common Stock such number of shares of
Common Stock as will be sufficient to permit the exercise in full of all
Warrants issued hereunder and all other rights, warrants or options exercisable
into, and the conversion of all securities convertible into, Common Stock and
Non-Voting Common Stock.
SECTION 4.4. Warrant Shares to be Duly Authorized and Issued,
Fully Paid and Nonassessable. The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all Warrant Shares delivered
upon the exercise in full of any Warrants, at the time of delivery of the
certificates representing such shares, shall be duly and validly authorized and
issued and fully paid and nonassessable, free of any preemptive rights in favor
of any Person in respect of such issuance and free of any security interest,
lien or other encumbrance of any kind or nature created by, arising out of
actions of, the Company, any subsidiary or any affiliate of the Company.
SECTION 4.5. Reports.
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(a) For so long as any Warrants are outstanding, the Company
shall deliver to the Warrant Agent and mail to each Holder, within 15 days after
the filing of the same with the Securities and Exchange Commission ("SEC"),
copies of its quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the SEC
pursuant to Section 13 or 15(d) of the Exchange Act.
(b) For so long as any Warrants are outstanding, if at any time
the Company is not subject to the requirements of such Section 13 or 15(d) of
the Exchange Act, the Company shall file with the SEC, to the extent permitted,
and distribute to the Warrant Agent and to each Holder copies of the quarterly
and annual financial information that would have been required to be contained
in a filing with the SEC on Forms 10-Q and 10-K and all current reports that
would be required to be filed with the SEC on Form 8-K had the Company been
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act. All such financial information shall include consolidated financial
statements (including footnotes) prepared in accordance with generally accepted
accounting principles. Such annual financial information shall also include an
opinion thereon expressed by an independent accounting firm of established
national reputation. All such consolidated financial statements shall be
accompanied by a "Management's Discussion and Analysis of Financial Condition
and Results of Operation." The financial and other information to be distributed
to Holders shall be filed with the Warrant Agent and mailed to the Holders at
their respective addresses appearing in the Warrant Register maintained by the
Warrant Agent, within 120 days after the end of the Company's fiscal year and
within 60 days after the end of each of the first three quarters of each such
fiscal year. In addition, for so long as any Warrants are outstanding, the
Company shall furnish to the Holders and to securities analysts and to
prospective purchasers upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act for so long as
the Company is required for an offer or sale of the Warrants under Rule 144A.
From and after the date of effectiveness of any registration statement filed
with the SEC with respect to the Warrants, the Company will file with the SEC
such Forms 10-Q and 10-K and any other information required to be filed by it.
SECTION 4.6. Private Placement Numbers. The Company covenants and
agrees to obtain, and thereafter maintain, a private placement number in respect
of the Warrants and a private placement number or CUSIP number, as appropriate,
in respect of the Warrant Shares from the CUSIP Service Bureau of Standard &
Poor's, a division of McGraw-Hill, Inc.
SECTION 4.7. Right of Action. All rights of action in respect of
the Warrants are vested in the respective registered Holders of the Warrant
Certificates, and any registered Holder of any Warrant Certificate, without the
consent of the Holder of any other Warrant Certificate, may, on its own behalf
and for its own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, its right to exercise the Warrants evidenced by such Warrant Certificate in
the manner provided in such Warrant Certificate and in this Warrant Agreement.
SECTION 4.8. Survival. The agreements of the Company contained in
Section 4.1 and Section 4.7 shall survive the exercise of and the expiration of
the Warrants.
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ARTICLE V
ADJUSTMENTS
SECTION 5.1. Adjustment of Exercise Price and Number of Warrant
Shares Issuable. The Exercise Price and the number and kind of Warrant Shares
purchasable upon the exercise of each Warrant shall be subject to adjustment
from time to time as follows:
(a) Stock Dividends, Subdivisions and Combinations. In case the
Company shall hereafter (A) pay a dividend in shares of Common Stock or
Non-Voting Common Stock or make a distribution in shares of Common Stock or
Non-Voting Common Stock, (B) reclassify by subdivision its outstanding shares of
Common Stock or Non-Voting Common Stock into a greater number of shares or (C)
reclassify by combination its outstanding shares of Common Stock or Non-Voting
Common Stock into a smaller number of shares, (i) the number of Warrant Shares
purchasable upon exercise of each Warrant immediately prior thereto shall be
adjusted so that the Holder of any Warrant Certificate thereafter exercised
shall be entitled to receive the number of Warrant Shares which such Holder
would have owned immediately following such action had such Warrant been
exercised immediately prior thereto, and (ii) the Exercise Price shall be
adjusted by multiplying such Exercise Price immediately prior to such adjustment
by a fraction, the numerator of which shall be the number of Warrant Shares
purchasable upon the exercise of each Warrant immediately prior to such
adjustment, and the denominator of which shall be the number of Warrant Shares
purchasable immediately thereafter. An adjustment made pursuant to this Section
5.1(a) shall become effective immediately after the record date, in the case of
a dividend, and shall become effective immediately after the effective date, in
the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this Section 5.1(a), the Holder of any Warrant
Certificate thereafter exercised shall become entitled to receive shares of two
or more classes of capital stock of the Company, the Board of Directors of the
Company shall determine, in its reasonable discretion, the allocation of the
adjusted Exercise Price between or among shares of such classes of capital
stock.
(b) Reclassification, Combinations, Mergers, etc. Subject to
Section 3.4, if (A) any capital reorganization, reclassification or change of
outstanding shares of Common Stock or Non-Voting Common Stock (other than as set
forth in Section 5.1(a) and other than a change in par value, or from par value
to no par value, or from no par value to par value; provided that the Company
shall not increase the par value of the Common Stock to exceed the Exercise
Price), or (B) in case of any consolidation or merger of the Company with or
into another corporation or other entity (other than a merger in which the
Company is the continuing corporation and which does not result in any
reclassification or change of the then outstanding shares of Common Stock or
Non-Voting Common Stock or other capital stock of the Company (other than a
change in par value, or from par value to no par value, or from no par value to
par value or as a result of a subdivision or combination)) or (C) in case of any
sale or conveyance to another corporation or other entity of all or
substantially all of the assets of the Company shall be effected in such a way
that the holders of Common Stock or Non-Voting Common Stock shall be
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entitled to receive shares of common stock, other securities or assets (whether
such stock, other securities or assets are issued or distributed by the Company
or another Person) with respect to or in exchange for Common Stock or Non-Voting
Common Stock, then, as a condition of such reclassification, reorganization,
change, consolidation, merger, sale or conveyance, the Company or such a
successor or purchasing corporation or other entity, as the case may be, shall
forthwith make lawful and adequate provision whereby the Holder of such Warrant
Certificate then outstanding shall have the right thereafter to receive on
exercise of such Warrant the kind and amount of shares of stock and other
securities and assets receivable upon such reclassification, reorganization,
change, consolidation, merger, sale or conveyance by a holder of the number of
shares of Common Stock or Non-Voting Common Stock that such holders would have
been entitled to receive upon exercise of such Warrant had such Warrant been
exercised immediately before such reclassification, reorganization, change,
consolidation, merger, sale or conveyance that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Article V.
For purposes of this Section 5.1(b), "shares of stock and other
securities and property" receivable upon a reclassification, change,
consolidation, merger, sale or conveyance shall include stock of any successor
or acquiring corporation of any class which is not subject to redemption and
shall also include any evidence of indebtedness, shares of stock or other
securities which are convertible into or exchangeable for any such stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event, including any warrants or other rights to subscribe for or
purchase any such stock. If the issuer of securities deliverable upon exercise
of Warrants under the supplemental warrant agreement is an affiliate of the
formed, surviving or transferee corporation or other entity, such issuer shall
join in the supplemental warrant agreement.
In case of any such reclassification, reorganization, merger,
consolidation or dispositions of assets, the successor or acquiring corporation
or other entity shall expressly assume the due and punctual observance and
performance of each and every covenant and condition of this Warrant Agreement
to be performed and observed by the Company and all the obligations and
liabilities hereunder, subject to such modifications as may be deemed
appropriate (as determined in good faith by resolution of the Board of Directors
of the Company) in order to provide for adjustments of Warrant Shares into which
each Warrant is exercisable, which shall be as nearly equivalent as practicable
to the adjustments provided for in this Article V.
(c) Issuances of Common Stock, Non-Voting Common Stock or Rights.
In the event that the Company shall, at any time or from time to time after the
date hereof, issue, sell distribute or otherwise grant (in any such case, a
"Distribution") shares of Common Stock, Non-Voting Common Stock or Rights,
whether or not such Rights are immediately exercisable, convertible or
exchangeable, at a Consideration Per Share lower than the per share Fair Market
Value of the Common Stock or the Non-Voting Common Stock on the date of such
issuance or sale, or if the Company shall amend any of the provisions of any
Rights, including, without limitation, a change in the purchase, conversion,
exchange or exercise price per share of Common Stock or Non-Voting Common Stock,
as the case may be, of any such Right, or the
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Aggregate Consideration Receivable applicable to any such Right (other than
under or by reason of provisions designed to protect against dilution upon an
event which results in an adjustment pursuant to this Article V which is no less
favorable to the Holder than such adjustment is to the holder of such Rights),
then, immediately after the date of such issuance or sale,
(A) the number of Warrant Shares purchasable upon exercise
of each Warrant shall be increased so that the Holders thereafter will
be entitled to receive the number of Warrant Shares determined by
multiplying:
(i) the number of shares of Common Stock or such Holders
would have been entitled to receive immediately before the date
of such issuance or sale had such Holders exercised their
Warrants immediately prior thereto; by
(ii) a fraction, the numerator of which shall be the sum
of: (X) the number of shares of Common Stock and Non-Voting
Common Stock outstanding on such date plus (Y) the number of
additional shares of Common Stock and Non-Voting Common Stock
offered for subscription or purchase (or into which the Rights so
offered are initially convertible or exchangeable or exercisable,
as the case may be), and the denominator of which shall be the
sum of: (X) the number of shares of Common Stock and Non-Voting
Common Stock outstanding on such date plus (Y) the number of
shares of Common Stock or Non-Voting Common Stock that the
Aggregate Consideration Receivable would purchase at such per
share Fair Market Value of the Common Stock on the date of such
issuance or sale, and
(B) the Exercise Price in effect immediately after such
Distribution shall be adjusted by multiplying the Exercise Price in
effect immediately prior to such Distribution by the quotient of:
(i) the sum of: (A) the number of shares of Common Stock
and Non-Voting Common Stock outstanding immediately prior to such
Distribution; plus (B) the quotient of: (X) the Aggregate
Consideration Receivable; divided by (Y) the per share Fair
Market Value of the Common Stock or Non-Voting Common Stock; in
each case immediately prior to such Distribution; divided by
(ii) the sum of: (A) the number of shares of Common Stock
and Non-Voting Common Stock outstanding immediately prior to such
Distribution; plus (B) the number of shares of Common Stock and
Non-Voting Common Stock so issued or sold (or initially issuable
pursuant to any Rights).
No adjustment shall be made pursuant to subparagraph (A) above
which would decrease the number of shares of Common Stock purchasable upon
exercise of a Warrant. No adjustment shall be made pursuant to subparagraph (B)
above which would increase the Exercise Price of a Warrant.
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For purposes of the foregoing calculation, the total maximum
number of shares of Common Stock and/or Non-Voting Common Stock issuable upon
exercise, conversion or exchange, as applicable, of all Rights shall be deemed
to have been issued as of the date of such Distribution and thereafter shall be
deemed to be outstanding and the Company shall be deemed to have received as
consideration therefor the Aggregate Consideration Receivable applicable thereto
after giving effect to such exercise, conversion or exchange. Except as provided
in Section 5.1(g), no additional adjustments of the Exercise Price shall be made
upon the actual exercise, exchange or conversion, as applicable, of such Rights.
(d) Dividends and Distributions. In the event the Company shall,
at any time or from time to time after the date hereof, make or pay any dividend
of, or distribute to holders of Common Stock or Non-Voting Common Stock (in any
such case, a "Dividend"), shares of capital stock, any of its property or
assets, including, without limitation, cash, evidences of its indebtedness,
Rights or other securities (in each case, other than dividends payable in Common
Stock or Non-Voting Common Stock) (collectively, "Dividend Securities"), then,
in each such case, the Company shall reserve shares or other units of such
Dividend Securities for distribution to the Holders upon exercise of their
Warrants so that, in addition to the Warrant Shares issuable upon exercise
thereof, such Holders will receive upon such exercise the amount and kind of
such Dividend Securities that such Holders would have received if the Holders
had, immediately prior to the record date for the distribution of the Dividend
Securities, exercised the Warrants.
(e) Self-Tenders. If, at any time or from time to time after the
date hereof, the Company or any subsidiary of the Company shall repurchase, by
self-tender offer or otherwise, any shares of Common Stock or Non-Voting Common
Stock of the Company or any Right at a weighted average purchase price in excess
of the per share Fair Market Value of the Common Stock or Non-Voting Common
Stock, then on the Business Day immediately prior to the earliest of (i) the
date of such repurchase, (ii) the commencement of an offer to repurchase or
(iii) the public announcement of either (such date being referred to as the
"Determination Date"), the Company shall (x) offer to repurchase the Warrant
Shares on the same terms and conditions on which it has offered to repurchase
the shares of Common Stock or Non-Voting Common Stock that were the subject of
the self-tender or (y) offer to repurchase the Warrants on the same terms and
conditions on which it has offered to repurchase the rights that were the
subject of the self- tender.
(f) Fair Market Value of Consideration Received. Notwithstanding
any provision to the contrary herein, for purposes of this Article V, if any
Rights shall be issued in connection with the issuance and sale of other
securities of the Company, together comprising one integral transaction in which
no specific consideration is allocated to such Rights by the parties thereto,
such Rights shall be deemed to have been issued without consideration, provided,
however, that if any such Rights have an exercise price (to the extent
applicable) equal to or greater than the per share Fair Market Value of the
Common Stock or Non-Voting Common Stock on the date of issuance of such Rights,
then such Rights shall be deemed to have been issued for consideration equal to
such exercise price.
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(g) Deferral of Certain Adjustments. No adjustment to the
Exercise Price (including the related adjustment to the number of Warrant Shares
purchasable upon the exercise of each Warrant) shall be required hereunder
unless such adjustment, together with other adjustments carried forward as
provided below, would result in an increase or decrease of at least one percent
(1%) of the Exercise Price; provided, however, that any adjustments which by
reason of this 5.1(g) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. No adjustment need be made for
a change in the par value of the Common Stock or Non-Voting Common Stock;
provided, however, the Company shall not increase the par value of the Common
Stock or Non-Voting Common Stock to exceed the Exercise Price. All calculations
under this Section 5.1 shall be made to the nearest 1/1,000 of one cent or to
the nearest 1/1,000th of a Warrant Share, as the case may be.
(h) Other Adjustments. In the event that at any time, as a result
of an adjustment made pursuant to this Article V, Holders shall become entitled
to receive any securities of the Company other than shares of Common Stock or
Non-Voting Common Stock, thereafter the number of such other securities so
receivable upon exercise of each Warrant and the Exercise Price applicable to
such exercise shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Warrant Shares and the Exercise Price contained in this Article V, and all
other relevant provisions of this Article V that are applicable to shares of
Common Stock or Non-Voting Common Stock shall be applicable to such other
securities. In case at any time or from time to time the Company shall take any
action in respect of its outstanding shares of Common Stock or Non-Voting Common
Stock, other than any action described in this Article V, or any event occurs as
to which the provisions of this Article V are not strictly applicable, then the
number of Warrant Shares for which each Warrant is exercisable shall be adjusted
in such manner as may be equitable in the circumstances and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
and the Exercise Price contained in this Article V and as shall be reasonably
necessary, in the good faith opinion of the Board of Directors of the Company,
to protect the exercise rights of the Holders, but in no event shall any such
adjustment have the effect of adversely affecting the Holders. If the Company
shall at any time or from time to time issue, sell or distribute any shares of
capital stock (other than Common Stock or Non-Voting Common Stock), any
evidences of indebtedness, any property or assets, Rights or other securities,
then, in each such case, such issuance, sale or distribution shall be deemed to
be of, or in respect of, Common Stock and Non-Voting Common Stock for purposes
of this Article V.
(i) Statement of Warrant Certificates. Irrespective of any
adjustment in the number or kind of Warrant Shares issuable upon the exercise of
each Warrant or the Exercise Price, Warrant Certificates theretofore or
thereafter issued shall continue to express the same number and kind of Warrant
Shares and Exercise Price as are stated in the Warrant Certificates initially
issuable pursuant to this Warrant Agreement.
(j) Increased Warrant Shares or Reduced Exercise Price. From time
to time, the Company may, for a period of not less than 20 Business Days, in its
discretion, upon written notice to the Warrant Agent, increase the number of
Warrant Shares purchasable upon the
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exercise of each Warrant, without making any adjustment to the Exercise Price,
or reduce the Exercise Price, without making any adjustment to the number of
Warrant Shares purchasable upon the exercise of each Warrant; provided that in
the event the Company elects to make any such adjustments, the Company shall
make the same or proportional adjustment, as the case may be, with respect to
all outstanding Warrants.
(k) No Adjustments for Certain Incentive Compensation, Issuance
of Warrant Shares or Issuance of Shares Pursuant to Existing Warrants.
Notwithstanding any other provision hereof, it is expressly understood that the
Warrants shall not be adjusted with respect to (a) Common Stock, Non-Voting
Common Stock or Rights, in any case, that may be issued to any of the Company's
officers or employees pursuant to the stock option plans or similar plans of the
Company, including, without limitation, the Discovery Zone, Inc. 1997 Stock
Incentive Plan (collectively, the "Plans"), to the extent that shares of Common
Stock, Non-Voting Common Stock or other securities issued or granted under such
Plans are issued or granted at a price, or with an exercise price, that is no
less than the per share Fair Market Value of the Common Stock or Non-Voting
Common Stock at the date of grant or issuance and such grant or issuance,
together with all previous grants and issuances under all such Plans, represent
not more than 10% of the fully diluted Common Stock and Non-Voting Common Stock
at the time of such grant or issuance, (b) the conversion or exchange (other
than pursuant to a reclassification), in any case on a share-for-share basis, of
Common Stock for Non-Voting Common Stock, (c) the issuance of any Warrant Shares
or (d) exercise of the Existing Warrants.
(l) No Impairment. The Company will not, by amendment of its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, liquidation, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Company, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5.1 and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders against impairment.
(m) Further Equitable Adjustments. If, after one or more
adjustments to the Exercise Price pursuant to this Section 5.1, the Exercise
Price cannot be reduced further without falling below the greater of (i) the par
value of the Common Stock and the Non-Voting Common Stock or (ii) the lowest
positive exercise price legally permissible for warrants to acquire shares of
common stock, the Company shall make further adjustments to compensate the
Holders, consistent with the foregoing principles, as the Board of Directors of
the Company, acting in good faith, deems necessary, including an increase in the
number of Warrant Shares issuable upon exercise of outstanding Warrants and/or a
cash payment to the Holders.
(n) Other Adjustments.
(i) Adjustments shall be made pursuant to this Section 5.1
successively whenever any of the events referred to in Section 5.1(a)
through Section 5.1(e), inclusive, and Section 5.1(p) shall occur.
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(ii) If any Warrant shall be exercised subsequent to the
record date for any of the events referred to in this Section 5.1, but
prior to the effective date thereof, appropriate adjustments shall be
made immediately after such effective date so that the Holder of such
Warrant on such record date shall have received, in the aggregate, the
kind and number of shares of Common Stock, Non-Voting Common Stock or
other securities or property or assets that it would have owned or been
entitled to receive on such effective date had such Warrant been
exercised prior to such record date.
(iii) Shares of Common Stock and Non-Voting Common Stock
owned by or held for the account of the Company shall not, for purposes
of the adjustments set forth in this Section 5.1 be deemed outstanding.
(o) Expiration of Rights. Upon the expiration of any Rights
referred to in this Section 5.1, without the exercise, exchange or conversion,
as applicable, thereof, the Exercise Price and the number of Warrant Shares
shall, upon such expiration, be readjusted and shall thereafter be such Exercise
Price and such number of Warrant Shares as would have been had such Exercise
Price and such number of Warrant Shares been originally adjusted (or had the
original adjustment not been required, as the case may be) as if:
(i) the only shares of Common Stock and Non-Voting Common
Stock so issued were the shares of Common Stock and Non-Voting Common
Stock, if any, actually issued or sold upon the exercise of such Rights;
and
(ii) such shares of Common Stock and Non-Voting Common
Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such Rights, whether or not exercised;
provided, however, that no such readjustment shall have the effect of
increasing the Exercise Price by an amount in excess of the amount of
the reduction initially made in respect of the issuance, sale, or grant
of such Rights.
(p) Adjustments in Connection with Plan Distributions. If, at any
time after July 22, 1997, and for so long as Warrants shall continue to be
outstanding, the Company shall have issued shares of Common Stock, Non-Voting
Common Stock or Rights to holders of Disputed Claims (as such term is defined in
the Company's Third Amended Plan of Reorganization, dated March 11, 1997 (the
"Reorganization Plan")) in settlement of such claims in an aggregate amount at
any time outstanding greater than 4,444,444 (which amount represents the sum of
(x) all of the issued and outstanding Common Stock and Non-Voting Common Stock
on July 22, 1997 in an aggregate amount of 4,000,000 issued to holders of
certain claims against the Company in accordance with the Reorganization Plan
and (y) 444,444 shares of Common Stock reserved for issuance upon exercise of
the Ten Year Warrants (as defined under the Reorganization Plan) (an "Excess
Plan Distribution"), then, on the date of any such Excess Plan Distribution, the
number of Warrant Shares issuable upon exercise of all Warrants shall be
increased such that each Holder thereof would receive upon such exercise on the
date of any such
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Excess Plan Distribution such number of Warrant Shares as shall be necessary to
cause such Holder's percentage interest in the Common Stock or Non-Voting Common
Stock on a fully diluted basis (except issuances of shares of Common Stock upon
exercise of options granted under the Company's 1997 Stock Incentive Plan (the
"Plan")) immediately after such Excess Payment Distribution to equal such
Holder's percentage interest in Common Stock or Non-Voting Common Stock on a
fully diluted basis (except issuances of shares of Common Stock upon exercise of
options granted under the Plan) immediately prior to such Excess Plan
Distribution. Notwithstanding the foregoing, if after July 22, 1997 the Company
shall, in connection with the resolution of Disputed Claims, have issued shares
of Common Stock or Non-Voting Common Stock in an aggregate amount less than
4,444,444, the balance of any such shares of Common Stock or Non-Voting Common
Stock may be distributed by the Company without requiring any adjustment
pursuant to this Section 5.1(p). The adjustments required by this Section 5.1(p)
shall not limit or otherwise adversely affect the rights of the Holders under
any other adjustments required by this Article V.
SECTION 5.2. Fractional Interest. The Company shall not be
required to issue fractional shares of Common Stock or Non-Voting Common Stock
on the exercise of Warrants. If more than one Warrant shall be presented for
exercise in full at the same time by the same Holder, the number of full shares
of Common Stock or Non-Voting Common Stock which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of shares of
Common Stock or Non-Voting Common Stock acquirable on exercise of the Warrants
so presented. If any fraction of a share of Common Stock or Non-Voting Common
Stock would, except for the provisions of this Section 5.2, be issuable on the
exercise of any Warrant, the Company shall either (i) pay an amount in cash
calculated by the Company to equal the per share Fair Market Value of the Common
Stock or Non-Voting Common Stock multiplied by such fraction of a share of
Common Stock or Non-Voting Common Stock computed to the nearest whole cent or
(ii) aggregate all such fractional shares of Common Stock and Non-Voting Common
Stock into a whole number of shares and sell such aggregated fractional shares
on behalf of the Holders entitled thereto in a public or private sale and
distribute, on a pro rata basis, the net cash proceeds therefrom to such
Holders. While the Company will use its best efforts to secure the best
available sale price for such aggregated fractional shares, such price shall not
necessarily be the highest price obtainable for such shares. By their
acceptances of the Warrant Certificates, Holders expressly waive any and all
rights to receive any fraction of a share of Common Stock or Non-Voting Common
Stock or a stock certificate or scrip representing a fraction of a share of
Common Stock or Non-Voting Common Stock.
SECTION 5.3. When Adjustment Not Required. If the Company shall
take a record of the holders of its Common Stock or Non-Voting Common Stock for
the purpose of entitling them to receive a dividend or distribution or
subscription or purchase rights and shall, thereafter and before the
distribution to stockholders thereof, legally abandon its plan to pay or deliver
such dividend, distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and annulled.
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SECTION 5.4. Treasury Stock. The sale or other disposition of any
issued shares of Common Stock or Non-Voting Common Stock owned or held by or for
the account of the Company shall be deemed an issuance thereof and, except for a
voluntary tender or exchange offer made by the Company or any subsidiary of the
Company subject to Section 13(e) of the Exchange Act, a repurchase thereof and
designation of such shares as treasury stock shall not be deemed to be a
redemption thereof for the purposes of this Warrant Agreement.
SECTION 5.5. Notices to Warrant Agent and Holders. Whenever the
number of Warrant Shares is adjusted or the Exercise Price in respect thereof is
adjusted, as herein provided, the Company shall promptly or, if notice of such
adjustment is required to be given to DTC, at least five (5) days prior to the
date on which notice of such adjustment is given to DTC, give to each Holder
notice of such adjustment or adjustments and shall promptly deliver to each
Holder and the Warrant Agent an Officer's Certificate (confirmed by a
certificate from the Company's independent certified public accountants) setting
forth: (i) the number of Warrant Shares issuable upon the exercise of each
Warrant and the Purchase Price of such shares after such adjustment; (ii) a
brief statement of the facts requiring such adjustment; and (iii) the
computation by which such adjustment was made.
So long as any Warrant is outstanding, within ninety (90) days of
the end of each fiscal year of the Company, the Company shall deliver to each
Holder an Officer's Certificate setting forth: (i) the number of Warrant Shares
issuable upon the exercise of each Warrant and the Exercise Price of such shares
as of the end of such fiscal year; (ii) a brief statement of the facts requiring
each adjustment, if any, required to be made in such fiscal year; and (iii) the
computation by which each such adjustment was made.
In the event that the Holders of at least 25% of the outstanding
Warrants shall challenge any of the calculations set forth in such notice within
20 Business Days after the Company's delivery thereof, the Company shall retain
an Independent Financial Advisor to prepare and execute a certificate verifying
that no adjustment is required. The Company shall promptly cause a signed copy
of any certificate prepared pursuant to this Section 5.5 to be delivered to each
Holder. The Company shall keep at the Warrant Agent Office copies of all such
certificates and cause the same to be available for inspection at said office
during normal business hours upon reasonable notice by any Holder or any
prospective purchaser of a Warrant designated by a Holder thereof.
ARTICLE VI
CONCERNING THE WARRANT AGENT
SECTION 6.1. Warrant Agent. At no time when the Company may be
acting as its own Warrant Agent shall any of its obligations to the Holders be
in any respect reduced as a result thereof. The Warrant Agent shall have the
powers and authority specifically
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granted to and conferred upon it in the Warrant Certificates and this Warrant
Agreement and such further powers and authority to act on behalf of the Company
as the Company may hereafter grant to or confer upon it and it shall accept in
writing. All of the terms and provisions with respect to such powers and
authority contained in the Warrant Certificates are subject to and governed by
the terms and provisions hereof.
SECTION 6.2. Conditions of Warrant Agent's Obligations. The
Warrant Agent accepts its obligations herein set forth upon the terms and
conditions hereof and in the Warrant Certificates, including the following, to
all of which the Company agrees and to all of which the rights hereunder of the
Holders from time to time of the Warrant Certificates shall be subject:
(a) The Warrant Agent shall be entitled to compensation to be
agreed upon with the Company in writing for all services rendered by it and the
Company agrees promptly to pay such compensation and to reimburse the Warrant
Agent for its reasonable out-of-pocket expenses (including reasonable fees and
expenses of counsel) incurred without gross negligence, bad faith or willful
misconduct on its part in connection with the services rendered by it hereunder.
The Company also agrees to indemnify the Warrant Agent, each predecessor Warrant
Agent, and their respective directors, officers, affiliates, agents and
employees for, and to hold it and its directors, officers, affiliates, agents
and employees harmless against, any loss, liability or expense of any nature
whatsoever (including, without limitation, fees and expenses of counsel)
incurred without gross negligence, bad faith or willful misconduct on the part
of the Warrant Agent or predecessor Warrant Agent, arising out of or in
connection with its acting as such Warrant Agent hereunder and its exercise or
failure to exercise of its rights and performance of its obligations hereunder.
The obligations of the Company under this Section 6.2 shall survive the exercise
and the expiration of the Warrant Certificates and the resignation and removal
of the Warrant Agent.
(b) In acting under this Warrant Agreement and in connection with
the Warrant Certificates, the Warrant Agent is acting solely as agent of the
Company and does not assume any obligation or relationship of agency or trust
for or with any of the owners or Holders of the Warrant Certificates.
(c) The Warrant Agent may consult with counsel and any advice or
written opinion of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with such advice or opinion.
(d) The Warrant Agent shall be fully protected and shall incur no
liability for or in respect of any action taken or omitted to be taken or thing
suffered by it in reliance upon any Warrant Certificate, notice, direction,
consent, certificate, affidavit, opinion of counsel, instruction, statement or
other paper or document reasonably believed by it to be genuine and to have been
presented or signed by the proper parties.
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(e) The Warrant Agent and its Related Parties may become the
owners of, or acquire any interest in, Warrant Certificates, shares or other
obligations of the Company with the same rights that it or they would have if it
were not the Warrant Agent hereunder and, to the extent permitted by applicable
law, it or they may engage or be interested in any financial or other
transaction with the Company and may act on, or as depositary, trustee or agent
for, any committee or body of holders of shares or other obligations of the
Company as freely as if it were not the Warrant Agent hereunder. Nothing in this
Warrant Agreement shall be deemed to prevent the Warrant Agent or such Related
Parties from acting in any other capacity for the Company.
(f) The Warrant Agent shall not be under any liability for
interest on, and shall not be required to invest, any money at any time received
by it pursuant to any of the provisions of this Warrant Agreement or of the
Warrant Certificates.
(g) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Warrant Agreement (or any term or provision
hereof) or the execution and delivery hereof or in respect of the validity or
execution of any Warrant Certificate (except its authentication thereof).
(h) The recitals and other statements contained herein and in the
Warrant Certificates (except as to the Warrant Agent's authentication thereon)
shall be taken as the statements of the Company, and the Warrant Agent assumes
no responsibility for the correctness of such recitals or other statements. The
Warrant Agent does not make any representation as to the validity or sufficiency
of this Warrant Agreement or the Warrant Certificates; provided, however, that
the Warrant Agent shall not be relieved of its duty to authenticate the Warrant
Certificates as authorized by this Warrant Agreement. The Warrant Agent shall
not be accountable for the use or application by the Company of the proceeds of
the exercise of any Warrant.
(i) Before the Warrant Agent acts or refrains from acting with
respect to any matter contemplated by this Warrant Agreement, it may require:
(A) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in
this Warrant Agreement relating to the proposed action have been
complied with; and
(B) if reasonably necessary in the sole judgment of the
Warrant Agent, an opinion of counsel for the Company stating
that, in the opinion of such counsel, all such conditions
precedent have been complied with.
Each Officers' Certificate or, if requested, an opinion of
counsel (with respect to which such counsel may rely, as to matters of fact, on
a certificate or certificates of Officers of the Company) with respect to
compliance with a condition or covenant provided for in this Warrant Agreement
shall include:
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(1) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he or
she has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of
such Person, such condition or covenant has been complied with.
(j) The Warrant Agent shall be obligated to perform such duties
as are herein and in the Warrant Certificates specifically set forth and no
implied duties or obligations shall be read into this Warrant Agreement or the
Warrant Certificates against the Warrant Agent. The Warrant Agent shall not be
accountable or under any duty or responsibility for the use by the Company of
any of the Warrant Certificates authenticated by the Warrant Agent and delivered
by it to the Company pursuant to this Warrant Agreement. The Warrant Agent shall
have no duty or responsibility in case of any default by the Company in the
performance of its covenants or agreements contained in the Warrant Certificates
or in the case of the receipt of any written demand from a Holder with respect
to such default, including, without limiting the generality of the foregoing,
any duty or responsibility to initiate or attempt to initiate any proceedings at
law or otherwise or, except as provided in Section 7.2 hereof, to make any
demand upon the Company. The Warrant Agent shall not be obligated to perform any
duty to the extent prohibited by law.
(k) Unless otherwise specifically provided herein, any order,
certificate, notice, request, direction or other communication from the Company
made or given under any provision of this Warrant Agreement shall be sufficient
if signed by its President or, Vice President and attested by its Treasurer,
Controller, Secretary or any Assistant Secretary.
(l) The Warrant Agent shall have no responsibility in respect of
any adjustment pursuant to Article V hereof.
(m) The Company agrees that it will perform, execute, acknowledge
and deliver, or cause to be performed, executed, acknowledged and delivered, all
such further and other acts, instruments and assurances as may reasonably be
required by the Warrant Agent for the carrying out or performing by the Warrant
Agent of the provisions of this Warrant Agreement.
(n) The Warrant Agent is hereby authorized and directed to accept
written instructions with respect to the performance of its duties hereunder
from any one of the
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President, the Treasurer, the Controller, any Vice President or the Secretary of
the Company or any other officer or official of the Company reasonably believed
to be authorized to give such instructions and to apply to such officers or
officials for advice or instructions in connection with its duties, and it shall
not be liable for any action taken or suffered to be taken by it in good faith
in accordance with instructions with respect to any matter arising in connection
with the Warrant Agent's duties and obligations arising under this Warrant
Agreement. Such application by the Warrant Agent for written instructions from
the Company may, at the option of the Warrant Agent, set forth in writing any
action proposed to be taken or omitted by the Warrant Agent with respect to its
duties or obligations under this Warrant Agreement and the date on or after
which such action shall be taken, and the Warrant Agent shall not be liable for
any action taken or omitted to be taken in accordance with a proposal included
in any such application on or after the date specified therein (which date shall
be not less than 10 Business Days after the Company receives such application
unless the Company consents to a shorter period), provided that (i) such
application includes a statement to the effect that it is being made pursuant to
this Section 6.2(n) and that unless objected to prior to such date specified in
the application, the Warrant Agent will not be liable for any such action or
omission to the extent set forth in such application and (ii) prior to taking or
omitting any such action, the Warrant Agent has not received written
instructions objecting to such proposed action or omission.
(o) Whenever in the performance of its duties under this Warrant
Agreement the Warrant Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by any one of the President, the
Treasurer, the Controller, any Vice President or the Secretary of the Company or
any other officer or official of the Company reasonably believed by the Warrant
Agent to be authorized to give such instructions and delivered to the Warrant
Agent and such certificate shall grant full authorization to the Warrant Agent
for any action taken or suffered in good faith by it under the provisions of
this Warrant Agreement in reliance upon such certificate.
(p) The Warrant Agent shall not be required to risk or expend its
own funds in the performance of its obligations and duties hereunder.
SECTION 6.3. Resignation and Appointment of Successor.
(a) The Company agrees, for the benefit of the Holders, that
there shall at all times be a Warrant Agent hereunder.
(b) The Warrant Agent may at any time resign as Warrant Agent by
giving written notice to the Company of such intention on its part, specifying
the date on which its desired resignation shall become effective, provided that
such date shall be at least 30 days after the date on which such notice is given
unless the Company agrees to accept less notice. Upon receiving such notice of
resignation, or in the event the Company shall determine not to continue to act
as its own Warrant Agent, the Company shall promptly appoint a successor Warrant
Agent,
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qualified as provided in Section 6.3(d) hereof, by written instrument in
duplicate signed on behalf of the Company, one copy of which shall be delivered
to the resigning Warrant Agent and one copy to the successor Warrant Agent. As
provided in Section 6.3(d) hereof, such resignation shall become effective upon
the earlier of (x) the acceptance of the appointment by the successor Warrant
Agent or (y) 30 days after receipt by the Company of notice of such resignation.
The Company may, at any time and for any reason, and shall, upon any event set
forth in the next succeeding sentence, remove the Warrant Agent and appoint a
successor Warrant Agent by written instrument in duplicate, specifying such
removal and the date on which it is intended to become effective, signed on
behalf of the Company, one copy of which shall be delivered to the Warrant Agent
being removed and one copy to the successor Warrant Agent. The Warrant Agent
shall be removed as aforesaid if it shall become incapable of acting, or shall
be adjudged a bankrupt or insolvent, or a receiver of the Warrant Agent or of
its property shall be appointed, or any public officer shall take charge or
control of it or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation. Any removal of the Warrant Agent and any
appointment of a successor Warrant Agent shall become effective upon acceptance
of appointment by the successor Warrant Agent as provided in Section 6.3(d). As
soon as practicable after appointment of the successor Warrant Agent, the
Company shall cause written notice of the change in the Warrant Agent to be
given to each of the registered Holders in the manner provided for in Section
7.4 hereof.
(c) Upon resignation or removal of the Warrant Agent, if the
Company shall fail to appoint a successor Warrant Agent within a period of 30
days after receipt of such notice of resignation or removal, then the Holder or
the Warrant Agent may apply to a court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Pending appointment of a
successor to the Warrant Agent, either by the Company or by such a court, the
duties of the Warrant Agent shall be carried out by the Company.
(d) Any successor Warrant Agent, whether appointed by the Company
or by a court, shall be a bank or trust company in good standing, incorporated
under the laws of the United States of America or any State thereof and having,
at the time of its appointment, a combined capital surplus of at least $150
million. Such successor Warrant Agent shall execute and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder and all the provisions of this Warrant Agreement, and thereupon such
successor Warrant Agent, without any further act, deed or conveyance, shall
become vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with like effect as if originally named as Warrant Agent
hereunder, and such predecessor shall thereupon become obligated to (i) transfer
and deliver, and such successor Warrant Agent shall be entitled to receive, all
securities, records or other property on deposit with or held by such
predecessor as Warrant Agent hereunder and (ii) upon payment of the amounts then
due it pursuant to Section 6.2(a) hereof, pay over, and such successor Warrant
Agent shall be entitled to receive, all money deposited with or held by any
predecessor Warrant Agent hereunder.
(e) Any corporation or bank into which the Warrant Agent
hereunder may be merged or converted, or any corporation or bank with which the
Warrant Agent may be
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consolidated, or any corporation or bank resulting from any merger, conversion
or consolidation to which the Warrant Agent shall be a party, or any corporation
or bank to which the Warrant Agent shall sell or otherwise transfer all or
substantially all of its corporate trust business or assets, shall be the
successor to the Warrant Agent under this Warrant Agreement (provided that such
corporation or bank shall be qualified as aforesaid) without the execution or
filing of any document or any further act on the part of any of the parties
hereto.
(f) No Warrant Agent under this Warrant Agreement shall be
personally liable for any action or omission of any successor Warrant Agent or
of the Company.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Defined Terms. Unless otherwise defined in this
Warrant Agreement, the capitalized terms set forth below and used in this
Warrant Agreement shall have the meanings given to such terms below:
"Aggregate Consideration Receivable" means, in the case of a
sale, issuance or other distribution of shares of Common Stock or Non-Voting
Common Stock, the aggregate amount paid to the Company in connection therewith
and, in the case of an issuance, sale or other distribution of Rights, or any
amendment thereto, the sum of: (a) the aggregate amount paid to the Company for
such Rights; plus (b) the aggregate consideration or premium stated in such
Rights to be payable for the shares of Common Stock or Non-Voting Common Stock
covered thereby, in each case, without deduction for any fees, expenses or
underwriters discounts; provided further, that if all or any portion of the
aggregate amount paid to the Company for such Rights was not paid in cash, the
amount of such consideration other than cash received by the Company shall be
deemed to be the then Fair Market Value of such consideration.
"Business Day" means any Monday, Tuesday, Wednesday, Thursday and
Friday on which (i) banks in New York City or the city in which the principal
corporate trust office of the Warrant Agent is located, (ii) the principal
national securities exchange or market, if any, on which the Common Stock, the
Non-Voting Common Stock or the Warrants are listed or admitted to trading, in
each case, are not obligated by law or executive order to be closed.
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and any and all warrants, options and rights with
respect thereto, including, without limitation, each class of common stock and
preferred stock, partnership interests and other indicia of ownership of such
person.
"Closing Prices" means, per share of Common Stock, Non-Voting
Common Stock or any other security, on any date specified herein:
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(i) the last sale price, regular way, on such date or, if no
such sale takes place on such date, the average of the
closing bid and asked prices on such date, in each case as
officially reported on the principal national securities
exchange on which the Common Stock, Non-Voting Common
Stock or other security is then listed or admitted to
trading; and
(ii) if the Common Stock, Non-Voting Common Stock or other
security is not then listed or admitted to trading on any
national securities exchange, but is designated as a
national market system security by the National
Association of Securities Dealers, Inc. ("NASD"), the last
trading price of the Common Stock, Non-Voting Common Stock
or such other security on such date, or if there shall
have been no trading on such date or if the Common Stock,
Non-Voting Common Stock or such other security is not so
designated, the average of the reported closing bid and
asked prices on such date as shown by the National
Association of Securities Dealers Annotated Quotation
System ("NASDAQ").
"Consideration Per Share" means, with respect to shares of Common
Stock, Non-Voting Common Stock or Rights, the quotient of: (a) the Aggregate
Consideration Receivable in respect of such shares of Common Stock, Non-Voting
Common Stock or such Rights, divided by (b) the total number of such shares of
Common Stock or Non-Voting Common Stock or, in the case of Rights, the total
number of shares of Common Stock or Non-Voting Common Stock into which such
Rights are exercisable or convertible.
"Convertible Preferred Stock" means the Series A Convertible
Preferred Stock of the Company issued by the Company in connection with the
issuance of the Existing Notes and the Existing Warrants.
"Disqualified Capital Stock" means any Capital Stock which, by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the holder thereof, in whole or in part, on or prior
to May 1, 2002.
"Existing Warrants" means the warrants to purchase the Company's
Common Stock initially issued on July 22, 1997 in connection with the Company's
issuance of the Existing Notes.
"Fair Market Value" means, per share of Common Stock, Non-Voting
Common Stock or any other security, as of any date of determination, the
arithmetic mean of the daily Closing Prices for the 30 consecutive trading days
before such date of determination; provided, however, that if the Common Stock,
Non-Voting Common Stock or such other security is then neither listed or
admitted to trading on any national securities exchange, designated as a
national
-39-
<PAGE>
market system security by the NASD or quoted by NASDAQ, then "Fair Market Value"
means the fair market value of one share of Common Stock, Non-Voting Common
Stock or such other security as determined by an Independent Financial Advisor
as of the date of determination. Any such valuation by an Independent Financial
Advisor shall be based on a sale of the Company, and such valuation shall not be
discounted based on a lack of liquidity or voting rights, with respect to any
such shares, or based on a lack of control of the Company or by the minority
position of the holders of any such shares. For all purposes of this Agreement,
the Fair Market Value of the Non-Voting Common Stock will be deemed to be the
same as the Fair Market Value of the Common Stock.
"Independent Financial Advisor" means Jefferies & Company, Inc.
or any of its successors. If and only to the extent Jefferies & Company, Inc. or
any such successor shall resign from acting as such, such other firm of
independent certified public accountants, an investment banking or appraisal
firm (which firm shall own no equity interest of, and shall not be an affiliate,
subsidiary or Related Party of the Company) of recognized national standing to
be retained by the Company and acceptable to Jefferies & Company, Inc. and the
Warrant Agent.
"Notes" means the Company's 13% Senior Collateralized Notes due
2002.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Public Equity Offering" means an offering of Qualified Capital
Stock of the Company pursuant to a registration statement filed with and
declared effective by the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (other than a registration statement on Form
S-8 or otherwise relating to equity securities under any employee benefit plans)
which results in net proceeds to the Company of at least $20 million.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Qualified Offering" means an offering of Qualified Capital Stock
of the Company which results in net proceeds to the Company of at least $20
million, all or a portion of which are used to redeem 100% of the Notes and such
redemption occurs within 30 days of the date of the closing of such offering.
"Related Party" means, with respect to any Person: (A) any other
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person, (B) any spouse or immediate family
member of such Person or (C) a trust, corporation, partnership or other entity,
the beneficiaries, stockholders, partners, owners or Persons holding a 50% or
more controlling interest of which consist of such Person and/or such other
Persons or entities referred to in the immediately preceding clause (A). A
Person shall be deemed to control another Person if such Person possesses,
directly or indirectly, the power to direct or cause the
-40-
<PAGE>
direction of the management and policies of such other Person, whether through
the ownership of voting securities, by contract or otherwise.
"Right" means and includes:
(a) any warrant (including, without limitation, any
Warrant) or any option (including, without limitation, employee stock
options) to acquire directly or indirectly Common Stock or Non-Voting
Common Stock;
(b) any right issued to holders of the Common Stock, or
any class thereof, permitting the holders thereof to subscribe directly
or indirectly for shares of additional Common Stock or Non-Voting Common
Stock (pursuant to a rights offering or otherwise);
(c) any right to acquire Common Stock or Non-Voting Common
Stock pursuant to the provisions of any security convertible directly or
indirectly or exchangeable directly or indirectly into Common Stock or
Non-Voting Common Stock; and
(d) any similar right permitting the holder thereof
directly or indirectly to subscribe for or purchase shares of Common
Stock or Non-Voting Common Stock.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
SECTION 7.2. Amendment. This Warrant Agreement and the terms of
the Warrants may be amended by the Company and the Warrant Agent, without the
consent of any Holder, (i) for the purpose of curing any ambiguity, (ii) for
curing, correcting or supplementing any defective or inconsistent provision
contained herein or therein or (iii) in any other manner which the Company may
reasonably deem necessary or desirable, which in each of clauses (i), (ii) and
(iii) shall not adversely affect in any respect the interests of any of the
Holders.
The Company and the Warrant Agent may modify this Warrant
Agreement and the terms of the Warrants with the consent of not less than a
majority in number of the then outstanding Warrants representing a majority of
the Warrant Shares then issuable upon the exercise of all then outstanding
Warrants (excluding Warrants held by the Company or by any subsidiary of the
Company) for the purpose of adding any provision to or changing in any manner or
eliminating any of the provisions of this Warrant Agreement or modifying in any
manner the rights of the Holders; provided, however, that no such modification
that increases the Exercise Price, reduces the number of Warrant Shares
purchaseable upon the exercise of Warrants, reduces the period of time during
which the Warrants are exercisable hereunder, otherwise adversely affects the
exercise rights of the Holders, reduces the percentage required for
modification, or effects any change to this Section 7.2, may be made with
respect to an outstanding Warrant without the consent of the Holder of such
Warrant.
-41-
<PAGE>
Any modification or amendment made in accordance with this
Warrant Agreement will be conclusive and binding on all present and future
Holders whether or not they have consented to such modification or amendment or
waiver and whether or not notation of such modification or amendment is made
upon such Warrant Certificates. Any instrument given by or on behalf of any
Holder in connection with any consent to any modification or amendment will be
conclusive and binding on all subsequent Holders.
SECTION 7.3. Notices and Demands to the Company and Warrant
Agent. If the Warrant Agent shall receive any notice or demand addressed to the
Company by the Holder of a Warrant Certificate pursuant to the provisions hereof
or of the Warrant Certificates, the Warrant Agent shall promptly forward such
notice or demand to the Company.
SECTION 7.4. Address for Notices to the Company and for
Transmission of Documents. All notices hereunder to the Company and the Warrant
Agent shall be deemed to have been given when sent by certified or registered
mail, postage prepaid, or by telecopy, confirmed by first class mail, postage
prepaid, addressed as follows:
To the Company:
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Elmsford, New York 10523
Telecopy: (914) 345-4500
Telephone: (914) 345-4516
Attention: Chief Executive Officer
To the Warrant Agent:
Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Telecopy: (651) 229-6415
Telephone: (651) 229-2600
Attention: Frank P. Leslie, III
SECTION 7.5. Notices to Holders. Notices to Holders shall be
mailed to such Holders at the addresses of such Holders as they appear in the
Warrant Register. Any such notice shall be sufficiently given if sent by
first-class mail, postage prepaid.
SECTION 7.6. Applicable Law. THE VALIDITY, INTERPRETATION
AND PERFORMANCE OF THIS WARRANT AGREEMENT AND EACH WARRANT
ISSUED HEREUNDER AND OF THE RESPECTIVE TERMS AND PROVISIONS THEREOF
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
-42-
<PAGE>
SECTION 7.7. Obtaining of Governmental Approvals. The Company
will from time to time take all action required to be taken by it which may be
necessary to obtain and keep effective any and all permits, consents and
approvals of governmental agencies and authorities and securities laws filings
under United States Federal and State laws, and the rules and regulations of all
stock exchanges or markets on which the Warrants may be listed, which may be or
become requisite in connection with the issuance, sale, transfer, and delivery
of the Warrant Certificates, the exercise of the Warrants or the issuance, sale,
transfer and delivery of the Warrant Shares, it being understood, however, that
the only contractual registration rights of the Holders are those set forth in
the Series B Preferred Unit Purchase Agreement.
SECTION 7.8. Persons Having Rights Under Agreement. Nothing in
this Warrant Agreement expressed or implied and nothing that may be inferred
from any of the provisions hereof is intended, or shall be construed, to confer
upon, or give to, any Person other than the Company, the Warrant Agent, the
Holders from time to time of the Warrant Certificates, Birch Acquisition L.L.C.
and Birch Holdings L.L.C. any right, remedy or claim under or by reason of this
Warrant Agreement or of any covenant, condition, stipulation, promise or
agreement hereof and all covenants, conditions, stipulations, promises and
agreements in this Warrant Agreement contained shall be for the sole and
exclusive benefit of the Company, Birch Acquisition L.L.C., Birch Holdings
L.L.C. and the Warrant Agent and their successors, and of the Holders from time
to time of the Warrant Certificates.
SECTION 7.9. Headings. The descriptive headings of the several
Articles and Sections of this Warrant Agreement are inserted for convenience of
reference only and shall not control or affect the meaning or construction of
any of the provisions hereof.
SECTION 7.10. Counterparts. This Warrant Agreement may be
executed in any number of counterparts, each of which so executed shall be
deemed to be an original; but such Counterparts shall together constitute but
one and the same instrument.
SECTION 7.11. Inspection of Warrant Agreement. A copy of this
Warrant Agreement shall be available at all reasonable times at the Warrant
Agent Office, for inspection by the Holder of any Warrant Certificate. The
Warrant Agent may require such Holder to submit his Warrant Certificate for
inspection by it.
SECTION 7.12. Successors. All the covenants and provisions of
this Warrant Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
* * * * *
-43-
<PAGE>
IN WITNESS WHEREOF, this Warrant Agreement has been duly executed
by the Company and the Warrant Agent as of the day and year first above written.
DISCOVERY ZONE, INC.
By: /s/ Scott W. Bernstein
---------------------------------
Name: Scott W. Bernstein
Title: President and Chief
Executive Officer
FIRSTAR BANK OF MINNESOTA, N.A.
as Warrant Agent
By: /s/ Frank P. Leslie, III
---------------------------------
Name: Frank P. Leslie, III
Title: Vice President
ACKNOWLEDGED AND AGREED TO:
- ---------------------------
BIRCH HOLDINGS L.L.C.
By: /s/ Greg S. Feldman
----------------------------------
Name: Greg S. Feldman
Title: Member
BIRCH ACQUISITION L.L.C.
By: /s/ Greg S. Feldman
----------------------------------
Name: Greg S. Feldman
Title: Member
<PAGE>
EXHIBIT A
{FORM OF WARRANT CERTIFICATE}
{FACE}
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR WARRANTS IN
CERTIFICATED FORM, THIS WARRANT MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.1
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAWS. NEITHER THIS WARRANT CERTIFICATE NOR ANY INTEREST
OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE, BY
ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THE WARRANTS
REPRESENTED BY THIS WARRANT CERTIFICATE PRIOR TO THE DATE WHICH IS TWO YEARS
AFTER THE LATER OF THE ORIGINAL ISSUE DATE OF THE WARRANTS REPRESENTED BY THIS
WARRANT CERTIFICATE AND THE LAST DATE ON WHICH DISCOVERY ZONE, INC. ("THE
COMPANY") OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THE WARRANTS
REPRESENTED BY THIS WARRANT CERTIFICATE (OR ANY PREDECESSOR OF SUCH WARRANTS OR
WARRANT CERTIFICATE) (THE "RESALE
- ------------------
1 This paragraph is to be included only if the Warrant Certificate is in global
form.
A-1
<PAGE>
RESTRICTION TERMINATION DATE"), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES
ACT, (C) FOR SO LONG AS THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING
OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT
THAT IS ACQUIRING THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE FOR ITS
OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR,"
FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN
CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F)
PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE WARRANT AGENT'S, AS
APPLICABLE, RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE
(D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION
AND/OR OTHER INFORMATION REASONABLY SATISFACTORY TO EACH OF THEM, AND IN EACH OF
THE FOREGOING CASES, AN ASSIGNMENT IN THE FORM APPEARING ON THE OTHER SIDE OF
THIS WARRANT CERTIFICATE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE
WARRANT AGENT. THIS LEGEND SHALL BE REMOVED UPON THE REQUEST OF A HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE.
THIS SECURITY IS SUBJECT TO A SERIES B PREFERRED UNIT PURCHASE AGREEMENT
DATED AS OF JULY 13, 1998 BETWEEN THE COMPANY, BIRCH ACQUISITION L.L.C., DZ
INVESTMENTS L.L.C. AND JEFFERIES & COMPANY, INC., A COPY OF WHICH IS ON FILE
WITH THE SECRETARY OF THE COMPANY.
PRIOR TO THE DATE ON WHICH THE STOCKHOLDERS' AGREEMENT (AS DEFINED BELOW
IS TERMINATED), THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE EXERCISED
FOR SHARES OF THE COMPANY'S COMMON STOCK, PAR VALUE $.00017 PER SHARE ("COMMON
STOCK") UNLESS THE HOLDER THEREOF HAS EXECUTED A COUNTERPART OF THE
STOCKHOLDERS' AGREEMENT DATED AS OF JULY 17, 1998, AS AMENDED FROM TIME TO TIME,
BY AND AMONG THE COMPANY, FIRSTAR BANK OF MINNESOTA, N.A., AS TRUSTEE WITH
RESPECT TO THE COMPANY'S 13 1/2% SENIOR
A-2
<PAGE>
COLLATERALIZED NOTES DUE 2002, AND CERTAIN HOLDERS OF THE COMPANY'S COMMON
STOCK, A COPY OF WHICH AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY, ANY
PURPORTED EXERCISE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE WITHOUT
COMPLIANCE WITH THE ABOVE REQUIREMENTS SHALL BE VOID.
A-3
<PAGE>
CUSIP NUMBER: ____________
No. [ ] [ ] Warrants
WARRANT CERTIFICATE
DISCOVERY ZONE, INC.
This Warrant Certificate certifies that [ ], or its registered assigns,
is the registered holder of [ ] Warrants (the "Warrants") to purchase, subject
to the conditions set forth in the Warrant Agreement, shares of Class A Voting
Common Stock, par value $0.00017 per share (the "Common Stock"), of Discovery
Zone, Inc., a Delaware corporation (the "Company"). Each Warrant entitles the
holder to purchase from the Company at any time on or after the Exercisability
Date (as defined in the Warrant Agreement) and until 5:00 p.m., New York City
time, on August 1, 2007 (the "Expiration Date"), 2,131,667.4631 fully paid and
non-assessable shares of Common Stock (as such number may be adjusted from time
to time, the "Warrant Shares", which may also include any other securities or
property issuable upon exercise of a Warrant, such adjustment and inclusion each
as provided in the Warrant Agreement) at the initial exercise price (the
"Exercise Price") of $0.00017 per Warrant Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at any office or agency maintained
for that purpose by the Company (the "Warrant Agent Office"), subject to the
conditions set forth herein and in the Warrant Agreement.
The Exercise Price shall be payable either (i) in cash or by certified
or official bank check in the lawful currency of the United States of America
which as of the time of payment is legal tender for payment of public or private
debts, (ii) by the surrender of Warrant Certificates in accordance with the
terms of the Warrant Agreement, or (iii) by the surrender of the Company's 14
1/2% Series B Junior Cumulative Preferred Stock (the "Series B Preferred Stock")
in accordance with the terms of the Warrant Agreement. Until otherwise
designated by the Company, the initial Warrant Agent Office will be the office
of Firstar Bank of Minnesota, N.A., having a principal office at 101 East 5th
Street, St. Paul, Minnesota 55101. The number of Warrant Shares issuable upon
exercise of the Warrants is subject to adjustment upon the occurrence of certain
events set forth in the Warrant Agreement.
Any Warrants not exercised on or prior to 5:00 p.m., New York City time,
on August 1, 2007 shall thereafter be void.
Reference is hereby made to the further provisions on the reverse
hereof, which provisions shall for all purposes have the same effect as though
fully set forth at this place.
All capitalized terms used in this Warrant Certificate and not otherwise
defined herein shall have the meanings ascribed thereto in the Warrant
Agreement.
A-4
<PAGE>
This Warrant Certificate shall not be valid unless authenticated by the
Warrant Agent, as such term is used in the Warrant Agreement. Initially, the
Company shall act as its own Warrant Agent.
THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK.
A-5
<PAGE>
WITNESS the corporate seal of the Company and the signatures of its duly
authorized officers.
Dated:
------------------
DISCOVERY ZONE, INC.
By:
----------------------------
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
Certificate of Authentication:
This is one of the Warrants
referred to in the within-
mentioned Warrant Agreement:
FIRSTAR BANK OF MINNESOTA, N.A.
as Warrant Agent
By:
----------------------------
Name:
Title:
A-6
<PAGE>
{FORM OF WARRANT CERTIFICATE}
{REVERSE}
DISCOVERY ZONE, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, each of which represents the right to purchase at
any time on or after the date hereof and until 5:00 p.m., New York City time, on
August 1, 2007, 2,131,667.4631 Warrant Shares, subject to adjustment as set
forth in the Warrant Agreement (as defined). The Warrants are issued pursuant to
a Warrant Agreement dated as of July 17, 1998 (the "Warrant Agreement"), duly
executed and delivered by the Company for the benefit of the holders from time
to time of the Warrant Certificates, and subject to the terms and provisions of
a purchase agreement, dated as of July 13, 1998, among Birch Acquisition L.L.C.,
DZ Investors L.L.C., Jefferies & Company, Inc. and the Company (the "Series B
Preferred Unit Purchase Agreement"), which Warrant Agreement and Series B
Preferred Unit Purchase Agreement are hereby incorporated by reference in and
made a part of this instrument and are hereby referred to for a description of
the rights, limitation of rights, obligations, duties and immunities thereunder
of the Warrant Agent, the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrant
Certificates. Warrants may be exercised by (i) surrendering at any Warrant Agent
Office this Warrant Certificate with the form of Election to Exercise set forth
hereon duly completed and executed and (ii) paying in full the Warrant Exercise
Price for each such Warrant exercised and any other amounts required to be paid
pursuant to the Warrant Agreement, and (iii) prior to the date on which the
Stockholders' Agreement (as defined in the Warrant Agreement) is terminated,
executing a counterpart of the Stockholders' Agreement.
If all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 2:00 p.m., New York
City time, on a Business Day, the exercise of the Warrant to which such items
relate will be effective on such Business Day. If any items referred to in the
last sentence of the preceding paragraph are received after 2:00 p.m., New York
City time, on a Business Day, the exercise of the Warrants to which such item
relates will be deemed to be effective on the next succeeding Business Day.
Notwithstanding the foregoing, in the case of an exercise of Warrants on the
Expiration Date, if all of the items referred to in the last sentence of the
preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m.,
New York City time, on such Expiration Date, the exercise of the Warrants to
which such items relate will be effective on the Expiration Date.
Subject to the terms of the Warrant Agreement, as soon as practicable
after the exercise of any Warrant or Warrants, the Company shall issue or cause
to be issued to or upon the written order of the registered holder of this
Warrant Certificate, a certificate or certificates evidencing the Warrant Share
or Warrant Shares to which such holder is entitled, in fully registered form,
registered in such name or names as may be directed by such holder pursuant to
the Election to Exercise, as set forth on the reverse of this Warrant
Certificate. Such certificate or certificates
A-7
<PAGE>
evidencing the Warrant Share or Warrant Shares shall be deemed to have been
issued and any Persons who are designated to be named therein shall be deemed to
have become the holder of record of such Warrant Share or Warrant Shares as of
the close of business on the date upon which the exercise of this Warrant was
deemed to be effective as provided in the preceding paragraph.
The Company will not be required to issue fractional shares of Common
Stock upon exercise of the Warrants or distribute Warrant Certificates that
evidence fractional shares of Common Stock. In lieu of fractional shares of
Common Stock, there shall be paid to the registered Holder of this Warrant
Certificate at the time such Warrant Certificate is exercised an amount in cash
equal to the same fraction of the Fair Market Value per share of Common Stock as
determined in accordance with the Warrant Agreement.
Warrant Certificates, when surrendered at any Warrant Agent Office by
the holder thereof in person or by legal representative or attorney duly
authorized in writing, may be exchanged for a new Warrant Certificate or new
Warrant Certificates evidencing in the aggregate a like number of Warrants, in
the manner and subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company or the Warrant
Agent for that purpose, a new Warrant Certificate evidencing in the aggregate a
like number of Warrants shall be issued to the transferee in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder hereof as the absolute owner of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone) for the
purpose of any exercise hereof and for all other purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
All capitalized terms used in this Warrant Certificate and not otherwise
defined herein have the meanings given to such terms in the Warrant Agreement.
A-8
<PAGE>
ELECTION TO EXERCISE
To be executed upon exercise of Warrants on the Exercise Date
The undersigned hereby irrevocably elects to exercise ______ of the
Warrants represented by this Warrant Certificate and purchase the whole number
of shares of Common issuable upon the exercise of such Warrants and herewith
tenders payment for such Warrant Shares:*
(i) |_| in the amount of $_____________ in cash or by certified or official
bank check; and/or
(ii) |_| in Warrant Certificates,
(iii) |_| in shares of 14 1/2% of Series B Junior Preferred Stock.
in each case, pursuant to Section 2.2 of the Warrant Agreement.
The undersigned requests that a certificate representing shares of _______
Common Stock; be registered in the name of ___________________, whose address is
____________________, and that such certificate be delivered to
_____________________, whose address is ____________________. Any cash payments
to be paid in lieu of a fractional Warrant Share should be made to
____________________, whose address is ____________________, and the check
representing payment thereof should be delivered to ____________________, whose
address is _____________________.
Name of holder of Warrant Certificate:
(Please Print)
Tax Identification or
Social Security Number:
Signature:
Note: The above signature must correspond
with the name as written upon the face of
this Warrant Certificate in every
particular, without alteration or
enlargement or any change whatever.
Dated:
-----------------,---
- -----------------
* Indicate, as applicable, the form of consideration being provided.
A-9
<PAGE>
ASSIGNMENT
For value received, ____________________ hereby sells, assigns and
transfers unto ____________________ the within Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint ____________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated:
-----------------,---
Signature:
---------------------------------------------------------
Note: The above signature must correspond with the
name as written upon the face of this Warrant
Certificate in every particular, without alteration
or enlargement or any change whatever.
SCHEDULE OF EXCHANGES OF DEFINITIVE WARRANTS**
The following exchanges of a part of this Global Warrant for Definitive Warrants
have been made:
<TABLE>
<CAPTION>
Amount of Amount of Number of
Decrease in Increase in Warrants of This
Number of Number of Global Warrant Signature of Authorized
Date of Warrants of Warrants of Following Such Signatory of Warrant
Exchange This Global This Global Decrease (or Agent or Depository
Warrant Warrant Increase)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
- ----------------
** This is to be included only if the Warrant Certificate is in global form.
A-10
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of Discovery Zone, Inc.
This Warrant Certificate relates to _____ Warrants held in *_____ book-entry or
*_____ certificated form by ____________________ (the "Transferor").
The Transferor:*
/_/ has requested the Warrant Agent by written order to deliver in exchange
for its beneficial interest in the Global Warrant held by the Depositary a
Warrant or Warrants in definitive, registered form of authorized denominations
and an aggregate number equal to its beneficial interest in such Global Warrant
(or the portion thereof indicated above) or
/_/ has requested the Warrant Agent by written order to exchange or register
the transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant, the
Transferor does hereby certify that the Transferor is familiar with the Warrant
Agreement relating to the above captioned Warrants and the restrictions on
transfers thereof as provided in Section 1.8(b) of such Warrant Agreement, and
that the transfer of this Warrant does not require registration under the
Securities Act of 1933, as amended (the "Act") because(*):
/_/ Such Warrant is being acquired for the Transferor's own account, without
transfer (in satisfaction of Section 1.8(a)(ii)(y)(A) or Section 1.8 (d)(i)(A)
of the Warrant Agreement).
/_/ Such Warrant is being transferred to a qualified institutional buyer (as
defined in Rule 144A under the Act) in reliance on Rule 144A or in accordance
with Regulation S under the Act.
/_/ Such Warrant is being transferred in accordance with Rule 144 under the
Act.
/_/ Such Warrant is being transferred in reliance on and in compliance with
an exemption from the registration requirements of the Act, other than Rule 144A
or Rule 144 or Regulation S under the Act. An opinion of counsel to the effect
that such transfer does not require registration under the Act accompanies this
Certificate.
{INSERT NAME OF TRANSFEROR}
By:
----------------------
Date:
--------------
* Check applicable box.
B-1
<PAGE>
EXHIBIT C
Transferee Letter of Representation
Discovery Zone, Inc.
565 Taxtur Road, 5th Floor
Elmsford, New York 10523
Ladies and Gentlemen:
In connection with our proposed purchase of warrants ("Warrants") to
purchase Common Stock, par value $0.00017 per share (the "Common Stock" and,
together with the Warrants, the "Securities"), of Discovery Zone, Inc. (the
"Company"), we confirm that:
1. We understand that the Securities have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), and, unless so
registered, may not be sold except as permitted in the following sentence. We
agree on our own behalf and on behalf of any investor account for which we are
purchasing Securities to offer, sell or otherwise transfer such Securities prior
to the date which is two years after the later of the date of original issue and
the last date on which the Company or any affiliate of the Company was the owner
of such Securities, or any predecessor thereto (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) so
long as the Securities are eligible for resale pursuant to Rule 144A, under the
Securities Act, to a Person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of subparagraph
(a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that is purchasing
for his own account or for the account of such an institutional "accredited
investor," or (f) pursuant to any other available exemption from the
registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of our property
or the property of such investor account or accounts be at all times within our
or their control and to compliance with any applicable state securities laws.
The foregoing restrictions on resale will not apply subsequent to the Resale
Restriction Termination Date. If any resale or other transfer of the Securities
is proposed to be made pursuant to clause (e) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee substantially in the form of this letter to the warrant agent under
the Warrant Agreement pursuant to which the Securities were issued (the "Warrant
Agent") which shall provide, among other things, that the transferee is an
institutional "accredited investor" within the meaning of subparagraph (a)(1),
(2), (3) or (7) of Rule 501 under the Securities Act and that it is acquiring
such Securities for investment purposes and not for distribution in violation of
the Securities Act. The Warrant Agent and the Company reserve the right, prior
to any offer, sale or other transfer prior to the Resale Restriction Termination
Date of the Securities pursuant to clause (e) or (f) above, to require the
delivery of a
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<PAGE>
written opinion of counsel, certifications, and/or other information reasonably
satisfactory to the Company and the Warrant Agent.
2. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) purchasing
for our own account or for the account of such an institutional "accredited
investor," and we are acquiring the Securities for investment purposes and not
with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act and we have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of our investment in the Securities, and we and any accounts for which we
are acting are each able to bear the economic risk of our or its investment for
an indefinite period.
3. We are acquiring the Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise sole
investment discretion.
4. You, the Warrant Agent and your respective counsel are entitled to
rely upon this letter and you are irrevocably authorized to produce this letter
or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
------------------------------
(Name of Purchaser)
By:
---------------------------
Upon transfer the Securities would be registered in the name of the new
beneficial owner as follows:
Name:
-----------------------------------
Address:
--------------------------
Taxpayer ID Number:
---------------
C-2
==============================
SECURITY AGREEMENT
between
DISCOVERY ZONE, INC.
and
FIRSTAR BANK OF MINNESOTA, N.A.,
as Collateral Agent
Dated as of July 17, 1998
==============================
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT, dated as of July 17, 1998 (the
"Security Agreement"), is entered into by and between DISCOVERY ZONE, INC.
(together with its successors and assigns, the "Company"), and FIRSTAR BANK OF
MINNESOTA, N.A., as the Trustee and Collateral Agent under the Indenture
(defined below) and secured party hereunder, for its benefit and the ratable
benefit of the holders of the Notes (defined below) (together with its
successors and assigns, in such capacity, the "Collateral Agent"). This Security
Agreement is being entered into in connection with, pursuant to and as
collateral security for the debts, liabilities and obligations arising under or
with respect to the Indenture and the Notes.
NOW, THEREFORE, in consideration of the premises and the
covenants set forth herein and in the Indenture, the parties hereto agree as
follows.
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, capitalized terms defined
in the Indenture and not otherwise defined herein are used herein as so defined.
All terms defined in the UCC (defined below) and not otherwise defined herein or
in the Indenture shall have the meanings assigned to them in the UCC.
"Accounts" shall mean all present and future rights of the
Company to payment for goods sold or leased or for services rendered, whether or
not evidenced by instruments or chattel paper, and whether or not earned by
performance, including, without limitation, accounts receivable and all
indebtedness due and owing from any Subsidiary (or any other subsidiary of the
Company), whether or not evidenced by a promissory note, intercompany credit or
other instrument of indebtedness.
"Affiliate" of any specified Person shall mean any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with"), as used with
respect to any Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
specified Person, whether through the ownership of voting securities, by
agreement or otherwise; provided, however, that beneficial ownership of 10% or
more of the aggregate voting power of the voting securities of a Person shall be
deemed to be control. Notwithstanding the foregoing definitions, none of
Jefferies & Company, Inc. and its Affiliates shall be considered Affiliates of
the Company or any of its Subsidiaries (or any other subsidiaries of the
Company).
"Capital Stock" shall mean, with respect to any Person, any
and all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and any and all warrants, options and rights with
respect thereto, including, without limitation, each class of common stock and
preferred stock, partnership interests and other indicia of ownership of such
Person.
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<PAGE>
"Collateral" shall have the meaning assigned to it in Article
II hereof.
"Equipment" shall mean all of the Company's now owned and
hereafter acquired machinery, equipment, furniture, furnishings, fixtures, and
other tangible personal property (except Inventory), including, without
limitation, data processing hardware and software, motor vehicles, aircraft,
dies, tools, jigs, signage, tubes, slides, ball bins, climbing mountains, air
and water trampolines, obstacle courses, ramps, devices for crawling, jumping,
running, swinging and climbing, and other "soft zone" equipment and toys, games,
arcade games and video and other electronic entertainment games, chairs, jungle
gyms, kitchen and other food and beverage equipment, identification devices and
office equipment, as well as all of such types of property leased by the Company
and all of the Company's rights and interests with respect thereto under such
leases (including, without limitation, options to purchase); together with all
present and future additions and accessions thereto, replacements therefor,
component and auxiliary parts and supplies used or to be used in connection
therewith, and all substitutes for any of the foregoing, and all manuals,
drawings, instructions, warranties and rights with respect thereto; wherever any
of the foregoing is located.
"Indenture" shall mean the Indenture, dated the date hereof,
among the Company, the Subsidiary Guarantors and the Collateral Agent, as
trustee thereunder, relating to the Notes, as amended or supplemented from time
to time in accordance with its terms.
"Inventory" shall mean all of the Company's now owned and
hereafter existing or acquired goods, merchandise, inventory and other personal
property other than personal property leased in connection with any real
property lease, all raw materials, work-in-process, finished goods, returned
goods, and materials and supplies of any kind, nature or description which are
or might be used or consumed, wherever located, in the Company's business or
used in connection with the manufacture, packing, shipping, advertising,
maintenance, selling or finishing of such goods, merchandise, inventory and
other personal property, and all documents of title or other documents
representing them.
"Lender" shall mean a Person that is not an Affiliate and is a
lender in an Eligible Credit Facility.
"McDonald's Collateral" shall mean those certain fourteen
parcels of real property and related fixtures, including, without limitation,
any proceeds thereof, which properties and proceeds are subject to McDonald's
Senior Liens.
"McDonald's shall mean the McDonald's Corporation, a Delaware
corporation, and its successors and assigns.
"McDonald's Secured Note" shall mean the secured promissory
note issued by the Company in favor of McDonald's, dated as of July 22, 1997,
which note represents restructured secured claims against the Company in an
estimated aggregate principal amount of up to $4,600,000.
"McDonald's Secured Rent Deferral Notes" shall mean the
secured promissory notes issued by the Company in favor of McDonald's, dated as
of July 22, 1997, which notes represent restructuring of rent deferrals which
McDonald's granted to the Company during bankruptcy proceedings of the Company
in an estimated aggregate principal amount of up to $300,000.
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<PAGE>
"McDonald's Senior Liens" shall mean the first priority liens
of McDonald's on the McDonald's Collateral as set forth in the first mortgages,
deeds of trust and/or deeds to secure debt, which McDonald's Senior Liens
secure, among other things, the payment of the McDonald's Secured Note, the
McDonald's Secured Rent Deferral Notes and any obligations of the Debtors (as
defined in the Plan or Reorganization) or the Company or any of the other
Reorganized Debtors (as defined in the Plan of Reorganization) that may arise
under (i) the agreement to indemnify as set forth in Section 10.3(f) and Section
11.2(a)(iii) of the Agreement and Plan of Merger, dated as of August 30, 1994,
by and among Discovery Zone, Inc., Discovery Zone International, Inc., Leaps &
Bounds, Inc. and McDonald's and (ii) the Stipulation and Order Between Debtors
and McDonald's Providing for the Resolution, Settlement and Compromise of
Disputes and for Rent Deferrals and Allowance of Certain Claims, entered by the
United States Bankruptcy Court for the District of Delaware on November 18,
1996, which liens are senior to the subordinate liens on the McDonald's
Collateral granted by the Company to the Collateral Agent as set forth in the
Subordination Agreement.
"Notes" shall mean the 13 1/2% Senior Collateralized Notes due
2002 of the Company, and the 13 1/2% Senior Collateralized Notes due 2002,
Series B, or Private Exchange Notes issued in exchange therefor in accordance
with the Indenture, in the aggregate principal amount of $20,000,000.
"Obligations" shall mean the Company's and the Subsidiary
Guarantors' Obligations under the Indenture, the Notes and the Collateral
Agreements.
"Person" or "person" shall mean any individual, corporation,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Purchase Agreement" shall mean the Purchase Agreement, dated
the date hereof, between the Company and Jefferies & Company, Inc., as the
initial purchaser, relating to the purchase and sale of the Notes.
"Records" shall mean all of the present and future books of
account of every kind or nature of the Company, purchase and sale agreements,
invoices, ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of the Company
with respect to the foregoing maintained with or by any other person).
"Requisite Holders" shall mean the Holder or Holders of at
least a majority in principal amount of the outstanding Notes, unless otherwise
provided in Article Six of the Indenture.
"Secured Parties" shall mean the collective reference to the
Collateral Agent and each Holder.
"Securities" shall have the meaning assigned to it in Article
II hereof.
"Subordination Agreement" shall mean the Subordination
Agreement dated July 29, 1997, as amended, between the Collateral Agent and
McDonald's with respect to the relative
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<PAGE>
priorities of the security interests and liens on the McDonald's Collateral
encumbered by the McDonald's Senior Liens.
"UCC" shall mean the Uniform Commercial Code as in effect from
time to time in the State of New York, provided that if by reason of mandatory
provisions of law, the perfection or the effect of perfection or non-perfection
of the Security Interest in any Collateral or the availability of any remedy
hereunder is governed by the Uniform Commercial Code as in effect on or after
the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such perfection or effect of perfection or non-perfection or
availability of such remedy.
"Voting Stock" shall mean, with respect to any Person one or
more classes of the Capital Stock of such Person having general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
ARTICLE II
GRANT OF SECURITY INTERESTS
2.1 Security Interest. As security for the prompt and complete
payment and performance in full of the principal of, premium, if any, and
interest on the Notes when and as the same shall be due and payable, whether on
an Interest Payment Date, at maturity, by acceleration, purchase, repurchase,
redemption or otherwise, and interest on the overdue principal of, premium and
interest, if any, to the extent such premium or interest is permitted by law, on
the Notes and the performance of all other Obligations, the Company hereby
grants to the Collateral Agent, for the benefit of itself and the Holders, a
security interest in and continuing lien on, all of their right, title and
interest in, to and under the following, in each case, whether now owned or
existing or hereafter acquired or arising, and wherever located (all of which is
defined as the "Collateral"):
(i) Accounts;
(ii) subject to the final paragraph of this Section 2.1, all
present and future contract rights (including, without limitation, all rights
under service contracts pursuant to which the Company renders its services to
its customers, which rights shall include any and all rights to all retainers
which may arise thereunder), general intangibles (including, but not limited to,
tax and duty refunds, patents, trade secrets, trademarks, service marks,
copyrights, trade names, trade styles, logos, applications and registrations for
the foregoing, goodwill, processes, drawings, blueprints, customer lists,
licenses, whether as licensor or licensee, choses in action and other claims),
chattel paper, documents, instruments, letters of credit, bankers' acceptances
and guaranties;
(iii) all present and future monies, securities, credit
balances, deposit accounts and other property of the Company now or hereafter
held or received by or in transit to Lender or its Affiliates or any other
lender or at any other depository or other institution from or for the account
of the Company, whether for safekeeping, pledge, custody, transmission,
collection or otherwise, and all present and future liens, security interests,
rights, remedies, title and interest in, to and in respect of Accounts and other
Collateral, including, without limitation, (a) rights and remedies under or
relating
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<PAGE>
to guaranties, contracts of suretyship, letters of credit and credit and other
insurance related to the Collateral, (b) rights of stoppage in transit,
replevin, repossession, reclamation and other rights and remedies of an unpaid
vendor, lienor or secured party, (c) goods described in invoices, documents,
contracts or instruments with respect to, or otherwise representing or
evidencing, Accounts or other Collateral, including, without limitation,
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors of other persons securing the obligations of account debtors;
provided, however, that the Collateral shall not include (A) the Escrow Funds,
(B) the Pledged Securities and other collateral held subject to the Escrow
Agreement (which are subject to the pledge and security interest granted
therein) unless made subject to the security interest and lien hereof, (C) the
Capital Stock of the Subsidiary Guarantors and the Company's other subsidiaries
which are subject to the Pledge Agreement (and the pledge and security interest
granted therein) and (D) the cash proceeds from the disposition of any
McDonald's Collateral subject to the McDonald's Senior Lien;
(iv) Inventory;
(v) Equipment;
(vi) Records; and
(vii) all products and proceeds of the foregoing, in any form,
including without limitation, insurance proceeds and all claims against third
parties for loss or damage to or destruction of any or all of the foregoing.
In no event shall the Collateral Agent's security interest in
a contract or agreement of the Company be deemed to be a present assignment,
transfer conveyance, subletting or other disposition (an "Assignment") of such
contract or agreement to the Collateral Agent within the meaning of any
provision in such contract or agreement prohibiting, or requiring any consent or
establishing any other conditions for, an assignment thereof by the Company. The
Collateral Agent acknowledges that any sale, transfer or Assignment of any such
contract or agreement upon the enforcement of the Collateral Agent's security
interest therein would be subject to the terms of such contract or agreement
governing Assignment, except as otherwise provided in Section 9-318 of the UCC.
The Collateral Agent's security interest in each contract or agreement of the
Company shall attach from the date hereof to all of the following, whether now
existing or hereafter arising or acquired: (i) all of the Company's Accounts and
general intangibles for money due or to become due arising under such contract
or agreement; (ii) all proceeds paid or payable to the Company from any sale,
transfer or assignment of such contract or agreement and all rights to receive
such proceeds; and (iii) all other rights and interests of the Company in, to
and under such contract or agreement to the fullest extent that attachment
thereto would not be a violation of such contract or agreement directly or
indirectly entitling a party thereto (other than the Company or Affiliate
thereof) to a legally enforceable right to terminate such contract or agreement.
-5-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Collateral
Agent, which representations and warranties shall survive execution and delivery
of this Security Agreement, as follows:
3.1 Validity, Perfection and Priority.
Except as permitted under the Indenture, the security
interests in the Collateral granted to the Collateral Agent hereunder will
constitute valid and continuing perfected security interests therein, to the
extent that such security interests may be perfected by the actions described in
Section 10.03 of the Indenture and subsections (i) and (ii) of this Section 3.1,
and pursuant to the terms of the New Intercreditor Agreements (with respect to
the Liens securing the Eligible Credit Facility) and subject only to the
Subordination Agreement (with respect to the McDonald's Collateral), superior
and prior to all Liens and rights or claims of all other Persons, except
Permitted Liens and as otherwise provided in the Indenture, upon (i) the filing
of UCC financing statements and continuation statements naming the Company as
"debtor" and the Collateral Agent as "secured party" and describing the
Collateral in the filing offices set forth on Schedule 3.1 hereto, and (ii) to
the extent not subject to Article 9 of the Uniform Commercial Code in any
applicable jurisdiction, the recordation of the security interests granted
hereunder in patents, trademarks, service marks and copyrights in the applicable
patent, trademark, service marks and copyright registries and the registration
of all copyrights.
3.2 No Liens; Other Financing Statements.
(a) Except for the Security Interest granted to the
Collateral Agent hereunder and any security interest and liens contemplated by
the New Intercreditor Agreements that may in the future be granted to the Lender
under the Eligible Credit Facility and except for the Permitted Liens,
including, without limitation, the McDonald's Senior Liens, Liens Securing the
Existing Notes, and the Liens securing the Eligible Credit Facility, the Company
owns and, as to all Collateral whether now existing or hereafter acquired, will
continue to own, each item of the Collateral free and clear of all Liens, rights
and claims, and the Company shall defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein
adverse to the Collateral Agent on the Collateral entitled to priority therein
under applicable law.
(b) No financing statement or other evidence of
any Lien covering or purporting to cover any of the Collateral is on file and is
effective in any public office other than for Permitted Liens which shall
include, without limitation, (i) financing statements filed or to be filed in
connection with the Security Interests granted to the Collateral Agent
hereunder, (ii) financing statements filed or to be filed in connection with the
Eligible Credit Facility, (iii) financing statements filed in connection with
the Existing Notes, (iv) financing statements for which proper, executed
termination statements have been delivered to the Collateral Agent for filing
and (v) mortgages, deeds of trust, deeds to secure debt, fixture filings,
financing statements or other evidence of Liens filed in connection with the
McDonald's Senior Liens and/or the Subordination Agreement.
3.3 Chief Executive Offices. The chief executive office of the
Company is 565 Taxter Road, Elmsford, New York 10523. The originals of the
Records are located at such chief
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<PAGE>
executive office of the Company. All Records are maintained at, and controlled
and directed (including, without limitation, for general accounting purposes)
from the chief executive office or other offices identified on Schedule 3.3 as
such.
3.4 Location of Inventory. All Inventory is kept only at (or
shall be in transit to) the locations listed on Schedule 3.3 hereto. None of
such Inventory is in the possession of an issuer of a negotiable document (as
defined in Section 7-104 of the UCC) therefor or otherwise in the possession of
a bailee or other Person.
3.5 Trade Names; Prior Names. The only names under which the
Company has conducted business during the last five years are as set forth on
Schedule 3.5 hereto.
3.6 Receivables.
(a) Each Account (other than indebtedness due and owing
from a Subsidiary or any other subsidiary of the Company) arises from the actual
and bona fide sale and delivery of goods by the Company or rendition of services
by the Company in the ordinary course of its business which transactions are
completed in all material respects with those terms and provisions contained in
any document related thereto, except for prepaid passes to FunCenters (as
defined in the Offering Circular) and deposits for birthday parties or other
similar functions which sale and delivery of goods by the Company or rendition
of services by the Company are to be completed in the ordinary course of its
business.
(b) The representations and warranties contained in this
Section shall be deemed to be repeated by the Company as of the time when each
respective Account arises.
(c) Each Account arising from indebtedness due and owing
from a Subsidiary or any other subsidiary of the Company is a bona fide
intercompany indebtedness arising from an appropriate business purpose incurred
in the ordinary course of the Company's business and in accordance with GAAP.
3.7 Intellectual Property.
(a) Schedule 3.5 sets forth (i) all United States, state
and foreign registration of and applications for patents, trademarks, service
marks and copyrights of the Company and (ii) all patent licenses, trademark and
service mark licenses and copyright licenses material to the business of the
Company; and
(b) the Company owns, or has valid rights to use, all
patents, trademarks, service marks, trade secrets, copyrights, and similar
intellectual property rights material to the business of the Company and used in
the conduct of the Company's business.
3.8 Equipment. All Equipment is owned free and clear of all
Liens, except Permitted Liens (including, without limitation, Liens granted in
connection with the Eligible Credit Facility and the Existing Notes), is located
only at the location set forth on Schedule 3.3 hereto and is in good working
condition subject only to wear and tear in the ordinary course, all of which is
accounted for at the lower of cost or fair market value in accordance with GAAP
on the financial statements of the Company.
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<PAGE>
3.9 Basic Representations and Warranties. As of the Issue
Date, the Company (a) will be duly organized and validly existing in good
standing under the laws of the jurisdiction of its formation or other
jurisdiction in which it is qualified to do business; (b) will have the power
and authority to execute, deliver and carry out the terms and provisions of this
Security Agreement and consummate the transactions contemplated hereby; (c) will
have taken all necessary action to authorize the execution, delivery and
performance of this Security Agreement and the consummation of the transactions
contemplated hereby; and (d) will have duly executed and delivered this Security
Agreement. As of the Issue Date, this Security Agreement will constitute the
Company's legal, valid and binding obligation, enforceable against the Company
in accordance with its terms.
ARTICLE IV
COVENANTS
The Company covenants and agrees with the Collateral Agent
that from and after the date of this Security Agreement:
4.1 Further Assurances. The Company will from time to time at
its own expense, promptly execute, deliver, file and record all further
instruments, endorsements and other documents, and take such further action as
the Collateral Agent may deem necessary or desirable in obtaining the full
benefits of this Security Agreement and of the rights, remedies and powers
herein granted, including, without limitation, the following:
(i) the filing of any financing statements,
in form acceptable to the Collateral Agent under the UCC in effect in
any jurisdiction with respect to the liens and security interests
granted hereby (and the Company hereby (x) authorizes the Collateral
Agent to file any such financing statement without its respective
signature to the extent permitted by applicable law and (y) agrees
that a photocopy or other reproduction of this Security Agreement
shall be sufficient as a financing statement and may be filed in lieu
of the original to the extent permitted by applicable law);
(ii) furnish to the Collateral Agent from time
to time statements and schedules further identifying and describing
the Collateral and such other reports in connection with the
Collateral as the Collateral Agent may request, all in reasonable
detail and in form satisfactory to the Collateral Agent; and
(iii) execute and deliver the Trademark
Assignment and cause it to be duly filed with the United States Patent
and Trademark Office.
4.2 Change of Name, Identity, Corporate Structure, Chief
Executive Offices, or Location of Inventory and Equipment. The Company will not
change its name, identity, corporate structure or the location of its chief
executive offices (as specified in Section 3.3) or location of its Inventory or
Equipment without (i) giving the Collateral Agent at least thirty (30) days'
prior written notice clearly describing such new name, identity, corporate
structure or new location and providing such other information in connection
therewith as the Collateral Agent may reasonably request, and (ii) taking all
action reasonably satisfactory to the Collateral Agent as the Collateral Agent
may reasonably request to maintain the security interest of the Collateral Agent
in the Collateral intended to be granted hereby at all times fully perfected
with the same or better priority than exists on the
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<PAGE>
date hereof and in full force and effect. All Accounts and Records of the
Company will continue to be maintained at, and controlled and directed
(including, without limitation, for general accounting purposes) from, such
chief executive office or a location identified as a location at which Accounts
or Records are maintained, controlled and directed on Schedule 3.3, or such new
locations as the Company may establish in accordance with this Section 4.2.
4.3 Maintain Records. The Company will keep and maintain at
its own cost and expense satisfactory and complete records of the Collateral,
including, but not limited to, the originals of all documentation with respect
to all Accounts and records of all payments received and all credits granted on
the Accounts, and all other dealings therewith.
4.4 Right of Inspection. The Collateral Agent shall at all
times have full and free access during normal business hours and upon reasonable
notice to the Company to all the books, correspondence and records of the
Company, and the Collateral Agent and its representatives may examine the same,
take extracts therefrom and make photocopies thereof, and the Company agrees to
render the Collateral Agent, at the cost and expense of the Company, such
clerical and other assistance as may be reasonably requested with regard
thereto.
4.5 Payment of Obligations. The Company will pay promptly when
due all taxes, assessments and governmental charges or levies imposed upon the
Collateral, as well as all claims of any kind (including, without limitation,
claims for labor, materials, supplies and services) against or with respect to
the Collateral, except that no such tax, assessment, charge or levy need be paid
if (i) the validity thereof is being contested in good faith by appropriate
proceedings properly instituted and diligently conducted for which adequate
reserves, to the extent required under GAAP, have been taken and (ii) such
proceedings do not involve, in the sole opinion of the Collateral Agent, any
material danger for the sale, forfeiture or loss of any of the Collateral or any
interest therein.
4.6 Negative Pledge. The Company will not create, incur or
permit to exist, and will defend the Collateral against, and will take such
other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than the Security Interest created hereby, Liens in favor of
the Lender under the Eligible Credit Facility, and Permitted Liens, including,
without limitation, the McDonald's Senior Liens and Liens securing Existing
Notes.
4.7 Limitations on Dispositions of Collateral. The Company
will not sell, transfer, lease or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so except as permitted in the Indenture.
4.8 Performance by the Collateral Agent of the Obligations of
the Company; Reimbursement. If the Company fails to perform or comply with any
of its agreements contained herein, the Collateral Agent may, without consent by
the Company, but upon written notice to the Company reasonably given, perform or
comply or cause performance or compliance therewith, and the expenses of the
Collateral Agent incurred in connection with such performance or compliance,
together with interest thereon at a rate per annum borne by the Notes, shall be
payable by the Company to the Collateral Agent on demand and such reimbursement
obligation shall be secured hereby; provided, however, that such interest shall
only be so due and payable if such expenses have not been so paid on demand and
in any event within ten (10) days of such notice; and, provided further, that
such interest shall be tolled in the event any such expenses are contested in
good faith as in error and the resolution of any such contest is diligently
pursued by the Company.
-9-
<PAGE>
4.9 No Impairment. Except as expressly permitted herein or in
the Indenture (including the creation of Permitted Liens), the Company will not
take or knowingly permit to be taken any action which could impair the
Collateral Agent's rights in the Collateral. The Company shall promptly notify
the Collateral Agent of any changes in fact or circumstance represented or
warranted by the Company or that could reasonably be expected to have a material
adverse effect with respect to any material portion of the Collateral, of any
impairment of the Collateral and of any claim, action or proceeding affecting
title to all or any of the Collateral.
4.10 Insurance. The Company will maintain, with financially
sound and reputable insurers acceptable to the Collateral Agent and licensed to
do business in each state in which any of the Collateral covered by any policy
is located, insurance in compliance with Section 4.05(b) of the Indenture. All
policies of insurance shall (i) name the Collateral Agent as additional insured
(with respect to liability insurance policies) or loss payee with a lender's
loss payable endorsement, (ii) include waivers by the insurer of all claims for
insurance premiums against the Collateral Agent, (iii) provide that any losses
shall be payable to the Collateral Agent notwithstanding (A) any act, failure to
act or negligence of or violation of warranties, declarations or conditions
contained in such policy by the Company, (B) any foreclosure or other
proceedings or notice of sale relating to any Collateral insured thereunder, or
(C) any change in the title to or ownership of any Collateral insured
thereunder, and (iv) provide that no cancellation, termination or lapse in
coverage thereof shall be effective until at least 30 days after receipt by the
Collateral Agent of written notice thereof.
4.11 Equipment. The Company shall maintain the Equipment in
good and working condition free of all Liens, except Permitted Liens, including,
without limitation, the McDonald's Senior Liens and Liens securing the Eligible
Credit Facility and the Existing Notes, and shall not remove or relocate any
Equipment except as provided herein, except that any motor vehicles or aircraft
intended to be mobile may be so used to the extent that all necessary and
appropriate actions have been taken and filings made to perfect a first priority
security interest therein in favor of the Collateral Agent for its benefit and
the ratable benefit of the Holders.
ARTICLE V
POWER OF ATTORNEY
The Company hereby irrevocably constitutes and appoints the
Collateral Agent and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of the Company and in the name of the
Company, from time to time in the Collateral Agent's discretion, for the purpose
of carrying out the terms of this Security Agreement, to take any and all
appropriate action, and to execute in any appropriate manner any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes of this Security Agreement.
The Company hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. This power of attorney is a
power coupled with an interest and shall be irrevocable.
-10-
<PAGE>
ARTICLE VI
REMEDIES; RIGHTS UPON DEFAULT
6.1 Rights and Remedies Generally.
(a) If an Event of Default shall occur and be continuing,
then and in every such case, the Collateral Agent shall have all the rights of a
secured party under the UCC, shall have all rights now or hereafter existing
under all other applicable laws, and, subject to any mandatory requirements of
applicable law then in effect, shall have all the rights set forth in this
Security Agreement and all the rights set forth with respect to the Collateral
or this Security Agreement in any other agreement between the parties.
(b) If an Event of Default occurs and is continuing, the
Collateral Agent may, and within three Business Days after written instructions
from the Requisite Holders shall, commence the taking of such actions toward
collection or enforcement of this Security Agreement and the Collateral (or any
portion thereof), including, without limitation, action toward foreclosure upon
any Collateral, as the Collateral Agent deems in its discretion to be
appropriate or as otherwise instructed in writing by the Requisite Holders.
6.2 Assembly of Collateral. If an Event of Default shall occur
and be continuing, immediately upon written notice to the Company, the Company
shall, at its own expense, and to the extent commercially practicable, assemble
the Collateral (or from time to time any portion thereof) and make it available
to the Collateral Agent at any place or places designated by the Collateral
Agent which is reasonably convenient to both parties.
6.3 Disposition of Collateral. The Collateral Agent will
determine the circumstances and manner in which the Collateral will be disposed
of, including, but not limited to, the determination of whether to foreclose on
the Collateral following an Event of Default. The Collateral Agent will give the
Company reasonable written notice of the time and place of any public sale of
the Collateral or any part thereof or of the time after which any private sale
or any other intended disposition thereof is to be made. The Company agrees that
the requirements of reasonable notice to it shall be met if such notice is
delivered to its address specified in and in accordance with Section 7.3 of this
Security Agreement (or such other address that the Company may provide to the
Collateral Agent in writing) at least ten days before the time of any public
sale or after which any private sale may be made.
6.4 Proceeds. If an Event of Default shall occur and be
continuing, (i) all proceeds and distributions on the Collateral received by the
Company shall be held in trust for the Collateral Agent, segregated from other
funds of the Company in a separate deposit account containing only such proceeds
and distributions, and shall forthwith upon receipt thereof, be turned over to
the Collateral Agent in the same form received (appropriately endorsed or
assigned to the order of the Collateral Agent or in such other manner as shall
be satisfactory to the Collateral Agent) and (ii) any and all such proceeds and
distributions received by the Collateral Agent (whether from the Company or
otherwise), or any part thereof, may, in the sole discretion of the Collateral
Agent, be held by the Collateral Agent in a separate account as Collateral
hereunder and/or then or at any time or from time to time thereafter, be applied
by the Collateral Agent against the Obligations (whether matured or unmatured)
and related expenses, including attorney's fees as provided in Section 6.6
below.
-11-
<PAGE>
6.5 Recourse. The Company shall pay or remain liable for any
deficiency if the proceeds of any sale or other disposition of the Collateral
are insufficient to satisfy the Obligations. The Company shall also be liable
for all expenses of the Collateral Agent incurred in connection with collecting
such deficiency, including, without limitation, the fees and disbursements of
any attorneys employed by the Collateral Agent to collect such deficiency.
6.6 Expenses; Attorneys Fees. The Company shall pay or
reimburse the Collateral Agent for all its expenses in connection with the
exercise of its rights hereunder, including, without limitation, (i) all
reasonable attorneys' fees and legal expenses incurred by the Collateral Agent
and (ii) all filing fees and related expenses contemplated by Section 4.1
hereof. Expenses of retaking, holding, preparing for sale, selling or the like
shall include the reasonable attorneys' fees and legal expenses of the
Collateral Agent. All such expenses shall be secured hereby.
6.7 Limitation on Duties Regarding Preservation of Collateral.
(a) The Collateral Agent's sole duty with respect to the
custody, safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the UCC or otherwise, shall be to deal with
it in the same manner as the Collateral Agent deals with similar property for
its own account;
(b) The Collateral Agent shall have no obligation to take any
steps to preserve rights against prior parties to any Collateral; and
(c) Neither the Collateral Agent nor any of its directors,
officers, employees or agents shall be liable for failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so or
shall be under any obligations to sell or otherwise dispose of any Collateral
upon the request of the Company or otherwise, except with respect to actions
taken or omitted with gross negligence, willful misconduct or in bad faith.
6.8 Cooperation of Subsidiary Guarantors. The Company shall
cause any Subsidiary that becomes a Subsidiary Guarantor after the date hereof
to enter into a supplement to the Subsidiary Security Agreement, pursuant to
which such Subsidiary shall grant to the Collateral Agent for itself and the
ratable benefit of the Holders and their respective successors and assigns, a
continuing security interest in all of the Collateral then owned by such
Subsidiary or thereafter acquired or arising as security for the prompt and
complete payment and performance in full of all the Obligations.
ARTICLE VII
MISCELLANEOUS
7.1 Indemnity. The Company agrees to indemnify, reimburse and
hold the Collateral Agent and its officers, directors, employees,
representatives and agents ("Indemnitees") harmless from any and all
liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, suits, costs or expenses or disbursements (including reasonable
attorneys' fees and expenses) for whatsoever kind or nature ("Losses") which may
be imposed on, asserted against or incurred by any of the Indemnitees in any way
relating to or arising out of this Security Agreement or the transactions
contemplated hereby, except to the extent that such Losses are caused by the
gross
-12-
<PAGE>
negligence, willful misconduct or bad faith of such Indemnitees as determined by
a final judgment of a court of competent jurisdiction. The obligations of the
Company under this Section shall be secured hereby and shall survive payment and
performance or discharge of the Obligations and the termination of this Security
Agreement.
7.2 Governing Law. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAWS).
7.3 Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
if to the Company:
------------------
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Elmsford, New York 10523
Attn: Chief Executive Officer
Telephone Number: (914) 345-4500
Telecopy Number: (914) 345-4527
with a copy to attn: General Counsel
Telecopy Number: (914) 345-4516
with a copy to:
---------------
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
Telephone Number: (212) 848-4000
Telecopy Number: (212) 848-7179
if to the Trustee:
------------------
Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Attn: Corporate Trust
Telephone Number: (651) 229-2600
Telecopy Number: (651) 229-6415
if to the Collateral Agent:
---------------------------
Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, MN 55101
Attn: Corporate Trust
Telephone Number: (651) 229-2600
Telecopy Number: (651) 229-6415
-13-
<PAGE>
Each of the Company and the Collateral Agent by written notice
to each other such Person may designate additional or different addresses for
notices to such Person. Any notice or communication to the Company or the
Collateral Agent shall be deemed to have been given or made as of the date so
delivered if personally delivered; when answered back, if telexed; when receipt
is acknowledged, if faxed; and five (5) calendar days after mailing if sent by
registered or certified mail, postage prepaid (except that a notice of change of
address shall not be deemed to have been given until actually received by the
addressee).
Any notice or communication mailed to a Holder shall be mailed
to such Holder by first class mail or other equivalent means at such Holder's
address as it appears on the registration books of the Registrar and shall be
sufficiently given to such Holder if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
7.4 Successors and Assigns. This Security Agreement shall be
binding upon and inure to the benefit of the Company, the Collateral Agent, all
future holders of the Obligations and their respective successors and assigns,
except that the Company may not assign or transfer any of its rights or
obligations under this Security Agreement without the prior written consent of
the Collateral Agent.
7.5 Waivers and Amendments. None of the terms or provisions of
this Security Agreement may be waived, amended, supplemented or otherwise
modified except in accordance with the terms of Article Nine of the Indenture.
In the case of any waiver, the Company and the Collateral Agent shall be
restored to their former position and rights hereunder and under the outstanding
Obligations, and any Default or Event of Default waived shall be deemed to be
cured and not continuing, but no such waiver shall extend to any subsequent or
other Default or Event of Default, or impair any right consequent thereon.
7.6 No Waiver; Remedies Cumulative. No failure or delay on the
part of the Collateral Agent in exercising any right, power or privilege
hereunder and no course of dealing between the Company and the Collateral Agent
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right or remedy which the Collateral Agent
would otherwise have on any future occasion. The rights and remedies herein
expressly provided are cumulative and may be exercised singly or concurrently
and as often and in such order as the Collateral Agent deems expedient and are
not exclusive of any rights or remedies which the Collateral Agent would
otherwise
-14-
<PAGE>
have whether by security agreement or now or hereafter existing under applicable
law. No notice to or demand on the Company in any case shall entitle the Company
to any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Collateral Agent to any other or future
action in any circumstances without notice or demand.
7.7 Termination; Release. When the Obligations have been
completely paid and performed in full in accordance with Article Eight of the
Indenture, this Security Agreement shall terminate, and the Collateral Agent, at
the request and sole expense of the Company, and subject to and in accordance
with the applicable terms of the Indenture, will execute and deliver to the
Company the proper instruments (including UCC termination statements)
acknowledging the termination of this Security Agreement, and will duly assign,
transfer and deliver to the Company, without recourse, representation or
warranty of any kind whatsoever, such of the Collateral and Securities as may be
in possession of the Collateral Agent and that has not theretofore been disposed
of, applied or released, all in accordance with the terms and conditions of the
Indenture and other Collateral Documents. In addition, so long as no Default or
Event of Default exists (with respect to a Released Interest other than in
connection with the immediately preceding sentence), the Collateral Agent, at
the request and sole expense of the Company, will execute and deliver to the
Company the proper instruments to effect the release of the Released Interests
in compliance with Section 10.05 of the Indenture.
7.8 Headings Descriptive. The headings of the several sections
and subsections of this Security Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Security Agreement.
7.9 Severability. In case any provision in or obligation under
this Security Agreement or the Obligations shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
7.10 Counterparts. This Security Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Security
Agreement by signing any such counterpart.
7.11 Trustee Capacity. In acting as Collateral Agent
hereunder, the Collateral Agent shall benefit from and be entitled to all of the
protections and benefits of the terms set forth in Article Seven of the
Indenture.
7.12 Intercreditor Agreements. Notwithstanding any term hereof
to the contrary, the terms and conditions of this Security Agreement are in all
respects subject to, and all rights and remedies of the parties hereunder shall
be exercised only in accordance with, the terms, conditions, benefits and
protections contained in the New Intercreditor Agreements.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be duly executed and delivered as of the date first above
written.
DISCOVERY ZONE, INC.
By: /s/ Scott W. Bernstein
-----------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
FIRSTAR BANK OF MINNESOTA, N.A.,
as Collateral Agent
By: /s/ Frank P. Leslie, III
-----------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
<PAGE>
SCHEDULE 3.1
A. UCC FILINGS
<TABLE>
<S> <C> <C>
State Facilities Located Filing Office
Within the Jurisdiction
of the Filing Office
_______________ ________________________ _______________________________
Alabama FunCenters ("FCs") Secretary of State
410, 413, 454 UCC Division
797 State Office Building, Room 536
Montgomery, AL 36130
Arizona Secretary of State
Dual Filing 1700 W. Washington, 7th Floor
Phoenix, AZ 85007
- AND -
FC 522 Pima County Recorder
115 N. Church Ave.
Tuscon, AZ
California FCs 362, 417, 418 Secretary of State
420, 428 UCC Division
453, 461 P.O. Box 942835
465, 474, 480 Sacramento, CA 94235-0001
481
514, 521, 523
526, 527, 561
563, 566
Colorado FCs 338, 353, 518 Secretary of State
556 Uniform Commercial Code
1560 Broadway, Suite 200
Denver, CO 80202
- AND -
</TABLE>
<PAGE>
2
<TABLE>
<S> <C> <C>
Central Indexing Systems, Inc.
1301 Pennsylvania St., Ste 900
Denver, CO 80203
Connecticut FCs 208, 235 Secretary of State
UCC Division
30 Trinity Street
P.O. Box 846
Hartford, CT 06106
Delaware FC 267 Department of State
Uniform Commercial Code
P.O. Box 793
Dover, DE 19901
Florida FCs 342, 433, 442 Bureau of Uniform Commercial Code
731, 733, 734 Department of State
740, 750, 755 P.O. Box 5588
792 Tallahassee, FL 32314
Office:
Plantation, FL 33313
Georgia FC 311 Clerk of the DeKalb County
Local Filing State Superior Court
Decatur, GA 30030
FC 334, 451 Clerk of the Cobb County
Superior Court
Box 3490
Marietta, GA 30091
FC 358 Clerk of the Fulton County
Superior Court
Atlanta, GA 30303
FC 439 Clerk of the Bibb County
Superior Court
P.O. Box 1015
Macon, GA 31208
</TABLE>
<PAGE>
3
<TABLE>
<S> <C> <C>
FC 802 Clerk of the Clayton County
Superior Court
121 So. McDonough
Jonesboro, GA 30236
Hawaii FC 547 Registrar of Conveyances
Bureau of Conveyances
P.O. Box 2867
Honolulu, HI 96803
Idaho FC 524 Secretary of State
Statehouse, Room 205
Boise, ID 83720
Illinois FCs 301, 303, 309 Secretary of State
335, 759, 787 UCC Division
Centennial Building
Springfield, IL 62756
Indiana FCs 307, 720, 736 Secretary of State
746, 760, 785 201 State House
796, 801 Indianapolis, IN 46204
Iowa FC 779 UCC Division
Secretary of State
Hoover Building
Des Moines, IA 50319
Kansas FCs 308, 554 Secretary of State
Attn: U.C.C., 2nd Floor, Capitol Bldg.
Topeka, KS 66612
Kentucky Office of the Secretary of State
Dual Filing State UCC Section
Capitol Building
Frankfort, KY 40602-0718
- AND -
</TABLE>
<PAGE>
4
<TABLE>
<S> <C> <C>
FCs 738, 745 Jefferson County Clerk
P.O. Box 33033
Louisville, KY 40202
Louisiana FC 438 Clerk of the Court for the Parish for:
Local Filing State 3908 Veterans Blvd.
Metairie, LA 70001
FC 456 Clerk of the Caddo Parish Court
Shreveport, LA 71101
FC 458 Clerk of the Lafayette Parish Court
P.O. Box 2009
Lafayette, LA 70502
FC 804 Clerk of the Jefferson Parish Court
P.O. Box 10
Gretna, LA 70054
Maryland FCs 201, 213, 220 Department of Assessments and Taxation
222, 242, 416 301 West Preston Street
Baltimore, MD 21201
Massachusetts Office of the Secretary of State
Dual Filing State Uniform Commercial Code Section
1 Ashburton Place, Room 1711
Boston, MA 02108
- AND-
FC 227 Town Clerk
Dartmouth, MA
FC 231 Town Clerk
Natick, MA
FC 232 Town Clerk
Tyngsboro, MA
FC 233 Town Clerk
Hanover, MA
</TABLE>
<PAGE>
5
<TABLE>
<S> <C> <C>
FC 234 Town Clerk
Danvers, MA
FC 257 Town Clerk
Shrewsbury, MA
FC 271 Town Clerk
W. Springfield, MA
Michigan FCs 332, 349, 431 Department of State
452, 455 U.C.C. Unit
Lansing, MI 48909-7697
Minnesota FCs 340, 739 Secretary of State
UCC Division
180 State Building
St. Paul, MN 55155
Mississippi Secretary of State
Dual Filing State UCC Division
P.O. Box 136
Jackson, MS 39205-0136
- AND -
FC 450 Clerk of the Madison County
Chancery Court
P.O. Box 404
Canton, MS 39046
Missouri Secretary of State
Dual Filing State Uniform Commercial Code
P.O. Box 1159
Jefferson City, MO 65102
- AND -
FC 315 Jackson County Recorder of Deeds
415 E. 12th Street
Independence, MO 64106
</TABLE>
<PAGE>
6
<TABLE>
<S> <C> <C>
FCs 321, 753, 754 St. Louis County Recorder of Deeds
Clayton, MO 63105
FC 769 Greene County Recorder of Deeds
Springfield, MO 65802
Nevada FC 345 Secretary of State
UCC Division, Capitol Complex
Secretary of State's Office
Carson City, NV 89710
New Jersey FCs 215, 217, 224 Secretary of State
228, 230, 236 UCC Section
243, 254, 260 State House
Trenton, NJ 08625
New Mexico FCs 532 Secretary of State
UCC Division
Executive Legislative Bldg.
Santa Fe, NM 87503
New York Department of State
Dual Filing State UCC Division
162 Washington Ave.
Albany, NY 12231
- AND -
FCs 202, 216, 223 Monroe County Clerk
39 W. Main Street
Rochester, NY 14614
Corporate Office:
Blansford, NY 10523
FCs 210, 256 Nassau County Clerk
240 Old Country Road
Mineola, NY 11501
FCs 214, 229 Onondaga County Clerk
Syracuse, NY 13202
</TABLE>
<PAGE>
7
<TABLE>
<S> <C> <C>
FC 219 Oneida County Clerk
Utica, NY 13501
FC 226 Dutchess County Clerk
22 Market Street
Poughkeepsie, NY 12601
FC 245 City Register
Bronx County Office
1932 Arthur Ave.
Bronx, NY 10457
FC 246 City Register
Queens County Office
90-27 Sutphin Blvd.
Jamaica, NY 11435
FC 248 Suffolk County Clerk
Riverhead, NY 11901
FC 249 City Register
Kings County Office
Municipal Bldg.
210 Joralemon St.
Brooklyn, NY 11201
FC 264 Chemung County Clerk
P.O. Box 588
Elmira, NY 14902
FC 266 Orange County Clerk
Goshen, NY 10924
FC 326 Erie County Clerk
25 Delaware Ave.
Buffalo, NY 14202
North Carolina Secretary of State
Dual Filing State UCC Division
300 North Salisbury Street
Raleigh, NC 27603-5909
</TABLE>
<PAGE>
8
<TABLE>
<S> <C> <C>
- AND -
FC 406 Forsythe County Registor of Deeds
P.O. Box 1013
Winston-Salem, NC 27101
FC 463 Cumberland County Registor of Deeds
P.O. Box 2039
Fayetteville, NC 28302
Ohio Secretary of State
Dual Filing State UCC Division
State Officer Tower
Columbus, OH 43216
- AND -
FC 306, 343 Hamilton County Recorder
Cincinnati, OH 45202
FCs 310, 339, 761 Franklin County Recorder
373 S. High Street
Columbus, OH 43215
FCs 716, 780 Cuyahoga County Recorder
1219 Ontario
Cleveland, OH 44113
FC 725 Summit County Recorder
117 South Main Street
Akron, OH 44308
FC 732 Stark County Recorder
110 Central Plaza South
Canton, OH 44702
FC 771 Lucas County Recorder
Jackson Street
Toledo, OH 43604
Oklahoma FCs 516, 517, 542 County Clerk of Oklahoma County
Oklahoma City, Oklahoma 73102
</TABLE>
<PAGE>
9
<TABLE>
<S> <C> <C>
Oregon FC 560, 565 Office of the Secretary of State
Uniform Commercial Code
Room 122, State Capital
Salem, OR 97310
Pennsylvania Secretary of Commonwealth
Dual Filing State UCC Division
Harrisburg, PA 17120
- AND -
FCs 204, 247 Philadelphia County Prothonotary
Broad & Market
Philadelphia, PA 19107
FC 225 Lehigh County Prothonotary
Allentown, PA 18105
FC 239 Lackawanna County Prothonotary
P.O. Box 133
Scranton, PA 18503
FC 263 Bucks County Prothonotary
Doylestown, PA 18901
FC 273 York County Prothonotary
York, PA 17401
FCs 317, 788 Allegheny County Prothonotary
542 Forbes Ave.
Pittsburgh, PA 15219
FC 324 Chester County Prothonotary
2 No. Hight Street
West Chester, PA 19380
Rhode Island FC 270 Division of Uniform Commercial Code
Office of Secretary of State
100 N. Main Street
Providence, RI 02903
</TABLE>
<PAGE>
10
<TABLE>
<S> <C> <C>
South Carolina FCs 404, 409 Secretary of State
UCC Section
P.O. Box 11350
Columbia, SC 29211
Tennessee FCs 405, 415, 436 Secretary of State
437 UCC Section
James K. Polk Building, 18th Floor
Nashville, TN 37219
Texas FCs 313, 320, 322 Secretary of State
344, 347, 348 UCC Division
501, 502, 504 P.O. Box 13193
506, 511, 512 Austin, TX 78711-3193
525, 541, 544
546, 552, 553
555, 559
Utah FC 549 Division of Corporations and
Commercial Code
UCC Division
P.O. Box 45801
Salt Lake City, UT 84145-0801
Virginia Clerk's Office
Dual Filing State State Corporation Commission
P.O. Box 1197
Richmond, VA 23218-1197
- AND -
FC 319 Clerk of the Court of
Prince William Country
P.O. Box 191
Manassas, VA 22110
FC 403 Clerk of the Court of the
City of Virginia Beach
Virginia Beach, VA 23458
</TABLE>
<PAGE>
11
<TABLE>
<S> <C> <C>
FC 407, 478 Clerk of the Court of the
County of Fairfax
4110 Chain Bridge Rd.
Fairfax, VA 22030
FC 408 Clerk of the Court for the
City of Newport News
Newport News, VA 23607
FC 430 Clerk of the Court for the
County of Henrico
P.O. Box 27032
Richmond, VA 23273
FC 443 Clerk of the Court for the
City of Norfolk
Norfolk, VA 23510
FC 477 Clerk of the Court for the
County of Roanoke
Salem, VA 24153
Washington FCs 475, 571 Department of Licensing
UCC Division
P.O. Box 9660
Olympia, WA 98507-9660
Wisconsin FCs 304, 763, 764 Department of Financial Institutions
795, 803 Division of Corporate and Consumer
Services
P.O. Box 7847
Madison, WI 53707
</TABLE>
<PAGE>
12
B. FIXTURE FILINGS
<TABLE>
<CAPTION>
State Facilities Located Filing Office
Within the Jurisdiction
of the Filing Office
_______________ ________________________ _______________________________
<S> <C> <C>
Alabama FC 410 Madison County Judge of Probate
Huntsville, AL 35801
FC 413 Mobile County Judge of Probate
Mobile, AL 36602
FC 454 Montgomery County Judge of Probate
Montgomery, AL 36104
FC 797 Jefferson County Judge of Probate
Birmingham, AL 35203
FC 797 Jefferson County Judge of Probate
Bessemer, AL 35020
Arizona FC 522 Pima County Recorder
115 N. Church Ave.
Tuscon, AZ
California FC 362 San Bernardino County Clerk
and Recorder
Hall of Records
San Bernardino, CA 92415
FC 417 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 418 San Diego County Clerk and Recorder
P.O. Box 1750
San Diego, CA 92112
</TABLE>
<PAGE>
13
<TABLE>
<S> <C> <C>
FC 420 Orange County Clerk and Recorder
P.O. Box 238
Santa Ana, CA 92701
FC 428 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 453 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 461 Riverside County Clerk and Recorder
Courthouse
Riverside, CA 92501
FC 465 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 474 San Diego County Clerk and Recorder
P.O. Box 1750
San Diego, CA 92112
FC 480 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 481 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
FC 514 San Joaquin County Clerk and Recorder
Hall of Records
Stockton, CA 95202
FC 521 Sacramento County Clerk and Recorder
P.O. Box 839
Sacramento, CA 95804
FC 523 Fresno County Clerk and Recorder
P.O. Box 766
Fresno, CA 93712
</TABLE>
<PAGE>
14
<TABLE>
<S> <C> <C>
FC 526 Sacramento County Clerk and Recorder
P.O. Box 839
Sacramento, CA 95804
FC 527 Stanislaus-Modesto County
Clerk and Recorder
P.O. Box 1008
Courthouse
Modesto, CA 95353
FC 561 Santa Clara County Clerk and Recorder
70 West Hedding
San Jose, CA 95110
FC 563 San Mateo County Clerk and Recorder
Courthouse
Redwood City, CA 94063
FC 566 Los Angeles County Clerk and Recorder
RM5 - New Hall of Records
Los Angeles, CA 90012
Colorado FC 338 Office of the County Clerk and Recorder,
Douglas County
FC 353 Office of the County Clerk and Recorder,
Arapahoe County
FC 518 Office of County Clerk and Recorder,
El Paso County
FC 556 Office of County Clerk and Recorder,
Jefferson County
Connecticut FC 208 Town Clerk
Danbury, CT
FC 235 Town Clerk
New Haven, CT
</TABLE>
<PAGE>
15
<TABLE>
<S> <C> <C>
Delaware FC 267 New Castle County Recorder of Deeds
800 French Street
Wilmington, DE 19801
Florida Corporate Office Office of the Broward County
Circuit Court Clerk
Box 14668
Fort Lauderdale, FL 33302
Corporate Office Office of the Broward County
Circuit Court Clerk
Box 14668
Fort Lauderdale, FL 33302
FC 342 Office of the Palm Beach County
Circuit Court Clerk
Box 4177
West Palm Beach, FL 33402
FC 433 Office of the Escambia County
Circuit Court Clerk
Pensacola, FL 32501
FC 442 Office of the Leon County
Circuit Court Clerk
Box 726
Tallahassee, FL 32301
FC 731 Office of the Duval County
Circuit Court Clerk
Jacksonville, FL 32202
FC 733 Office of the Orange County
Circuit Court Clerk
Box 38
Orlando, FL 32802
FC 734 Office of the Duval County
Circuit Court Clerk
Jacksonville, FL 32202
</TABLE>
<PAGE>
16
<TABLE>
<S> <C> <C>
FC 740 Office of the Broward County
Circuit Court Clerk
Box 14668
Ft. Lauderdale, FL 33302
FC 750 Office of the Dade County
Circuit Court Clerk
Miami, FL 33130
FC 755 Office of the Broward County
Circuit Court Clerk
Box 14668
Ft. Lauderdale, FL 33302
FC 792 Office of the Lee County
Circuit Court Clerk
Box 2278
Fort Myers, FL 33902
Georgia FC 311 Clerk of the DeKalb County
Superior Court
Decatur, GA 30030
FC 334 Clerk of the Cobb County
Superior Court
Box 3490
Marietta, GA 30091
FC 358 Clerk of the Fulton County Superior Court
Atlanta, GA 30303
FC 439 Clerk of the Bibb County Superior Court
P.O. Box 1015
Macon, GA 31208
FC 451 Clerk of the Cobb County Superior Court
Box 3490
Marietta, GA 30091
FC 802 Clerk of the Clayton County
Superior Court
121 So. McDonough
Jonesboro, GA 30236
</TABLE>
<PAGE>
17
<TABLE>
<S> <C> <C>
Hawaii FC 547 Registrar of Conveyances
Bureau of Conveyances
P.O. Box 2867
Honolulu, HI 96803
Idaho FC 524 Ada County Recorder
Boise, ID 83702
Illinois FC 301 Du Page County Recorder
Wheaton, IL 60187
FC 303 Du Page County Recorder
Wheaton, IL 60187
FC 309 Cook County Recorder
Chicago, IL 60602
FC 335 Cook County Recorder
Chicago, IL 60602
FC 759 Winnebago County Recorder
Rockford, IL 61101
FC 787 Peoria County Recorder
Peoria, IL 61602
Indiana FC 307 Marion County Recorder
Indianapolis, IN 46204
FC 720 Lake County Recorder
2293 N. Main
Crown Point, IN 46307
FC 736 Marion County Recorder
Indianapolis, IN 46204
FC 746 Allen County Recorder
1 E. Main Street
Fort Wayne, IN 46802
FC 760 Marion County Recorder
Indianapolis, IN 46204
</TABLE>
<PAGE>
18
<TABLE>
<S> <C> <C>
FC 785 Howard County Recorder
Courthouse
Kokomo, IN 46901
FC 796 Johnson County Recorder
P.O. Box 475
Franklin, IN 46131
FC 801 St. Joseph County Recorder
South Bend, IN 46601
Iowa FC 779 Polk County Recorder
111 Court Avenue
Des Moines 50309
Kansas FC 308 Johnson County Register of Deeds
P.O. Box 700
Olathes, KS 66061
FC 554 Sedgwick County Register of Deeds
Wichita, KS 67203
Kentucky FC 738 Jefferson County Clerk
P.O. Box 33033
Louisville, KY 40202
FC 745 Jefferson County Clerk
P.O. Box 33033
Louisville, KY 40202
Louisiana FC 438 Clerk of the Jefferson Parish Court
P.O. Box 10
Gretna, LA 70054
FC 456 Clerk of the Caddo Parish Court
Shreveport, LA 71101
FC 458 Clerk of the Lafayette Parish Court
P.O. Box 2009
Lafayette, LA 70502
FC 804 Clerk of the Jefferson Parish Court
P.O. Box 10
Gretna, LA 70054
</TABLE>
<PAGE>
19
<TABLE>
<S> <C> <C>
Maryland FC 201 Clerk of the Baltimore County
Circuit Court
Towson, MD 21285
FC 213 Clerk of the Anne Arundel County
Circuit Court
P.O. Box 71
Annapolis, MD 21404
FC 220 Clerk of the Harford County
Circuit Court
20 W. Courtland Street
Bel Air, MA 21014
FC 222 Clerk of the Baltimore County
Circuit Court
P.O. Box 6754
Towson, MD 21285
FC 242 Clerk of the Frederick County
Circuit Court
100 W. Patrick Street
Frederick, MD 21701
FC 416 Clerk of the Anne Arundel County
Circuit Court
P.O. Box 71
Annapolis, MD 21404
Massachusetts FC 227 Bristol County
Registry of Deeds
FC 231 Middlesex County
Registry of Deeds
FC 232 Middlesex County
Registry of Deeds
FC 233 Plymouth County
Registry of Deeds
</TABLE>
<PAGE>
20
<TABLE>
<S> <C> <C>
FC 234 Essex County
Registry of Deeds
FC 257 Worcester County
Registry of Deeds
FC 271 Hampden County
Registry of Deeds
Michigan FC 332 Oakland County Register of Deeds
Pontiac, MI 48053
FC 349 Macomb County Register of Deeds
10 N. Main
Mount Clemons, MI 48043
FC 431 Genesse County Register of Deeds
Flint, MI 48502
FC 452 Kalamazoo County Register of Deeds
Kalamazoo, MI 49007
FC 455 Oakland County Register of Deeds
Pontiac, MI 48053
Minnesota FC 340 Anoka County Recorder
Anoka, MN 55303
FC 739 Hennepin County Recorder
Minneapolis, MN 55415
Mississippi FC 450 Clerk of the Madison County
Chancery Court
P.O. Box 404
Canton, MS 39046
Missouri FC 315 Jackson County Recorder of Deeds
415 E. 12th Street
Independence, MO 64106
</TABLE>
<PAGE>
21
<TABLE>
<S> <C> <C>
FC 321 St. Louis County Recorder of Deeds
Clayton, MO 63105
FC 753 St. Louis County Recorder of Deeds
Clayton, MO 63105
FC 754 St. Louis County Recorder of Deeds
Clayton, MO 63105
FC 769 Greene County Recorder of Deeds
Springfield, MO 65802
Nevada FC 345 Clark County Recorder
Box 551510
309 South Third Street
Las Vegas, NV 89155
New Jersey FC 215 Morris County Clerk
CN 900
Morristown, NJ 07960
FC 217 Middlesex County Clerk
P.O. Box 1110
New Brunswick, NJ 08903
FC 224 Hudson County Register of
Deeds and Mortgages
Jersey City, NJ 07306
FC 228 Camden County Register of
Deeds and Mortgages
Camden, NJ 08101
FC 230 Middlesex County Clerk
P.O. Box 1110
New Brunswick, NJ 08903
FC 236 Union County Register of
Deeds and Mortgages
Elizabeth, NJ 07207
FC 243 Mercer County Clerk
Trenton, NJ 08607
</TABLE>
<PAGE>
22
<TABLE>
<S> <C> <C>
FC 254 Monmouth County Clerk
P.O. Box 351
Freehold, NJ 07728
FC 260 Bergen County Clerk
Hackensack, NJ 07601
New Mexico FC 532 Bernalillo County Clerk
Albququerque, NM 87108
New York Corporate Office Westchester County Clerk
White Plains, NY 10601
FC 202 Monroe County Clerk
39 W. Main Street
Rochester, NY 14614
FC 210 Nassau County Clerk
240 Old Country Road
Mineola, NY 11501
FC 216 Monroe County Clerk
39 W. Main Street
Rochester, NY 14614
FC 223 Monroe County Clerk
39 W. Main Street
Rochester, NY 14614
FC 214 Onondaga County Clerk
Syracuse, NY 13202
FC 219 Oneida County Clerk
Utica, NY 13501
FC 229 Onondaga County Clerk
Syracuse, NY 13202
FC 226 Dutchess County Clerk
22 Market Street
Poughkeepsie, NY 12601
</TABLE>
<PAGE>
23
<TABLE>
<S> <C> <C>
FC 245 City Register
Bronx County Office
1932 Arthur Ave.
Bronx, NY 10457
FC 246 City Register
Queens County Office
90-27 Sutphin Blvd.
Jamaica, NY 11435
FC 248 Suffolk County Clerk
Riverhead, NY 11901
FC 249 City Register
Kings County Office
Municipal Bldg.
210 Joralemon St.
Brooklyn, NY 11201
FC 256 Nassau County Clerk
240 Old Country Road
Mineola, NY 11501
FC 264 Chemung County Clerk
P.O. Box 588
Elmira, NY 14902
FC 266 Orange County Clerk
Goshen, NY 10924
FC 326 Erie County Clerk
25 Delaware Ave.
Buffalo, NY 14202
North Carolina FC 406 Forsythe County Registor of Deeds
P.O. Box 1013
Winston-Salem, NC 27101
FC 463 Cumberland County Registor of Deeds
P.O. Box 2039
Fayetteville, NC 28302
</TABLE>
<PAGE>
24
<TABLE>
<S> <C> <C>
Ohio FC 306 Hamilton County Recorder
Cincinnati, OH 45202
FC 339 Franklin County Recorder
373 S. High Street
Columbus, OH 43215
FC 343 Hamilton County Recorder
Cincinnati, OH 45202
FC 310 Franklin County Recorder
373 S. High Street
Columbus, OH 43215
FC 716 Cuyahoga County Recorder
1219 Ontario
Cleveland, OH 44113
FC 725 Summit County Recorder
117 South Main Street
Akron, OH 44308
FC 732 Stark County Recorder
110 Central Plaza South
Canton, OH 44702
FC 761 Franklin County Recorder
373 S. High Street
Columbus, OH 43215
FC 771 Lucas County Recorder
Jackson Street
Toledo, OH 43604
FC 780 Cuyahoga County Recorder
1219 Ontario
Cleveland, OH 44113
Oklahoma FC 516 County Clerk of Oklahoma County
Oklahoma City, OK 73102
</TABLE>
<PAGE>
25
<TABLE>
<S> <C> <C>
FC 517 County Clerk of Tulsa County
Tulsa, OK 74103
FC 542 County Clerk of Oklahoma County
Oklahoma City, OK 73102
Oregon FC 560 Marion County Clerk
Salem, OR 97301
FC 565 Lane County Clerk
Eugene, OR 97401
Pennsylvania FC 204 Philadelphia County Recorder of Deeds
Broad & Market
Philadelphia, PA 19107
FC 225 Lehigh County Recorder of Deeds
Allentown, PA 18105
FC 239 Lackawanna County Recorder of Deeds
P.O. Box 133
Scranton, PA 18503
FC 247 Philadelphia County Recorder of Deeds
Broad & Market
Philadelphia, PA 19107
FC 263 Bucks County Recorder of Deeds
Doylestown, PA 18901
FC 273 York County Recorder of Deeds
York, PA 17401
FC 317 Allegheny County Recorder of Deeds
542 Forbes Ave.
Pittsburgh, PA 15219
FC 324 Chester County Recorder of Deeds
2 No. Hight Street
West Chester, PA 19380
</TABLE>
<PAGE>
26
<TABLE>
<S> <C> <C>
FC 788 Allegheny County Recorder of Deeds
542 Forbes Ave.
Pittsburgh, PA 15219
Rhode Island FC 270 Recorder of Deeds
East Greenwich, RI
South Carolina FC 404 Charleston County Register of
Mesne Conveyances
P.O. Box 726
Charleston, SC 29401
FC 409 Greenville County Register of
Mesne Conveyances
Greenville, SC 29601
Tennessee FC 405 Knox County Register
Knoxville, TN 37902
FC 415 Shelby County Register
Box 3823
Memphis, TN 38173
FC 436 Davidson County Register
103 Courthouse
Nashville, TN 37201
FC 437 Davidson County Register
103 Courthouse
Nashville, TN 37201
Texas FC 313 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
FC 320 Dallas County Clerk
Dallas, TX 75202
FC 322 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
</TABLE>
<PAGE>
27
<TABLE>
<S> <C> <C>
FC 344 Bexar County Clerk
San Antonio, TX 78205
FC 347 Tarrant County Clerk
100 E. Weatherford
Fort Worth, TX 76196
FC 348 Bexar County Clerk
San Antonio, TX 78205
FC 501 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
FC 502 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
FC 504 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
FC 506 Collin County Clerk
McKinney, TX 75069
FC 511 Tarrant County Clerk
100 E. Weatherford
Fort Worth, TX 76196
FC 512 Dallas County Clerk
Dallas, TX 75202
FC 525 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
FC 541 Lubbock County Clerk
P.O. Box 10536
Lubbock, TX 79408
</TABLE>
<PAGE>
28
<TABLE>
<S> <C> <C>
FC 544 El Paso County Clerk
501 E. Overland
El Paso, TX 79901
FC 546 Travis County Clerk
P.O. Box 1748
Austin, TX 78701
FC 552 Dallas County Clerk
Dallas, TX 75202
FC 553 Jefferson County Clerk
P.O. Box 1151
Beaumont, TX 77704
FC 555 Midland County Clerk
P.O. Box 211
Midland, TX 79702
FC 559 Harris County Clerk
P.O. Box 1525
Houston, TX 77251
Utah FC 549 Salt Lake County Recorder
Salt Lake City, UT 84401
Virginia FC 319 Clerk of the Court of
Prince William Country
P.O. Box 191
Manassas, VA 22110
FC 403 Clerk of the Court of the
City of Virginia Beach
Virginia Beach, VA 23458
FC 407 Clerk of the Court of the
County of Fairfax
4110 Chain Bridge Rd.
Fairfax, VA 22030
FC 408 Clerk of the Court for the
City of Newport News
Newport News, VA 23607
</TABLE>
<PAGE>
29
<TABLE>
<S> <C> <C>
FC 430 Clerk of the Court for the
County of Henrico
P.O. Box 27032
Richmond, VA 23273
FC 443 Clerk of the Court for the
City of Norfolk
Norfolk, VA 23510
FC 477 Clerk of the Court for the
County of Roanoke
P.O. Box 1126
Salem, VA 24153
FC 478 Clerk of the Court for the
County of Fairfax
4110 Chain Bridge Road
Fairfax, VA 22030
Washington FC 475 Pierce County Recording Officer
2401 So. 35th Street
Tacoma, WA98409
FC 571 Clark County Recording Officer
P.O. Box 5000
Vancouver, WA 98668
Wisconsin FC 304 Milwaukee County Register of Deeds
901 N. 9th Street
Milwaukee, WI 53233
FC 763 Dane County Register of Deeds
210 Martin Luther King Blvd.
Box 1438
Madison, WI 53701
FC 764 Outagamie County Register of Deeds
410 South Walnut Street
Appleton, WI 54911
</TABLE>
<PAGE>
30
<TABLE>
<S> <C> <C>
FC 795 Brown County Register of Deeds
P.O. Box 23600
Green Bay, WI 54305
FC 803 Marathon County Register of Deeds
500 Forest Street
Wausau, WI 54403
</TABLE>
<PAGE>
SCHEDULE 3.3
LOCATION OF COLLATERAL
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. Corporate Office Taxter Park Associates
565 Taxter Road c/o Dean Witter Realty Inc.
Elmsford, NY 10523 Two World Trade Center
64th Floor
New York, NY 10048
Kamenstein
565 Taxter Road
Elmsford, NY 10523
(Sub-landlord)
Discovery Zone, Inc. Corporate Office Tessler Enterprises
6600 NW 16th Street 2240 SW 70th Avenue
Plantation, FL 33313 Unit H
Davie, FL 33317
Discovery Zone, Inc. 201 [SEE SCHEDULE 3.3A]
8661 Philadelphia Road
Baltimore, MD 21237
Discovery Zone, Inc. 202 Joseph Fanghetti, Esq.
1000 Hylan Dr. c/o Keilum Realty Corp.
Hylan Dr. & Jefferson Rd. One Old Country Road, Suite 400
Henrietta, NY 14623 Carle Place, NY 11514
Discovery Zone, Inc. 204 [SEE SCHEDULE 3.3A]
2327 Cottman Avenue
Philadelphia, PA 19149
Discovery Zone, Inc. 208 Tisano Realty Inc.
26 Backus Avenue 30 Sweet Briar Court
Danbury, CT 06810 Stamford, CT 06905
Discovery Zone, Inc. 210 [SEE SCHEDULE 3.3A]
3601 Hempstead Turnpike
Levittown, NY 11756
Discovery Zone, Inc. 213 Saul Subsidiary Ltd. Partnership
46 Mountain Road c/o Wyndham Management Company
Glen Burnie, MD 21061 8401 Connecticut Avenue
Chevy Chase, MD 20815
Discovery Zone, Inc. 214 [SEE SCHEDULE 3.3A]
7421 Oswego Road
Liverpool, NY 13090
Discovery Zone, Inc. 215 [SEE SCHEDULE 3.3A]
Rt. 80 & Mt. Hope Rd.
Rockaway, NJ 07866
</TABLE>
<PAGE>
2
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 216 Benderson Development Company
1601 Penfield Road 570 Delaware Avenue
Rochester, NY 14625 Buffalo, New York 14202
Discovery Zone, Inc. 217 Midstate HYE L.P.
300 Route 18 North c/o Gabrallian Assoc.
East Brunswick, NJ 08816 95 Route 17 South
Paramus, New Jersey 07652
Discovery Zone, Inc. 219 [SEE SCHEDULE 3.3A]
1092 Commercial Drive
New Hartford, NY 13413
Discovery Zone, Inc. 220 [SEE SCHEDULE 3.3A]
527 Baltimore Pike
Bel Air, MD 21014
Discovery Zone, Inc. 222 [SEE SCHEDULE 3.3A]
6510 Baltimore National Pike
Catonsville, MD 21228
Discovery Zone, Inc. 223 [SEE SCHEDULE 3.3A]
170 Greece Ridge Center Drive
Greece, NY 14626
Discovery Zone, Inc. 224 [SEE SCHEDULE 3.3A]
Route 440 South
Jersey City, NJ 07304
Discovery Zone, Inc. 225 [SEE SCHEDULE 3.3A]
2180 MacArthur Rd.
Whitehall, PA 18052
Discovery Zone, Inc. 226 [SEE SCHEDULE 3.3A]
838 South Road, Rt. 9
Poughkeepsie, NY 12601
Discovery Zone, Inc. 227 [SEE SCHEDULE 3.3A]
Rt. 6, 169 Dartmouth Mall
Dartmouth, MA 02747
Discovery Zone, Inc. 228 [SEE SCHEDULE 3.3A]
1660 Kings Highway North
Cherry Hill, NJ 08034
Discovery Zone, Inc. 229 Albert D. Pizio Trust B
3439 Erie Blvd. c/o Tornatore & Co., CPA's P.C.
Dewitt, NY 13214 6075 East Molloy Road
Syracuse, NY 13211
Discovery Zone, Inc. 230 [SEE SCHEDULE 3.3A]
Stelton & Hadley Roads
South Plainfield, NJ 07080
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 231 [SEE SCHEDULE 3.3A]
1282 Worcester Street, Rte. 9E
Natick, MA 01760
Discovery Zone, Inc. 232 TYN Limited Partnership
440 Middlesex Road Attn: Director of Real Estate
Tyngsboro, MA 01879 c/o Boston Development Assoc., Inc.
32 Southwest Park
Westwood, MA 02090
Discovery Zone, Inc. 233 [SEE SCHEDULE 3.3A]
Rt. 3 at 53
1775 Washington Street
Hanover, MA 02339
Discovery Zone, Inc. 234 [SEE SCHEDULE 3.3A]
8-10 Newbury Street
Danvers, MA 01923
Discovery Zone, Inc. 235 [SEE SCHEDULE 3.3A]
138 Amity Road
New Haven, CT 06515
Discovery Zone, Inc. 236 Martin Rappaport d/b/a
1235 Route 22 W. Union Equity Realty
Union, NJ 07083 P.O. Box 1562
Englewood Cliffs, NJ 07632
Discovery Zone, Inc. 239 [SEE SCHEDULE 3.3A]
423 Scranton Carbondale Hwy.
Scanton, PA 18508
Discovery Zone, Inc. 242 [SEE SCHEDULE 3.3A]
470-474 Prospect Blvd.
Frederick, MD 21701
Discovery Zone, Inc. 243 [SEE SCHEDULE 3.3A]
318 Route 33
Hamilton Square, NJ 08619
Discovery Zone, Inc. 245 Val-Ford Realty, Inc.
237 East Fordham Rd. 1557 Broadway
Bronx, NY 10458 New York, NY 10036
Discovery Zone, Inc. 246 [SEE SCHEDULE 3.3A]
66-26 Metropolitan Avenue
Middle Village (Queens), NY 11379
Discovery Zone, Inc. 247 [SEE SCHEDULE 3.3A]
2403-17 Aramingo Ave
Philadelphia, PA 19125
Discovery Zone, Inc. 248 [SEE SCHEDULE 3.3A]
114-116 Deer Park Avenue
North Babylon, NY 11703
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 249 [SEE SCHEDULE 3.3A]
5405 Kings Plaza
Brooklyn, NY 11234
Discovery Zone, Inc. 254 [SEE SCHEDULE 3.3A]
Consumer Center 3
310 Rt. 36, Suite 607
West Long Branch, NJ 07764
Discovery Zone, Inc. 256 Carle Place Annex Co
183 Glen Cove Road c/o Basser & Kaufman
Carle Place, NY 11514 335 Central Avenue
Lawrence, NY 11559
Attn: Marc Kemp, Esq.
Discovery Zone, Inc. 257 [SEE SCHEDULE 3.3A]
77 Boston Turnpike, Rt. 9W
Shrewsbury, MA 01545
Discovery Zone, Inc. 260 Fashion Center Associates
The Fashion Center c/o Kravco Co.
Rt. 17 at Ridgewood Avenue The Atrium
Paramus, NJ 07652 234 Mall Blvd, Box 1528
King of Prussia, PA 19406
Discovery Zone, Inc. 263 [SEE SCHEDULE 3.3A]
Fairless Hills Shopping Center
463 Oxford Valley Road
Fairless Hills, PA 19030
Discovery Zone, Inc. 264 FG-85 Associates
845 County Route 64 570 Delaware Avenue
Elmira, NY 14903 Buffalo, New York 14202
Discovery Zone, Inc. 266 [SEE SCHEDULE 3.3A]
200 N. Galleria Drive
Middletown, NY 10940
Discovery Zone, Inc. 267 [SEE SCHEDULE 3.3A]
Gordy Plaza
4317 Kirkwood Hwy.
Wilmington, DE 19808
Discovery Zone, Inc. 270 Amalgamated Financial
1000 Division Street Group IX, L.P.
East Greenwich Shopping Center 1414 Atwood Avenue
East Greenwich, RI 02818 Johnston, RI 02919
Discovery Zone, Inc. 271 [SEE SCHEDULE 3.3A]
247 Memorial Avenue
Century Shopping Center
W. Springfield, MA 01089
</TABLE>
<PAGE>
5
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 273 [SEE SCHEDULE 3.3A]
2420 Eastern Boulevard
York, PA 17402
Discovery Zone, Inc. 301 [SEE SCHEDULE 3.3A]
Tower Crossing Shopping Center
1512 Naper Blvd., STE 180
Naperville, IL 60563
Discovery Zone, Inc. 303 [SEE SCHEDULE 3.3A]
6226 S. Cass Avenue
Westmont, IL 60559
Discovery Zone, Inc. 304 [SEE SCHEDULE 3.3A]
5008 S. 74th Street
Greenfield, WI 53220
Discovery Zone, Inc. 306 Gilbert Ave. Assoc.
8057 Beechmont Ave. 2820 Gilbert Ave.
Cincinnati, OH 45255 Cincinnati, OH 45206
Discovery Zone, Inc. 307 Owned Property
3720 E. 82nd Street
Indianapolis, IN 46240
Discovery Zone, Inc. 308 [SEE SCHEDULE 3.3A]
7594 W. 119th Street
Overland Park, KS 66213
Discovery Zone, Inc. 309 [SEE SCHEDULE 3.3A]
15131 S. LaGrange Road
Orland Park, IL 60461
Discovery Zone, Inc. 310 [SEE SCHEDULE 3.3A]
Dublin Village Center
6561 Dublin Center Drive
Dublin, OH 43017
Discovery Zone, Inc. 311 McDonald's Corporation
Stone Mountain Square Shopping Center 8th Floor
5370 Hwy. 78 #1100 1 McDonald's Plaza
Stone Mountain, GA 30087 Oakbrook, IL 60521
Attention: Bob Sweitzer
Discovery Zone, Inc. 313 [SEE SCHEDULE 3.3A]
7744 FM 1960 West
Houston, TX 77070
Discovery Zone, Inc. 315 [SEE SCHEDULE 3.3A]
4420 S. Noland Rd.
Noland South Shopping Center
Independence, MO 64055
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 317 [SEE SCHEDULE 3.3A]
251 Clairton Blvd.
West Mifflin, PA 15236
Discovery Zone, Inc. 319 [SEE SCHEDULE 3.3A]
Promenade at Manassas
7730 Streamwalk Lane
Manassas, VA 22110
Discovery Zone, Inc. 320 [SEE SCHEDULE 3.3A]
1233 Town East Blvd.
Mesquite, TX 75150
Discovery Zone, Inc. 321 [SEE SCHEDULE 3.3A]
14373 Manchester Blvd.
Manchester, MO 63011
Discovery Zone, Inc. 322 [SEE SCHEDULE 3.3A]
19801 Gulf Freeway #900
Webster, TX 77598
Discovery Zone, Inc. 324 [SEE SCHEDULE 3.3A]
270 N. Pottstown Pike
Exton, PA 19341
Discovery Zone, Inc. 326 [SEE SCHEDULE 3.3A]
5435 Sheridan Drive
Amherst, NY 14221
Discovery Zone, Inc. 332 [SEE SCHEDULE 3.3A]
105 East 13 Mile Road
Madison Heights, MI 48071
Discovery Zone, Inc. 334 Owned Property
824 Earnest W. Barrett Pkwy
Kennesaw, GA 30144
Discovery Zone, Inc. 335 Owned Property
2570 W. Schaumburg Road
Schaumburg, IL 60194
Discovery Zone, Inc. 338 Owned Property
7510 Parkway Drive
Littleton, CO 80124
Discovery Zone, Inc. 339 Owned Property
5705 Chantry Drive
Columbus, OH 43232
Discovery Zone, Inc. 340 Owned Property
8601 Springbrook Drive, NE
Coon Rapids, MN 55433
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 342 [SEE SCHEDULE 3.3A]
10301 Southern Blvd.
Royal Palm Beach, FL 33411
Discovery Zone, Inc. 343 Owned Property
1140 Smiley Road
Forest Park, OH 45240
Discovery Zone, Inc. 344 Owned Property
5751 NW Loop 410
Leon Valley, TX 78238
Discovery Zone, Inc. 345 [SEE SCHEDULE 3.3A]
2020 Olympic Avenue
Henderson, NV 89014
Discovery Zone, Inc. 347 Owned Property
1118 W. Arbrook
Arlington, TX 76015
Discovery Zone, Inc. 348 Owned Property
13722 Embassy Row
San Antonio, TX 78216
Discovery Zone, Inc. 349 Owned Property
13745 Lakeside Circle
Sterling Hts, MI 48313
Discovery Zone, Inc. 352 Owned Property
(Land Only)
Frankline Mills Mall
Wrights Rd & Woodhaven
Franklin Mills, PA 19154
Discovery Zone, Inc. 353 Owned Property
14281 E. Exposition Avenue
Aurora, CO 80012
Discovery Zone, Inc. 357 Owned Property
(Land Only)
Vancouver Mall Cr
Vancouver, WA 98662
Discovery Zone, Inc. 358 [SEE SCHEDULE 3.3A]
730 Holcomb Bridge Road
Roswell, GA 30076
Discovery Zone, Inc. 362 [SEE SCHEDULE 3.3A]
10540 Foot Hill Blvd.
Rancho Cucamanga, CA 91730
Discovery Zone, Inc. 403 [SEE SCHEDULE 3.3A]
774 Hilltop North, #38
Virginia Beach, VA 23451
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 404 [SEE SCHEDULE 3.3A]
7800 North Rivers Ave.
N. Charleston, SC 29418
Discovery Zone, Inc. 405 [SEE SCHEDULE 3.3A]
192 N. Seven Oaks
Knoxville, TN 37922
Discovery Zone, Inc. 406 [SEE SCHEDULE 3.3A]
620 Hanes Mall Blvd
Winston-Salem, NC 27103
Discovery Zone, Inc. 407 [SEE SCHEDULE 3.3A]
5195-A Leesburg Pike
Falls Church, VA 22041
Discovery Zone, Inc. 408 KMart Corporation
401 Oriana Rd. c/o K-Mart Int'l. Hq.
Newport News, VA 23608 3100 W. Big Beam Rd.
Troy, MI 48034-3163
Discovery Zone, Inc. 409 [SEE SCHEDULE 3.3A]
20 Haywood Rd. Ste D
Greenville, SC 29607
Discovery Zone, Inc. 410 [SEE SCHEDULE 3.3A]
6125 University Drive NW #D1
Huntsville, AL 35806
Discovery Zone, Inc. 413 [SEE SCHEDULE 3.3A]
3725 Airport Blvd, STE 133
Mobile, AL 36608
Discovery Zone, Inc. 415 [SEE SCHEDULE 3.3A]
3684 Ridgeway
Memphis, TN 38115
Discovery Zone, Inc. 416 [SEE SCHEDULE 3.3A]
81-B Forest Drive
Annapolis, MD 21401
Discovery Zone, Inc. 417 [SEE SCHEDULE 3.3A]
147 Stonewood Street
Space A-35
Downey, CA 90241
Discovery Zone, Inc. 418 [SEE SCHEDULE 3.3A]
315 N. Magnolia
El Cajon, CA 92020
Discovery Zone, Inc. 420 [SEE SCHEDULE 3.3A]
136 Orange Fair Mall
Fullerton, CA 92632
</TABLE>
<PAGE>
9
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 428 [SEE SCHEDULE 3.3A]
6633 Fallbrook Avenue, #420
West Hills, CA 91307
Discovery Zone, Inc. 430 [SEE SCHEDULE 3.3A]
1532-A Parham Road
Richmond, VA 23229
Discovery Zone, Inc. 431 [SEE SCHEDULE 3.3A]
5038 Miller Road, Suite D
Flint, MI 48507
Discovery Zone, Inc. 433 [SEE SCHEDULE 3.3A]
1670 Airport Blvd
Pensacola FL 32504
Discovery Zone, Inc. 436 [SEE SCHEDULE 3.3A]
2088 North Gallatin Road
Madison, TN 37115
Discovery Zone, Inc. 437 [SEE SCHEDULE 3.3A]
5314 Mountain View Road
Antioch, TN 37013
Discovery Zone, Inc. 438 [SEE SCHEDULE 3.3A]
3908 Veterans Blvd
Metairie, LA 70002
Discovery Zone, Inc. 439 [SEE SCHEDULE 3.3A]
3640 Eisenhower Pkwy., Ste. 9
Macon, GA 31206
Discovery Zone, Inc. 442 [SEE SCHEDULE 3.3A]
3425 Thomsville Road
Tallahassee FL 32308
Discovery Zone, Inc. 443 Janaf Assoc. LP
5900 East Virginia Beach Blvd. c/o McKinley Commercial, Inc.
Norfolk, VA 23510 For Bankers Trust
320 N. Main, Suite 200
Ann Arbor, MI 48104
Discovery Zone, Inc. 450 Townline Square, L.P.
826 South Wheatly Street, STE B 1818 Crane Ridge Drive
Ridgeland, MS 39157 Jackson, MS 39216
Discovery Zone, Inc. 451 [SEE SCHEDULE 3.3A]
3701 Austell Road
Marietta, GA 30062
Discovery Zone, Inc. 452 [SEE SCHEDULE 3.3A]
6175 South Westnedge Avenue
Portage, MI 49002
</TABLE>
<PAGE>
10
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 453 [SEE SCHEDULE 3.3A]
4645 Silva Street
Lakewood, CA 90712
Discovery Zone, Inc. 454 [SEE SCHEDULE 3.3A]
3439-D McGehee Road
Montgomery, AL 36111
Discovery Zone, Inc. 455 Fourteen Mile and Haggerty Partnership
7390 S. Haggerty 1577 N. Woodward Avenue
W. Bloomfield, MI 48322 Suite 240
Bloomfield Hills, MI 48304
Southfield, MI 48034
Discovery Zone, Inc. 456 Shreve City Shopping Center
1103 Shreveport-Barksdale Hwy. Stanley R Gumberg,Trustee
Shreveport, LA 71105 c/o J.J. Gumberg Company
1051 Brinton Road
Pittsburgh, PA 15221
Discovery Zone, Inc. 458 [SEE SCHEDULE 3.3A]
5700 Johnston, B20
Lafayette, LA 70503
Discovery Zone, Inc. 461 [SEE SCHEDULE 3.3A]
585 N. McKinley Street
Corona, CA 91719
Discovery Zone, Inc. 463 [SEE SCHEDULE 3.3A]
5075 Morganton Road
Fayetteville, NC 28314
Discovery Zone, Inc. 465 [SEE SCHEDULE 3.3A]
11231 183rd Street
Cerritos, CA 90701
Discovery Zone, Inc. 474 [SEE SCHEDULE 3.3A]
510-520 Broadway
Chula Vista, CA 91910
Discovery Zone, Inc. 475 [SEE SCHEDULE 3.3A]
5801 South Sprague Ct.
Tacoma, WA 98409
Discovery Zone, Inc. 477 [SEE SCHEDULE 3.3A]
4035 Electric Road, SW
Roanoke, VA 24014
Discovery Zone, Inc. 478 [SEE SCHEDULE 3.3A]
3031 Nutley St.
Fairfax, VA 22031
Discovery Zone, Inc. 480 [SEE SCHEDULE 3.3A]
320 S. California Ave.
West Covina, CA 91790
</TABLE>
<PAGE>
11
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 481 Antelope Valley Zone
1401 West Avenue P c/o Jerome White
Palmdale, CA 93551 10801 National Blvd #600
Los Angeles, CA 90064
Discovery Zone, Inc. 501 [SEE SCHEDULE 3.3A]
10201 B Katy Freeway
Houston, TX 77024
Discovery Zone, Inc. 502 Intercity Investment Properties, Inc.
4016-20 Bellaire Blvd. Mr. Bert Jordan
Houston, TX 77025 4301 Westside Dr. #100
Dallas, Texas 75209-6546
Discovery Zone, Inc. 504 [SEE SCHEDULE 3.3A]
124 E. FM 1960 Bypass
Humble, TX 77338
Discovery Zone, Inc. 506 [SEE SCHEDULE 3.3A]
1201 North Central Expressway No. 30
Plano, TX 75075
Discovery Zone, Inc. 511 [SEE SCHEDULE 3.3A]
4860 S.W. Loop 820
Ft. Worth, TX 76109-4420
Discovery Zone, Inc. 512 Owned Property
15240 Dallas Parkway
Dallas, TX 75248
Discovery Zone, Inc. 514 Normandy Village, L.P.
7912 North West Lane 1821 East Hammon Lane, Suite E
Stockton, CA 95210 Stockton, CA 95210
Attn: Leasing Coordinator
Discovery Zone, Inc. 516 [SEE SCHEDULE 3.3A]
2501 W. Memorial Road #105
Oklahoma City, OK 73134
Discovery Zone, Inc. 517 [SEE SCHEDULE 3.3A]
9919 E. 71st Street
Tulsa, OK 74133
Discovery Zone, Inc. 518 Citadel Crossing Assoc.
855 N. Academy Blvd c/o The Summit Commercial Group
Colorado Springs, CO 80909 101 North Cascade Avenue, Suite 320
Colorado Springs, CO 80903
Discovery Zone, Inc. 521 [SEE SCHEDULE 3.3A]
6351 Mack Road
Sacramento, CA 95823
Discovery Zone, Inc. 522 [SEE SCHEDULE 3.3A]
6238 E. Broadway Blvd.
Tuscon, AZ 85711
</TABLE>
<PAGE>
12
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 523 [SEE SCHEDULE 3.3A]
455 East Shaw Avenue
Fresno, CA 93710
Discovery Zone, Inc. 524 [SEE SCHEDULE 3.3A]
8567 West Franklin Road
Boise, ID 83709
Discovery Zone, Inc. 525 [SEE SCHEDULE 3.3A]
Randall Center
1822 SE Beltway 8
Pasadena, TX 77503
Discovery Zone, Inc. 526 [SEE SCHEDULE 3.3A]
7155 Greenback Lane
Citrus Heights, CA 95610
Discovery Zone, Inc. 527 Beverly & Henry Rowan
3500 Sisk Road c/o Liberty Property Management
Modesto, CA 95356 1230 E. Orangeburg Ave., #C
Modesto, CA 95350
Discovery Zone, Inc. 532 [SEE SCHEDULE 3.3A]
6300 San Mateo NE #G
Albuquerque, NM 87109
Discovery Zone, Inc. 541 [SEE SCHEDULE 3.3A]
5011 Slide Road
Lubbock, TX 79414
Discovery Zone, Inc. 542 [SEE SCHEDULE 3.3A]
7110 South I-35 Service Road
Oklahoma City, OK 73149
Discovery Zone, Inc. 544 [SEE SCHEDULE 3.3A]
9801 Gateway Blvd. W. - #9
El Paso, TX 79925
Discovery Zone, Inc. 546 [SEE SCHEDULE 3.3A]
Gateway Square
9503 Research Boulevard #500
Austin, TX 78759
Discovery Zone, Inc. 547 [SEE SCHEDULE 3.3A]
Waikele Center
94-792 Lumiana Street
Waipahu, HI 96797
Discovery Zone, Inc. 549 Boyer Plaza 5400 Associates
1836 West 5400 South 127 S. 500 East 320
Taylorsville, UT 84118 Salt Lake City, UT 84102
</TABLE>
<PAGE>
13
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 551 Owned Property
(Land Only)
Reserve G at Town Center
Sugarland, TX 75060
Discovery Zone, Inc. 552 [SEE SCHEDULE 3.3A]
3301 W. Airport Freeway
Irving, TX 75060
Discovery Zone, Inc. 553 [SEE SCHEDULE 3.3A]
Parkdale Mall
5755 Easter Freeway
Beaumont, TX 77706
Discovery Zone, Inc. 554 [SEE SCHEDULE 3.3A]
7500 East Kellog - #100
Wichita, KS 67207
Discovery Zone, Inc. 555 [SEE SCHEDULE 3.3A]
4715 Billingsley Blvd
Midland, TX 79705
Discovery Zone, Inc. 556 [SEE SCHEDULE 3.3A]
9110 Wadsworth Pkwy.
Westminster, CO 80021
Discovery Zone, Inc. 559 KV Associates
2326 FM 1960 West c/o S.C. Management Co.
Houston, TX 77068 2189 FM 1960 West, #227
Houston, TX 77268
Discovery Zone, Inc. 560 [SEE SCHEDULE 3.3A]
444 Lancaster Drive, NE
Salem, OR 97301
Discovery Zone, Inc. 561 [SEE SCHEDULE 3.3A]
217 Ranch Drive
Milpitas, CA 95035
Discovery Zone, Inc. 563 [SEE SCHEDULE 3.3A]
2541-43 El Camino Real
Redwood City, CA 94063
Discovery Zone, Inc. 565 [SEE SCHEDULE 3.3A]
3000 Gateway Street, #412
Springfield OR 97477
Discovery Zone, Inc. 566 [SEE SCHEDULE 3.3A]
930 N. San Fernando
Burbank, CA 91504
Discovery Zone, Inc. 571 [SEE SCHEDULE 3.3A]
7809 B Vancouver Plaza #180
Vancouver, WA 98662
</TABLE>
<PAGE>
14
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 716 D & S Realty Co.
6420 Mayfield Road #1609 8255 East Washington Street
Mayfield Heights, OH 44124 Chagrin Falls, OH 44023
Discovery Zone, Inc. 720 [SEE SCHEDULE 3.3A]
Merrillville Plaza
1700 E. 80th Street
Merrillville, IN 46410
Discovery Zone, Inc. 725 [SEE SCHEDULE 3.3A]
1952 Bucholzer Blvd.
Akron, OH 44310
Discovery Zone, Inc. 731 [SEE SCHEDULE 3.3A]
8102-27A Blanding Blvd
Jacksonville, FL 32244
Discovery Zone, Inc. 732 [SEE SCHEDULE 3.3A]
4377 Whipple Avenue, NW
Canton, OH 44718
Discovery Zone, Inc. 733 [SEE SCHEDULE 3.3A]
205 University Park Drive
Winter Park, FL 32792
Discovery Zone, Inc. 734 Shopping Ctr. Equities
Discovery Zone Plaza 4347-10 Univ. Blvd. South
10732 Atlantic Blvd. Jacksonville, FL 32216
Jacksonville, FL 32225
Discovery Zone, Inc. 736 [SEE SCHEDULE 3.3A]
5926 Crawfordsville Road
Space 2A Center
Speedway, IN 46224
Discovery Zone, Inc. 738 [SEE SCHEDULE 3.3A]
4615 Outer Loop
Louisville, KY 40219
Discovery Zone, Inc. 739 [SEE SCHEDULE 3.3A]
3441 Hazelton Road
Edina, MN 55435
Discovery Zone, Inc. 740 [SEE SCHEDULE 3.3A]
1403 E. Hallandale Beach Blvd.
Hallandale, FL 33009
Discovery Zone, Inc. 745 [SEE SCHEDULE 3.3A]
2030 South Hustbourne Pkwy
Louisville, KY 40220
</TABLE>
<PAGE>
15
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 746 [SEE SCHEDULE 3.3A]
5321 Coldwater Road
Fort Wayne, IN 46825
Discovery Zone, Inc. 750 [SEE SCHEDULE 3.3A]
13700 SW 84th Street
Miami, FL 33183
Discovery Zone, Inc. 753 [SEE SCHEDULE 3.3A]
12450 Tesson Ferry Rd.
St. Louis, MO 63128
Discovery Zone, Inc. 754 [SEE SCHEDULE 3.3A]
Shopping Center
2B Grandview Plaza
Florissant, MO 63033
Discovery Zone, Inc. 755 [SEE SCHEDULE 3.3A]
10141 Pines Blvd, #405
Pembroke Pines, FL 33026
Discovery Zone, Inc. 759 [SEE SCHEDULE 3.3A]
Forest Plaza
6055 East State St.
Rockford, IL 61107
Discovery Zone, Inc. 760 [SEE SCHEDULE 3.3A]
9493 East Washington Street
Indianapolis, IN 46229
Discovery Zone, Inc. 761 [SEE SCHEDULE 3.3A]
2745 Northland Plaza Drive
Columbus, OH 43229
Discovery Zone, Inc. 763 [SEE SCHEDULE 3.3A]
4617 Verona Road
Madison, WI 53711
Discovery Zone, Inc. 764 Appleton Shops Ltd Prt
728 N. Casaloma Drive c/o Chase Properties
Appleton, WI 54915 25825 Science Park Drive
Suite 355
Benchwood, OH 44122
Discovery Zone, Inc. 769 Battlefield Real Estate, Inc.
319 East Battlefield 1275 Peachtree Street
Springfield, MO 65807 Suite 10
Atlanta, GA 30367-1801
Discovery Zone, Inc. 771 National Amusements, Inc.
5225 Monroe Street 200 Elm Street
Toledo, OH 43602-3603 Dedham, MA 02026
</TABLE>
<PAGE>
16
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 779 New Plan Realty Trust
4365 Merle Hay Road 1120 Avenue of the Americas
Des Moines, IA 50310 New York, New York 10036
Discovery Zone, Inc. 780 [SEE SCHEDULE 3.3A]
Parma Town Plaza
7601 W. Ridgewood Rd.
Parma, OH 44129
Discovery Zone, Inc. 785 [SEE SCHEDULE 3.3A]
1429 S. Reed Road
Kokomo, IN 46902
Discovery Zone, Inc. 787 [SEE SCHEDULE 3.3A]
910 W. Lake
Sheridan Rd. & Lake St.
Peoria, IL 61614
Discovery Zone, Inc. 788 [SEE SCHEDULE 3.3A]
300 Mall Blvd.
Monroeville, PA 15146
Discovery Zone, Inc. 792 [SEE SCHEDULE 3.3A]
7091-9 College Parkway
Ft. Myers, FL 33907
Discovery Zone, Inc. 795 [SEE SCHEDULE 3.3A]
2779 S. Oneida Street
Ste. 101
Green Bay, WI 54304
Discovery Zone, Inc. 796 [SEE SCHEDULE 3.3A]
Greenwood Shopping Center
1238 US 31 North
Greenwood, IN 46142
Discovery Zone, Inc. 797 [SEE SCHEDULE 3.3A]
7001 Crestwood Blvd.,
Ste. 700
Birmingham, AL 35210
Discovery Zone, Inc. 801 [SEE SCHEDULE 3.3A]
4150 Grape Road
Mishawaka, IN 46545
Discovery Zone, Inc. 802 [SEE SCHEDULE 3.3A]
1956 Mt. Zion Road
Morrow, GA 30260
Discovery Zone, Inc. 803 [SEE SCHEDULE 3.3A]
10101 Market Street, Ste. A5
Mosinee, WI 54455
</TABLE>
<PAGE>
17
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBER AND ADDRESS INFORMATION (IF APPLICABLE)
----------- ------------------ ---------------------------
<S> <C> <C>
Discovery Zone, Inc. 804 [SEE SCHEDULE 3.3A]
1999 Barataria Blvd.
Marrero, LA 70072
</TABLE>
<PAGE>
SCHEDULE 3.3A
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
201 WHITE OAK-VINCENT PLACE ASSOC. C/O PENCE FRIEDEL DEVELOPERS 1359 BEVERLY ROAD, SUITE 200
202 JOSEPH FAMIGHETTI, ESQ. C/O KELLUM REALTY CORP. ONE OLD COUNTRY ROAD, SUITE 400
204 NEW PLAN REALTY TRUST REAL ESTATE ADMINISTRATION 1120 AVENUE OF THE AMERICAS
208 TISANO REALTY, INC. 30 SWEET BRIAR COURT
210 NASSAU MALL ASSOCIATES C/O JEFFERY MANAGEMENT 7 PENN PLAZA, ROOM 618
213 SAUL SUBSIDIARY I LTD PRTNRSHP C/O WINDHAM MANAGEMENT COMPANY 8401 CONNECTICUT AVENUE
214 GENERAL ELECTRIC CAPITAL CORP. C/O KELLY & DUTCH 217 MONTGOMERY STREET
215 CORPORATE PROPERTY INVESTORS C/O ROCKAWAY TOWNSQUARE ROUTE 80 & MT. HOPE AVENUE
216 BENDERSON DEVELOPMENT COMPANY LEASE #46138 570 DELAWARE AVENUE
217 MIDSTATE HYE, L.P. C/O GABRALLIAN ASSOC. 95 ROUTE 17
219 HARVRICH ASSOCIATES /CO GOODRICH ASSOCIATES MANAGMENT 560 SYLVAN AVENUE
220 HILL MANAGEMENT SERVICES INC. 9640 DEERCO ROAD
222 PIKE PARK PLAZA C/O MARYLAND FINANCIAL INVESTORS 9475 DEERCO ROAD, SUITE 302
223 GREECE TOWNE MALL, L.P. 1265 SCOTTSVILLE ROAD
224 PREIT-RUBIN, INC., Agents for C/O HUDSON ASSOCIATES, L.P. ROUTE 440
225 KRT PROPERTY HOLDINGS, INC. C/O KRANZCO REALTY TRUST 128 FAYETTE STREET
226 HARTFORD CREEK ASSOCIATES DBA SOUTH HILLS MALL 1127 S. MANNHEIM ROAD, SUITE 212
227 PR NORTH DARTMOUTH MALL C/O NORTH DARTMOUTH MALL 200 SOUTH BEND
228 FEDERAL REALTY INVESTMENT TRUST DEPARTMENT 0930 112 C. PARK AVENUE
229 ALBERT D. PIZIO TRUST B C/O TORNATORE & CO., CPA's, P.C. 6075 E. MOLLOY ROAD
230 SOUTH FIELDS ASSOCIATES C/O GIBRALTAR MANAGEMENT COMPANY 150 WHITE PLAINS ROAD
231 HC ATLANTIC DEVELOPMENT LP C/O HC ATLANTIC DEVELOPMENT L.P. 393 TOTTEN POND ROAD
232 TYN LIMITED PARTNERSHIP C/O BOSTON DEVELOPMENT ASSOC. 32 SOUTHWEST PARK
233 THE REALTY ASSOCIATES FUND, III, L.P. C/O R. WEINER & ASSOCIATES 1330 BOYLSTON STREET, SUITE 212
234 DANCROSS ASSOCIATES, L.P. C/O WEINGARTEN PROPERTIES, INC. ONE WYNNWOOD ROAD, SUITE 200
235 PAD II ASSOCIATES LIMITED PARTNERSHIP C/O KONOVER PROPERTY MANAGEMENT 2410 ALBANY AVENUE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
201 MCLEAN VA 22101 703 827-8300 ELISE KIPER
202 CARLE PLACE NY 11514 516 741-8141 JOSEPH FAMIGHETTI
204 NEW YORK NY 10036 212 869-3000 IRVING MARSHALL
208 STANFORD CT 06905 203 322-9047 WILLIAM TISSANO
210 NEW YORK NY 10001 212 563-6557 MAUREEN DAVIS
213 CHEVY CHASE MD 20815 301 986-6000 BARBARA FISHER
214 SYRACUSE NY 13090 315 422-3356 BILL DUTCH
215 ROCKAWAY NJ 07866 212 421-8200 JOHN ARCHER
216 BUFFALO NY 14202 716 886-0211 DON ROBINSON
217 PARAMUS NJ 07652 201 845-4100 GERI REYNOLDS
219 ENGLEWOOD CLIFF NJ 07632 201 816-9550 HOWARD GORDON
220 TIMONIUM MD 21014 410 666-2388 SCOTT SYNDEL
222 TIMONIUM MD 21093 410 337-2298 MAUREEN KNEALY
223 ROCHESTER NY 14624 716 464-9400 FRED LAPPLE
224 JERSEY CITY NJ 07304 201 432-0119 STEVE TRIVEDI
225 CONSHOHOCKEN PA 19428 610 941-9292 CHRISTINE HIRSCHBUHL
226 WESTCHESTER IL 60154 708 334-9242 DON BAKER
227 PHILADELPHIA PA 19102 508 999-4535 LARRY TRACKMAN
228 WILLOW GROVE PA 19090 215 657-8740 ED MCLAUGHIN
229 SYRACUSE NY 13211 315 433-1585 WILLIAM PIZZIO
230 TARRYTOWN NY 10591 914 631-6200 BARBARA QUIS
231 WALTHAM MA 02154 781 890-1380 BRUCE LEADER
232 WESTWOOD MA 02090 781 461-0660 ANN MORENO
233 CHESTNUT HILL MA 02167 617 232-8900 CHRISTINE ROCCO
234 WYNNWOOD PA 19606 610 896-9680 DUKE DAVIS
235 WEST HARTFORD CT 06515 860 233-8635 DAN CHAREST
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
236 MARTIN RAPPAPORT dba UNION EQUITY REALTY 110 CHARLOTTE PLACE
239 OFFICE MAX, INC. REAL ESTATE ADMINISTRATION 3605 WARRENSVILLE CENTER ROAD
242 TRIANGLE V II, L.P. C/O MARK PROPERTIES 1400 DOMINION TOWER
243 HILTON REALTY COMPANY OF PRINCETON C/O PRINCETON ARMS 194 NASSAU STREET
245 VAL-FORD REALTY, INC. 1557 BROADWAY
246 MIDDLE VILLAGE ASSOCIATES 1500 OLD NORTHERN BOULEVARD
247 PORT RICHMON ASSOCIATES C/O BRYANT ASSET MANAGEMENT 2900 WESTCHESTER AVENUE
248 DEER PARK ASSOCIATES C/O SEYMOUR PIENKNY 51 JOHN STREET
249 KINGS PLAZA SHOPPING CENTER AND MARINA 5100 KINGS PLAZA
254 BFG ASSOCIATES LEASE #46899 570 DELAWARE AVENUE
256 CARLE PLACE ANNEX CO. C/O BASSER-KAUFMAN 335 CENTRAL AVENUE
257 TURNPIKE REALTY TRUST C/O JOSEPH J. CARIGLIA, ESQUIRE 188 LINCOLN STREET
260 FASHION CENTER ASSOCIATES C/O KRAVCO COMPANY 234 MALL BOULEVARD
263 FAIRLESS HILLS S.C. ASSOCIATES 521 E. BALTIMORE PIKE
264 FG-85 ASSOCIATES LEASE #46122 570 DELAWARE AVENUE
266 PCM PLAZA COMPANY C/O PYRAMID MANAGEMENT COMPANY 4 CLINTON SQUARE
267 GORDY MANAGEMENT, INC. 105 N. DU PONT HIGHWAY
270 AMALGAMATED FINANCIAL GROUP, IX 1414 ATWOOD AVENUE
271 CENTURY INVESTMENT COMPANY 73 STATE STREET
273 KIMCO REALTY CORPORATION C/O KIMCO DEVELOPMENT 4979 OLD STREET
301 NAPEROG LIMITED PARTNERSHIP C/O BRAODCARE MANAGEMENT CO. 455 EAST ILLINOIS STREET, SUITE 570
303 MID AMERICA ASSET MANAGEMENT C/O WESTMONT VILLAGE/SIDCOR TWO-MID AMERICA PLAZA, SUITE
304 BMC REAL ESTATE ACQUISITIONS C/O BONNIE MANAGEMENT CORPORATION 3400 DUNDEE ROAD, SUITE 108
306 GILBERT AVENUE ASSOCIATES 2820 GILBERT AVENUE
308 ROSANA SQUARE C/O ROSANA SQUARE SHOPPING CENTER 909 TROOST
309 TRI-LAND PROPERTIES, INC. LEASE ID (015-Z-4-3850) ONE WESTBROOK CORPORATE STR., SUITE
520
310 CONTINENTAL SAWMILL, LTD. PTSHP C/O DEVELOPERS DIVERSIFIED REALTY 34555 CHAGRIN BOULEVARD
311 NEW RONSTONE, L.L.C. C/O CNM MANAGEMENT ASSOCIATES 950 E. PACES FERRY ROAD, SUITE 200
313 THE COMMONS AT WILLOWBROOK, INC. C/O TRAMMELL CROW COMPANY 1390 POST OAK BOULEVARD, SUITE 1800
315 NOLAND SOUTH DEVELOPMENT 911 MAIN STREET 720 COMMERCE TOWER
317 TECH ONE ASSOCIATES 200 MARSHALL DRIVE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
236 ENGLEWOOD CLIFFS NJ 07632 201 567-6633 INGRID NAGY
239 SHAKER HEIGHTS OH 44122 216 921-6900 BRIAN J. BERN
242 NORFOLK VA 23610 973 538-7111 KATHERINE WIDMARK
243 PRINCETON NJ 08542 609 921-6060 MARIE PREISTOR
245 NEW YORK NY 10036 212 398-6388 DAVID COHEN
246 ROSLYN NY 11576 516 484-8800 MAX BRITTAN
247 PURCHASE NY 10577 914 701-4300 DENNIS BRAUCHLE
248 BABYLON NY 11703 516 557-6500 SEYMOUR PIENKY
249 BROOKLYN NY 11234 718 253-6844 DANIEL PASSARELLO
254 BUFFALO NY 14202 716 886-9487 AMANDA IANDUS
256 LAWRENCE NY 11559 516 569-3700 KEVIN MCCABE
257 WORCESTER MA 01605 508 791-2367 JOSPEH CARRIGILA, ESQ.
260 KING OF PRUSSIA PA 19406 610 768-6327 ANNA THOMAS
263 MEDIA PA 19063 610 627-0349 JERRY SODY
264 BUFFALO NY 14202 716 886-0211 STEVEN GOODMAN
266 SYRACUSE NY 13202 315 422-7000 GAYLE RENKERT
267 NEW CASTLE DE 19720 302 322-3723 RALPH GORDY
270 JOHNSON RI 02919 401 273-6800 HOLLIE WEIDELEL
271 SPRINGFIELD MA 01103 413 785-1981 ANDRE COHEN
273 TREVOSE PA 17402 717 394-0521 SUSAN MASONE
301 CHICAGO IL 60611 312 836-5400 PAUL DIWOSKIN
303 OAKBROOK IL 60181 630 954-7300 JOHN MARCONNET
304 NORTHBROOK IL 60062 847 714-0605 DAVID LASKY
306 CINCINNATI OH 45206 513 221-5600 TIMOTHY MACCONNELL
308 KANSAS CITY MO 64106 816 842-0766 ANOTHONY PRIVITERA, II
309 WESTCHESTER IL 60673 708 531-8210 JULIE DONAHUE
310 CHAGRIN FALLS OH 44022 440 247-9852 BOB SEAWRIGHT
311 ATLANTA GA 30326 770 869-2700 ANN CROWDER
313 HOUSTON TX 77056 713 875-4141 JANICE MEINZER
315 KANSAS CITY MO 64105 816 421-2963 CURTIS BLISS
317 CORAPOLIS PA 15108 412 264-8385 JAMES JARRETT
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
319 MANASAS PROMENADE L.P. C/O KRITI MANAGEMENT, INC. 345 EAST 37 STREET, SUITE 312
320 PACIFIC RETAIL TRUST C/O BANKERS TRUST COMPANY 10675 E. NORTH WEST HIGHWAY, SUITE 2630
321 SCOTT INVESTORS C/O WOLFF PROPERTIES 225 MERMEC AVENUE, SUITE 301
322 PRICE BAYBROOK, LIMITED C/O TRANSWESTERN PROPERTY COMPANY 2754 BINGLE
324 EXTON PLAZA ASSOCIATES C/O COM-DEL INTERNATIONAL LTD. 1 FRITCHIE PLACE
326 RANDALL BENDERSON 1993-1 TRUST C/O BENDERSON DEVELOPMENT 570 DELAWARE AVENUE
332 HARBOR MADISON SQUARE C/H LIMITED PARTNERSHIP 2555 SOUTH TELEGRAPH
335 ALLIED DISTRICT PROPERTIES, L.P. C/O KLAFF REALTY, L.P. 111 WEST JACKSON BOULEVARD
342 SOUTHERN CENTERS C/O ROGER MILLER 18679 SE FEDERAL HIGHWAY
345 SILVER SPRINGS, INC. C/O G.V. COMMERCIAL, LP. 901 N. VALLEY GREEN ROAD, SUITE 200
358 PERLIS CORPORATION C/O LAMAR J. PERLIS 622 EAST SIXTEENTH AVENUE
362 LEWIS HOMES MANAGEMENT CORPORATION C/O PROPERTY MANAGEMENT DEPARTM. 1156 NORTH MOUNTAIN AVENUE
403 S.L. NUSSBAUM REALTY COMPANY ONE COMMERCIAL PLACE 1000 NATIONSBANK CENTER
404 KIMCO REALTY CORPORATION TENANT # 692-5 3333 HYDE PARK ROAD
405 TALISMAN KNOXVILLE, L.L.C. 1500 SAN REMO AVE. STE. 185-A
406 RCP-1 C/O RICHARDSON CORP 701 GREEN VALLEY ROAD, SUITE 300
407 SEVENTH SKYLINE ASSOCIATES C/O CHARLES E. SMITH, MGMT INC. 2345 CRYSTAL DRIVE
408 K-MART CORP. INTERNATIONAL HEADQUARTERS 3100 WEST BIG BEAVER ROAD
409 VERDAE PROPERTIES, INC. C/O CAINE COMPANY 111 WILLIAMS STREET
410 MARX'S REALTY & IMPROVEMENT C/O MADISON MALL SHOPPING CTR 708 THIRD AVENUE, 15TH FLOOR
413 KONOVER MOBILE FESTIVAL CENTER C/O KONOVER & ASSOCIATES SOUTH, INC.7000 WEST PALMETTO ROAD, SUITE 405
415 GRABER INVESTMENTS C/O STANLEY GRABER 4646 POPLAR AVENUE, SUITE 245
416 MACERICH REAL ESTATE COMPANY C/O ANNAPOLIS MANAGEMENT CO. 170 JENNIFER ROAD, SUITE 330
417 MACERICH STONEWOOD C/O STONEWOOD CENTER MALL 251 STONEWOOD STREET
418 ECTC, LLC C/O ESSIX REALTY MANAGEMENT, INC. 3146 REDHILL AVENUE, SUITE 150
420 THE ORANGEFAIR COMPANY, L.L.C. C/O MIDLAND LOAN SERVICES, L.P. 433 NORTH CAMDEN DRIVE, SUITE 725
428 FALLBROOK MALL C/O GENERAL GROWTH PROPERTY MAN 110 NORTH WACKER DRIVE
430 BARNES & NOBLE, INC. 122 FIFTH AVENUE
431 HEITMAN PROPERTIES OF MICHIGAN LTD. C/O MILL CREEK DEVELOPMENT CENTER 3341 SOUTH LINDEN BOULEVARD
433 CORDOVA COMMONS C/O CNM ASSOCIATES 6301 WEST CYPRESS STREET, SUITE 202
435 410-7 POWER CONTRES LIMITED C/O FIRST PROFESSIONAL MGT., INC. 259 YORKLAND ROAD, SUITE 300
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
319 NEW YORK NY 10016 212 699-3530 DAVIDSON WILLIAMS
320 DALLAS TX 76238 214 696-9500 SANDI LANDRI
321 ST. LOUIS MO 63105 314 727-9800 STEPHAN WOLFF
322 HOUSTON TX 77055 213 937-8200 LINDA SALISBURY
324 VALLEY STREAM NY 11580 516 825-2663 ROGER A. WHYMAN
326 BUFFALO NY 14202 716 878-9487 STEVEN GOODMAN
332 BLOOMFIELD HILLS MI 48302 248 332-4444 BRUCE MEASOM
335 CHICAGO IL 60604 312 360-1234 RENEE EPSTEIN
342 TEQUESTA FLA 33469 561 743-0014 CHRISTOPHER AUSTIN
345 HENDERSON NV 89193 702 458-8855 NATALIE ALLRED
358 CORDELE GA 31015 912 276-1491 SUE DEES
362 UPLAND CA 91785 909 989-2332 SARA BOMBARDIER
403 NORFOLK VA 23510 757 627-8611 RICK JACOBSON/FAYE CLAYTON
404 NEW HYDE PARK NY 10042 516 869-9000 PAT CALLAN
405 CORAL GABLES FL 33146 305 662-9559 THOMAS SAWYER
406 GREENSBORO NC 27402 910 275-0911 BILL PHIPPS, CPM
407 ARLINGTON VA 22202 703 769-1121 JANICE PRICHET
408 TROY MI 48084 248 643-5128 JOAN PAPPAS
409 GREENVILLE SC 29602 864 250-2800 REX JONES
410 NEW YORK NY 10017 212 557-1400 ROBERT ALTSCHULER
413 BOCA RATON FL 33433 561 394-4224 JULIAN TRUSSELL
415 MEMPHIS TN 38117 901 682-2555 STANLEY GRABER
416 ANNAPOLIS MD 21401 410 224-3700 MELINDA BEDNARIK
417 DOWNEY CA 90241 562 861-9233 GLORIA ABRAMS
418 COSTA MESA CA 92626 714 540-5188 LINDA WEBBER
420 BEVERLY HILLS CA 90210 310 278-2036 ADEL RAPHAEL
428 CHICAGO IL 60606 818 340-5871 NICOLE KELLY/VINCE CINTRINO
430 NEW YORK NY 10011 212 633-3376 JEAN BOLLERMAN
431 FLINT MI 48507 810 732-4000 JULIE GINGELL
433 TAMPA FL 33607 813 281-8887 BILL PHILIPS
435 NORTH YORK ON M2J5B2 416 493-9112 EMILY DI-TRANI
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
436 CASUAL WEAR, INC. C/O JUST FOR FEET 3460 GALLERIA CIRCLE
437 PAINEWEBBER QUALIFIED PLAN C/O EDENS & AVANT 1901 MAIN STREET
438 FRENCH RIVIERA HEALTH SPA, INC. 3908 VETERANS BLVD
438 LATTER & BLUM PROPERTY MANAGEMENT, INC. 800 COMMON STREET, STE. 1000
439 PARKWAY VILLAGE SHOPPING CENTER C/O EDENS & AVANT FINANCING II, L.P.1901 MAIN STREET
442 RRC FL THREE, INC. C/O REGENCY RLTY/CARRIAGE GATE 24488 BRANDON BOULEVARD
443 JANAF ASSOCIATES LTD PARTNER. C/O BANKERS TRUST FOR NOMURA/JAN 5900 E. VIRGINIA BEACH BLVD., SUITE 100
450 TOWNLINE SQUARE, L.P. C/O THE MATTIACE COMPANY 1818 CRANE RIDGE DRIVE
451 PERRY S. ALTERMAN, TRUSTEE C/O CUMBERLAND REAL ESTATE 333 SANDY SPRINGS CIRCLE #227
452 SEYMOUR N. LOGAN ASSOCIATES C/O MARTIN FISHMAN 29 SOUTH LASALLE STREET, SUITE 705
453 LAKEWOOD MALL SHOPPING C/O LAKEWOOD MALL BUSINESS CTR. 500 LAKEWOOD CENTER MALL
454 COLONIAL PROPERTIES, INC. INTERSTATE PARK CENTER 2000 INTERSTATE PARK DRIVE, SUITE 103
455 FOURTEEN MILE & HAGGERTY C/O THE ROSIN COMPANY 1577 N. WOODWARD AVENUE, SUITE 240
456 STANLEY R. GUMBERG, TRUSTEE C/O J.J. GUMBERG COMPANY 1051 BRINTON ROAD
458 KIMCO REALTY CORPORATION C/O CONCORDIA LAFAYETTE, L.L.C. 3333 NEW HYDE PARK ROAD
461 CORONA HILLS MARKET PLACE C/O GATLIN DEVELOPMENT 12625 HIGH BLUFF DRIVE, SUITE 304
463 FAYETTEVILLE MORGANTON ASSOCIATES C/O JDN REALTY CORPORATION 359 EAST PACES FERRY ROAD, N.E.
465 KRAUSZ ENTERPRISES C/O KRAUSZ COMPANY 651 GATEWAY BOULEVARD, SUITE 101
474 HARRIET STONE C/O LAS TIENDAS SHOPPING CENTER 6566 RIDGE MANOR ROAD
475 SEATTLE FIRST NATIONAL BANK C/O NORTHWESTERN TRUST & INVEST 1201 THIRD AVENUE, 20TH FLOOR
477 WALDVOGEL, POE & CRONK 800 PROFESSIONAL ARTS BUILDING 30 W. FRANKLIN ROAD
478 FEDERAL REALTY INVESTMENT TRUST DEPT 0930 1626 JEFFERSON STREET
480 PLAZA WEST COVINA LLC C/O WESTFIELD CORPORATION, INC. 11601 WILSHIRE BOULEVARD, 12TH FLOOR
481 ANTELOPE VALLEY ZONE C/O JEROME WHITE 10801 NATIONAL BLVD., SUITE 600
501 MILTON BONIUK M.D. C/O MILA PROPERTIES 2416 GRESNER
502 INTERCITY INVESTMENT PROPERTY 4301 WESTSIDE DRIVE #100
504 6464 T-W ASSOCIATES, L.P. C/O WULFE MANAGEMENT SVCS., INC. 11 GREENWAY PLAZA, STE. #1700
506 TANDY CORPORATION C/O VIDEO CONCEPTS/MCDUFFS 300 W. 3RD STREET, STE. 4
511 PROPERTY TEXAS SC ONE CORP. C/O TRANSWESTERN PROPERTY CO. 100 EAST FIFTEENTH, SUITE 115
513 NCC-SAND HILL C/O NIKKO CAPITAL CORP 3961 MACARTHUR BLVD., STE 105
514 NORMANDY VILLAGE 1821 EAST HAMMER LANE, SUITE E
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
436 BIRMINGHAM AL 35244 205 408-3000 DORIS SEWELL
437 COLUMBIA SC 29202 803 779-4420 DUSTY RHODES
438 MATARIE LA 70001 504 454-5855 REYNOLD RICE
438 NEW ORLEANS LA 70112 504 544-7025 JEFF LAUFER
439 COLUMBIA SC 29202 803 779-4420 NATALIE WRIGHT
442 BRANDON FL 33509 904 356-7000 PAM T. ASHE
443 NORFOLK VA 23510 757 461-4954 SANDI MARAGONI
450 JACKSON MS 39216 601 982-1818 WAYNE PRICE/ANDREW MATTICE
451 ATLANTA GA 30328 404 252-0440 PERRY ALTERMAN
452 CHICAGO IL 60603 312 782-6008 MARTIN FISHERMAN
453 LAKEWOOD CA 90714 562 633-0437 SEAN THOMPSON
454 MONTGOMERY AL 36109 334 270-6727 HANK ESCAVAGE
455 BLOOMFIELD HILLS MI 48034 248 645-5400 ROBERT GALPERIN
456 PITTSBURGH PA 15221 412 244-4000 KIMBERLY A. BROWN
458 NEW HYDE PARK NY 11042 616 869-9000 TOM MEREDITH
461 SAN DIEGO CA 92130 619 793-2850 THOMAS SHERBONDY
463 ATLANTA GA 30305 704 376-0524 CONNIE CLUDERAY
465 SOUTH SAN CA 94083 415 871-5600 AMOS KRAUSZ
FRANCISCO
474 SAN DIEGO CA 92120 619 582-9574 HARRIET STONE
475 SEATTLE WA 98101 206 442-6403 MARY ANN KELEHER
477 ROANOKE VA 24011 540 982-2444 SHERRY LAWRENCE
478 ROCKVILLE MD 20852 301 998-8100 PAT ARNONE
480 LOS ANGELES CA 90064 818 960-1881 GENERAL COUNSEL
481 LOS ANGELES CA 90064 310 474-9534 JEROME WHITE
501 HOUSTON TX 77080 713 984-8300 BENJAMIN HERSHORN
502 DALLAS TX 75209 214 520-2565 SUSAN NEWPORT
504 HOUSTON TX 77046 713 621-1700 TARYN OLIVER
506 FORT WORTH TX 76102 817 390-3818 LEASE ADMINISTRATION
511 FORT WORTH TX 76102 817 877-4044 ANGELIQUE GUELLO
513 NEWPORT BEACH CA 92660 714 852-0651 LEONARD LEPERA
514 STOCKTON CA 95210 209 474-0991 ALAN BAILEY
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
516 DAYJAY ASSOCIATES C/O GENERAL GROWTH PROPERTIES, INC. 110 NORTH WACKER DRIVE
517 SOLLCO, L.L.C. C/O SANDITEN INVESTMENTS, LTD. 3314 EAST 51 STREET, SUITE 207K
518 CITADEL CROSSING ASSOCIATES C/O THE SUMMIT COMMERCIAL GROUP 101 NORTH CASCADE AVE., SUITE 410
521 MCNEIL REAL ESTATE MGMT., INC. SOUTH POINTE SHOPPING CENTER 26 WEST DRY CREEK CIRCLE #150
522 K-GAM BROADWAY WILMOT, L.L.C. C/O KIVEL REALTY INVESTMENTS 6061 EAST BROADWAY, SUITE 130
523 NAOMI BUJULIAN C/O JOAN KEVORKIAN 6179 N. PALM AVENUE
524 FRANKLIN TOWNE PLAZA II C/O HAWKINS SMITH MANAGEMENT, CO. 8645 W. FRANKLIN ROAD
525 RANDALL'S PASADENA C/O TRANSWESTERN PROPERTY COMPANY 6671 SOUTHWEST FREEWAY, SUITE 200
526 COMMONWEALTH EQUITY TRUST C/O PEREGRINE REAL ESTATE 1300 ETHAN WAY, SUITE 200
527 BEVERLY & HENRY ROWEN C/O LIBERTY PROPERTY MANAGEMENT 1230 E. ORANGEBURG AVENUE, SUITE C
532 FAR NORTH SHOPPING CENTER C/O LEWINGER HAMILTON, INC. 2340 MANAUL NE SUITE 200
541 EQUITY DEVELOPMENT CORPORATION P.O. BOX 519 519 GIBSON STREET
542 CROSSROADS SOUTH SHOPPING CENTER C/O ALLEN GANN ONE HORTH HUDSON, SUITE 140
544 9801 GB ASSOCIATES, L.L.C. C/O STEINER EQUITIES GROUP, L.L.C. 75 EISENHOWER PARKWAY
546 DT LAND GROUP, INC. C/O TRIANGLE II PARTNER, LTD. 9901 CAPITAL OF TEXAS HIGHWAY N. #230
547 WAIKELE PREMIUM OUTLETS C/O CHELSEA GCA REALTY PARTNERSHIP 103 EISENHOWER PARKWAY
549 BOYER PLAZA 5400 ASSOCIATES C/O THE BOYER COMPANY 127 SOUTH 500 EAST, SUITE 100
552 TANDY CORPORATION C/O VIDEO CONCEPTS/MCDUFFS 300 W. 3RD STREET, STE. 4
553 ROANS PRARIE DEVELOPMENT CORP. C/O FERTITTA REALTY P.O. BOX 12400
554 MTV REAL ESTATE L.P. C/O ROBERT MOORE 3600 WEST MAIN STREET, STE. 150
555 WAL-MART STORES, INC. LEASE #17848-608 2001 SOUTHEAST 10TH STREET
556 BROOKHILL III LTD LIABILITY CO. C/O SULLIVAN HAYES 1001 LINCOLN STREET, SUITE 100
559 K.V. ASSOCIATES C/O SC MANAGEMENT COMPANY 2189 F.M. 1960 WEST, SUITE 227
560 SUNSET-RENEE PROPERTIES C/O JOSEPH R. FOX 2265 McGILCRIST STREET, SUITE 200
561 MCCARTHY RANCH MANAGEMENT ACCT C/O HUNTER PROPERTY 20725 VALLEY GREEN DR. #100
563 PACIFIC RETAIL TRUST C/O WOODSIDE CENTRAL PLAZA 10675 E. NORTHWEST HIGHWAY, SUITE 2630
565 GATEWAY MALL C/O GENERAL GROWTH MANAGEMENT 110 NORTH WACKER DRIVE
566 STERIK COMPANY C/O AUBURNDALE PROPERTIES, INC. 372 WASHINGTON STREET
571 THE CAFARO NORTHWEST PRTNRSHP C/O VANCOUVER PLAZA 2445 BELMONT AVENUE
716 D & S REALTY COMPANY 8255 EAST WASHINGTON STREET
720 R.D. MERRILLVILLE ASSOC., L.P. C/O ACADIA MANAGEMENT, LLC 805 THIRD AVENUE, 9TH FLOOR
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
516 CHICAGO IL 60606 405 755-6530 KELLY HASSEL
517 TULSA OK 74135 918 742-2471 SAM STEEL
518 COLORADO SPRINGS CO 80903 719 520-1000 CINDY ROSE
521 LITTLETON CO 80120 303 798-9710 KEN MAUGHAN
522 TUCSON AZ 85711 520 747-7576 JULIE NILES
523 FRESNO CA 93704 209 439-8130 JOAN KEVORKIAN
524 BOISE ID 83709 208 376-8521 PEGGY MOYER
525 HOUSTON TX 77074 713 270-3346 KATHY QUINN
526 SACRAMENTO CA 95825 916 929-8244 YVETTE DEGUERO
527 MODESTO CA 95350 209 576-0934 REGINA LIPSCOMB
532 ALBUQUERQUE NM 87107 505 884-8900 BRETT CAMPBELL
541 SEAGOVILLE TX 75159 972 287-2570 DEBBIE SMITH
542 OKLAHOMA CITY OK 73102 405 843-7474 ALLEN GANN
544 ROSELAND NJ 07068 201 228-5800 ELEASTER L. SMILEY
546 AUSTIN TX 78766 512 338-4755 DIANNE SWEENEY
547 ROSELAND NJ 07068 973 403-3169 BARBARA VASLEINKO
549 SALT LAKE CITY UT 84102 801 521-4781 MARC CALL
552 FORT WORTH TX 76102 817 390-3818 RENT ACCONTING
553 BEAUMONT TX 77726 409 839-4428 MARK FERTITTA
554 NORMAN OK 73072 405 329-2252 GAIL GOMEZ
555 BENTONVILLE AR 27212 501 204-0203 SANFORD SMITH
556 DENVER CO 80203 303 534-0900 BRENDA JOHNSON
559 HOUSTON TX 77090 281 537-9066 BILL MEHERNS
560 SALEM OR 97302 603 581-8900 ROSE DOHENY
561 CUPERTINO CA 95014 408 255-4100 CATHERINE PERRINO
563 DALLAS TX 75238 510 935-5900 JENNY STACK
565 CHICAGO IL 60606 541 747-6294 ROBERT BUCHANAN
566 WELLESLEY MA 02181 781 431-2600 CHRISTINE FELIX
571 YOUNGSTOWN OH 44504 330 747-2661 ROGER GUGUCELLO
716 CHAGRIN FALLS OH 44023 216 543-2700 DON SCHNEDIER
720 NEW YORK NY 10022 212 421-8830 JOSEPH NAPOLITANO
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
725 NOUR MANAGEMENT CO. 4269 PEARL RD., SUITE 401
731 CROSSROADS SQUARE SHOPPING CTR C/O LAT PURSER FLORIDA 6230-7 ST. AGUSTINE ROAD
732 PHOENIX HOME LIFE MUTUAL INS. C/O GRUBB & ELLIS MANAGEMENT SRVC 1350 EUCLID AVENUE, SUITE 300
733 UNIVERSITY PARK, A JOINT VENTURE C/O COLONIAL PROPERTIES 130 UNIVERSITY PARK DRIVE, SUITE 125
734 SHOPPING CENTER EQUITIES, INC. C/O SLEISMAN ENTERPRISES, INC. 4347-10 UNIVERSITY BLVD SOUTH
736 BRADLEY FINANCING LTD. PARTNERSIHP C/O BANK OF AMERICA 5852 CRAWFORDSVILLE ROAD
738 AEGON USA REALTY MANAGEMENT 4333 EDGEWOOD ROAD NE
739 VULCAN PROPERTIES C/O UNITED PROPERTIES (YORK) 3500 WEST 80TH STREET
740 HASAM REALTY LIMITED, d/b/a DIPLOMATT C/O TERRANOVA CORPORATION 1200 BRICKELL AVENUE, SUITE 1500
MALL
745 TAYLORHURST ASSOCIATES C/O HAGAN PROPERTIES 11901 BRINLEY AVE., SUITE 100
746 DUKE REALTY L.P. C/O DUKE REALTY INVESTMENT, INC. 8888 KEYSTONE CROSSING, SUITE 1200
750 STOLTZ MGMT. OF DELAWARE, INC. AGENT FOR LSOF CYNWYD, L.P. 725 CONSCHOHOKEN STATE ROAD
751 DEVELOPERS DIVERSIFIED FINANCIAL C/O THE HERITAGE 34555 CHAGRIN BLVD.
COMPANY
753 CAPITOL LAND COMPANY P.O. BOX 419121 11850 STUDT
754 BRADLEY REAL ESTATE, INC. C/O GRANDVIEW PLAZA 62 GRANDVIEW PLAZA
755 DIM PINES LIMITED C/O DANEBELT GROUP, INC. 1650 S.E. 17TH ST., SUITE 310
759 SIMON PROPERTY (ILLINOIS L.P.) C/O SIMON DEBARTOLO GROUP 115 WEST WASHINGTON STREET
760 FLYNN & ZINKAN REALTY COMPANY INDIANA GENERAL PARTNERSHIP 36 S PENNSYLVANIA SUITE 750
761 COLUMBUS JOINT VENTURE C/O SIMON DEBARTOLO GROUP 115 WEST WASHINGTON STREET
763 MADISON PLAZA LTD. PARTNERSHIP C/O BRADLEY REAL ESTATE, INC. 10910 N. PORT RICHMOND ROAD
764 APPLETON SHOPS LIMITED C/O CHASE PROPERTIES 25825 SCIENCE PARK DRIVE, SUITE 355
769 1995 BATTLEFIELD PLAZA L.P. C/O GUARDIAN INVESTORS, INC. 8023 E. 63RD PLACE, SUITE 730
771 NATIONAL AMUSEMENTS, INC. 200 ELM STREET
779 NEW PLAN REALTY TRUST 1120 AVENUE OF THE AMERICAS
780 RMS INVESTMENT CORPORATION C/O PROPERTY MANAGEMENT 1650 TERMINAL TOWER, 50 PUBLIC SQUARE
785 MARKLAND PLAZA C/O SIMON PROPERTY GROUP 115 WEST WASHINGTON STREET
787 BRADLEY FINANCING LTD. PRTNRSHP SHERIDAN VILLAGE SHOPPING CNTR 7630 N. BARRINGTON ROAD
788 MONROEVILLE MALL C/O TURNBERRY ASSOCIATES 1972 SOUTH UNIVERSITY DRIVE
792 SCHONINGER SHOPPING CENTERS LIMITED 3225 AVIATION AVENUE, SUITE 700
795 WILC/ASHWAUBENON LTD., PRTNRSHP C/O MLG MANAGEMENT LLC 13400 BISHOPS LANE, SUITE 100
796 SCHOTTENSTEIN MANAGEMENT CO. 1798 FREBIS AVENUE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
725 CLEVELAND OH 44109 216 398-4632 GEORGE GADD
731 JACKSONVILLE FL 32217 904 268-9772 THERESA GRASSOFF
732 CLEVELAND OH 44115 216 623-4060 KAREN LEHNECKER
733 WINTER PARK FL 32792 407 677-1112 DIANNE HUGHES
734 JACKSONVILLE FL 32216 904 731-8806 TRACIA LUTEN
736 SPEEDWAY IN 46224 317 243-8219 TOM WELLMAN
738 CEDAR RAPIDS IA 52499 319 398-8559 JEFF BOHR
739 MINNEAPOLIS MN 55431 612 893-7537 NANCY MILLER
740 MIAMI FL 33131 305 754-7540 MAYRA GOZMAN
745 LOUISVILLE KY 40243 502 245-8800 DON EHLERS
746 INDIANAPOLIS IN 46266 317 846-4700 SCOTT S. LACY
750 BALA CYNWDY PA 19004 610 667-5800 MICHEAL MOSS
751 CHARAGRIN FALLS OH 44022 216 247-4700 BILL READ
753 ST. LOUIS MO 63141 314 991-8900 ROSE WAGSTAFF
754 FLORRISANT MO 63033 888 790-4177 RON A. CANTES
755 FORT LAUDERDALE FL 33316 954 467-6543 BRIAN MARK
759 INDIANAPOLIS IN 46204 317 263-2289 CINDY PARISH
760 INDIANAPOLIS IN 46204 317 634-6002 KELLY FLYNN
761 INDIANAPOLIS IN 46204 317 263-2283 PATTY HOLDER
763 MEQUON WI 53092 608 251-6400 WILLIAM R. READ
764 BEACHWOOD OH 44122 216 464-6626 REGINA SEIGAL
769 TULSA OK 74133 918 254-8116 MARTHA BRIGHT
771 DEAHAM MA 02026 781 461-1600 TARYN WARREN
779 NEW YORK NY 10036 212 869-3000 IRVING MARSHALL
780 CLEVELAND OH 44113 216 621-6060 BARBARA TACKES
785 INDIANAPOLIS IN 46204 317 263-2289 CINDY ROSE
787 HANOVER PARK IL 60103 630 736-7200 NANCY L. ROYCE
788 DAVIE FL 33324 954 423-2734 SOL BANKOLE
792 COCONUT GROVE FL 33133 305 860-8558 RITA SIVARO
795 BROOKFIELD WI 53005 414 797-9400 GARY G. KNOWSKI
796 COLUMBUS OH 43206 614 445-8461 RUTH GROSS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
797 DEVELOPERS DIVERSIFIED FINANCIAL C/O THE HERITAGE 34556 CHAGRIN BLVD.
COMPANY
801 GSG PROPERTIES LLC C/O HARRY S. SHAFFER 401 S. LAFAYETTE BOULEVARD
802 SPI XI, L.P. C/O JAMESTOWN MANAGEMENT CORP 2727 PACES FERRY RD., BLDG 2, SUITE 1600
803 CRESKE CORPORATION CEDAR CREEK FACTORY STORES 10101 MARKET STREET, SUITE 840
804 MARRERO LAND & IMPROVEMENT ASSOCIATION 5201 WESTBANK EXPRESSWAY
811 MONTGOMERY PLAZA C/O TRAMMELL CROW COMPANY 4575 SAN MATEO BOULEVARD NE SUITE I
812 JEHA FAMILY TRUST 318 DIABLO RD, SUITE 250
901 H T VENTURES, S.E. WOODLAKE PROFESSIONAL CENTER 3900 WOODLAKE BLVD., SUITE 307
904 FW CAGUAS RETAIL JOINT VENTURE C/O RD MANAGEMENT CORP. 810 SEVENTH AVENUE, 28TH FLOOR
905 VORNADO MONEHIEDRAS ACQUISITIONS, L.P.C/O VORNADO REALTY TRUST 66 LONG WHARF
950 GREAT PACIFIC INDUSTRIES, INC. C/O OVERWAITEA FOOD GROUP 19890 92A AVENUE
951 ERNST & YOUNG INC. C/O GATEWAY PLAZA 10060 JASPER AVENUE
952 ALMAHURST HOLDINGS LIMITED C/O EFFORT TRUST COMPANY 242 MAIN STREET EAST
963 65434 MANITOBA LTD. 477 WESTWOOD DRIVE
71905 M. KAMENSTEIN, INC. 565 TAXTER ROAD, FIFTH FLOOR
71915 RAND INDUSTRIES REALTY NO. 101 L.P. 2240 S.W. 70 AVENUE, SUITE H
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
797 CHARAGIN FALLS OH 44022 216 247-4700 BILL READ
801 SOUTH BEND IN 46634 219 237-4988 HARRY SHAFFER
802 ATLANTA GA 30339 770 805-1000 LISA THOMAS
803 MOSINEE WI 54455 715 359-3121 LARRY MCCUSKER
804 MARRERO LA 70022 504 341-1635 GARY GUIDRY
811 ALBUQUERQUE NM 87109 505 881-3100 LINDA REETZ
812 DANVILLE CA 94526 510 820-2110 RICHARD JEHA
901 LAKE WORTH FL 33463 561 963-8400 KEITH WILKELM
904 NEW YORK NY 10019 212 265-6600 RAFAEL DE GUZMAN
905 BOSTON MA 02110 617 726-1500 COLLEEN COTTER
950 LANGLEY BC V3A 4P8 604 888-8565 MICHEAL FONG
951 EDMONTON AB T5J 3R8 403 441-4680 SHAWNA BIRCH
952 HAMILTON ON L8N 1H5 905 528-8956 LIZ ODDI
963 WINNIPEG MB R3K 1G5 204 786-5981 MICHEAL BEWZA
71905 ELMSFORD NY 10523 914 785-8019 BOB GALANTE
71915 DAVIE FL 33317 954 370-3317 KATHY COOK
</TABLE>
========================================
SUBSIDIARY SECURITY AGREEMENT
among
DISCOVERY ZONE (CANADA) LIMITED,
DISCOVERY ZONE (PUERTO RICO), INC.,
and
DISCOVERY ZONE LICENSING, INC.
and
FIRSTAR BANK OF MINNESOTA, N.A.,
as Collateral Agent
Dated as of July 17, 1998
========================================
<PAGE>
SUBSIDIARY SECURITY AGREEMENT
THIS SUBSIDIARY SECURITY AGREEMENT, dated as of July 17, 1998
(the "Subsidiary Security Agreement"), is entered into by and among DISCOVERY
ZONE (CANADA) LIMITED, an entity formed under the laws of Canada ("DZL"),
DISCOVERY ZONE (PUERTO RICO), INC., a corporation formed under the laws of
Puerto Rico ("DZPR"), DISCOVERY ZONE LICENSING, INC., a Nevada corporation ("DZ
Licensing", together with DZL, DZPR and other subsidiaries of the Company that
may become Subsidiary Guarantors after the date hereof and their permitted
respective successors and assigns, the "Subsidiary Guarantors"), and FIRSTAR
BANK OF MINNESOTA, N.A., as the Trustee and Collateral Agent under the Indenture
(as defined below) and secured party hereunder for its benefit and the ratable
benefit of the holders of the Notes (as defined below) (together with its
successors and assigns, in such capacity, the "Collateral Agent"). This
Subsidiary Security Agreement is being entered into in connection with, pursuant
to and as collateral security for the debts, liabilities and Obligations arising
under or with respect to the Subsidiary Guarantees (as defined in the Indenture)
set forth in Article Eleven of the Indenture.
W I T N E S S E T H:
WHEREAS, Discovery Zone, Inc., a Delaware corporation (the
"Company"), has issued $20,000,000 aggregate principal amount of 13 1/2% Senior
Collateralized Notes due 2002 pursuant to the Indenture, dated the date hereof,
between the Company, each Subsidiary Guarantor and the Collateral Agent, as
amended or supplemented from time to time in accordance with its terms (the
"Indenture");
WHEREAS, pursuant to the Indenture or a supplement thereto,
each Subsidiary Guarantor has guaranteed the payment and performance of all now
existing and hereafter arising Obligations (defined below) of the Company and
the Subsidiary Guarantors (the "Subsidiary Guarantees"); and
WHEREAS, in order to secure the payment and performance in
full of the Obligations under the Subsidiary Guarantees, the parties hereto
desire to set forth their mutual understanding and certain agreements regarding
the terms and conditions of the supplement to the Indenture made by each
Subsidiary Guarantor to the Trustee for the ratable benefit of the Holders.
NOW, THEREFORE, in consideration of the premises and the
covenants set forth herein and in the Indenture, the parties hereto agree as
follows.
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein, capitalized terms defined
in the Indenture and not otherwise defined herein are used herein as so defined.
All terms defined in the UCC
-1-
<PAGE>
(defined below) and not otherwise defined herein or in the Indenture shall have
the meanings assigned to them in the UCC.
"Accounts" shall mean all present and future rights of each
Subsidiary Guarantor to payment for goods sold or leased or for services
rendered, whether or not evidenced by instruments or chattel paper, and whether
or not earned by performance, including, without limitation, accounts
receivable.
"Affiliate" of any specified Person shall mean any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with"), as used with
respect to any Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
specified Person, whether through the ownership of voting securities, by
agreement or otherwise; provided, however, that beneficial ownership of 10% or
more of the aggregate voting power of the voting securities of a Person shall be
deemed to be control. Notwithstanding the foregoing definitions, none of
Jefferies & Company, Inc. and its Affiliates shall be considered Affiliates of
the Company or any of its subsidiaries.
"Capital Stock" shall mean, with respect to any Person, any
and all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and any and all warrants, options and rights with
respect thereto, including, without limitation, each class of common stock and
preferred stock, partnership interests and other indicia of ownership of such
Person.
"Collateral" shall have the meaning assigned to it in Article
II hereof.
"Equipment" shall mean all of each Subsidiary Guarantor's now
owned and hereafter acquired machinery, equipment, furniture, furnishings,
fixtures, and other tangible personal property (except Inventory), including,
without limitation, data processing hardware and software, motor vehicles,
aircraft, dies, tools, jigs, signage, tubes, slides, ball bins, climbing
mountains, air and water trampolines, obstacle courses, ramps, devices for
crawling, jumping, running, swinging and climbing, and other "soft zone"
equipment and toys, games, arcade games and video and other electronic
entertainment games, chairs, jungle gyms, kitchen and other food and beverage
equipment, identification devices and office equipment, as well as all of such
types of property leased by each Subsidiary Guarantor and all of each Subsidiary
Guarantor's rights and interests with respect thereto under such leases
(including, without limitation, options to purchase); together with all present
and future additions and accessions thereto, replacements therefor, component
and auxiliary parts and supplies used or to be used in connection therewith, and
all substitutes for any of the foregoing, and all manuals, drawings,
instructions, warranties and rights with respect thereto; wherever any of the
foregoing is located.
"Inventory" shall mean all of each Subsidiary Guarantor's now
owned and hereafter existing or acquired goods, merchandise, inventory and other
personal property other than personal property leased in connection with any
real property lease, all raw materials, work-in-process, finished goods,
returned goods, and materials and supplies of any kind, nature or description
which are or might be used or consumed, wherever located, in such Subsidiary
Guarantor's business or used in connection with the manufacture, packing,
shipping, advertising, maintenance, selling or finishing of such goods,
merchandise, inventory and other personal property, and all documents of title
or other documents representing them.
-2-
<PAGE>
"Notes" shall mean the 13 1/2% Senior Collateralized Notes
due 2002 of the Company, and the 13 1/2% Senior Collateralized Notes, due 2002,
Series B, or Private Exchange Notes issued in exchange therefor in accordance
with the Indenture in the aggregate principal amount of $20,000,000.
"Obligations" shall mean the Company's and each Subsidiary
Guarantor's Obligations under the Indenture, the Notes and the Collateral
Agreements.
"Person" or "person" shall mean any individual, corporation,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Purchase Agreement" shall mean the Purchase Agreement, dated
the date hereof, between the Company and Jefferies & Company, Inc., as the
initial purchaser, relating to the purchase and sale of the Notes.
"Records" shall mean all of the present and future books of
account of every kind or nature of each Subsidiary Guarantor, purchase and sale
agreements, invoices, ledger cards, bills of lading and other shipping evidence,
statements, correspondence, memoranda, credit files and other data relating to
the Collateral or any account debtor, together with the tapes, disks, diskettes
and other data and software storage media and devices, file cabinets or
containers in or on which the foregoing are stored (including any rights of each
Subsidiary Guarantor with respect to the foregoing maintained with or by any
other person).
"Requisite Holders" shall mean the Holder or Holders of at
least a majority in principal amount of the outstanding Notes, unless otherwise
provided in Article Six of the Indenture.
"Secured Parties" shall mean the collective reference to the
Collateral Agent and each Holder.
"Securities" shall have the meaning assigned to it in Article
II hereof.
"UCC" shall mean the Uniform Commercial Code as in effect
from time to time in the State of New York, provided that if by reason of
mandatory provisions of law, the perfection or the effect of perfection or
non-perfection of the Security Interest in any Collateral or the availability of
any remedy hereunder is governed by the Uniform Commercial Code as in effect on
or after the date hereof in any other jurisdiction, "UCC" means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the
provisions hereof relating to such perfection or effect of perfection or
non-perfection or availability of such remedy.
"Voting Stock" shall mean, with respect to any Person one or
more classes of the Capital Stock of such Person having general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers, or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
-3-
<PAGE>
ARTICLE II
GRANT OF SECURITY INTERESTS
2.1 Security Interest. As security for the prompt and
complete payment and performance in full of the principal of, premium, if any,
and interest on the Notes when and as the same shall be due and payable, whether
on an Interest Payment Date, at maturity, by acceleration, purchase, repurchase,
redemption or otherwise, and interest on the overdue principal of, premium and
interest, if any, to the extent such premium or interest is permitted by law, on
the Notes and the performance of all other Obligations, each Subsidiary
Guarantor hereby grants to the Collateral Agent, for the benefit of itself and
the Holders, a security interest in and continuing lien on, all of their right,
title and interest in, to and under the following, in each case, whether now
owned or existing or hereafter acquired or arising, and wherever located (all of
which is defined as the "Collateral"):
(i) Accounts;
(ii) subject to the final paragraph of this Section
2.1, all present and future contract rights (including, without limitation, all
rights under service contracts pursuant to which each Subsidiary Guarantor
renders its services to its customers, which rights shall include any and all
rights to all retainers which may arise thereunder), general intangibles
(including, but not limited to, tax and duty refunds, patents, trade secrets,
trademarks, service marks, copyrights, trade names, trade styles, logos,
applications and registrations for the foregoing, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims), chattel paper, documents, instruments, letters of
credit, bankers' acceptances and guaranties;
(iii) all present and future monies, securities, credit
balances, deposit accounts and other property of each Subsidiary Guarantor now
or hereafter held or received by or in transit to a lender or at any other
depository or other institution from or for the account of each Subsidiary
Guarantor, whether for safekeeping, pledge, custody, transmission, collection or
otherwise, and all present and future liens, security interests, rights,
remedies, title and interest in, to and in respect of Accounts and other
Collateral, including, without limitation, (a) rights and remedies under or
relating to guaranties, contracts of suretyship, letters of credit and credit
and other insurance related to the Collateral, (b) rights of stoppage in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid vendor, lienor or secured party, (c) goods described in invoices,
documents, contracts or instruments with respect to, or otherwise representing
or evidencing, Accounts or other Collateral, including, without limitation,
returned, repossessed and reclaimed goods, and (d) deposits by and property of
account debtors of other persons securing the obligations of account debtors;
(iv) Inventory;
(v) Equipment;
(vi) Records; and
(vii) all products and proceeds of the foregoing, in
any form, including without limitation, insurance proceeds and all claims
against third parties for loss or damage to or destruction of any or all of the
foregoing.
-4-
<PAGE>
In no event shall the Collateral Agent's security interest in
a contract or agreement of each Subsidiary Guarantor be deemed to be a present
assignment, transfer conveyance, subletting or other disposition (an
"Assignment") of such contract or agreement to the Collateral Agent within the
meaning of any provision in such contract or agreement prohibiting, or requiring
any consent or establishing any other conditions for, an assignment thereof by
each Subsidiary Guarantor. The Collateral Agent acknowledges that any sale,
transfer or Assignment of any such contract or agreement upon the enforcement of
the Collateral Agent's security interest therein would be subject to the terms
of such contract or agreement governing Assignment, except as otherwise provided
in Section 9-318 of the UCC. The Collateral Agent's security interest in each
contract or agreement of each Subsidiary Guarantor shall attach from the date
hereof to all of the following, whether now existing or hereafter arising or
acquired: (i) all of each Subsidiary Guarantor's Accounts and general
intangibles for money due or to become due arising under such contract or
agreement; (ii) all proceeds paid or payable to each Subsidiary Guarantor from
any sale, transfer or assignment of such contract or agreement and all rights to
receive such proceeds; and (iii) all other rights and interests of each
Subsidiary Guarantor in, to and under such contract or agreement to the fullest
extent that attachment thereto would not be a violation of such contract or
agreement directly or indirectly entitling a party thereto (other than each
Subsidiary Guarantor or Affiliate thereof) to a legally enforceable right to
terminate such contract or agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each Subsidiary Guarantor hereby represents and warrants to
the Collateral Agent, which representations and warranties shall survive
execution and delivery of this Security Agreement, as follows:
3.1 Validity, Perfection and Priority.
Except as permitted under the Indenture, the
security interests in the Collateral granted to the Collateral Agent hereunder
will constitute valid and continuing perfected security interests therein, to
the extent that such security interests may be perfected by the actions
described in Section 10.03 of the Indenture and subsections (i) and (ii) of this
Section 3.1, pursuant to the terms of the New Intercreditor Agreements (with
respect to the Liens securing the Eligible Credit Facility) and subject only to
the Subordination Agreement (with respect the McDonald's collateral), superior
and prior to all Liens and rights or claims of all other Persons, except
Permitted Liens and as otherwise provided in the Indenture, upon (i) the filing
of UCC financing statements and continuation statements naming any Subsidiary
Guarantor as "debtor" and the Collateral Agent as "secured party" or filing or
recordation of other similar financing statements or instruments or charges or
mortgages with respect to any jurisdiction in which the UCC does not govern
secured transactions, and describing the Collateral in the appropriate filing
offices, set forth on Schedule 3.1 hereto, and (ii) to the extent not subject to
Article 9 of the UCC in any applicable jurisdiction, the recordation of the
security interests granted hereunder in patents, trademarks, service marks and
copyrights in the applicable patent, trademark, service mark and copyright
registries and the registration of all copyrights.
-5-
<PAGE>
3.2 No Liens; Other Financing Statements.
(a) Except for the Lien granted to the Collateral
Agent hereunder, and except for Permitted Liens (including, without limitation,
Liens securing the Existing Notes and the Eligible Credit Facility), each
Subsidiary Guarantor owns and, as to all Collateral whether now existing or
hereafter acquired, will continue to own, each item of the Collateral free and
clear of all Liens, rights and claims, and each Subsidiary Guarantor shall
defend the Collateral against all claims and demands of all Persons at any time
claiming the same or any interest therein adverse to the Collateral Agent on the
Collateral entitled to priority therein under applicable law.
(b) No financing statement or other evidence of Lien
covering or purporting to cover any of the Collateral is on file and is
effective in any public office other than for Permitted Liens which shall
include, without limitation, (i) financing statements filed or to be filed in
connection with the security interests granted to the Collateral Agent
hereunder; (ii) financing statements for which proper, executed termination
statements have been delivered to the Collateral Agent for filing; and (iii)
financing statements filed in connection with the Existing Notes and the
Eligible Credit Facility.
3.3 Chief Executive Offices. The chief executive office of
each Subsidiary Guarantor is 565 Taxter Road, Elmsford, New York 10523. The
originals of the Records are located at such chief executive office of the
Company. All Records are maintained at, and controlled and directed (including,
without limitation, for general accounting purposes) from the chief executive
office or other offices identified on Schedule 3.3 as such.
3.4 Location of Inventory. All Inventory is kept only at (or
shall be in transit to) the locations listed on Schedule 3.3 hereto. None of
such Inventory is in the possession of an issuer of a negotiable document (as
defined in Section 7-104 of the UCC) therefor or otherwise in the possession of
a bailee or other Person.
3.5 Trade Names; Prior Names. The only names under which each
Subsidiary Guarantor has conducted business during the last five years are as
set forth on Schedule 3.5 hereto.
3.6 Receivables.
(a) Each Account (other than indebtedness due and
owing from the Company) arises from the actual and bona fide sale and delivery
of goods by a Subsidiary Guarantor or rendition of services by a Subsidiary
Guarantor in the ordinary course of its business which transactions are
completed in all material respects with those terms and provisions contained in
any document related thereto, except for prepaid passes to FunCenters (as
defined in the Offering Memorandum) and deposits for birthday parties or other
similar functions which sale and delivery of goods by a Subsidiary Guarantor or
rendition of services by a Subsidiary Guarantor are to be completed in the
ordinary course of its business.
(b) The representations and warranties contained in
this Section shall be deemed to be repeated by each Subsidiary Guarantor as of
the time when each respective Account arises.
-6-
<PAGE>
3.7 Intellectual Property.
(a) Schedule 3.5 sets forth (i) all United States,
state and foreign registration of and applications for patents, trademarks,
service marks and copyrights of each Subsidiary Guarantor and (ii) all patent
licenses, trademark and service mark licenses and copyright licenses material to
the business of the Subsidiary Guarantors; and
(b) each Subsidiary Guarantor owns, or has valid
rights to use, all patents, trademarks, trade secrets, copyrights, and similar
intellectual property rights material to the business of the Subsidiary
Guarantors and used in the conduct of any Subsidiary Guarantor's business.
(c) each account arising from indebtedness due and
owing from the Company is a bona fide intercompany indebtedness arising from an
appropriate business purpose in the ordinary course of a subsidiary's business
and in accordance with GAAP.
3.8 Equipment. All Equipment is owned free and clear of all
Liens, except Permitted Liens (including, without limitation, Liens securing the
Existing Notes and the Eligible Credit Facility), is located only at the
location set forth on Schedule 3.3 hereto and is in good working condition
subject only to wear and tear in the ordinary course, all of which is accounted
for at the lower of cost or fair market value in accordance with GAAP on the
financial statements of each of the Subsidiary Guarantors.
3.9 Basic Representations and Warranties. As of the Issue
Date, each Subsidiary Guarantor (a) will be duly organized and validly existing
in good standing under the laws of the jurisdiction of its formation or other
jurisdiction in which it is qualified to do business; (b) will have the power
and authority to execute, deliver and carry out the terms and provisions of this
Security Agreement and consummate the transactions contemplated hereby; (c) will
have taken all necessary action to authorize the execution, delivery and
performance of this Security Agreement and the consummation of the transactions
contemplated hereby; and (d) will have duly executed and delivered this Security
Agreement. As of the Issue Date, this Security Agreement will constitute each
Subsidiary Guarantor's legal, valid and binding obligation, enforceable against
each Subsidiary Guarantor in accordance with its terms.
ARTICLE IV
COVENANTS
Each Subsidiary Guarantor covenants and agrees with the
Collateral Agent that from and after the date of this Security Agreement:
4.1 Further Assurances. Each Subsidiary Guarantor will from
time to time at its own expense, promptly execute, deliver, file and record all
further instruments, endorsements and other documents, and take such further
action as the Collateral Agent may deem necessary or desirable in obtaining the
full benefits of this Security Agreement and of the rights, remedies and powers
herein granted, including, without limitation, the following:
(i) the filing of any financing statements,
in form acceptable to the Collateral Agent under the UCC in effect in
any jurisdiction with respect to the liens and
-7-
<PAGE>
security interests granted hereby (and each Subsidiary Guarantor
hereby (x) authorizes the Collateral Agent to file any such financing
statement without its respective signature to the extent permitted by
applicable law and (y) agrees that a photocopy or other reproduction
of this Security Agreement shall be sufficient as a financing
statement and may be filed in lieu of the original to the extent
permitted by applicable law); and
(ii) furnish to the Collateral Agent from time
to time statements and schedules further identifying and describing
the Collateral and such other reports in connection with the
Collateral as the Collateral Agent may request, all in reasonable
detail and in form satisfactory to the Collateral Agent.
4.2 Change of Name, Identity, Corporate Structure, Chief
Executive Offices, or Location of Inventory and Equipment. No Subsidiary
Guarantor will change its name, identity, corporate structure or the location of
its chief executive offices (as specified in Section 3.3) or location of its
Inventory or Equipment without (i) giving the Collateral Agent at least thirty
(30) days' prior written notice clearly describing such new name, identity,
corporate structure or new location and providing such other information in
connection therewith as the Collateral Agent may reasonably request, and (ii)
taking all action reasonably satisfactory to the Collateral Agent as the
Collateral Agent may reasonably request to maintain the security interest of the
Collateral Agent in the Collateral intended to be granted hereby at all times
fully perfected with the same or better priority than exists on the date hereof
and in full force and effect. All Accounts and Records of each Subsidiary
Guarantor will continue to be maintained at, and controlled and directed
(including, without limitation, for general accounting purposes) from, such
chief executive office or a location identified as a location at which Accounts
or Records are maintained, controlled and directed on Schedule 3.3, or such new
locations as such Subsidiary Guarantor may establish in accordance with this
Section 4.2.
4.3 Maintain Records. Each Subsidiary Guarantor will keep and
maintain at its own cost and expense satisfactory and complete records of the
Collateral, including, but not limited to, the originals of all documentation
with respect to all Accounts and records of all payments received and all
credits granted on the Accounts, and all other dealings therewith.
4.4 Right of Inspection. The Collateral Agent shall at all
times have full and free access during normal business hours and upon reasonable
notice to all the books, correspondence and records of each Subsidiary
Guarantor, and the Collateral Agent and its representatives may examine the
same, take extracts therefrom and make photocopies thereof, and each Subsidiary
Guarantor agrees to render the Collateral Agent at the cost and expense of the
Subsidiary Guarantors, such clerical and other assistance as may be reasonably
requested with regard thereto.
4.5 Payment of Obligations. Each Subsidiary Guarantor will
pay promptly when due all taxes, assessments and governmental charges or levies
imposed upon the Collateral, as well as all claims of any kind (including,
without limitation, claims for labor, materials, supplies and services) against
or with respect to the Collateral, except that no such tax, assessment, charge
or levy need be paid if (i) the validity thereof is being contested in good
faith by appropriate proceedings properly instituted and diligently conducted
for which adequate reserves, to the extent required under GAAP, have been taken,
(ii) such proceedings do not involve, in the sole opinion of the Collateral
Agent, any material danger for the sale, forfeiture or loss of any of the
Collateral or any interest therein and (iii) such charge is adequately reserved
against on the books of the applicable Subsidiary Guarantor in accordance with
GAAP.
-8-
<PAGE>
4.6 Negative Pledge. No Subsidiary Guarantor will create,
incur or permit to exist, and each will defend the Collateral against, and will
take such other action as is necessary to remove, any Lien or claim on or to the
Collateral, other than the Security Interest and Liens created hereby and
Permitted Liens (including, without limitation, Liens securing the Existing
Notes and the Eligible Credit Facility).
4.7 Limitations on Dispositions of Collateral. No Subsidiary
Guarantor will sell, transfer, lease or otherwise dispose of any of the
Collateral, or attempt, offer or contract to do so except as permitted in the
Indenture.
4.8 Performance by the Collateral Agent of the Obligations of
any Subsidiary Guarantor; Reimbursement. If any Subsidiary Guarantor fails to
perform or comply with any of its agreements contained herein, the Collateral
Agent may, without consent by such Subsidiary Guarantor, but upon written notice
to such Subsidiary Guarantor reasonably given, perform or comply or cause
performance or compliance therewith, and the expenses of the Collateral Agent
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum borne by the Notes, shall be payable by
each Subsidiary Guarantor to the Collateral Agent on demand and such
reimbursement obligation shall be secured hereby; provided, however, that such
interest shall only be so due and payable if such expenses have not been so paid
on demand and in any event within ten (10) days of such notice; and, provided
further, that such interest shall be tolled in the event any such expenses are
contested in good faith as in error and the resolution of any such contest is
diligently pursued by the Subsidiary Guarantors.
4.9 No Impairment. Except as expressly permitted herein or in
the Indenture (including the creation of Permitted Liens), no Subsidiary
Guarantor will take or knowingly permit to be taken any action which could
impair the Collateral Agent's rights in the Collateral. Each Subsidiary
Guarantor shall promptly notify the Collateral Agent of any changes in any fact
or circumstance represented or warranted by such Subsidiary Guarantor or that
could reasonably be expected to have a material adverse effect with respect to
any material portion of the Collateral, of any impairment of the Collateral and
of any claim, action or proceeding affecting title to all or any of the Pledged
Collateral.
4.10 Insurance. Each Subsidiary Guarantor will maintain, with
financially sound and reputable insurers acceptable to the Collateral Agent and
licensed to do business in each state in which any of the Collateral covered by
any policy is located, insurance in compliance with Section 4.05(b) of the
Indenture. All policies of insurance shall (i) name the Collateral Agent as
additional insured (with respect to liability insurance policies) or loss payee
with a lender's loss payable endorsement, in each case as its interests may
appear, (ii) include waivers by the insurer of all claims for insurance premiums
against the Collateral Agent, (iii) provide that any losses shall be payable to
the Collateral Agent notwithstanding (A) any act, failure to act or negligence
of or violation of warranties, declarations or conditions contained in such
policy by any Subsidiary Guarantor, (B) any foreclosure or other proceedings or
notice of sale relating to any Collateral insured thereunder, or (C) any change
in the title to or ownership of any Collateral insured thereunder, and (iv)
provide that no cancellation, termination or lapse in coverage thereof shall be
effective until at least 30 days after receipt by the Collateral Agent of
written notice thereof.
4.11 Equipment. Each Subsidiary Guarantor shall maintain its
Equipment in good and working condition free of all Liens, except Permitted
Liens (including, without limitation, Liens securing the Existing Notes and the
Eligible Credit Facility), and shall not remove or relocate any
-9-
<PAGE>
Equipment except as provided herein except that any motor vehicles or aircraft
intended to be mobile may be so used to the extent that all necessary and
appropriate actions have been taken and filings made to perfect a first priority
security interest therein in favor of the Collateral Agent for its benefit and
the ratable benefit of the Holders.
ARTICLE V
POWER OF ATTORNEY
Each Subsidiary Guarantor hereby irrevocably constitutes and
appoints the Collateral Agent and any officer or agent thereof, with full power
of substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of each Subsidiary Guarantor and in
the name of each Subsidiary Guarantor, from time to time in the Collateral
Agent's discretion, for the purpose of carrying out the terms of this Security
Agreement, to take any and all appropriate action, and to execute in any
appropriate manner any and all documents and instruments which may be necessary
or desirable to accomplish the purposes of this Security Agreement.
Each Subsidiary Guarantor hereby ratifies all that said
attorneys shall lawfully do or cause to be done by virtue hereof. This power of
attorney is a power coupled with an interest and shall be irrevocable.
ARTICLE VI
REMEDIES; RIGHTS UPON DEFAULT
6.1 Rights and Remedies Generally.
(a) If an Event of Default shall occur and be
continuing, then and in every such case, the Collateral Agent shall have all the
rights of a secured party under the UCC, shall have all rights now or hereafter
existing under all other applicable laws, and, subject to any mandatory
requirements of applicable law then in effect, shall have all the rights set
forth in this Security Agreement and all the rights set forth with respect to
the Collateral or this Security Agreement in any other agreement between the
parties.
(b) If an Event of Default occurs and is continuing,
the Collateral Agent may, and within three Business Days after written
instructions from the Requisite Holders shall, commence the taking of such
actions toward collection or enforcement of this Security Agreement and the
Collateral (or any portion thereof), including, without limitation, action
toward foreclosure upon any Collateral, as the Collateral Agent deems in its
discretion to be appropriate or as otherwise instructed in writing by the
Requisite Holders.
6.2 Assembly of Collateral. If an Event of Default shall
occur and be continuing, immediately upon written notice to each Subsidiary
Guarantor, each such Subsidiary Guarantor shall, at its own expense, and to the
extent commercially practicable, assemble the Collateral (or from time to time
any portion thereof) and make it available to the Collateral Agent at any place
or places designated by the Collateral Agent which is reasonably convenient to
both parties.
-10-
<PAGE>
6.3 Disposition of Collateral. The Collateral Agent will
determine the circumstances and manner in which the Collateral will be disposed
of, including, but not limited to, the determination of whether to foreclose on
the Collateral following an Event of Default. The Collateral Agent will give
each Subsidiary Guarantor reasonable written notice of the time and place of any
public sale of the Collateral or any part thereof or of the time after which any
private sale or any other intended disposition thereof is to be made. Each
Subsidiary Guarantor agrees that the requirements of reasonable notice to it
shall be met if such notice is delivered to its address specified in and in
accordance with Section 7.3 of this Security Agreement (or such other address
that a Subsidiary Guarantor may provide to the Collateral Agent in writing) at
least ten (10) days before the time of any public sale or after which any
private sale may be made.
6.4 Proceeds. If an Event of Default shall occur and be
continuing, (i) all proceeds and distributions on the Collateral received by any
Subsidiary Guarantor shall be held in trust for the Collateral Agent, segregated
from other funds of the Subsidiary Guarantors in a separate deposit account
containing only such proceeds and distributions, and shall forthwith upon
receipt thereof be turned over to the Collateral Agent in the same form received
(appropriately endorsed or assigned to the order of the Collateral Agent or in
such other manner as shall be satisfactory to the Collateral Agent) and (ii) any
and all such proceeds and distributions received by the Collateral Agent
(whether from any Subsidiary Guarantor or otherwise), or any part thereof, may,
in the sole discretion of the Collateral Agent, be held by the Collateral Agent
in a separate account as Collateral hereunder and/or then or at any time or from
time to time thereafter, be applied by the Collateral Agent against the
Obligations (whether matured or unmatured) and related expenses, including
attorney's fees as provided in Section 6.6 below.
6.5 Recourse. Each Subsidiary Guarantor shall, jointly and
severally, pay or remain liable for any deficiency if the proceeds of any sale
or other disposition of the Collateral are insufficient to satisfy the
Obligations. Each Subsidiary Guarantor shall also be, jointly and severally,
liable for all expenses of the Collateral Agent incurred in connection with
collecting such deficiency, including, without limitation, the fees and
disbursements of any attorneys employed by the Collateral Agent to collect such
deficiency.
6.6 Expenses; Attorneys Fees. Each Subsidiary Guarantor
shall, jointly and severally, pay or reimburse the Collateral Agent for all its
expenses in connection with the exercise of its rights hereunder, including,
without limitation, (i) all reasonable attorneys' fees and legal expenses
incurred by the Collateral Agent and (ii) all filing fees and related expenses
contemplated by Section 4.1 hereof. Expenses of retaking, holding, preparing for
sale, selling or the like shall include the reasonable attorneys' fees and legal
expenses of the Collateral Agent. All such expenses shall be secured hereby.
6.7 Limitation on Duties Regarding Preservation of
Collateral.
(a) The Collateral Agent's sole duty with respect to
the custody, safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the UCC or otherwise, shall be to deal with
it in the same manner as the Collateral Agent deals with similar property for
its own account;
(b) The Collateral Agent shall have no obligation to
take any steps to preserve rights against prior parties to any Collateral; and
-11-
<PAGE>
(c) Neither the Collateral Agent nor any of its
directors, officers, employees or agents shall be liable for failure to demand,
collect or realize upon all or any part of the Collateral or for any delay in
doing so or shall be under any obligations to sell or otherwise dispose of any
Collateral upon the request of any Subsidiary Guarantor or otherwise, except
with respect to actions taken or omitted with gross negligence, willful
misconduct or in bad faith.
6.8 Cooperation of Other Subsidiaries. Each Subsidiary
Guarantor shall cause any subsidiary that becomes a subsidiary after the date
hereof to enter into a supplement to the subsidiary Security Agreement, pursuant
to which such Subsidiary shall grant to the Collateral Agent for itself and the
ratable benefit of the Holders and their respective successors and assigns, a
continuing security interest in all of the Collateral then owned by such
subsidiary or thereafter acquired or arising as security for the prompt and
complete payment and performance in full of all the Obligations.
ARTICLE VII
MISCELLANEOUS
7.1 Indemnity. Each Subsidiary Guarantor agrees, jointly and
severally, to indemnify, reimburse and hold the Collateral Agent and its
officers, directors, employees, representatives and agents ("Indemnitees")
harmless from any and all liabilities, obligations, losses, damages, penalties,
claims, actions, judgments, suits, costs or expenses or disbursements (including
reasonable attorneys' fees and expenses) for whatsoever kind or nature
("Losses") which may be imposed on, asserted against or incurred by any of the
Indemnitees in any way relating to or arising out of this Security Agreement or
the transactions contemplated hereby, except to the extent that such Losses are
caused by the gross negligence, willful misconduct or bad faith of such
Indemnitees as determined by a final judgment of a court of competent
jurisdiction. The obligations of each Subsidiary Guarantor under this Section
shall be secured hereby, shall survive payment and performance or discharge of
the Obligations and the termination of this Security Agreement and shall be
joint and several with each of the other Subsidiary Guarantors.
7.2 Governing Law. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAWS).
7.3 Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
if to Discovery Zone (Canada) Limited:
Discovery Zone, Inc.
565 Taxtor Road, 5th Floor
Elmsford, New York 10523
Attn: Chief Executive Officer
Telephone Number: (914) 345-4500
Telecopy Number: (914) 345-4527
-12-
<PAGE>
with a copy to attn: General Counsel
Telecopy Number: (914) 345-4516
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
Telephone Number: (212) 848-4000
Telecopy Number: (212) 848-7179
if to Discovery Zone (Puerto Rico), Inc.:
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Elmsford, New York 10523
Attn: Chief Executive Officer
Telephone Number: (914) 345-4500
Telecopy Number: (914) 345-4527
with a copy to attn: General Counsel
Telecopy Number: (914) 345-4516
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
Telephone Number: (212) 848-4000
Telecopy Number: (212) 848-7179
if to Discovery Zone Licensing, Inc.:
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Elmsford, New York 10523
Attn: Chief Executive Officer
Telephone Number: (914) 345-4500
Telecopy Number: (914) 345-4527
-13-
<PAGE>
with a copy to attn: General Counsel
Telecopy Number: (914) 345-4516
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attn: Douglas P. Bartner, Esq.
Telephone Number: (212) 848-4000
Telecopy Number: (212) 848-7179
if to the Collateral Agent:
Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, MN 55101
Attn: Corporate Trust
Telephone Number: (651) 229-2600
Telecopy Number: (651) 229-6415
Each of the Subsidiary Guarantors and the Collateral Agent by
written notice to each other such Person may designate additional or different
addresses for notices to such Person. Any notice or communication to the
Subsidiary Guarantors or the Collateral Agent shall be deemed to have been given
or made as of the date so delivered if personally delivered; when answered back,
if telexed; when receipt is acknowledged, if faxed; and five (5) calendar days
after mailing if sent by registered or certified mail, postage prepaid (except
that a notice of change of address shall not be deemed to have been given until
actually received by the addressee).
Any notice or communication mailed to a Holder shall be
mailed to such Holder by first class mail or other equivalent means at such
Holder's address as it appears on the registration books of the Registrar and
shall be sufficiently given to such Holder if so mailed within the time
prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
7.4 Successors and Assigns. This Security Agreement shall be
binding upon and inure to the benefit of each Subsidiary Guarantor, the
Collateral Agent, all future holders of the Obligations and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Security Agreement without the prior
written consent of the Collateral Agent.
7.5 Waivers and Amendments. None of the terms or provisions
of this Security Agreement may be waived, amended, supplemented or otherwise
modified except in accordance with the terms of Article Nine of the Indenture.
In the case of any waiver, each Subsidiary Guarantor and the Collateral Agent
shall be restored to their former position and rights hereunder and under the
-14-
<PAGE>
outstanding Obligations, and any Default or Event of Default waived shall be
deemed to be cured and not continuing, but no such waiver shall extend to any
subsequent or other Default or Event of Default, or impair any right consequent
thereon.
7.6 No Waiver; Remedies Cumulative. No failure or delay on
the part of the Collateral Agent in exercising any right, power or privilege
hereunder and no course of dealing among the Subsidiary Guarantors and the
Collateral Agent shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right or remedy which
the Collateral Agent would otherwise have on any future occasion. The rights and
remedies herein expressly provided are cumulative and may be exercised singly or
concurrently and as often and in such order as the Collateral Agent deems
expedient and are not exclusive of any rights or remedies which the Collateral
Agent would otherwise have whether by security agreement or now or hereafter
existing under applicable law. No notice to or demand on each Subsidiary
Guarantor in any case shall entitle any Subsidiary Guarantor to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Collateral Agent to any other or future action in
any circumstances without notice or demand.
7.7 Termination; Release. When the Obligations have been
completely paid and performed in full in accordance with Article Eight of the
Indenture, this Security Agreement shall terminate, and the Collateral Agent, at
the request and sole expense of each Subsidiary Guarantor, and subject to and in
accordance with the applicable terms of the Indenture, will execute and deliver
to such Subsidiary Guarantor the proper instruments (including UCC termination
statements) acknowledging the termination of this Security Agreement, and will
duly assign, transfer and deliver to such Subsidiary Guarantor, without
recourse, representation or warranty of any kind whatsoever, such of the
Collateral and Securities as may be in possession of the Collateral Agent and
that has not theretofore been disposed of, applied or released, all in
accordance with the terms and conditions of the Indenture and other Collateral
Documents. In addition, so long as no Default or Event of Default exists (with
respect to a Released Interest other than in connection with the immediately
preceding sentence), the Collateral Agent, at the request and sole expense of
any Subsidiary Guarantor, will execute and deliver to such Subsidiary Guarantor
the proper instruments to effect the release of the Released Interests in
compliance with Section 10.05 of the Indenture.
7.8 Headings Descriptive. The headings of the several
sections and subsections of this Security Agreement are inserted for convenience
only and shall not in any way affect the meaning or construction of any
provision of this Security Agreement.
7.9 Severability. In case any provision in or obligation
under this Security Agreement or the Obligations shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
7.10 Counterparts. This Security Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Security
Agreement by signing any such counterpart.
7.11 Trustee Capacity. In acting as Collateral Agent
hereunder, the Collateral Agent shall benefit from and be entitled to all of the
protections and benefits of the terms set forth in Article Seven of the
Indenture.
-15-
<PAGE>
7.12 Joint and Several Liability. Each of the Subsidiary
Guarantors, on the date hereof or hereafter becoming a party hereto, shall be
jointly and severally liable for the Obligations under the Subsidiary Guarantees
and under this Security Agreement.
7.13 Subsidiary Guarantors' Indenture Obligations Absolute.
The liability of each Subsidiary Guarantor under this Subsidiary Security
Agreement shall remain in full force and effect without regard to, and shall not
be released, suspended, discharged, terminated or otherwise affected by: any
change in the time, place or manner of payment of all or any of such Subsidiary
Guarantor's Obligations under the Indenture or the Notes, or in any other term
of the Indenture, the Notes, the Subsidiary Pledge Agreement or any Subsidiary
Guarantee, any waiver, indulgence, renewal, extension, amendment or modification
of or addition, consent or supplement to or deletion from or any other action or
inaction under or in respect of the Indenture, the Notes, the Subsidiary Pledge
Agreement or any Subsidiary Guarantee, or any assignment or transfer thereof;
any lack of validity or enforceability, in whole or in part, of the Indenture,
the Notes, the Subsidiary Pledge Agreement or any Subsidiary Guarantee; any
furnishing of any additional security for the Indenture Obligations or any
acceptance thereof or any release or nonperfection of any security interest in
property; any limitation on any party's liability or obligations under the
Indenture, the Notes, the Subsidiary Pledge Agreement or any Subsidiary
Guarantee; any bankruptcy, insolvency, reorganization, composition, adjustment,
dissolution, liquidation or other like proceeding relating to any Subsidiary
Guarantor or any Person other than any Subsidiary Guarantor or any action taken
with respect to this Subsidiary Security Agreement by any trustee or receiver,
or by any court, in any such proceeding, whether or not such Subsidiary
Guarantor shall have notice or knowledge of any of the foregoing; or any
exchange, release or amendment or waiver of or consent to departure from any
other agreement pursuant to which a Lien is created in favor of the Collateral
Agent for the benefit of the Holder, pursuant to which a person other than a
Subsidiary Guarantor has granted a security interest.
7.14 Intercreditor Agreements. Notwithstanding any term
hereof to the contrary, the terms and conditions of this Subsidiary Security
Agreement are in all respects subject to, and all rights and remedies of the
parties hereunder shall be exercised only in accordance with, the terms,
conditions, benefits and protections contained in the New Intercreditor
Agreements.
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Subsidiary Security Agreement to be duly executed and delivered as of the date
first above written.
DISCOVERY ZONE (CANADA) LIMITED
By: /s/ Scott W. Bernstein
-----------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
DISCOVERY ZONE (PUERTO RICO), INC.
By: /s/ Scott W. Bernstein
-----------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
DISCOVERY ZONE LICENSING, INC.
By: /s/ Scott W. Bernstein
-----------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
FIRSTAR BANK OF MINNESOTA, N.A.,
as Collateral Agent
By: /s/ Frank P. Leslie, III
-----------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
<PAGE>
STATE OF NEW YORK )
)SS:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott Bernstein, to
me known, who being by me duly sworn, did depose and say that he is the
President and CEO of DISCOVERY ZONE (CANADA) LIMITED, the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
---------------------------------------------
Notary Public
STATE OF NEW YORK )
)SS:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott Bernstein, to
me known, who being by me duly sworn, did depose and say that he is the
President of DISCOVERY ZONE (PUERTO RICO), INC., the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
---------------------------------------------
Notary Public
<PAGE>
STATE OF NEW YORK )
)SS:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott Bernstein, to
me known, who being by me duly sworn, did depose and say that he is the
President and CEO of DISCOVERY ZONE LICENSING, INC., the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
---------------------------------------------
Notary Public
<PAGE>
SCHEDULE 3.1
UCC FILINGS
A. DISCOVERY ZONE LICENSING, INC.
State Facilities Located Filing Office
Within the Jurisdiction
of the Filing Office
____________ _______________________ _________________________________
New York Corporate Office Secretary of State
UCC Division
41 State Street
2nd Floor
Albany, NY 12231
and
Westchester County Clerks Office
Attn: UCC Recorder
110 Dr. Martin Luther King Blvd
White Plains, NY 10601
Nevada State of Incorporation Secretary of State
UCC Division, Capitol Complex
Secretary of State's Office
Carson City, NV 89710
B. DISCOVERY ZONE (PUERTO RICO), INC.
Filing locations to be provided by Axtmayer, Adsuar, Muniz & Goyco, P.S.C.,
local counsel to Initial Purchaser.
C. DISCOVERY ZONE (CANADA) LIMITED
Filing locations provided by McCarthy Tetrault, local counsel to Initial
Purchaser.
Ontario
Alberta
Manitoba
<PAGE>
SCHEDULE 3.3
LOCATION OF COLLATERAL
<TABLE>
<CAPTION>
LOCATION LANDLORD ADDRESS
CORPORATION NUMBERS AND ADDRESSES INFORMATION
----------- --------------------- -----------
<S> <C> <C>
Discovery Zone 110 East Broward Blvd. Blockbuster Entertainment
Licensing, Inc. Fort Lauderdale, FL 33301 Att: Michael Victorson
1201 Elm Street
Dallas, TX 75270
Discovery Zone 435 410-7 Power Contres Limited
(Canada) Limited Power Center c/o First Professional Mgmt., Inc.
150 W Dr. Unit 2A, Hwy 7 & 410 259 Yorkland Road, Ste. 300
Brampton, Ontario L6T4P9 N. York, Ontario M2J5B2
Discovery Zone 950 [SEE SCHEDULE 3.3A]
(Canada) Limited 360 Mayfield Common
Edmonton, Alberta T5P4K9
Discovery Zone 951 [SEE SCHEDULE 3.3A]
(Canada) Limited 3414 Calgary Trail South, #400
Edmonton, Alberta T6J6RS
Discovery Zone 952 Almahurst Holdings Limited
(Canada) Limited Superstore Mall c/o Effort Trust Company
4380 Wellington Road South 242 Main St., East
London, Ontario N6E2Z6 Hamilton, Ontario L8N1H5
Discovery Zone 953 65434 Manitoba Limited
(Canada) Limited 1320 Ellice Avenue, #3 477 Westwood Drive
Winnipeg, Manitoba R36OE9 Whinnipeg, Manitoba R3K1G5
Discovery Zone 901 [SEE SCHEDULE 3.3A]
(Puerto Rico), Inc. 506 Truncado Street
Hatillo, PR 00659
Discovery Zone 904 [SEE SCHEDULE 3.3A]
(Puerto Rico), Inc. Plaza Center II
Munoz Marin Ave & Hwy. 30
Caguas, PR 00725
Discovery Zone 905 [SEE SCHEDULE 3.3A]
(Puerto Rico), Inc. 9410 Los Romeros Avenue
San Juan, PR 00927
</TABLE>
<PAGE>
SCHEDULE 3.3A
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
201 WHITE OAK-VINCENT PLACE ASSOC. C/O PENCE FRIEDEL DEVELOPERS 1359 BEVERLY ROAD, SUITE 200
202 JOSEPH FAMIGHETTI, ESQ. C/O KELLUM REALTY CORP. ONE OLD COUNTRY ROAD, SUITE 400
204 NEW PLAN REALTY TRUST REAL ESTATE ADMINISTRATION 1120 AVENUE OF THE AMERICAS
208 TISANO REALTY, INC. 30 SWEET BRIAR COURT
210 NASSAU MALL ASSOCIATES C/O JEFFERY MANAGEMENT 7 PENN PLAZA, ROOM 618
213 SAUL SUBSIDIARY I LTD PRTNRSHP C/O WINDHAM MANAGEMENT COMPANY 8401 CONNECTICUT AVENUE
214 GENERAL ELECTRIC CAPITAL CORP. C/O KELLY & DUTCH 217 MONTGOMERY STREET
215 CORPORATE PROPERTY INVESTORS C/O ROCKAWAY TOWNSQUARE ROUTE 80 & MT. HOPE AVENUE
216 BENDERSON DEVELOPMENT COMPANY LEASE #46138 570 DELAWARE AVENUE
217 MIDSTATE HYE, L.P. C/O GABRALLIAN ASSOC. 95 ROUTE 17
219 HARVRICH ASSOCIATES /CO GOODRICH ASSOCIATES MANAGMENT 560 SYLVAN AVENUE
220 HILL MANAGEMENT SERVICES INC. 9640 DEERCO ROAD
222 PIKE PARK PLAZA C/O MARYLAND FINANCIAL INVESTORS 9475 DEERCO ROAD, SUITE 302
223 GREECE TOWNE MALL, L.P. 1265 SCOTTSVILLE ROAD
224 PREIT-RUBIN, INC., Agents for C/O HUDSON ASSOCIATES, L.P. ROUTE 440
225 KRT PROPERTY HOLDINGS, INC. C/O KRANZCO REALTY TRUST 128 FAYETTE STREET
226 HARTFORD CREEK ASSOCIATES DBA SOUTH HILLS MALL 1127 S. MANNHEIM ROAD, SUITE 212
227 PR NORTH DARTMOUTH MALL C/O NORTH DARTMOUTH MALL 200 SOUTH BEND
228 FEDERAL REALTY INVESTMENT TRUST DEPARTMENT 0930 112 C. PARK AVENUE
229 ALBERT D. PIZIO TRUST B C/O TORNATORE & CO., CPA's, P.C. 6075 E. MOLLOY ROAD
230 SOUTH FIELDS ASSOCIATES C/O GIBRALTAR MANAGEMENT COMPANY 150 WHITE PLAINS ROAD
231 HC ATLANTIC DEVELOPMENT LP C/O HC ATLANTIC DEVELOPMENT L.P. 393 TOTTEN POND ROAD
232 TYN LIMITED PARTNERSHIP C/O BOSTON DEVELOPMENT ASSOC. 32 SOUTHWEST PARK
233 THE REALTY ASSOCIATES FUND, III, L.P. C/O R. WEINER & ASSOCIATES 1330 BOYLSTON STREET, SUITE 212
234 DANCROSS ASSOCIATES, L.P. C/O WEINGARTEN PROPERTIES, INC. ONE WYNNWOOD ROAD, SUITE 200
235 PAD II ASSOCIATES LIMITED PARTNERSHIP C/O KONOVER PROPERTY MANAGEMENT 2410 ALBANY AVENUE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
201 MCLEAN VA 22101 703 827-8300 ELISE KIPER
202 CARLE PLACE NY 11514 516 741-8141 JOSEPH FAMIGHETTI
204 NEW YORK NY 10036 212 869-3000 IRVING MARSHALL
208 STANFORD CT 06905 203 322-9047 WILLIAM TISSANO
210 NEW YORK NY 10001 212 563-6557 MAUREEN DAVIS
213 CHEVY CHASE MD 20815 301 986-6000 BARBARA FISHER
214 SYRACUSE NY 13090 315 422-3356 BILL DUTCH
215 ROCKAWAY NJ 07866 212 421-8200 JOHN ARCHER
216 BUFFALO NY 14202 716 886-0211 DON ROBINSON
217 PARAMUS NJ 07652 201 845-4100 GERI REYNOLDS
219 ENGLEWOOD CLIFF NJ 07632 201 816-9550 HOWARD GORDON
220 TIMONIUM MD 21014 410 666-2388 SCOTT SYNDEL
222 TIMONIUM MD 21093 410 337-2298 MAUREEN KNEALY
223 ROCHESTER NY 14624 716 464-9400 FRED LAPPLE
224 JERSEY CITY NJ 07304 201 432-0119 STEVE TRIVEDI
225 CONSHOHOCKEN PA 19428 610 941-9292 CHRISTINE HIRSCHBUHL
226 WESTCHESTER IL 60154 708 334-9242 DON BAKER
227 PHILADELPHIA PA 19102 508 999-4535 LARRY TRACKMAN
228 WILLOW GROVE PA 19090 215 657-8740 ED MCLAUGHIN
229 SYRACUSE NY 13211 315 433-1585 WILLIAM PIZZIO
230 TARRYTOWN NY 10591 914 631-6200 BARBARA QUIS
231 WALTHAM MA 02154 781 890-1380 BRUCE LEADER
232 WESTWOOD MA 02090 781 461-0660 ANN MORENO
233 CHESTNUT HILL MA 02167 617 232-8900 CHRISTINE ROCCO
234 WYNNWOOD PA 19606 610 896-9680 DUKE DAVIS
235 WEST HARTFORD CT 06515 860 233-8635 DAN CHAREST
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
236 MARTIN RAPPAPORT dba UNION EQUITY REALTY 110 CHARLOTTE PLACE
239 OFFICE MAX, INC. REAL ESTATE ADMINISTRATION 3605 WARRENSVILLE CENTER ROAD
242 TRIANGLE V II, L.P. C/O MARK PROPERTIES 1400 DOMINION TOWER
243 HILTON REALTY COMPANY OF PRINCETON C/O PRINCETON ARMS 194 NASSAU STREET
245 VAL-FORD REALTY, INC. 1557 BROADWAY
246 MIDDLE VILLAGE ASSOCIATES 1500 OLD NORTHERN BOULEVARD
247 PORT RICHMON ASSOCIATES C/O BRYANT ASSET MANAGEMENT 2900 WESTCHESTER AVENUE
248 DEER PARK ASSOCIATES C/O SEYMOUR PIENKNY 51 JOHN STREET
249 KINGS PLAZA SHOPPING CENTER AND MARINA 5100 KINGS PLAZA
254 BFG ASSOCIATES LEASE #46899 570 DELAWARE AVENUE
256 CARLE PLACE ANNEX CO. C/O BASSER-KAUFMAN 335 CENTRAL AVENUE
257 TURNPIKE REALTY TRUST C/O JOSEPH J. CARIGLIA, ESQUIRE 188 LINCOLN STREET
260 FASHION CENTER ASSOCIATES C/O KRAVCO COMPANY 234 MALL BOULEVARD
263 FAIRLESS HILLS S.C. ASSOCIATES 521 E. BALTIMORE PIKE
264 FG-85 ASSOCIATES LEASE #46122 570 DELAWARE AVENUE
266 PCM PLAZA COMPANY C/O PYRAMID MANAGEMENT COMPANY 4 CLINTON SQUARE
267 GORDY MANAGEMENT, INC. 105 N. DU PONT HIGHWAY
270 AMALGAMATED FINANCIAL GROUP, IX 1414 ATWOOD AVENUE
271 CENTURY INVESTMENT COMPANY 73 STATE STREET
273 KIMCO REALTY CORPORATION C/O KIMCO DEVELOPMENT 4979 OLD STREET
301 NAPEROG LIMITED PARTNERSHIP C/O BRAODCARE MANAGEMENT CO. 455 EAST ILLINOIS STREET, SUITE 570
303 MID AMERICA ASSET MANAGEMENT C/O WESTMONT VILLAGE/SIDCOR TWO-MID AMERICA PLAZA, SUITE
304 BMC REAL ESTATE ACQUISITIONS C/O BONNIE MANAGEMENT CORPORATION 3400 DUNDEE ROAD, SUITE 108
306 GILBERT AVENUE ASSOCIATES 2820 GILBERT AVENUE
308 ROSANA SQUARE C/O ROSANA SQUARE SHOPPING CENTER 909 TROOST
309 TRI-LAND PROPERTIES, INC. LEASE ID (015-Z-4-3850) ONE WESTBROOK CORPORATE STR., SUITE
520
310 CONTINENTAL SAWMILL, LTD. PTSHP C/O DEVELOPERS DIVERSIFIED REALTY 34555 CHAGRIN BOULEVARD
311 NEW RONSTONE, L.L.C. C/O CNM MANAGEMENT ASSOCIATES 950 E. PACES FERRY ROAD, SUITE 200
313 THE COMMONS AT WILLOWBROOK, INC. C/O TRAMMELL CROW COMPANY 1390 POST OAK BOULEVARD, SUITE 1800
315 NOLAND SOUTH DEVELOPMENT 911 MAIN STREET 720 COMMERCE TOWER
317 TECH ONE ASSOCIATES 200 MARSHALL DRIVE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
236 ENGLEWOOD CLIFFS NJ 07632 201 567-6633 INGRID NAGY
239 SHAKER HEIGHTS OH 44122 216 921-6900 BRIAN J. BERN
242 NORFOLK VA 23610 973 538-7111 KATHERINE WIDMARK
243 PRINCETON NJ 08542 609 921-6060 MARIE PREISTOR
245 NEW YORK NY 10036 212 398-6388 DAVID COHEN
246 ROSLYN NY 11576 516 484-8800 MAX BRITTAN
247 PURCHASE NY 10577 914 701-4300 DENNIS BRAUCHLE
248 BABYLON NY 11703 516 557-6500 SEYMOUR PIENKY
249 BROOKLYN NY 11234 718 253-6844 DANIEL PASSARELLO
254 BUFFALO NY 14202 716 886-9487 AMANDA IANDUS
256 LAWRENCE NY 11559 516 569-3700 KEVIN MCCABE
257 WORCESTER MA 01605 508 791-2367 JOSPEH CARRIGILA, ESQ.
260 KING OF PRUSSIA PA 19406 610 768-6327 ANNA THOMAS
263 MEDIA PA 19063 610 627-0349 JERRY SODY
264 BUFFALO NY 14202 716 886-0211 STEVEN GOODMAN
266 SYRACUSE NY 13202 315 422-7000 GAYLE RENKERT
267 NEW CASTLE DE 19720 302 322-3723 RALPH GORDY
270 JOHNSON RI 02919 401 273-6800 HOLLIE WEIDELEL
271 SPRINGFIELD MA 01103 413 785-1981 ANDRE COHEN
273 TREVOSE PA 17402 717 394-0521 SUSAN MASONE
301 CHICAGO IL 60611 312 836-5400 PAUL DIWOSKIN
303 OAKBROOK IL 60181 630 954-7300 JOHN MARCONNET
304 NORTHBROOK IL 60062 847 714-0605 DAVID LASKY
306 CINCINNATI OH 45206 513 221-5600 TIMOTHY MACCONNELL
308 KANSAS CITY MO 64106 816 842-0766 ANOTHONY PRIVITERA, II
309 WESTCHESTER IL 60673 708 531-8210 JULIE DONAHUE
310 CHAGRIN FALLS OH 44022 440 247-9852 BOB SEAWRIGHT
311 ATLANTA GA 30326 770 869-2700 ANN CROWDER
313 HOUSTON TX 77056 713 875-4141 JANICE MEINZER
315 KANSAS CITY MO 64105 816 421-2963 CURTIS BLISS
317 CORAPOLIS PA 15108 412 264-8385 JAMES JARRETT
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
319 MANASAS PROMENADE L.P. C/O KRITI MANAGEMENT, INC. 345 EAST 37 STREET, SUITE 312
320 PACIFIC RETAIL TRUST C/O BANKERS TRUST COMPANY 10675 E. NORTH WEST HIGHWAY, SUITE 2630
321 SCOTT INVESTORS C/O WOLFF PROPERTIES 225 MERMEC AVENUE, SUITE 301
322 PRICE BAYBROOK, LIMITED C/O TRANSWESTERN PROPERTY COMPANY 2754 BINGLE
324 EXTON PLAZA ASSOCIATES C/O COM-DEL INTERNATIONAL LTD. 1 FRITCHIE PLACE
326 RANDALL BENDERSON 1993-1 TRUST C/O BENDERSON DEVELOPMENT 570 DELAWARE AVENUE
332 HARBOR MADISON SQUARE C/H LIMITED PARTNERSHIP 2555 SOUTH TELEGRAPH
335 ALLIED DISTRICT PROPERTIES, L.P. C/O KLAFF REALTY, L.P. 111 WEST JACKSON BOULEVARD
342 SOUTHERN CENTERS C/O ROGER MILLER 18679 SE FEDERAL HIGHWAY
345 SILVER SPRINGS, INC. C/O G.V. COMMERCIAL, LP. 901 N. VALLEY GREEN ROAD, SUITE 200
358 PERLIS CORPORATION C/O LAMAR J. PERLIS 622 EAST SIXTEENTH AVENUE
362 LEWIS HOMES MANAGEMENT CORPORATION C/O PROPERTY MANAGEMENT DEPARTM. 1156 NORTH MOUNTAIN AVENUE
403 S.L. NUSSBAUM REALTY COMPANY ONE COMMERCIAL PLACE 1000 NATIONSBANK CENTER
404 KIMCO REALTY CORPORATION TENANT # 692-5 3333 HYDE PARK ROAD
405 TALISMAN KNOXVILLE, L.L.C. 1500 SAN REMO AVE. STE. 185-A
406 RCP-1 C/O RICHARDSON CORP 701 GREEN VALLEY ROAD, SUITE 300
407 SEVENTH SKYLINE ASSOCIATES C/O CHARLES E. SMITH, MGMT INC. 2345 CRYSTAL DRIVE
408 K-MART CORP. INTERNATIONAL HEADQUARTERS 3100 WEST BIG BEAVER ROAD
409 VERDAE PROPERTIES, INC. C/O CAINE COMPANY 111 WILLIAMS STREET
410 MARX'S REALTY & IMPROVEMENT C/O MADISON MALL SHOPPING CTR 708 THIRD AVENUE, 15TH FLOOR
413 KONOVER MOBILE FESTIVAL CENTER C/O KONOVER & ASSOCIATES SOUTH, INC.7000 WEST PALMETTO ROAD, SUITE 405
415 GRABER INVESTMENTS C/O STANLEY GRABER 4646 POPLAR AVENUE, SUITE 245
416 MACERICH REAL ESTATE COMPANY C/O ANNAPOLIS MANAGEMENT CO. 170 JENNIFER ROAD, SUITE 330
417 MACERICH STONEWOOD C/O STONEWOOD CENTER MALL 251 STONEWOOD STREET
418 ECTC, LLC C/O ESSIX REALTY MANAGEMENT, INC. 3146 REDHILL AVENUE, SUITE 150
420 THE ORANGEFAIR COMPANY, L.L.C. C/O MIDLAND LOAN SERVICES, L.P. 433 NORTH CAMDEN DRIVE, SUITE 725
428 FALLBROOK MALL C/O GENERAL GROWTH PROPERTY MAN 110 NORTH WACKER DRIVE
430 BARNES & NOBLE, INC. 122 FIFTH AVENUE
431 HEITMAN PROPERTIES OF MICHIGAN LTD. C/O MILL CREEK DEVELOPMENT CENTER 3341 SOUTH LINDEN BOULEVARD
433 CORDOVA COMMONS C/O CNM ASSOCIATES 6301 WEST CYPRESS STREET, SUITE 202
435 410-7 POWER CONTRES LIMITED C/O FIRST PROFESSIONAL MGT., INC. 259 YORKLAND ROAD, SUITE 300
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
319 NEW YORK NY 10016 212 699-3530 DAVIDSON WILLIAMS
320 DALLAS TX 76238 214 696-9500 SANDI LANDRI
321 ST. LOUIS MO 63105 314 727-9800 STEPHAN WOLFF
322 HOUSTON TX 77055 213 937-8200 LINDA SALISBURY
324 VALLEY STREAM NY 11580 516 825-2663 ROGER A. WHYMAN
326 BUFFALO NY 14202 716 878-9487 STEVEN GOODMAN
332 BLOOMFIELD HILLS MI 48302 248 332-4444 BRUCE MEASOM
335 CHICAGO IL 60604 312 360-1234 RENEE EPSTEIN
342 TEQUESTA FLA 33469 561 743-0014 CHRISTOPHER AUSTIN
345 HENDERSON NV 89193 702 458-8855 NATALIE ALLRED
358 CORDELE GA 31015 912 276-1491 SUE DEES
362 UPLAND CA 91785 909 989-2332 SARA BOMBARDIER
403 NORFOLK VA 23510 757 627-8611 RICK JACOBSON/FAYE CLAYTON
404 NEW HYDE PARK NY 10042 516 869-9000 PAT CALLAN
405 CORAL GABLES FL 33146 305 662-9559 THOMAS SAWYER
406 GREENSBORO NC 27402 910 275-0911 BILL PHIPPS, CPM
407 ARLINGTON VA 22202 703 769-1121 JANICE PRICHET
408 TROY MI 48084 248 643-5128 JOAN PAPPAS
409 GREENVILLE SC 29602 864 250-2800 REX JONES
410 NEW YORK NY 10017 212 557-1400 ROBERT ALTSCHULER
413 BOCA RATON FL 33433 561 394-4224 JULIAN TRUSSELL
415 MEMPHIS TN 38117 901 682-2555 STANLEY GRABER
416 ANNAPOLIS MD 21401 410 224-3700 MELINDA BEDNARIK
417 DOWNEY CA 90241 562 861-9233 GLORIA ABRAMS
418 COSTA MESA CA 92626 714 540-5188 LINDA WEBBER
420 BEVERLY HILLS CA 90210 310 278-2036 ADEL RAPHAEL
428 CHICAGO IL 60606 818 340-5871 NICOLE KELLY/VINCE CINTRINO
430 NEW YORK NY 10011 212 633-3376 JEAN BOLLERMAN
431 FLINT MI 48507 810 732-4000 JULIE GINGELL
433 TAMPA FL 33607 813 281-8887 BILL PHILIPS
435 NORTH YORK ON M2J5B2 416 493-9112 EMILY DI-TRANI
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
436 CASUAL WEAR, INC. C/O JUST FOR FEET 3460 GALLERIA CIRCLE
437 PAINEWEBBER QUALIFIED PLAN C/O EDENS & AVANT 1901 MAIN STREET
438 FRENCH RIVIERA HEALTH SPA, INC. 3908 VETERANS BLVD
438 LATTER & BLUM PROPERTY MANAGEMENT, INC. 800 COMMON STREET, STE. 1000
439 PARKWAY VILLAGE SHOPPING CENTER C/O EDENS & AVANT FINANCING II, L.P.1901 MAIN STREET
442 RRC FL THREE, INC. C/O REGENCY RLTY/CARRIAGE GATE 24488 BRANDON BOULEVARD
443 JANAF ASSOCIATES LTD PARTNER. C/O BANKERS TRUST FOR NOMURA/JAN 5900 E. VIRGINIA BEACH BLVD., SUITE 100
450 TOWNLINE SQUARE, L.P. C/O THE MATTIACE COMPANY 1818 CRANE RIDGE DRIVE
451 PERRY S. ALTERMAN, TRUSTEE C/O CUMBERLAND REAL ESTATE 333 SANDY SPRINGS CIRCLE #227
452 SEYMOUR N. LOGAN ASSOCIATES C/O MARTIN FISHMAN 29 SOUTH LASALLE STREET, SUITE 705
453 LAKEWOOD MALL SHOPPING C/O LAKEWOOD MALL BUSINESS CTR. 500 LAKEWOOD CENTER MALL
454 COLONIAL PROPERTIES, INC. INTERSTATE PARK CENTER 2000 INTERSTATE PARK DRIVE, SUITE 103
455 FOURTEEN MILE & HAGGERTY C/O THE ROSIN COMPANY 1577 N. WOODWARD AVENUE, SUITE 240
456 STANLEY R. GUMBERG, TRUSTEE C/O J.J. GUMBERG COMPANY 1051 BRINTON ROAD
458 KIMCO REALTY CORPORATION C/O CONCORDIA LAFAYETTE, L.L.C. 3333 NEW HYDE PARK ROAD
461 CORONA HILLS MARKET PLACE C/O GATLIN DEVELOPMENT 12625 HIGH BLUFF DRIVE, SUITE 304
463 FAYETTEVILLE MORGANTON ASSOCIATES C/O JDN REALTY CORPORATION 359 EAST PACES FERRY ROAD, N.E.
465 KRAUSZ ENTERPRISES C/O KRAUSZ COMPANY 651 GATEWAY BOULEVARD, SUITE 101
474 HARRIET STONE C/O LAS TIENDAS SHOPPING CENTER 6566 RIDGE MANOR ROAD
475 SEATTLE FIRST NATIONAL BANK C/O NORTHWESTERN TRUST & INVEST 1201 THIRD AVENUE, 20TH FLOOR
477 WALDVOGEL, POE & CRONK 800 PROFESSIONAL ARTS BUILDING 30 W. FRANKLIN ROAD
478 FEDERAL REALTY INVESTMENT TRUST DEPT 0930 1626 JEFFERSON STREET
480 PLAZA WEST COVINA LLC C/O WESTFIELD CORPORATION, INC. 11601 WILSHIRE BOULEVARD, 12TH FLOOR
481 ANTELOPE VALLEY ZONE C/O JEROME WHITE 10801 NATIONAL BLVD., SUITE 600
501 MILTON BONIUK M.D. C/O MILA PROPERTIES 2416 GRESNER
502 INTERCITY INVESTMENT PROPERTY 4301 WESTSIDE DRIVE #100
504 6464 T-W ASSOCIATES, L.P. C/O WULFE MANAGEMENT SVCS., INC. 11 GREENWAY PLAZA, STE. #1700
506 TANDY CORPORATION C/O VIDEO CONCEPTS/MCDUFFS 300 W. 3RD STREET, STE. 4
511 PROPERTY TEXAS SC ONE CORP. C/O TRANSWESTERN PROPERTY CO. 100 EAST FIFTEENTH, SUITE 115
513 NCC-SAND HILL C/O NIKKO CAPITAL CORP 3961 MACARTHUR BLVD., STE 105
514 NORMANDY VILLAGE 1821 EAST HAMMER LANE, SUITE E
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
436 BIRMINGHAM AL 35244 205 408-3000 DORIS SEWELL
437 COLUMBIA SC 29202 803 779-4420 DUSTY RHODES
438 MATARIE LA 70001 504 454-5855 REYNOLD RICE
438 NEW ORLEANS LA 70112 504 544-7025 JEFF LAUFER
439 COLUMBIA SC 29202 803 779-4420 NATALIE WRIGHT
442 BRANDON FL 33509 904 356-7000 PAM T. ASHE
443 NORFOLK VA 23510 757 461-4954 SANDI MARAGONI
450 JACKSON MS 39216 601 982-1818 WAYNE PRICE/ANDREW MATTICE
451 ATLANTA GA 30328 404 252-0440 PERRY ALTERMAN
452 CHICAGO IL 60603 312 782-6008 MARTIN FISHERMAN
453 LAKEWOOD CA 90714 562 633-0437 SEAN THOMPSON
454 MONTGOMERY AL 36109 334 270-6727 HANK ESCAVAGE
455 BLOOMFIELD HILLS MI 48034 248 645-5400 ROBERT GALPERIN
456 PITTSBURGH PA 15221 412 244-4000 KIMBERLY A. BROWN
458 NEW HYDE PARK NY 11042 616 869-9000 TOM MEREDITH
461 SAN DIEGO CA 92130 619 793-2850 THOMAS SHERBONDY
463 ATLANTA GA 30305 704 376-0524 CONNIE CLUDERAY
465 SOUTH SAN CA 94083 415 871-5600 AMOS KRAUSZ
FRANCISCO
474 SAN DIEGO CA 92120 619 582-9574 HARRIET STONE
475 SEATTLE WA 98101 206 442-6403 MARY ANN KELEHER
477 ROANOKE VA 24011 540 982-2444 SHERRY LAWRENCE
478 ROCKVILLE MD 20852 301 998-8100 PAT ARNONE
480 LOS ANGELES CA 90064 818 960-1881 GENERAL COUNSEL
481 LOS ANGELES CA 90064 310 474-9534 JEROME WHITE
501 HOUSTON TX 77080 713 984-8300 BENJAMIN HERSHORN
502 DALLAS TX 75209 214 520-2565 SUSAN NEWPORT
504 HOUSTON TX 77046 713 621-1700 TARYN OLIVER
506 FORT WORTH TX 76102 817 390-3818 LEASE ADMINISTRATION
511 FORT WORTH TX 76102 817 877-4044 ANGELIQUE GUELLO
513 NEWPORT BEACH CA 92660 714 852-0651 LEONARD LEPERA
514 STOCKTON CA 95210 209 474-0991 ALAN BAILEY
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
516 DAYJAY ASSOCIATES C/O GENERAL GROWTH PROPERTIES, INC. 110 NORTH WACKER DRIVE
517 SOLLCO, L.L.C. C/O SANDITEN INVESTMENTS, LTD. 3314 EAST 51 STREET, SUITE 207K
518 CITADEL CROSSING ASSOCIATES C/O THE SUMMIT COMMERCIAL GROUP 101 NORTH CASCADE AVE., SUITE 410
521 MCNEIL REAL ESTATE MGMT., INC. SOUTH POINTE SHOPPING CENTER 26 WEST DRY CREEK CIRCLE #150
522 K-GAM BROADWAY WILMOT, L.L.C. C/O KIVEL REALTY INVESTMENTS 6061 EAST BROADWAY, SUITE 130
523 NAOMI BUJULIAN C/O JOAN KEVORKIAN 6179 N. PALM AVENUE
524 FRANKLIN TOWNE PLAZA II C/O HAWKINS SMITH MANAGEMENT, CO. 8645 W. FRANKLIN ROAD
525 RANDALL'S PASADENA C/O TRANSWESTERN PROPERTY COMPANY 6671 SOUTHWEST FREEWAY, SUITE 200
526 COMMONWEALTH EQUITY TRUST C/O PEREGRINE REAL ESTATE 1300 ETHAN WAY, SUITE 200
527 BEVERLY & HENRY ROWEN C/O LIBERTY PROPERTY MANAGEMENT 1230 E. ORANGEBURG AVENUE, SUITE C
532 FAR NORTH SHOPPING CENTER C/O LEWINGER HAMILTON, INC. 2340 MANAUL NE SUITE 200
541 EQUITY DEVELOPMENT CORPORATION P.O. BOX 519 519 GIBSON STREET
542 CROSSROADS SOUTH SHOPPING CENTER C/O ALLEN GANN ONE HORTH HUDSON, SUITE 140
544 9801 GB ASSOCIATES, L.L.C. C/O STEINER EQUITIES GROUP, L.L.C. 75 EISENHOWER PARKWAY
546 DT LAND GROUP, INC. C/O TRIANGLE II PARTNER, LTD. 9901 CAPITAL OF TEXAS HIGHWAY N. #230
547 WAIKELE PREMIUM OUTLETS C/O CHELSEA GCA REALTY PARTNERSHIP 103 EISENHOWER PARKWAY
549 BOYER PLAZA 5400 ASSOCIATES C/O THE BOYER COMPANY 127 SOUTH 500 EAST, SUITE 100
552 TANDY CORPORATION C/O VIDEO CONCEPTS/MCDUFFS 300 W. 3RD STREET, STE. 4
553 ROANS PRARIE DEVELOPMENT CORP. C/O FERTITTA REALTY P.O. BOX 12400
554 MTV REAL ESTATE L.P. C/O ROBERT MOORE 3600 WEST MAIN STREET, STE. 150
555 WAL-MART STORES, INC. LEASE #17848-608 2001 SOUTHEAST 10TH STREET
556 BROOKHILL III LTD LIABILITY CO. C/O SULLIVAN HAYES 1001 LINCOLN STREET, SUITE 100
559 K.V. ASSOCIATES C/O SC MANAGEMENT COMPANY 2189 F.M. 1960 WEST, SUITE 227
560 SUNSET-RENEE PROPERTIES C/O JOSEPH R. FOX 2265 McGILCRIST STREET, SUITE 200
561 MCCARTHY RANCH MANAGEMENT ACCT C/O HUNTER PROPERTY 20725 VALLEY GREEN DR. #100
563 PACIFIC RETAIL TRUST C/O WOODSIDE CENTRAL PLAZA 10675 E. NORTHWEST HIGHWAY, SUITE 2630
565 GATEWAY MALL C/O GENERAL GROWTH MANAGEMENT 110 NORTH WACKER DRIVE
566 STERIK COMPANY C/O AUBURNDALE PROPERTIES, INC. 372 WASHINGTON STREET
571 THE CAFARO NORTHWEST PRTNRSHP C/O VANCOUVER PLAZA 2445 BELMONT AVENUE
716 D & S REALTY COMPANY 8255 EAST WASHINGTON STREET
720 R.D. MERRILLVILLE ASSOC., L.P. C/O ACADIA MANAGEMENT, LLC 805 THIRD AVENUE, 9TH FLOOR
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
516 CHICAGO IL 60606 405 755-6530 KELLY HASSEL
517 TULSA OK 74135 918 742-2471 SAM STEEL
518 COLORADO SPRINGS CO 80903 719 520-1000 CINDY ROSE
521 LITTLETON CO 80120 303 798-9710 KEN MAUGHAN
522 TUCSON AZ 85711 520 747-7576 JULIE NILES
523 FRESNO CA 93704 209 439-8130 JOAN KEVORKIAN
524 BOISE ID 83709 208 376-8521 PEGGY MOYER
525 HOUSTON TX 77074 713 270-3346 KATHY QUINN
526 SACRAMENTO CA 95825 916 929-8244 YVETTE DEGUERO
527 MODESTO CA 95350 209 576-0934 REGINA LIPSCOMB
532 ALBUQUERQUE NM 87107 505 884-8900 BRETT CAMPBELL
541 SEAGOVILLE TX 75159 972 287-2570 DEBBIE SMITH
542 OKLAHOMA CITY OK 73102 405 843-7474 ALLEN GANN
544 ROSELAND NJ 07068 201 228-5800 ELEASTER L. SMILEY
546 AUSTIN TX 78766 512 338-4755 DIANNE SWEENEY
547 ROSELAND NJ 07068 973 403-3169 BARBARA VASLEINKO
549 SALT LAKE CITY UT 84102 801 521-4781 MARC CALL
552 FORT WORTH TX 76102 817 390-3818 RENT ACCONTING
553 BEAUMONT TX 77726 409 839-4428 MARK FERTITTA
554 NORMAN OK 73072 405 329-2252 GAIL GOMEZ
555 BENTONVILLE AR 27212 501 204-0203 SANFORD SMITH
556 DENVER CO 80203 303 534-0900 BRENDA JOHNSON
559 HOUSTON TX 77090 281 537-9066 BILL MEHERNS
560 SALEM OR 97302 603 581-8900 ROSE DOHENY
561 CUPERTINO CA 95014 408 255-4100 CATHERINE PERRINO
563 DALLAS TX 75238 510 935-5900 JENNY STACK
565 CHICAGO IL 60606 541 747-6294 ROBERT BUCHANAN
566 WELLESLEY MA 02181 781 431-2600 CHRISTINE FELIX
571 YOUNGSTOWN OH 44504 330 747-2661 ROGER GUGUCELLO
716 CHAGRIN FALLS OH 44023 216 543-2700 DON SCHNEDIER
720 NEW YORK NY 10022 212 421-8830 JOSEPH NAPOLITANO
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
725 NOUR MANAGEMENT CO. 4269 PEARL RD., SUITE 401
731 CROSSROADS SQUARE SHOPPING CTR C/O LAT PURSER FLORIDA 6230-7 ST. AGUSTINE ROAD
732 PHOENIX HOME LIFE MUTUAL INS. C/O GRUBB & ELLIS MANAGEMENT SRVC 1350 EUCLID AVENUE, SUITE 300
733 UNIVERSITY PARK, A JOINT VENTURE C/O COLONIAL PROPERTIES 130 UNIVERSITY PARK DRIVE, SUITE 125
734 SHOPPING CENTER EQUITIES, INC. C/O SLEISMAN ENTERPRISES, INC. 4347-10 UNIVERSITY BLVD SOUTH
736 BRADLEY FINANCING LTD. PARTNERSIHP C/O BANK OF AMERICA 5852 CRAWFORDSVILLE ROAD
738 AEGON USA REALTY MANAGEMENT 4333 EDGEWOOD ROAD NE
739 VULCAN PROPERTIES C/O UNITED PROPERTIES (YORK) 3500 WEST 80TH STREET
740 HASAM REALTY LIMITED, d/b/a DIPLOMATT C/O TERRANOVA CORPORATION 1200 BRICKELL AVENUE, SUITE 1500
MALL
745 TAYLORHURST ASSOCIATES C/O HAGAN PROPERTIES 11901 BRINLEY AVE., SUITE 100
746 DUKE REALTY L.P. C/O DUKE REALTY INVESTMENT, INC. 8888 KEYSTONE CROSSING, SUITE 1200
750 STOLTZ MGMT. OF DELAWARE, INC. AGENT FOR LSOF CYNWYD, L.P. 725 CONSCHOHOKEN STATE ROAD
751 DEVELOPERS DIVERSIFIED FINANCIAL C/O THE HERITAGE 34555 CHAGRIN BLVD.
COMPANY
753 CAPITOL LAND COMPANY P.O. BOX 419121 11850 STUDT
754 BRADLEY REAL ESTATE, INC. C/O GRANDVIEW PLAZA 62 GRANDVIEW PLAZA
755 DIM PINES LIMITED C/O DANEBELT GROUP, INC. 1650 S.E. 17TH ST., SUITE 310
759 SIMON PROPERTY (ILLINOIS L.P.) C/O SIMON DEBARTOLO GROUP 115 WEST WASHINGTON STREET
760 FLYNN & ZINKAN REALTY COMPANY INDIANA GENERAL PARTNERSHIP 36 S PENNSYLVANIA SUITE 750
761 COLUMBUS JOINT VENTURE C/O SIMON DEBARTOLO GROUP 115 WEST WASHINGTON STREET
763 MADISON PLAZA LTD. PARTNERSHIP C/O BRADLEY REAL ESTATE, INC. 10910 N. PORT RICHMOND ROAD
764 APPLETON SHOPS LIMITED C/O CHASE PROPERTIES 25825 SCIENCE PARK DRIVE, SUITE 355
769 1995 BATTLEFIELD PLAZA L.P. C/O GUARDIAN INVESTORS, INC. 8023 E. 63RD PLACE, SUITE 730
771 NATIONAL AMUSEMENTS, INC. 200 ELM STREET
779 NEW PLAN REALTY TRUST 1120 AVENUE OF THE AMERICAS
780 RMS INVESTMENT CORPORATION C/O PROPERTY MANAGEMENT 1650 TERMINAL TOWER, 50 PUBLIC SQUARE
785 MARKLAND PLAZA C/O SIMON PROPERTY GROUP 115 WEST WASHINGTON STREET
787 BRADLEY FINANCING LTD. PRTNRSHP SHERIDAN VILLAGE SHOPPING CNTR 7630 N. BARRINGTON ROAD
788 MONROEVILLE MALL C/O TURNBERRY ASSOCIATES 1972 SOUTH UNIVERSITY DRIVE
792 SCHONINGER SHOPPING CENTERS LIMITED 3225 AVIATION AVENUE, SUITE 700
795 WILC/ASHWAUBENON LTD., PRTNRSHP C/O MLG MANAGEMENT LLC 13400 BISHOPS LANE, SUITE 100
796 SCHOTTENSTEIN MANAGEMENT CO. 1798 FREBIS AVENUE
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
725 CLEVELAND OH 44109 216 398-4632 GEORGE GADD
731 JACKSONVILLE FL 32217 904 268-9772 THERESA GRASSOFF
732 CLEVELAND OH 44115 216 623-4060 KAREN LEHNECKER
733 WINTER PARK FL 32792 407 677-1112 DIANNE HUGHES
734 JACKSONVILLE FL 32216 904 731-8806 TRACIA LUTEN
736 SPEEDWAY IN 46224 317 243-8219 TOM WELLMAN
738 CEDAR RAPIDS IA 52499 319 398-8559 JEFF BOHR
739 MINNEAPOLIS MN 55431 612 893-7537 NANCY MILLER
740 MIAMI FL 33131 305 754-7540 MAYRA GOZMAN
745 LOUISVILLE KY 40243 502 245-8800 DON EHLERS
746 INDIANAPOLIS IN 46266 317 846-4700 SCOTT S. LACY
750 BALA CYNWDY PA 19004 610 667-5800 MICHEAL MOSS
751 CHARAGRIN FALLS OH 44022 216 247-4700 BILL READ
753 ST. LOUIS MO 63141 314 991-8900 ROSE WAGSTAFF
754 FLORRISANT MO 63033 888 790-4177 RON A. CANTES
755 FORT LAUDERDALE FL 33316 954 467-6543 BRIAN MARK
759 INDIANAPOLIS IN 46204 317 263-2289 CINDY PARISH
760 INDIANAPOLIS IN 46204 317 634-6002 KELLY FLYNN
761 INDIANAPOLIS IN 46204 317 263-2283 PATTY HOLDER
763 MEQUON WI 53092 608 251-6400 WILLIAM R. READ
764 BEACHWOOD OH 44122 216 464-6626 REGINA SEIGAL
769 TULSA OK 74133 918 254-8116 MARTHA BRIGHT
771 DEAHAM MA 02026 781 461-1600 TARYN WARREN
779 NEW YORK NY 10036 212 869-3000 IRVING MARSHALL
780 CLEVELAND OH 44113 216 621-6060 BARBARA TACKES
785 INDIANAPOLIS IN 46204 317 263-2289 CINDY ROSE
787 HANOVER PARK IL 60103 630 736-7200 NANCY L. ROYCE
788 DAVIE FL 33324 954 423-2734 SOL BANKOLE
792 COCONUT GROVE FL 33133 305 860-8558 RITA SIVARO
795 BROOKFIELD WI 53005 414 797-9400 GARY G. KNOWSKI
796 COLUMBUS OH 43206 614 445-8461 RUTH GROSS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDLORD ADDRESS BOOK
---------------------
FC LANDLORD ADDRESS
- -- -------- -------
<S> <C> <C> <C>
797 DEVELOPERS DIVERSIFIED FINANCIAL C/O THE HERITAGE 34556 CHAGRIN BLVD.
COMPANY
801 GSG PROPERTIES LLC C/O HARRY S. SHAFFER 401 S. LAFAYETTE BOULEVARD
802 SPI XI, L.P. C/O JAMESTOWN MANAGEMENT CORP 2727 PACES FERRY RD., BLDG 2, SUITE 1600
803 CRESKE CORPORATION CEDAR CREEK FACTORY STORES 10101 MARKET STREET, SUITE 840
804 MARRERO LAND & IMPROVEMENT ASSOCIATION 5201 WESTBANK EXPRESSWAY
811 MONTGOMERY PLAZA C/O TRAMMELL CROW COMPANY 4575 SAN MATEO BOULEVARD NE SUITE I
812 JEHA FAMILY TRUST 318 DIABLO RD, SUITE 250
901 H T VENTURES, S.E. WOODLAKE PROFESSIONAL CENTER 3900 WOODLAKE BLVD., SUITE 307
904 FW CAGUAS RETAIL JOINT VENTURE C/O RD MANAGEMENT CORP. 810 SEVENTH AVENUE, 28TH FLOOR
905 VORNADO MONEHIEDRAS ACQUISITIONS, L.P.C/O VORNADO REALTY TRUST 66 LONG WHARF
950 GREAT PACIFIC INDUSTRIES, INC. C/O OVERWAITEA FOOD GROUP 19890 92A AVENUE
951 ERNST & YOUNG INC. C/O GATEWAY PLAZA 10060 JASPER AVENUE
952 ALMAHURST HOLDINGS LIMITED C/O EFFORT TRUST COMPANY 242 MAIN STREET EAST
963 65434 MANITOBA LTD. 477 WESTWOOD DRIVE
71905 M. KAMENSTEIN, INC. 565 TAXTER ROAD, FIFTH FLOOR
71915 RAND INDUSTRIES REALTY NO. 101 L.P. 2240 S.W. 70 AVENUE, SUITE H
</TABLE>
<TABLE>
<CAPTION>
FC CITY STATE ZIP PHONE CONTACT
- -- ---- ----- --- ----- -------
<S> <C> <C> <C> <C> <C>
797 CHARAGIN FALLS OH 44022 216 247-4700 BILL READ
801 SOUTH BEND IN 46634 219 237-4988 HARRY SHAFFER
802 ATLANTA GA 30339 770 805-1000 LISA THOMAS
803 MOSINEE WI 54455 715 359-3121 LARRY MCCUSKER
804 MARRERO LA 70022 504 341-1635 GARY GUIDRY
811 ALBUQUERQUE NM 87109 505 881-3100 LINDA REETZ
812 DANVILLE CA 94526 510 820-2110 RICHARD JEHA
901 LAKE WORTH FL 33463 561 963-8400 KEITH WILKELM
904 NEW YORK NY 10019 212 265-6600 RAFAEL DE GUZMAN
905 BOSTON MA 02110 617 726-1500 COLLEEN COTTER
950 LANGLEY BC V3A 4P8 604 888-8565 MICHEAL FONG
951 EDMONTON AB T5J 3R8 403 441-4680 SHAWNA BIRCH
952 HAMILTON ON L8N 1H5 905 528-8956 LIZ ODDI
963 WINNIPEG MB R3K 1G5 204 786-5981 MICHEAL BEWZA
71905 ELMSFORD NY 10523 914 785-8019 BOB GALANTE
71915 DAVIE FL 33317 954 370-3317 KATHY COOK
</TABLE>
7
================================================================================
COLLATERAL ASSIGNMENT OF PATENTS, TRADEMARKS AND COPYRIGHTS
(SECURITY AGREEMENT)
between
DISCOVERY ZONE, INC.,
DISCOVERY ZONE (CANADA) LIMITED,
DISCOVERY ZONE (PUERTO RICO), INC.
and DISCOVERY ZONE LICENSING, INC.,
as Assignor
and
FIRSTAR BANK OF MINNESOTA, N.A.,
as Assignee
Dated as of July 17, 1998
================================================================================
<PAGE>
COLLATERAL ASSIGNMENT OF PATENTS, TRADEMARKS AND COPYRIGHTS
(SECURITY AGREEMENT)
COLLATERAL ASSIGNMENT OF PATENTS, TRADEMARKS AND COPYRIGHTS
(SECURITY AGREEMENT) dated as of July 17, 1998, between DISCOVERY ZONE, INC., a
Delaware corporation with offices at 565 Taxter Road, Elmsford, New York 10523
("Discovery Zone"), DISCOVERY ZONE (CANADA) LIMITED, an entity organized under
the laws of Ontario, Canada with offices at 565 Taxter Road, Elmsford, New York
10523 ("DZ (Canada) Limited"), DISCOVERY ZONE (PUERTO RICO), INC., a corporation
organized under the laws of Puerto Rico with offices at 565 Taxter Road,
Elmsford, New York 10523 ("DZ Puerto Rico"), DISCOVERY ZONE LICENSING, INC., a
Nevada corporation with offices at 565 Taxter Road, Elmsford, New York 10523
("DZ Licensing" and collectively with Discovery Zone, DZ (Canada) Limited and DZ
Puerto Rico, the "Assignor"), and FIRSTAR BANK OF MINNESOTA, N.A., in its
capacity as trustee under the Indenture (as hereinafter defined), with an office
at 101 East 5th Street, St. Paul, Minnesota 55101 (in such capacity,
"Assignee"). Capitalized terms used in this Agreement which are defined in the
Indenture (as hereinafter defined) shall have the respective meanings given them
in the Indenture, unless otherwise defined herein.
W I T N E S S E T H:
WHEREAS, Discovery Zone and Assignee have entered into the
Indenture dated the date hereof (together with all supplements and amendments
thereto and all extensions, renewals, restatements and replacements thereof, the
"Indenture," and such Indenture together with all agreements, instruments and
documents now or hereafter entered into or delivered in connection therewith,
collectively, the "Collateral Agreements"), pursuant to which the Notes were
issued to the Holders;
WHEREAS, certain Security Agreements of even date herewith
between each of the Assignors and the Assignee (collectively, the "Security
Agreement") grants to the Assignee, for the benefit of itself and the ratable
benefit of the holders of the Notes, a security interest in certain of the
Assignor's assets, including, without limitation, its patents, patent rights and
applications therefor, trademarks and applications therefor, copyrights and all
applications and registrations therefor, license rights and goodwill;
NOW, THEREFORE, in consideration of the premises set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Assignor agrees as follows:
1. Grant of Security Interest. As security for the complete
and timely payment and satisfaction of Assignor's Obligations to Assignee under
the Indenture and the Notes, Assignor hereby grants to the Assignee, a
continuing security interest in and continuing lien on Assignor's entire right,
title and interest in and to all of the now owned or existing and hereafter
acquired or arising:
a. United States and foreign patents and patent
applications, including, without limitation, the inventions
and improvements described and claimed therein, all patentable
inventions and those patents and patent applications listed on
Schedule A attached hereto and made a part hereof, and the
reissues, divisions, continuations,
<PAGE>
renewals, extensions and continuations in-part of any of the
foregoing, and all income, royalties, damages and payments now
and hereafter due and/or payable under any of the foregoing
with respect to any of the foregoing, including, without
limitation, damages and payments for past, present and future
infringements of any of the foregoing and the right to sue for
past, present and future infringements of any of the foregoing
(all of the foregoing United States and foreign patents and
patent applications are sometimes hereinafter individually
and/or collectively referred to as the "Patents");
b. United States and foreign copyrights, rights and
interests in copyrights, works protectable by copyrights,
copyright registrations, and copyright applications,
including, without limitation, the copyright registrations and
applications listed on Schedule B attached hereto and made a
part hereof, and all renewals of any of the foregoing, all
income, royalties, damages and payments now and hereafter due
and/or payable under any of the foregoing, including, without
limitation, damages and payments for past, present and future
infringements of any of the foregoing and the right to sue for
past, present and future infringements of any of the foregoing
(all of the foregoing United States and foreign copyrights are
sometimes hereinafter individually and/or collectively
referred to as the "Copyrights");
c. United States and foreign trademarks, trade names,
corporate names, company names, business names, fictitious
business names, trade styles, service marks, logos, other
business identifiers, prints and labels on which any of the
foregoing have appeared or appear, all registrations and
recordings thereof, and all applications in connection
therewith, including, without limitation, the trademarks and
applications listed on Schedule C attached hereto and made a
part hereof or of any of the foregoing (other than
applications to register a mark under Section 1(b) of the
Lanham Act for which a verified statement of use has not been
filed) (all of the foregoing trademarks, tradenames, service
marks, trademark registrations, service mark registrations,
trademark applications and service mark applications are
sometimes hereinafter individually and/or collectively
referred to as the "Trademarks");
d. any license agreement in which the Assignor is or
becomes licensed to use a Patent, Copyright, Trademark or the
know-how of any other Person including, without limitation,
the license agreements listed on Schedules A, B and C attached
hereto and made a part hereof (all the foregoing are referred
to as the "Licenses"); and
e. the goodwill of the Assignor's business connected
with the use of and symbolized by the Trademarks.
All of the foregoing items set forth in clauses (a) through (e) are hereinafter
referred to collectively as the "Collateral" and shall be included as part of
the definition of Collateral in the Security Agreement. The Security Agreement
and the provisions thereof are hereby incorporated herein in their entirety by
this reference thereto.
2. Assignor's Obligations. Assignor agrees that it will
perform and discharge and remain liable for all its covenants, duties, and
obligations arising in connection with the Collateral
-2-
<PAGE>
and any licenses and agreements related thereto. Assignee shall have no
obligation or liability in connection with the Collateral or any licenses or
agreements relating thereto by reason of this Assignment or any payment received
by Assignee relating to the Collateral and Assignee shall not be required to
perform any covenant, duty or obligation of Assignor arising in connection with
the Collateral or any license or agreement related thereto or to take any other
action regarding the Collateral or any such licenses or agreements, except and
only to the extent that Assignee has acquired absolute ownership of the
Collateral upon an exercise of its remedies under Section 5 hereof.
3. Representations and Warranties. Assignor represents and
warrants to Assignee that as of the Issue Date with respect to the Collateral in
existence on such date each such representation and warranty is made: (a)
Assignor is the beneficial and record owner of such Collateral, and no adverse
claims have been made with respect to its title to or the validity of such
Collateral; (b) the trademarks and service marks covered by the Licenses and the
Trademarks as listed on Schedule C are the only trademarks, service marks,
trademark and service mark registrations and applications therefor and the only
trade names and trade styles in which Assignor has any or all right, title and
interest; (c) the patents and patent applications listed on Schedule A are the
only patents and patent applications in which Assignor has any or all right,
title and interest; (d) the copyright registrations and applications listed on
Schedule B are the only copyright registrations and applications in which
Assignor has any or all right, title and interest; (e) no such Collateral is
subject to any existing mortgage, pledge, lien, security interest, lease,
charge, encumbrance, settlement or consent, covenant not to sue, non-assertion
assurance, release or license (by Assignor as licensor), except the security
interest created hereby and under the other Collateral Agreements and except for
any licenses between or among any Assignors and except for Permitted Liens
(including, without limitation, the liens and security interests securing the
Eligible Credit Facility and the Existing Notes); (f) Assignor has performed all
acts and has paid all renewal, maintenance and other fees and taxes required to
maintain each and every registration and application of such Collateral in full
force and effect; (g) no claims have been made against Assignor that the use of
any of the Collateral violates the asserted rights of any third party; (h) to
the best of Assignor's knowledge, no third party is infringing upon any such
Collateral; and (i) concerning Collateral in the United States and regarding the
perfection of the security interest hereunder in the United States, when this
Agreement is filed in and recorded by the United States Patent and Trademark
Office (the "Trademark Office") the United States Copyright Office (the
"Copyright Office") and, other than with respect to Copyrights, UCC-1 Financing
Statements in appropriate form for recordation have been filed in the recording
offices where the Assignor's principal place of business is located and such
other locations required by applicable law, and the Assignee has taken the other
actions contemplated by the Indenture and in this Agreement, this Agreement will
create a legal and valid perfected and continuing lien on and security interest
in the Collateral in favor of Assignee, enforceable against Assignor and all
third parties, subject to no other mortgage, lien, charge, encumbrance, or
security or other interest, except as expressly permitted by the Indenture, the
New Intercreditor Agreements and the other Collateral Agreements.
4. Covenants. Assignor will maintain and renew all items of
Collateral necessary for the conduct of its business and all registrations of
the Collateral necessary for the conduct of its business and will defend the
Collateral against the claims of all persons. Assignor will maintain the same
standards of quality for the goods and services in connection with which the
Trademarks and the trademarks covered by the Licenses are used as Assignor or
such other persons maintained for such goods and services prior to entering into
this Agreement. Assignee shall have the right to enter upon Assignor's premises
at all reasonable times to monitor such quality standards. Assignor shall
promptly notify Assignee if it knows or has reason to know that any of the
Collateral may become subject to any adverse determination or development
(including the institution of
-3-
<PAGE>
proceedings) in any action or proceeding in the Trademark Office, the Copyright
Office, or any court. In the event that any of the Collateral is infringed or
diluted by a third party, promptly after the Assignor becomes aware of such
infringement or dilution, Assignor shall take all reasonable actions to stop
such infringement or dilution and protect its exclusive rights in such
Collateral including, but not limited to, the initiation of a suit for
injunctive relief and to recover damages. Without limiting the generality of the
foregoing, Assignor shall not permit the expiration, termination or abandonment
of any Trademark, Patent, Copyright or License used in or necessary for the
conduct of its business without the prior written consent of Assignee. If,
before the Obligations have been satisfied in full, Assignor shall obtain rights
to or be licensed to use any new Trademark, Copyright or Patent not identified
on Schedules A, B or C hereto, the provisions of Section 1 hereof shall
automatically apply thereto and Assignor shall give Assignee prompt notice
thereof in writing.
5. Remedies Upon Default. Whenever any Event of Default shall
occur and be continuing, Assignee shall have all the rights and remedies granted
to it in such event by the Indenture, which rights and remedies are specifically
incorporated herein by reference and made a part hereof. Assignee in such event
may collect directly any payments due to Assignor in respect of the Collateral
and, subject to any limitations imposed under any license agreements
constituting part of the Collateral, may sell, license, lease, assign, or
otherwise dispose of the Collateral in the manner set forth in the Indenture.
Assignor agrees that, in the event of any disposition of the Collateral upon any
such Event of Default which is continuing, it will duly execute, acknowledge,
and deliver all documents necessary or advisable to record title to the
Collateral in any transferee or transferees thereof, including, without
limitation, valid, recordable assignments of the Collateral. In the event an
Event of Default occurs and is continuing, Assignor hereby irrevocably appoints
Assignee as its attorney-in-fact, with power of substitution, to execute,
deliver, and record any such documents on Assignor's behalf. Notwithstanding any
provision hereof to the contrary, during the continuance of an Event of Default,
Assignor may sell merchandise or services bearing the Trademarks, Copyrights and
trademarks or copyrights covered by the Licenses and utilize the Patents and
patents covered by the Licenses in the ordinary course of their respective
business and in a manner consistent with its past practices, until it receives
written notice from Assignee of an intended sale or disposition of the
Collateral. The preceding sentence shall not limit any right or remedy granted
to Assignee with respect to Assignor's inventory and other property under the
Indenture and the Collateral Agreements or any other agreement now or
hereinafter in effect.
6. Power of Attorney. Concurrently with the execution and
delivery hereof, Assignor shall execute and deliver to the Assignee, in the form
of Exhibit 1 hereto, five (5) originals of a Special Power of Attorney for the
implementation of the assignment, sale, license, lease or other disposition of
the Trademarks, Copyrights, Patents and Licenses pursuant to Section 5. Assignor
hereby releases Assignee from any claims, causes of action and demands at any
time arising out of or with respect to any actions taken or omitted to be taken
by Assignee in accordance with Section 5 under the powers of attorney granted
therein, other than actions taken or omitted to be taken through the bad faith,
willful misconduct or gross negligence of Assignee, as determined by a final,
non-appealable order of a court of competent jurisdiction.
7. Cumulative Remedies. The rights and remedies provided
herein are cumulative and not exclusive of any other rights or remedies provided
by law. The security interest granted hereby is granted in conjunction with the
security interest granted to Assignee under the Indenture and Security
Agreement. The rights and remedies of Assignee with respect to the security
interest granted hereby are in addition to those set forth in the Indenture and
other Collateral Agreements and those which are now or hereafter available to
Assignee as a matter of law or equity.
-4-
<PAGE>
The exercise by Assignee of any one or more of the rights, powers or remedies
provided for in this Agreement, Indenture and the Security Agreement or now or
hereafter existing at law or in equity shall not preclude the simultaneous or
later exercise by any person, including Assignee, of any or all other rights,
powers or remedies. The rights and remedies provided herein are intended to be
in addition to and not in substitution of the rights and remedies provided by
the Indenture and the Collateral Agreements.
8. Amendments and Waivers. This Agreement may not be modified,
supplemented, or amended, or any of its provisions waived at the request of
Assignor, without the prior written consent of Assignee. Assignor hereby
authorizes Assignee to modify this Agreement by amending the Schedules hereto to
include any future Trademark, Patent or Copyright, additional licenses or other
additional Collateral in the future arising.
9. Waiver of Rights. No course of dealing between the parties
to this Agreement or any failure or delay on the part of any such party in
exercising any rights or remedies hereunder shall operate as a waiver of any
rights and remedies of such party or any other party, and no single or partial
exercise of any rights or remedies by one party hereunder shall operate as a
waiver or preclude the exercise of any other rights and remedies of such party
or any other party. No waiver by Assignee of any breach or default by Assignor
shall be deemed a waiver of any other previous breach or default or of any
breach or default occurring thereafter.
10. Assignment. Each of Discovery Zone, DZ (Canada) Limited
and DZ Puerto Rico have assigned all of its right, title and interest in and to
the Collateral (as of the date of such assignment) to DZ Licensing pursuant to
an Assignment and License Agreement, dated as of July 22, 1997 (the "DZ
Licensing Assignment"). The provisions of this Agreement shall be binding upon
and inure to the benefit of the respective successors and assigns of the parties
hereto; provided however, that, except for the DZ Licensing Assignment, no
interest herein or in or to the Collateral may be assigned by Assignor without
the prior written consent of Assignee; and, provided further, that the Assignee
may assign the rights and benefits hereof to any party acquiring any interest in
the Obligations of any part thereof.
11. Further Acts. Assignor shall have the duty to prosecute
diligently any application for the Patents, Trademarks and Copyrights necessary
for the conduct of its business pending as of the date of this Agreement or
thereafter, until the Obligations shall have been paid in full, and to make
applications on material unregistered but registrable trademarks and copyrights
and unpatented or unregistered but patentable or registrable invention;
necessary for the conduct of its business in any location where Assignor does
business and to preserve and maintain all rights in the Collateral necessary for
the conduct of its business. Any expenses incurred in connection with such
applications shall be borne by Assignor. Assignor shall not abandon any right to
file a trademark, service mark application or registration for any trademark,
service mark, copyright, copyright application or patent application or
registration used in or necessary for the conduct of its business, or abandon
any such pending applications or registrations necessary for the conduct of its
business, without the consent of Assignee.
12. Enforcement. Upon Assignor's failure to do so after
Assignee's demand, or upon an Event of Default, Assignee shall have the right
but shall in no way be obligated to bring suit in its own name to enforce the
Trademarks, Patents, Copyrights, Licenses or the trademarks, patents or
copyrights covered by the Licenses, and any license under any of the foregoing,
in which event Assignor shall at the request of Assignee do any and all lawful
acts and execute any and all proper
-5-
<PAGE>
documents that may be reasonably requested by Assignee in aid of such
enforcement including, but not limited to, joining as a plaintiff in any such
enforcement action, and Assignor shall promptly, upon demand, reimburse and
indemnify Assignee or its agents for all costs and expenses incurred by Assignee
in the exercise of its rights under this Section 12.
13. Release and Re-Assignment. At such time as all of the
Obligations under the Indenture and the Notes have been satisfied, and the
Collateral Agreements have been terminated, other than upon enforcement of
Assignee's remedies under the Collateral Agreements after an Event of Default,
Assignee will, subject to and in accordance with the applicable terms of the
Indenture, execute and deliver to Assignor all deeds, assignments and other
instruments as may be necessary or proper to release Assignee's lien in the
Collateral and reassign to Assignor any and all rights of Assignee therein which
were granted to Assignee hereunder, subject to any dispositions thereof which
may have been made by Assignee pursuant hereto. No express or implied license
with respect to the Collateral is granted to Assignee under this Agreement and
Assignee shall have no rights in Collateral, except as provided in Section 5 as
explicitly granted therein and as otherwise explicitly granted hereunder in
connection with the security interest granted hereunder.
14. Severability. If any clause or provision of this Agreement
shall be held invalid or unenforceable, in whole or in part, in any
jurisdiction, such invalidity or unenforceability shall attach only to such
clause or provision, or part thereof, in such jurisdiction, and shall not in any
manner affect any other clause or provision in any other jurisdiction.
15. Notices. All notices, requests and demands to or upon
Assignor or Assignee under this Agreement shall be given in the manner
prescribed by the Indenture.
16. Governing Law. This Agreement shall be governed by and
construed, applied, and enforced in accordance with the federal laws of the
United States of America applicable to trademarks, patents and copyrights and
the laws of the State of New York, except that no doctrine of choice of law
shall be used to apply the laws of any other state or jurisdiction.
17. Financing Agreement. This Agreement is one of the
Collateral Agreements.
18. Counterparts. This Agreement may be signed in one or more
counterparts, and by each party in separate counterparts, which, when taken
together, shall constitute one and the same document.
19. Indenture Protections. Notwithstanding any term hereof to
the contrary, the terms of this Agreement applicable to or governing the
Assignee shall in all respects be subject to the terms, benefits and protections
afforded to the Assignee under Article Seven of the Indenture.
20. Intercreditor Agreements. Notwithstanding any term hereof
to the contrary, the terms and conditions of this Collateral Assignment of
Patents, Trademarks and Copyrights (Security Agreement) are in all respects
subject to, and all rights and remedies of the parties hereunder shall be
exercised only in accordance with, the terms, conditions, benefits and
protections contained in the New Intercreditor Agreements with provide that,
among other things, the Lender under the Eligible Credit Facility has a superior
Lien in and to the Collateral senior to the rights of Assignee and the holders
of, and the Collateral Agent regarding, the Existing Note; and the Assignee has
a superior Lien in and to the Collateral senior to the rights of the holders of,
and the Collateral Agent regarding, the Existing Notes.
-6-
<PAGE>
21. Notices. Any notices or other communications required or
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
if to the Company:
------------------
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Elmsford, New York 10523
Attn: Chief Executive Officer
Telephone Number: (914) 345-4500
Telecopy Number: (914) 345-4527
with a copy to attn: General Counsel
Telecopy Number: (914) 345-4516
if to the Assignee:
-------------------
Firstar Bank of Minnesota
101 East 5th Street
St. Paul, Minnesota 55101
Attn: Corporate Trust
Telephone Number: (651) 229-2600
Telecopy Number: (651) 229-6415
Each of the Company and the Assignee by written notice to each
other such Person may designate additional or different addresses for notices to
such Person. Any notice or communication to the Company or the Assignee shall be
deemed to have been given or made as of the date so delivered if personally
delivered; when answered back, if telexed; when receipt is acknowledged, if
faxed; and five calendar days after mailing if sent by registered or certified
mail, postage prepaid (except that a notice of change of address shall not be
deemed to have been given until actually received by the addressee).
Any notice or communication mailed to a Holder shall be mailed
to such Holder by first class mail or other equivalent means at such Holder's
address as it appears on the registration books of the Registrar and shall be
sufficiently given to such Holder if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this
Agreement as of the date first above written.
DISCOVERY ZONE, INC.,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
DISCOVERY ZONE (CANADA) LIMITED,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
DISCOVERY ZONE (PUERTO RICO), INC.,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
DISCOVERY ZONE LICENSING, INC.,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
FIRSTAR BANK OF MINNESOTA, N.A.,
solely in its capacity as Trustee and Collateral
Agent under the Indenture,
Assignee
By: /s/ Frank P. Leslie, III
---------------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
<PAGE>
SCHEDULE A
PATENTS
ISSUED UTILITY PATENTS
<TABLE>
<CAPTION>
Type Inventor Application Number Patent Number Issued Date Assignee of Record
- ---- -------- ------------------ ------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
US Gleeson, et al. 07/845,301 5,167,595 December 1, 1992 Discovery Zone, Inc.
US Petersheim 07/845,414 5,205,748 April 27, 1993 Discovery Zone, Inc.
US Petersheim, et al. 07/845,119 5,405,304 April 11, 1995 Discovery Zone, Inc.
US Gleeson, et al. 08/097,494 5,425,677 June 20, 1995 Discovery Zone, Inc.
US Gutterman, et al. 08/316,700 5,482,565 January 9, 1996 Discovery Zone, Inc.
US Weimer, et al. 08/184,513 5,499,641 March 19, 1996 Discovery Zone, Inc.
US Weimer, et al. 08/472,086 5,542,440 June 7, 1995 Discovery Zone, Inc.
US Weimer, et al. 08/475,314 5,529,082 June 7, 1995 Discovery Zone, Inc.
US Weimer, et al. 08/475,317 5,546,967 June 7, 1995 Discovery Zone, Inc.
</TABLE>
UTILITY PATENT APPLICATIONS
<TABLE>
<CAPTION>
Type Inventor Number Filing Date Status Assignee of Record
- ---- -------- ------ ------------ ------ ------------------
<S> <C> <C> <C> <C> <C>
PCT Weimer, et al. WO95/19854 January 20, 1995 ABANDONED
US Petersheim, et al. 08/191,431 February 3, 1994 ABANDONED
US Huffmann, et al. 08/791,873 January 31, 1997 pending
</TABLE>
<PAGE>
ISSUED DESIGN PATENTS
<TABLE>
<CAPTION>
Type Inventor Application No. Design No. Filing Date Assignee of Record
- ---- -------- --------------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
US Petersheim, et al. 07/828,587 D342,115 January 30, 1992 Discovery Zone, Inc.
US Warren 07/828,588 D349,964 January 30, 1992 Discovery Zone, Inc.
US Gleeson 07/828,589 D340,100 January 30, 1992 Discovery Zone, Inc.
US Gleeson 07/828,590 D339,387 January 30, 1992 Discovery Zone, Inc.
US Warren, et al. 07/828,594 D340,099 January 30, 1992 Discovery Zone, Inc.
US Gleeson, et al. 07/828,595 D340,274 January 30, 1992 Discovery Zone, Inc.
US Warren, et al. 07/830,268 D340,498 February 4, 1992 Discovery Zone, Inc.
US Warren 07/830,269 D340,102 February 4, 1992 Discovery Zone, Inc.
US Ingold, et al. 07/830,270 D340,101 February 4, 1992 Discovery Zone, Inc.
US Petersheim 07/830,272 D341,644 February 4, 1992 Discovery Zone, Inc.
US Petersheim 07/831,040 D340,098 February 4, 1992 Discovery Zone, Inc.
US Petersheim 07/834,506 D344,317 February 15, 1994 Discovery Zone, Inc.
US Petersheim 07/834,507 D343,670 January 25, 1994 Discovery Zone, Inc.
US Weimer, et al. 29/010,196 D360,715 June 29, 1993 Discovery Zone, Inc.
US Strawcutter, et al. 29/010,728 D358,190 July 15, 1993 Discovery Zone, Inc.
US Matsch 07/518,821 D328,939 May 4, 1990 Discovery Zone, Inc.
US Matsch 07/518,839 D328,940 May 4, 1990 Discovery Zone, Inc.
US Matsch 07/533,063 D330,742 June 4, 1990 Discovery Zone, Inc.
US Matsch 07/532,977 D330,744 June 4, 1990 Discovery Zone, Inc.
US Matsch 07/532,978 D330,741 June 4, 1990 Discovery Zone, Inc.
</TABLE>
DESIGN PATENT APPLICATIONS
Type Inventor Number Filing Date Assignee of Record.
- ---- -------- ------ ----------- -------------------
US Matsch 07/933,529 ABANDONED
US Petersheim, et al. 29/011,036 ABANDONED
US Matsch 07/698,068 ABANDONED
<PAGE>
SCHEDULE B
COPYRIGHTS
COPYRIGHT REGISTRATIONS
<TABLE>
<CAPTION>
Country Title Number Date Assignee of Record
- ------- ----- ------ ---- ------------------
<S> <C> <C> <C> <C>
US We make happy... TX 3277072 March 9, 1992 Discovery Zone Licensing, Inc.
US Horizone... TX3334160 March 14, 1992 Discovery Zone Licensing, Inc.
US Discover How Fit... TX3306053 March 9, 1992 Discovery Zone Licensing, Inc.
US Employee Handbook TX3306918 April 27, 1992 Discovery Zone Licensing, Inc.
US Hiring/Recruiting Manual TX3306504 March 9, 1992 Discovery Zone Licensing, Inc.
US 1991 Kids PA564669 March 9, 1992 Discovery Zone Licensing, Inc.
US Discover an Investment... TX3285922 March 9, 1992 Discovery Zone Licensing, Inc.
US Let Your Kids Bounce... TX3299596 March 9, 1992 Discovery Zone Licensing, Inc.
US At Discovery Zone, Every... TX3299592 March 9, 1992 Discovery Zone Licensing, Inc.
US The Place For Kids... TX3299598 March 9, 1992 Discovery Zone Licensing, Inc.
US Let Your Kids Climb... TX3299593 March 9, 1992 Discovery Zone Licensing, Inc.
US Bring Your Kids... TX3299594 March 9, 1992 Discovery Zone Licensing, Inc.
US The Opportunity for TX3299599 March 9, 1992 Discovery Zone Licensing, Inc.
Investment...
US Fitness Fun... TX3299597 March 9, 1992 Discovery Zone Licensing, Inc.
US Tell Your Kids... TX3299591 March 9, 1992 Discovery Zone Licensing, Inc.
US Welcome to Discovery... TX3276556 March 9, 1992 Discovery Zone Licensing, Inc.
US The Perfect Destination... TX3277110 March 9, 1992 Discovery Zone Licensing, Inc.
US Discovery How Fit... TX3299595 March 9, 1992 Discovery Zone Licensing, Inc.
US Discovery Zone... TX3153744 July 11, 1991 Discovery Zone Licensing, Inc.
</TABLE>
APPLICATIONS FOR COPYRIGHT REGISTRATION
<TABLE>
<CAPTION>
Country Title Number Date Assignee of Record
- ------- ----- ------ ---- ------------------
<S> <C> <C> <C> <C>
US Z-Bop - robot character TX 3277072 March 9, 1992 Discovery Zone Licensing, Inc.
</TABLE>
<PAGE>
Schedule C
Trademarks
Country Mark Registration No. (RV) Class
Serial No. (S)
Australia DISCOVERY ZONE (R) 553185 41
Australia Discovery Zone Logo (R) 553186 41
Puerto Rico DISCOVERY ZONE (R) 345 41
United States Discovery Zone Logo (R) 1,619,865 16
United States DISCOVERY ZONE (R) 1,619,867 16
United States Discovery Zone Logo (R) 1,620,069 25
United States DISCOVERY ZONE (R) 1,620,087 25
United States Discovery Zone Logo (R) 1,620,486 41
United States DISCOVERY ZONE (R) 1,620,487 41
United States Discovery Zone Logo (R) 1,639,186 28
United States DISCOVERY ZONE (R) 1,639,187 28
United States FUNBELIEVABLE (R) 1,808,035 41
United States Robot Design (R) 1,816,211 41
United States Z-BOP (R) 1,827,776 41
United States WHERE KIDZ (R) 1,835,777 41
WANNA BEI
United States DZ (R) 1,847,478 41
United States DZ (R) 1,850,362 25
United States WEEBODIES (R) 1,871,651 41
United States DZ DINER (R) 1,871,739 42
United States PHONE THE ZONE (R) 1,949,543 41
United States KIDZ WATCH (R) 1,953,607 41
United States CHICKEN (R) 1,958,271 29
DINOBITES
United States DISCOVER ZONE (R) 1,976,126 41
and Tube Design
United States STARTER ZONE (R) 1,991,068 41
United States SKILL ZONE (R) 1,991,069 41
United States TAKE ME HOME (R) 1,992,959 41
ZONE
<PAGE>
Country Mark Registration No. (RV) Class
Serial No. (S)
United States MINI ZONE (R) 1,992,690 41
United States FUNSITTERS (R) 2,000,077 42
United States ZONE BRAIN (R) 2,011,598 41
United States IMAGINACTION (R) 2,012,590 41
United States MEGA ZONE (R) 2,020,317 41
United States THE FREEDOM (R) 2,025,727 42
YOU WANT, THE
FUN THEY LOVE!
United States DISCOVERY ZONE (S) 74/711,695 14
United States Discovery Zone Logo (S) 74/712,805 14
United States DISCOVERY ZONE (S) 74/720,947 16
United States DZ (S) 75/410,719 28
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President and CEO of DISCOVERY ZONE, INC., the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE (CANADA) LIMITED, the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE (PUERTO RICO), INC., the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE LICENSING, INC., the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Frank P.
Leslie, to me known, who being by me duly sworn, did depose and say that he is
the Vice President of Firstar Bank of Minnesota, N.A., the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Wendy W. Tinkler
-----------------------------
Notary Public
[SEAL]
<PAGE>
EXHIBIT 1
SPECIAL POWER OF ATTORNEY
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, THAT DISCOVERY ZONE, INC., a Delaware
corporation with its principal office at 565 Taxter Road, Elmsford, New York
10523 (hereinafter called "Assignor"), hereby appoints and constitutes Firstar
Bank of Minnesota, N.A. (hereinafter called "Assignee") its true and lawful
attorney, with full power of substitution, and with full power and authority to
perform the following acts on behalf of Assignor:
1. For the purpose of assigning, selling, licensing or otherwise
disposing of all right, title and interest of Assignor in and to: (i) any
trademarks, trade names and service marks, and all registrations, renewals,
recordings and all pending applications therefor, and all licenses therefor;
(ii) any patents and patent applications and patentable inventions and the
reissues, divisions, continuations, renewals, extensions and continuations in
part and all licenses therefor; and (iii) any copyrights, copyright
applications, rights and interests in copyrights, works protectable by
copyrights and all renewals therefor, and for the purpose of the recording,
registering and filing of, or accomplishing any other formality with respect to,
the foregoing, to execute and deliver any and all agreements, documents,
instruments of assignment or other papers necessary or advisable to effect such
purpose; and
2. To execute any and all documents, statements, certificates or other
papers necessary or advisable in order to obtain the purposes described above as
Assignee may in its sole discretion determine.
This power of attorney is made pursuant to a Collateral Assignment of
Patents, Trademarks and Copyrights (Security Agreement) dated the date hereof,
between Assignor and Assignee and takes effect solely for the purposes of
Section 5 thereof and is subject to the conditions thereof and may not be
revoked until the payment in full of all "Obligations" as defined in such
security agreement.
Dated as of July 17th, 1998
DISCOVERY ZONE, INC.,
Assignor
By: /s/ Scott W. Bernstein
--------------------------------------------
Name: Scott W. Bernstein
Title: President and Chief Executive Officer
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President and CEO of DISCOVERY ZONE, INC., the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
[SEAL]
<PAGE>
EXHIBIT 1
SPECIAL POWER OF ATTORNEY
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, THAT DISCOVERY ZONE (CANADA)
LIMITED, a corporation organized under the laws of Canada, with its principal
office at 565 Taxter Road, Elmsford, New York 10523 (hereinafter called
"Assignor"), hereby appoints and constitutes Firstar Bank of Minnesota, N.A.
(hereinafter called "Assignee") its true and lawful attorney, with full power of
substitution, and with full power and authority to perform the following acts on
behalf of Assignor:
1. For the purpose of assigning, selling, licensing or otherwise
disposing of all right, title and interest of Assignor in and to: (i) any
trademarks, trade names and service marks, and all registrations, renewals,
recordings and all pending applications therefor, and all licenses therefor;
(ii) any patents and patent applications and patentable inventions and the
reissues, divisions, continuations, renewals, extensions and continuations in
part and all licenses therefor; and (iii) any copyrights, copyright
applications, rights and interests in copyrights, works protectable by
copyrights and all renewals therefor, and for the purpose of the recording,
registering and filing of, or accomplishing any other formality with respect to,
the foregoing, to execute and deliver any and all agreements, documents,
instruments of assignment or other papers necessary or advisable to effect such
purpose; and
2. To execute any and all documents, statements, certificates or other
papers necessary or advisable in order to obtain the purposes described above as
Assignee may in its sole discretion determine.
This power of attorney is made pursuant to a Collateral Assignment of
Patents, Trademarks and Copyrights (Security Agreement) dated the date hereof,
between Assignor and Assignee and takes effect solely for the purposes of
Section 5 thereof and is subject to the conditions thereof and may not be
revoked until the payment in full of all "Obligations" as defined in such
security agreement.
Dated as of July 17th, 1998
DISCOVERY ZONE (CANADA) LIMITED,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE (CANADA) LIMITED, the corporation described
in and which executed the foregoing instrument; and that he signed his name
thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
[SEAL]
<PAGE>
EXHIBIT 1
SPECIAL POWER OF ATTORNEY
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, THAT DISCOVERY ZONE (PUERTO RICO),
INC., a corporation organized under the laws of Puerto Rico with its principal
office at 565 Taxter Road, Elmsford, New York 10523 (hereinafter called
"Assignor"), hereby appoints and constitutes Firstar Bank of Minnesota, N.A.
(hereinafter called "Assignee") its true and lawful attorney, with full power of
substitution, and with full power and authority to perform the following acts on
behalf of Assignor:
1. For the purpose of assigning, selling, licensing or otherwise
disposing of all right, title and interest of Assignor in and to: (i) any
trademarks, trade names and service marks, and all registrations, renewals,
recordings and all pending applications therefor, and all licenses therefor;
(ii) any patents and patent applications and patentable inventions and the
reissues, divisions, continuations, renewals, extensions and continuations in
part and all licenses therefor; and (iii) any copyrights, copyright
applications, rights and interests in copyrights, works protectable by
copyrights and all renewals therefor, and for the purpose of the recording,
registering and filing of, or accomplishing any other formality with respect to,
the foregoing, to execute and deliver any and all agreements, documents,
instruments of assignment or other papers necessary or advisable to effect such
purpose; and
2. To execute any and all documents, statements, certificates or other
papers necessary or advisable in order to obtain the purposes described above as
Assignee may in its sole discretion determine.
This power of attorney is made pursuant to a Collateral Assignment of
Patents, Trademarks and Copyrights (Security Agreement) dated the date hereof,
between Assignor and Assignee and takes effect solely for the purposes of
Section 5 thereof and is subject to the conditions thereof and may not be
revoked until the payment in full of all "Obligations" as defined in such
security agreement.
Dated as of July 17, 1998
DISCOVERY ZONE (PUERTO RICO), INC.,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE (PUERTO RICO), INC., the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
[SEAL]
<PAGE>
EXHIBIT 1
SPECIAL POWER OF ATTORNEY
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
KNOW ALL MEN BY THESE PRESENTS, THAT DISCOVERY ZONE LICENSING,
INC., a Nevada corporation, with its principal office at 565 Taxter Road,
Elmsford, New York 10523 (hereinafter called "Assignor"), hereby appoints and
constitutes Firstar Bank of Minnesota, N.A. (hereinafter called "Assignee") its
true and lawful attorney, with full power of substitution, and with full power
and authority to perform the following acts on behalf of Assignor:
1. For the purpose of assigning, selling, licensing or otherwise
disposing of all right, title and interest of Assignor in and to: (i) any
trademarks, trade names and service marks, and all registrations, renewals,
recordings and all pending applications therefor, and all licenses therefor;
(ii) any patents and patent applications and patentable inventions and the
reissues, divisions, continuations, renewals, extensions and continuations in
part and all licenses therefor; and (iii) any copyrights, copyright
applications, rights and interests in copyrights, works protectable by
copyrights and all renewals therefor, and for the purpose of the recording,
registering and filing of, or accomplishing any other formality with respect to,
the foregoing, to execute and deliver any and all agreements, documents,
instruments of assignment or other papers necessary or advisable to effect such
purpose; and
2. To execute any and all documents, statements, certificates or other
papers necessary or advisable in order to obtain the purposes described above as
Assignee may in its sole discretion determine.
This power of attorney is made pursuant to a Collateral Assignment of
Patents, Trademarks and Copyrights (Security Agreement) dated the date hereof,
between Assignor and Assignee and takes effect solely for the purposes of
Section 5 thereof and is subject to the conditions thereof and may not be
revoked until the payment in full of all "Obligations" as defined in such
security agreement.
Dated as of July 17th, 1998
DISCOVERY ZONE LICENSING, INC.,
Assignor
By: /s/ Scott W. Bernstein
---------------------------------------------
Name: Scott W. Bernstein
Title: President
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF NEW YORK )
On the 17th day of July, 1998 before me personally came Scott
Bernstein, to me known, who being by me duly sworn, did depose and say that he
is the President of DISCOVERY ZONE LICENSING, INC., the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by order of the Board of Directors of said corporation.
/s/ Christine Dionne
-----------------------------
Notary Public
[SEAL]
[Shearman & Sterling Letterhead]
October 26, 1998
Discovery Zone, Inc.
565 Taxter Road, Fifth Floor
Elmsford, New York 10523
Ladies and Gentlemen:
We are acting as counsel to Discovery Zone, Inc. (the "Company"), a
Delaware corporation, in connection with the filing by the Company of a
Registration Statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"). Pursuant to the
Registration Statement, the Company offers to exchange (the "Exchange Offer")
$20,000,000 aggregate principal amount of its outstanding 13 1/2% Senior
Collateralized Notes due 2002 (the "Private Notes") for $20,000,000 aggregate
principal amount of its 13 1/2% Senior Collateralized Notes due 2002 (the
"Exchange Notes"). The Private Notes were, and the Exchange Notes will be,
issued under an indenture (the "Indenture") dated as of July 17, 1998 among the
Company, the guarantors named therein and Firstar Bank of Minnesota, N.A., as
trustee (the "Trustee").
In this capacity, we have examined the Registration Statement, the
Indenture, the Private Notes, a form of the Exchange Notes contained in the
Indenture and originals and copies certified or otherwise identified to our
satisfaction of such documents as we have deemed necessary or appropriate to
enable us to render the opinions expressed below.
Based upon the foregoing and assuming the due authorization, execution
and delivery of the Indenture by the Trustee, it is our opinion that the
Exchange Notes to be exchanged for the Private Notes as contemplated in the
Registration Statement, when duly authorized, executed and delivered by the
Company and duly authenticated by the Trustee, in each case in accordance with
the provisions of the Indenture, will constitute the legal, valid and binding
obligations of the Company entitled to the benefits of the Indenture, except as
enforcement thereof may be limited by bankruptcy, insolvency (including, without
limitation, all laws relating to fraudulent transfer), reorganization,
moratorium and other similar laws relating to or affecting enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether the issue of enforceability is considered in a proceeding in equity or
at law).
<PAGE>
We are attorneys admitted to practice law in the State of New York and
we do not express herein any opinion as to any matters governed by or involving
conclusions under the laws of any other jurisdiction other than the laws of the
State of New York and the federal laws of the United States of America.
We are aware that we are referred to under the heading "Legal Matters"
in the prospectus forming a part of the Registration Statement, and we hereby
consent to such use of our name therein and the filing of this opinion as
Exhibit 5.1 to the Registration Statement. In giving this consent, we do not
hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Shearman & Sterling
STG/TJF/JPB/DEG/JA
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PURCHASE AGREEMENT
with respect to
SERIES A PREFERRED UNITS
by and among
DISCOVERY ZONE, INC.,
BIRCH HOLDINGS L.L.C.,
BIRCH ACQUISITION L.L.C.
and
WAFRA ACQUISITION FUND 6, L.P.
and
WAFRA FUND MANAGEMENT LTD.
Dated as of July 13, 1998
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<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definitions.................................................. 1
ARTICLE II.
PURCHASE AND SALE OF SERIES A PREFERRED UNITS; CLOSING
SECTION 2.1. Authorization; Purchase and Sale of Series A Preferred Units;
Closing......................................................10
ARTICLE III.
CONDITIONS TO THE CLOSING
SECTION 3.1. Conditions to Obligations of the Purchasers..................11
SECTION 3.2. Conditions to Obligations of the Company.....................13
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.1. Organization and Qualification; Subsidiaries.................15
SECTION 4.2. Charter of Incorporation and By-Laws.........................15
SECTION 4.3. Capitalization...............................................15
SECTION 4.4. Authority....................................................17
SECTION 4.5. No Conflict; Required Filings and Consents; Certain Rights...17
SECTION 4.6. Preferred Stock; Warrants....................................18
SECTION 4.7. Compliance with Laws.........................................19
SECTION 4.8. Governmental Consents and Approvals..........................19
SECTION 4.9. Financial Statements; Financial Projections..................19
SECTION 4.10. Absence of Undisclosed Liabilities..........................20
SECTION 4.11. Absence of Certain Changes, Events and Conditions;
Conduct in the Ordinary Course..............................20
SECTION 4.12. Employee Benefit Matters....................................22
SECTION 4.13. Real Property...............................................24
SECTION 4.14. Tangible Personal Property..................................24
SECTION 4.15. Intellectual Property.......................................25
SECTION 4.16. Environmental Matters.......................................27
SECTION 4.17. Litigation..................................................29
<PAGE>
Page
SECTION 4.18. Insurance...................................................29
SECTION 4.19. Material Contracts..........................................29
SECTION 4.20. Licenses and Permits........................................29
SECTION 4.21. Labor Matters...............................................29
SECTION 4.22. Taxes.......................................................30
SECTION 4.23. Private Offering............................................30
SECTION 4.24. Brokers.....................................................30
SECTION 4.25. Accuracy of Information.....................................31
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
SECTION 5.1. Organization.................................................31
SECTION 5.2. Authority....................................................31
SECTION 5.3. No Conflict; Required Filings and Consents...................32
SECTION 5.4. Funds........................................................32
SECTION 5.5. Convertible Preferred Shares.................................32
SECTION 5.6. Delivery of Certificates.....................................33
SECTION 5.7. Investment Purpose...........................................33
SECTION 5.8. Brokers......................................................33
ARTICLE VI.
INDEMNIFICATION
SECTION 6.1. Survival of Representations and Warranties...................33
SECTION 6.2. Indemnification by the Company...............................34
SECTION 6.3. Indemnification by the Purchasers............................34
SECTION 6.4. Materiality..................................................34
SECTION 6.5. Time Period; Dollar Threshold................................35
SECTION 6.6. Notice and Defense...........................................35
ARTICLE VII.
COVENANTS OF THE COMPANY, BIRCH AND THE PURCHASERS
SECTION 7.1. Legends......................................................35
SECTION 7.2. Resale of Stock..............................................36
SECTION 7.3. Drag-Along Right.............................................36
SECTION 7.4. Tag-Along Rights.............................................37
SECTION 7.5. Exchange Rights..............................................38
SECTION 7.6. Right of First Offer.........................................38
<PAGE>
- iii -
Page
SECTION 7.7. Reporting and Information....................................39
SECTION 7.8. Fees and Expenses............................................40
SECTION 7.9. .............................................................40
SECTION 7.10. Injunctive Relief...........................................40
ARTICLE VIII.
REGISTRATION RIGHTS
SECTION 8.1. Definitions..................................................41
SECTION 8.2. Demand Registration..........................................41
SECTION 8.3. Piggyback Registration.......................................43
SECTION 8.4. Expenses of Registration.....................................44
SECTION 8.5. Procedures...................................................44
SECTION 8.6. Indemnification..............................................45
SECTION 8.7. Information by the Purchasers................................47
SECTION 8.8. Rule 144 Reporting...........................................47
SECTION 8.9. "Market Stand-off" Agreement.................................48
SECTION 8.10. Termination.................................................48
SECTION 8.11. Suspension of Sales.........................................48
ARTICLE IX.
AMENDMENT AND WAIVER
SECTION 9.1. Amendment....................................................49
SECTION 9.2. Waiver.......................................................49
ARTICLE X.
GENERAL PROVISIONS
SECTION 10.1. Notices.....................................................49
SECTION 10.2. Entire Agreement; Assignment................................52
SECTION 10.3. Parties in Interest.........................................52
SECTION 10.4. Governing Law...............................................52
SECTION 10.5. Jurisdiction, Etc...........................................52
SECTION 10.6. Headings....................................................53
SECTION 10.7. Counterparts................................................53
SECTION 10.8. Termination.................................................53
EXHIBIT A -- Certificate of Designations of Series A Senior Cumulative
Preferred Stock of Discovery Zone, Inc.
EXHIBIT B -- Form of Series A Preferred Warrant Agreement
<PAGE>
PURCHASE AGREEMENT (this "Agreement"), dated as of July 13, 1998, by and among
DISCOVERY ZONE, INC., a Delaware corporation (the "Company"), BIRCH HOLDINGS
L.L.C., a New York limited liability company ("Birch Holdings"), BIRCH
ACQUISITION L.L.C., a New York limited liability company ("Birch Acquisition"),
WAFRA ACQUISITION FUND 6, L.P., a Delaware limited partnership ("WAF-6"), and
WAFRA FUND MANAGEMENT LTD., a Bermuda company ("WMFL" and, together with WAF-6,
the "Purchasers" and each, individually, a "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company desires to authorize, issue, and sell to
each Purchaser, and each Purchaser, severally and not jointly, desires to
purchase from the Company the respective number of shares of Series A Preferred
Units (as hereinafter defined) set forth in Section 2.1;
WHEREAS, the parties hereto desire to promote their mutual
interests by agreeing to certain matters relating to the operations of the
Company and the registration and disposition of shares of capital stock of the
Company.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definitions. As used in this Agreement, the
following terms shall have the following meanings:
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority.
"Affiliate" of a Person means a Person that directly or
indirectly, through one or more intermediates, controls, is controlled
by, or is under common control with, the first mentioned Person.
"Amendment" means the amendment to the Certificate of
Incorporation adopted by the Board and approved by the written consent
of the holders of a majority of the capital stock of the Company and to
be filed with the Secretary of the State of Delaware prior to the
Closing Date, which amendment, among other things, increases the
authorized share capital of the Company.
"Bankruptcy Code" means title 11 of the United States Code, as
now in effect or hereafter amended.
<PAGE>
2
"Birch" means, collectively, Birch Holdings L.L.C., Birch
Acquisition L.L.C. and any of their respective Related Parties.
"Board" means the Board of Directors of the Company.
"Business" means the operation by the Company and its
Subsidiaries of indoor entertainment and fitness facilities.
"Business Day" means any day other than a Saturday, Sunday, or
federal holiday and consists of the time period from 12:01 a.m. through
12:00 midnight, Eastern Standard Time.
"By-Laws" means the Amended and Restated By-Laws of the
Company in the form attached as Exhibit A to the Disclosure Statement
to be adopted by the Board and approved by the Court pursuant to the
Confirmation Order.
"CERCLA" has the meaning specified in the definition of
"Environmental Laws."
"CERCLIS" means the Comprehensive Environmental Responsive,
Compensation and Liability Information System, 42 U.S.C. ss. 9616(a).
"Certificate of Designations" means, as applicable, the
Certificate of Designations relating to the Convertible Preferred
Stock, the Series A Preferred Stock or the Series B Preferred Stock, as
the case may be, filed with the Secretary of State of Delaware on or
prior to the Closing Date. The Certificate of Designations for the
Series A Preferred Stock is attached hereto as Exhibit A.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company in the form attached as
Exhibit A to the Disclosure Statement, as amended by the Amendment and
the Certificate of Designations for each of the Convertible Preferred
Stock, the Series A Preferred Stock and the Series B Preferred Stock,
and filed with the Secretary of State of Delaware.
"Closing" means the completion of the transactions specified
herein relating to the purchase and sale of the Series A Preferred
Units as contemplated by Article II hereof.
"Closing Date" means July 17, 1998, the date on which the
Closing shall occur.
"Code" means the Internal Revenue Code of 1986, as amended,
together with the rules and regulations promulgated thereunder.
"Common Stock" means, collectively, the Class A Voting Common
Stock, par value $0.00017 per share, of the Company and the the Class B
Nonvoting Common
<PAGE>
3
Stock, par value $0.00017 per share, of the Company, authorized for
issuance pursuant to the Certificate of Incorporation.
"Company Loss" has the meaning specified in Section 6.3.
"control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly or
as trustee or executor, of the power to direct or cause the direction
of the management and/or policies of a Person, whether through the
ownership of stock, as trustee or executor, by contract or credit
arrangement or otherwise.
"Convertible Preferred Shares" has the meaning specified in
Section 2.1(a).
"Convertible Preferred Stock" means $15,000,000 aggregate
stated value of Series A Convertible Preferred Stock, par value $0.01
per share, of the Company issued pursuant to the Certificate of
Incorporation and having the rights set forth in the Certificate of
Designations with respect thereto.
"Disclosure Schedule" means the Disclosure Schedule dated as
of the date hereof delivered to the Purchasers by the Company and
forming a part of this Agreement.
"Encumbrance" means any security interest, pledge, mortgage,
lien (including environmental liens), charge or (as determined to the
best of the Company's knowledge after due inquiry) adverse claim,
including, without limitation, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of
ownership, but excluding such Encumbrances which, taken as a whole,
would not have a Material Adverse Effect.
"Environmental Laws" means any federal, state or local
statute, code, ordinance, rule, regulation, principal of environmental
common law, permit, consent, approval, license, judgment, order, writ,
judicial decision, decree, agency interpretation, injunction or other
authorization or requirement whenever promulgated, issued, or modified,
relating to:
(a) emissions, discharges, spills, releases or
threatened releases of pollutants, contaminants, Hazardous
Substances, materials containing Hazardous Substances, or
hazardous or toxic materials or wastes into ambient air,
surface water, groundwater, watercourses, publicly or
privately owned treatment works, drains, sewer systems,
wetlands, septic systems or onto land; or
(b) the use, treatment, storage, disposal, handling,
manufacturing, transportation, or shipment of Hazardous
Substances, materials containing Hazardous Substances or
hazardous and/or toxic wastes, material, products or
by-products (or of equipment or apparatus containing Hazardous
Substances) as
<PAGE>
4
defined in or regulated under the following statutes and their
implementing regulations: the Hazardous Materials
Transportation Act, 49 U.S.C. ss.ss. 1801 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901
et seq., the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 et seq.
("CERCLA"), The Clean Water Act, 33 U.S.C. ss.ss. 1251 et
seq., The Clean Air Act, 42 U.S.C. ss.ss. 7401 et seq., and/or
the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et
seq., each as amended from time to time.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, together with the rules and regulations promulgated
thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated
thereunder.
"Existing Notes" means $85,000,000 aggregate principal amount
of 13.5% Senior Secured Notes due 2002 issued by the Company under the
Indenture, dated as of July 22, 1997, among the Company, the Subsidiary
Guarantors listed therein and State Street Bank and Trust Company,
trustee.
"Existing Warrants" means 85,000 warrants, each to purchase
one share of Common Stock at an exercise price of $0.01 per share,
issued by the Company pursuant to the Warrant Agreement, dated as of
July 22, 1997, among the Company and Boston Equiserve, Inc., warrant
agent.
"Financial Statements" has the meaning specified in Section
4.9.
"Foothill Credit Facility" means the revolving credit facility
dated as of March 31, 1998, between the Company and Foothill Capital
Corporation in the amount of $10,000,000.
"GAAP" means U.S. generally accepted accounting principles and
practices in effect from time to time, applied consistently throughout
the periods involved.
"Governmental Authority" means any United States federal,
state or local or any foreign government, governmental, regulatory or
administrative authority, agency or commission or any court, tribunal,
or judicial or arbitral body.
"Hazardous Substances" means (a) hazardous materials,
hazardous wastes and hazardous substances as defined or regulated under
any Environmental Laws, (b) any mixtures, blends, compounds or liquids
containing any hazardous substances in any proportions, (c) petroleum
and petroleum products including crude oil and any fractions thereof,
(d) asbestos and/or any material which contains any hydrated mineral
silicates, whether friable or non-friable, (e) PCBs, or PCB-containing
materials or fluids, (f) any other hazardous radioactive, toxic or
noxious substance, material, pollutant, or solid,
<PAGE>
5
liquid or gaseous waste and (g) any substance with respect to which a
federal, state or local agency requires environmental investigation,
monitoring or remediation.
"Indebtedness" means, with respect to any Person, (a) any
indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in
respect thereof) or representing the balance deferred and unpaid of the
purchase price of any property (including pursuant to capital leases)
or representing any Interest Swap Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing Indebtedness (other than Interest Swap
Obligations) would appear as a liability upon a balance sheet of such
person prepared in accordance with GAAP, (b) all obligations of such
Person to purchase, redeem, retire or defease or otherwise acquire for
value any capital stock of such Person or any warrants, rights or
options to acquire such capital stock, valued, in the case of
redeemable preferred stock, at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid dividends,
and (c) to the extent not otherwise included, the guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, by such Person in any manner
(including, without limitation, letters of credit and reimbursement
agreements in respect thereof), of all or any part of any of the items
that would be included within this definition.
"Intellectual Property" means trademarks, service marks,
trademark rights, trade names, trade name rights, registered copyrights
and trade secrets owned or used by the Company or any of its
Subsidiaries in the conduct of its business.
"Interest Swap Obligations" means the obligations of any
Person pursuant to any arrangement with any other Person, whereby,
directly or indirectly, such Person is entitled to receive from time to
time periodic payments calculated by applying either a floating or a
fixed rate of interest to a stated notional amount in exchange for
periodic payments made by such other Person calculated by applying a
fixed or a floating rate of interest to the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Interim Financial Statements" has the meaning specified in
Section 4.9.
"IRS" means the United States Internal Revenue Service.
"Leased Real Property" means the real property leased by the
Company or its Subsidiaries, together with, to the extent leased by the
Company, all buildings and other structures, facilities or improvements
presently or hereafter located thereon, all fixtures and systems of the
Company or its Subsidiaries attached or appurtenant thereto and all
easements, licenses, rights and appurtenances relating to the
foregoing.
<PAGE>
6
"Liabilities" means any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, mature
or unmatured or determined or determinable, including, without
limitation, those arising under any law, rule, regulation, or order by
a Governmental Authority and those arising under any contract,
agreement, commitment or undertaking.
"Licensed Intellectual Property" means all Intellectual
Property licensed or sublicensed to the Company or any Subsidiary from
a third party for a term of one year or greater.
"Loss" has the meaning specified in Section 6.3.
"Material Adverse Effect" means any circumstance, change,
event, transaction, loss, failure, effect or other occurrence that is,
or is reasonably likely to be, materially adverse to the Business,
operations, condition (financial or otherwise), assets, Liabilities or
results of operations or prospects of the Company and its Subsidiaries,
taken as a whole.
"McDonald Obligations" mean, collectively, the McDonald's Rent
Deferral Secured Notes and the McDonald's Secured Note, as such terms
are defined in the New Indenture.
"Multiemployer Plan" has the meaning specified in Section
4.12(b).
"Nasdaq" means any tier of the National Association of
Securities Dealers, Inc. Automated Quotation System.
"New Indenture" means the indenture, dated as of the Closing
Date, among the Company, each of the Subsidiary Guarantors named
therein and Firststar Bank of Minnesota, trustee, pursuant to which the
New Notes are to be issued in connection with the Offering.
"New Notes" means $20,000,000 aggregate principal amount of
13 1/2% Senior Collateralized Notes due 2002 of the Company to be
issued pursuant to the terms of the New Indenture.
"New Units" means the 20,000 Units, each consisting of $1,000
principal amount of New Notes and seventeen New Series A Warrants to
purchase shares of Common Stock and seventeen New Series B Warrants to
purchase shares of Common Stock, to be sold in the Offering.
"New Series A Warrants" means 340,000 Series A Warrants, each
to purchase 1,769.3683 shares of Common Stock (voting or nonvoting) at
an exercise price of $.00017 per share, issued by the Company pursuant
to the Series A Warrant Agreement,
<PAGE>
7
dated as of July 15, 1998, between the Company and Firststar Bank of
Minnesota, N.A. warrant agent.
"New Series B Warrants" means 340,000 Series B Warrants, each
to purchase 780.6036 shares of Common Stock (voting or nonvoting) at an
exercise price of $.00017 per share, issued by the Company pursuant to
the Series B Warrant Agreement, dated as of July 15, 1998, between the
Company and Firststar Bank of Minnesota, N.A. warrant agent.
"New Warrants" means, collectively, the New Series A Warrants
and the New Series B Warrants.
"Offering" means the offering of the New Units pursuant to the
Offering Circular.
"Offering Circular" means the Final Offering Circular, dated
July 9, 1998, of the Company with respect to the issuance and sale of
the New Units.
"Other Shareholders" has the meaning specified in Section
8.2(b).
"Owned Intellectual Property" means all Intellectual Property
in and to which the Company or any Subsidiary holds, or has a right to
hold, right, title and interest.
"Owned Real Property" means the real property owned by the
Company or its Subsidiaries, together with all buildings and other
structures, facilities or improvements presently or hereafter located
thereon, all fixtures, systems, equipment and items of personal
property of the Company or its Subsidiaries attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating
to the foregoing.
"Person" means an individual, corporation, limited liability
company, partnership, limited partnership, association, trust, joint
venture, unincorporated organization, other entity or group (as defined
in Section 13(d)(3) of the Exchange Act).
"Plan of Reorganization" means the Third Amended Joint Plan of
Reorganization, which became effective on July 29, 1997.
"Plans" has the meaning specified in Section 4.12(a).
"Preferred Units" means the Series A Preferred Units and the
Series B Preferred Units.
"Preferred Warrants" means the Series A Preferred Warrants and
the Series B Preferred Warrants.
"Purchase Price" has the meaning specified in Section 2.1.
<PAGE>
8
"Purchaser Loss" has the meaning specified in Section 6.2.
"Related Party" means, with respect to any Person: (A) any
other Person directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such Person, (B) any
spouse or immediate family member of such Person or (C) a trust,
corporation, limited liability company, partnership, limited
partnership, or other entity, the beneficiaries, stockholders, members,
partners, owners or Persons holding a 75% or more controlling interest
of which consist of such Person and/or such other Persons or entities
referred to in the immediately preceding clause (A). A Person shall be
deemed to control another Person if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the
ownership of voting securities, by contract or otherwise.
"Real Property" means the Leased Real Property and the Owned
Real Property.
"SEC" means the United States Securities and Exchange
Commission.
"Securities" means the New Units and the Series B Preferred
Units.
"Securities Act" means the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Series A Preferred Stock" means the Series A Senior
Cumulative Preferred Stock, par value $0.01 per share, liquidation
preference $25.00 per share, of the Company, authorized for issuance by
the Company pursuant to the Certificate of Incorporation and having the
rights set forth in the Certificate of Designations with respect
thereto.
"Series A Preferred Units" means 80 units, each consisting of
$25,000 aggregate stated value of Series A Preferred Stock and one
Series A Preferred Warrant.
"Series A Preferred Warrant" means a warrant to acquire
2,131,667.4631 shares of Common Stock at an exercise price of $0.00017
per share until August 1, 2007, to be issued pursuant to the Series A
Preferred Warrant Agreement, dated as of the Closing Date, between the
Company and Firststar Bank of Minnesota, N.A. warrant agent, a copy of
which is attached hereto on Exhibit B.
"Series B Preferred Stock" means the Series B Junior
Cumulative Preferred Stock, par value $0.01 per share, liquidation
preference $25.00 per share, of the Company authorized for issuance by
the Company pursuant to the Certificate of Incorporation and having the
rights set forth in the Certificate of Designations for the Series B
Preferred Stock attached hereto as Exhibit A.
<PAGE>
9
"Series B Preferred Units" means 340 units, each consisting of
$25,000 aggregate stated value of Series B Preferred Stock and one
Series B Preferred Warrant.
"Series B Preferred Warrant" means a warrant to acquire
2,131,667.4631 shares of Common Stock at an exercise price of $0.00017
per share until August 1, 2007, to be issued pursuant to the Series B
Preferred Warrant Agreement dated as of the Closing Date, between the
Company and Firststar Bank of Minnesota, N.A. warrant agent.
"Stock Incentive Plan" means the 1997 Stock Incentive Plan of
Discovery Zone, Inc.
"Subsidiary" or "Subsidiaries" means any corporation, limited
liability company, partnership, limited partnership, joint venture or
other legal entity of which the Company or any other Person, as the
case may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the stock or
other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body
of such corporation or other legal entity.
"Tangible Personal Property" means machinery, equipment,
vehicles and other tangible personal property.
"Tax" or "Taxes" means all income, gross receipts, sales, use,
transfer, employment, franchise, profits, property, excise or other
similar taxes, estimated import duties, fees, stamp taxes and duties,
value added taxes, assessments or charges of any kind whatsoever
(whether payable directly or by withholding), together with any
interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority with respect thereto.
"Ten-Year Warrants" means warrants issued by the Company to
acquire up to an aggregate of 444,444 shares of Common Stock pursuant
to a warrant agreement, dated as of July 29, 1997, between the Company
and State Street Bank and Trust Company, warrant agent.
<PAGE>
10
ARTICLE II.
PURCHASE AND SALE OF SERIES A PREFERRED UNITS; CLOSING
SECTION 2.1. Authorization; Purchase and Sale of Series A
Preferred Units; Closing. (a) Upon the terms and subject to the conditions set
forth herein, at the Closing (i) the Company shall authorize, issue and sell to
WFML, and WFML shall purchase from the Company, 40 Series A Preferred Units for
an aggregate purchase price of $1,000,000 in cash and (ii) the Company shall
authorize, issue and sell to WAF-6, and WAF-6 shall purchase from the Company,
40 Series A Preferred Units for an aggregate purchase price consisting solely of
shares of Convertible Preferred Stock having an aggregate liquidation preference
of $1,000,000 (the "Convertible Preferred Shares" and, together with the amount
in cash set forth in clause (i), the "Purchase Price")). Such delivery of, and
payment for, the Series A Preferred Units shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, on the
Closing Date, or at such other time and place as the Company and the Purchasers
may mutually agree in writing (such time and date of delivery against payment
being referred to herein as the "Closing Date").
(b) On the Closing Date, (A) the Purchasers shall deliver the
Purchase Price to the Company (x) with respect to that portion of the Purchase
Price payable in cash, by wire transfer of same-day funds to an account or
accounts designated by the Company at least one Business Day prior to the
Closing Date and (y) with respect to that portion of the Purchase Price to be
paid in Convertible Preferred Shares, by transfer to the Company of certificates
for the Convertible Preferred Shares (in suitable form for transfer by delivery
or accompanied by duly executed instruments of transfer or assignment in blank),
together with (i) the certificates referred to in Section 3.2(a) and Section
3.2(d) and (ii) receipts for the Series A Preferred Units delivered to each
Purchaser; and (B) the Company shall deliver to the Purchasers (i) receipts for
the Purchase Price delivered by each Purchaser; (ii) a certificate evidencing
the respective Series A Preferred Units registered in the name of each Purchaser
(or its designee); (iii) the certificates referred to in Section 3.1(d) and
Section 3.1(g); (iv) the legal opinion referred to in Section 3.1(l); (v) a
stock certificate evidencing the remaining shares of Convertible Preferred Stock
held by WAF-6 and (vi) such other documents as the Purchasers shall reasonably
request. Upon the Company's receipt of the Convertible Preferred Shares, such
shares shall be cancelled by the Company and not reissued.
<PAGE>
11
ARTICLE III.
CONDITIONS TO THE CLOSING
SECTION 3.1. Conditions to Obligations of the Purchasers. The
obligations of the Purchasers to effect the Closing shall be subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Simultaneous Closings. Consummation by the Company of (i)
the Offering pursuant to Rule 144A under the Securities Act and (ii)
the issuance and sale of the Series B Preferred Units to Birch,
Jefferies & Company, L.L.C. and DZ Investors, L.L.C., in each case
simultaneously with the closing of the issuance and sale by the Company
of the Series A Preferred Units to the Purchasers hereunder.
(b) Representations and Warranties; Agreements and Covenants.
(i) The representations and warranties of the Company contained in this
Agreement which are qualified as to materiality shall be true and
correct in all respects and all other representations and warranties
shall be true and correct in all material respects on and as of the
Closing Date, with the same force and effect as if made as of the
Closing, (ii) all the agreements and covenants contained in this
Agreement to be performed or complied with by the Company at or before
the Closing shall have been performed or complied with in all material
respects and (iii) the Purchasers shall have received a certificate of
the Company signed by a duly authorized officer thereof, as to the
fulfillment of the conditions set forth in the foregoing clauses (i)
and (ii).
(c) Litigation. There shall have been no order or preliminary
or permanent injunction entered in any Action or proceeding before any
Governmental Authority, or no other Action taken or threatened, or
statute, rule, regulation, legislation, interpretation, judgment or
order enacted, entered, enforced, promulgated, amended, issued or
deemed applicable to the Purchasers, the Company or any of its
Subsidiaries or Affiliates, by any Government Authority which shall
have remained in effect and which shall have had the effect of: (i)
making illegal, materially delaying or otherwise directly or indirectly
restraining or prohibiting the consummation of the transactions
hereunder (including, without limitation, the purchase of the Series A
Preferred Units or the conversion or redemption of the Series A
Preferred Stock or the exercise of the Series A Preferred Warrants),
except that the enforcement of this Agreement may be subject to (x)
bankruptcy, insolvency, reorganization, receivership, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally, (y) general principles of
equity (whether applied by a court of law or equity) and the discretion
of the court before which any proceeding therefore may be brought and
(z) with respect to Section 8.6 hereof, federal or state securities
laws or principles of public policy affecting enforcement of rights to
indemnity or contribution; (ii) prohibiting or materially limiting the
ownership of the Series A Preferred Units; (iii) imposing material
limitations on the ability of each Purchaser to exercise full rights of
ownership of any of the Series A
<PAGE>
12
Preferred Units, including, without limitation, the right to vote any
shares of Series A Preferred Stock pursuant to the Certificate of
Designations for the Series A Preferred Stock; or (iv) requiring
divestiture by either Purchaser of any Series A Preferred Units.
(d) Resolutions. On or prior to the Closing Date, the
Purchasers shall have received a true and complete copy, certified by
the Secretary of the Company, of the resolutions duly and validly
adopted by the Board evidencing its authorization of the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby.
(e) Incumbency Certificate of the Company. On or prior to the
Closing Date, the Purchasers shall have received a certificate of the
Secretary or an Assistant Secretary of the Company certifying the names
and signatures of the officers of the Company authorized to sign this
Agreement and the other documents to be delivered hereunder.
(f) Consents and Approvals. On or prior to the Closing Date,
the Purchasers and the Company shall have received, each in form and
substance reasonably satisfactory to the Purchasers, all
authorizations, consents, orders and approvals of all Governmental
Authorities and officials and all third party consents and estoppel
certificates identified to the Company and necessary or desirable for
the consummation of the transactions contemplated by this Agreement.
(g) Organizational Documents. On or prior to the Closing Date,
the Purchasers shall have received a copy of (i) the Certificate of
Incorporation, certified by the Secretary of State of Delaware, as of a
date not earlier than five Business Days prior to the Closing Date and
accompanied by a certificate of the Secretary or Assistant Secretary of
the Company, dated as of the Closing Date, stating that no amendments
have been made to such Certificate of Incorporation (or similar
organizational documents) since such date, and (ii) the By-Laws of the
Company, certified by a certificate of the Secretary or Assistant
Secretary of the Company, dated as of the Closing Date, stating that no
amendments have been made to such By-Laws.
(h) Calamities. There shall not have occurred and be
continuing (i) any general suspension of, or limitation on prices for
or trading in, securities on any United States securities exchange,
(ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States, (iii) any limitation
(whether or not mandatory) by any Governmental Authority or other event
that materially adversely affects the ability of either Purchaser to
purchase the Series A Preferred Units hereunder or (iv) a commencement
of a war or armed hostilities or other national or international
calamity directly involving the United States.
(i) No Material Adverse Effect. No fact, event or condition
(financial or otherwise) shall have occurred with respect to the
Company or any of its Subsidiaries
<PAGE>
13
having, or which is likely to have, individually or in the aggregate, a
Material Adverse Effect.
(j) Opinion. Each Purchaser shall have received an opinion
from Shearman & Sterling on no less favorable terms than the opinion of
such counsel to be delivered to the initial purchaser of the New Units;
provided, however, that such form of opinion shall not include the
matters set forth in the penultimate paragraph of Section 7(a) of the
Purchase Agreement dated July 9, 1998, between the Company and
Jefferies & Company, Inc., as initial purchaser, with respect to the
Offering.
(k) Filing of Corporate Certificates. On or prior to the
Closing Date, the Company shall have filed Amendment and the respective
Certificate of Designations for each of the Series A Preferred Stock
and the Series B Preferred Stock with the Secretary of State of
Delaware.
(l) Offering Circular. The Purchasers shall have approved the
terms of the Offering Circular, which approval shall not be
unreasonably withheld.
SECTION 3.2. Conditions to Obligations of the Company. The
obligations of the Company to effect the Closing shall be subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Representations and Warranties. (i) The representations
and warranties of the Purchasers contained in this Agreement shall be
true and correct in all material respects on and as of the Closing
Date, with the same force and effect as if made as of the Closing, (ii)
all the agreements and covenants contained in this Agreement to be
performed or complied with by the Purchasers at or before the Closing
shall have been performed or complied with in all material respects and
(iii) the Company shall have received a certificate of each Purchaser
signed by a duly authorized officer thereof, as to the fulfillment of
the conditions set forth in the foregoing clauses (i) and (ii).
(b) Litigation. There shall have been no order or preliminary
or permanent injunction entered in any Action or proceeding before any
federal, state or foreign court or governmental, administrative or
regulatory authority or agency by any federal, state or foreign
legislative body, court, government or governmental, administrative or
regulatory authority or agency which shall have remained in effect and
which shall have had the effect of making illegal the consummation of
any of the transactions hereunder, except that the enforcement of this
Agreement may be subject to (x) bankruptcy, insolvency, reorganization,
receivership, moratorium, fraudulent conveyance or other similar laws
now or hereafter in effect relating to creditors' rights generally, (y)
general principles of equity (whether applied by a court of law or
equity) and the discretion of the court before which any proceeding
therefore may be brought and (z) with respect to Section 8.6 hereof,
federal or state securities laws or principles of public policy
affecting enforcement of rights to indemnity or contribution.
<PAGE>
14
(c) Resolutions. On or prior to the Closing Date, the Company
shall have received a true and complete copy, certified by the
Secretary of each Purchaser, of the resolutions duly and validly
adopted by each Purchaser, if any, evidencing its authorization of the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
(d) Incumbency Certificate of the Company. On or prior to the
Closing Date, the Company shall have received a certificate of the
Secretary or an Assistant Secretary of each Purchaser certifying the
names and signatures of the officer(s) of such Purchaser authorized to
sign this Agreement and the other documents to be delivered hereunder.
(e) Organizational Documents. On or prior to the Closing Date,
the Company shall have received a copy of (i) the certificate of
limited partnership, or charter or other organizational document, as
the case may be, of each Purchaser, certified by the Secretary of State
of Delaware or the appropriate Governmental Authority in Bermuda, as of
a date not earlier than ten Business Days prior to the Closing Date and
accompanied by a certificate of the Secretary or Assistant Secretary of
each Purchaser, dated as of the Closing Date, stating that no
amendments have been made to such certificate or charter since such
date and (ii) the agreement of limited partnership or bylaws, as the
case may be, of each Purchaser certified by the Secretary or Assistant
Secretary of each Purchaser.
<PAGE>
15
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that:
SECTION 4.1. Organization and Qualification; Subsidiaries. On
the Closing Date, each of the Company and its Subsidiaries will be duly
organized, validly existing and, where applicable, in good standing as a
corporation under the laws of its respective jurisdiction of incorporation or
formation, with all requisite corporate power and authority to own, lease and
operate its properties and carry on its business as presently owned or conducted
and as is described in the Offering Circular. The Company and each of its
Subsidiaries is duly qualified or licensed as a foreign corporation to do
business and, where applicable, is in good standing, in each jurisdiction where
the character of its properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except those
jurisdictions, if any, in which the failure to be so duly qualified or licensed
and in good standing would not, individually or in the aggregate, have a
Material Adverse Effect. Schedule 4.1 of the Disclosure Schedule sets forth a
complete and correct list of each of the Subsidiaries of the Company. Each such
Subsidiary is wholly owned by the Company, unless otherwise indicated in
Schedule 4.1 of the Disclosure Schedule, which sets forth all other owners of
each such Subsidiary not wholly owned by the Company. Other than the
Subsidiaries, there are no other corporations, partnerships, joint ventures,
associations or other entities in which the Company owns, of record or
beneficially, any direct or indirect equity or other interest or any right
(contingent or otherwise) to acquire the same. Other than the Subsidiaries, the
Company is not a member of (nor is any part of its business conducted through)
any partnership, nor is the Company a participant in any joint venture or
similar arrangement.
SECTION 4.2. Charter of Incorporation and By-Laws. The Company
has heretofore furnished to the Purchasers a complete and correct copy of the
Certificate of Incorporation and the By-Laws, each of which shall be in full
force and effect on the Closing Date. As of the Closing Date, the Board shall
have adopted the Amendment and the respective Certificate of Designations with
respect to each of the Series A Preferred Stock and the Series B Preferred Stock
of the Company and the Company shall have filed the Amendment and each such
Certificate of Designations with the Secretary of State of Delaware. The Company
is not in violation of any of the provisions of the Certificate of Incorporation
or By-Laws, and its Subsidiaries are not in violation of any of the provisions
of their charters of incorporation, by-laws or equivalent organizational
documents, except where such violation would not, taken as a whole, have a
Material Adverse Effect.
SECTION 4.3. Capitalization. (a) As of the Closing Date, (i)
the authorized capital stock of the Company shall consist of (x) 2,200,000,000
shares of Class A Voting Common Stock (of which 4,000,000 shall represent all
issued and outstanding shares of Class A Voting Common Stock on the Closing
Date), (y) 190,000,000 shares of Class B Nonvoting Common Stock and (z)
10,000,000 shares of Preferred Stock (of which 420,933.33 shall
<PAGE>
16
represent all issued and outstanding shares of Preferred Stock on the Closing
Date); (ii) no shares of Common Stock shall be held in the treasury of the
Company; (iii) an aggregate of 715,691 shares of Class A Voting Common Stock
issuable in respect of options issued and outstanding under the Stock Incentive
Plan have been reserved for issuance; (iv) an aggregate of 805,154 shares of
Class A Voting Common Stock shall be reserved for issuance upon exercise of the
Existing Warrants; (v) an aggregate of 444,444 shares of Class A Voting Common
Stock shall be reserved for issuance upon exercise of the Ten-Year Warrants;
(vi) an aggregate of 1,191,626 shares of Class A Voting Common Stock are
reserved for issuance upon conversion of the Convertible Preferred Stock (of
which 79,411 shares shall cease to be reserved by the Company for future
issuance upon the transfer by WAF-6 of the Convertible Preferred Shares to the
Company at the Closing); (vii) an aggregate of 866,990,443 shares of Class A
Voting Common Stock shall have been reserved for issuance upon the exercise of
the New Warrants; (viii) an aggregate of 170,533,397 shares of Class A Voting
Common Stock shall have been reserved for issuance upon the exercise of the
Series A Preferred Warrants; (ix) an aggregate of 724,766,937 shares of Class A
Voting Common Stock shall have been reserved for issuance upon the exercise of
the Series B Preferred Warrants.
(b) Except as set forth in this Section 4.3 or in Schedule
4.3(b) of the Disclosure Schedule, as of the Closing Date, there are no options,
Warrants or other rights, agreements, arrangements or material commitments of
any character to which the Company or any of its Subsidiaries or Affiliates is a
party or obligating the Company or any of its Subsidiaries or Affiliates to
issue or sell any shares of capital stock of, or other equity interests in, the
Company or any of its Subsidiaries or Affiliates. Except as set forth in
Schedule 4.3(b) of the Disclosure Schedule, as of the Closing Date, there are no
outstanding contractual obligations of the Company or any of its Subsidiaries or
Affiliates to repurchase, redeem or otherwise acquire any of the capital stock
of the Company or any Subsidiary or Affiliate or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or Affiliate or any other entity. As of the Closing Date, each of the
outstanding shares of capital stock of the Company and each of the Subsidiaries
will be duly authorized, validly issued, fully paid and nonassessable and will
not have been issued in violation of any preemptive or similar rights. All of
the outstanding shares of capital stock of each of the Subsidiaries as of the
Closing Date will be owned by the Company, directly or indirectly, free and
clear of all Encumbrances (other than restrictions on transferability imposed by
the Securities Act and the securities or "Blue Sky" laws of certain
jurisdictions).
(c) As of the Closing Date, except as set forth in Schedule
4.3(c) of the Disclosure Schedule and as set forth herein, neither the Company
nor any of its Affiliates shall be a party to any agreement granting
registration rights to any Person with respect to any equity or debt securities
of the Company.
(d) Schedule 4.3(d) of the Disclosure Schedule sets forth a
complete and accurate list of (i) the names of each Person or group of Persons
known by the Company to beneficially own more than 5% of the outstanding shares
of capital stock of the Company as of
<PAGE>
17
the Closing Date and the corresponding number of such shares beneficially owned
by such Person as of the Closing Date.
SECTION 4.4. Authority. The Company has all necessary
corporate power and authority to execute, deliver and perform its obligations
under this Agreement, the Series A Warrant Agreement and the Certificates of
Designations relating to the Series A Preferred Stock and to consummate the
transactions contemplated hereunder and thereunder. The execution, delivery and
performance of this Agreement, the Series A Warrant Agreement and the
Certificates of Designations relating to the Series A Preferred Stock by the
Company have been duly and validly authorized by all necessary corporate action
and no other corporate proceedings on the part of the Company are necessary to
authorize, or to consummate the transactions contemplated by, this Agreement,
the Series A Warrant Agreement and the Certificates of Designations relating to
the Series A Preferred Stock. This Agreement, the Series A Warrant Agreement and
the Certificates of Designations relating to the Series A Preferred Stock have
been duly and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery hereof by the Purchasers and payment
for the Series A Preferred Units as contemplated by this Agreement, constitute
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except that the enforcement hereof may
be subject to (i) bankruptcy, insolvency, reorganization, receivership,
moratorium, fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditors' rights generally, (ii) general principles of
equity (whether applied by a court of law or equity) and the discretion of the
court before which any proceeding therefore may be brought and (iii) with
respect to Section 8.6 hereof, federal or state securities laws or principles of
public policy affecting enforcement of rights to indemnity or contribution.
SECTION 4.5. No Conflict; Required Filings and Consents;
Certain Rights. (a) The execution and delivery of this Agreement, the Series A
Warrant Agreement and the Certificates of Designations relating to the Series A
Preferred Stock by the Company do not, and the performance of this Agreement,
the Series A Warrant Agreement and the Certificates of Designations relating to
the Series A Preferred Stock (including, without limitation, the consummation of
the transactions contemplated hereunder) will not, (i) conflict with or violate
the Certificate of Incorporation or By-Laws, (ii) conflict with or violate the
certificates of incorporation or bylaws or equivalent organizational documents
of any of the Subsidiaries, (iii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
Subsidiaries or by which its or any of their respective properties are bound or
affected, or (iv) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or Encumbrance on any of
the properties or assets of the Company or any of its Subsidiaries pursuant to
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, insurance policy or other instrument or obligation to which the Company
or any of its Subsidiaries is a party, or by which the Company or any of its
Subsidiaries or its or any of their respective properties are bound or affected,
except in the case of clauses (ii) , (iii) and (iv) above, for such conflicts,
breaches or
<PAGE>
18
defaults with respect to which waivers or consents have been obtained or which
would not, individually or in the aggregate, have a Material Adverse Effect.
(b) Except as disclosed in Schedule 4.13(b), as of the date
hereof and as of the Closing Date, the Company is not in breach of or in default
(nor has any event occurred which, with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
Encumbrance on any of the properties or assets of the Company or any of its
Subsidiaries pursuant to any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, insurance policy or other instrument or
obligation to which the Company or any of its Subsidiaries is a party, or by
which the Company or any of its Subsidiaries or its or any of their respective
properties are bound or affected, except for any such breach, default, violation
or event which would not, individually or in the aggregate, have a Material
Adverse Effect. The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company (including, without
limitation, the consummation of the transactions hereunder and the conversion or
redemption, if any, of the Series A Preferred Stock) will not, require any
consent, approval, authorization or permit of, or filing with or notification to
(in each case, a "Consent") any Governmental Authority on the part of the
Company or any of its Subsidiaries, except for such consents as have been
obtained and other than such other consents as may be required under the
Securities Act or state securities or "Blue Sky" laws in connection with the
issuance and sale of the Series A Preferred Units.
(c) No antidilution protections or substantially similar
provisions in respect of any outstanding security of the Company are triggered
with respect to the issuance of the New Units, the Series A Preferred Units or
the Series B Preferred Units, except for such as have been expressly waived in
writing on or prior to the date hereof.
SECTION 4.6. Preferred Stock; Warrants. On the Closing Date,
following the consummation of the transactions hereunder, the Series A Preferred
Stock, upon issuance against payment therefor as contemplated by this Agreement,
shall be duly authorized, validly issued, fully paid and nonassessable, free of
all preemptive or similar rights, and entitled to the rights set forth in the
Certificate of Designations relating thereto and will not be subject to any
Encumbrances.
The Series A Preferred Warrants have been duly authorized by
the Company and, at the Closing, will have been duly executed by the Company
and, when executed and issued in the manner provided for in the Series A
Preferred Warrant Agreement and delivered against payment of the Purchase Price
therefor as provided in this Agreement, (A) will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as the enforcement thereof may be subject to (I) bankruptcy,
insolvency, reorganization, receivership, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to creditors' rights
generally, (II) general principles of equity (whether applied by a court of law
or equity) and the discretion of the court before which any proceeding therefor
may be brought and (III) with respect to the indemnity and contribution
provisions
<PAGE>
19
thereof, federal or state securities laws or principles of public policy
affecting enforcement of rights to indemnity or contribution and (B) will be in
the form contemplated by, and entitled to the benefits of, the Series A
Preferred Warrant Agreement. The shares of Common Stock issuable upon exercise
of the Series A Preferred Warrants have been duly authorized and reserved by the
Company and, when issued and delivered upon exercise of the Series A Preferred
Warrants in accordance with the terms of the Series A Preferred Warrants and the
Series A Preferred Warrant Agreement, will be validly issued, fully paid and
non-assessable.
SECTION 4.7. Compliance with Laws. Except as set forth in the
Offering Circular, neither the Company nor any of its Subsidiaries is in
conflict with, or in violation of, any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its Subsidiaries or by which the
Company or any of its Subsidiaries or any of its or their respective properties
are bound or affected, except for any such conflicts or violations which would
not, individually or in the aggregate, have a Material Adverse Effect.
SECTION 4.8. Governmental Consents and Approvals. The
execution, delivery and performance of this Agreement by the Company do not and
will not require any consent, approval, authorization or other order of, action
by, filing with or notification to any Governmental Authority.
SECTION 4.9. Financial Statements; Financial Projections. (a)
Set forth in Schedule 4.9 of the Disclosure Statement are true and complete
copies of (i) the audited balance sheets of the Company for the fiscal year
ended December 31, 1997 and the related audited statements of results of
operations and cash flows of the Company, together with all related notes
thereto, accompanied by the reports thereon or management letters from the
Company's accountants (collectively, the "Financial Statements") and (ii) the
unaudited balance sheets of the Company for the fiscal quarter ended March 31,
1998; and the related unaudited statements of results of operations and cash
flows, which statements include all material known adjustments as of the date of
such statements, subject to ordinary year-end adjustments which in the aggregate
would not be material (the aforementioned item (ii) being referred to herein as
the "Interim Financial Statements"). The Financial Statements and the Interim
Financial Statements (i) were prepared in accordance with the books of account
and other financial records of the Company, (ii) present fairly the financial
condition, results of operations and cash flows of the Company as of the dates
thereof or for the periods covered thereby, (iii) such statements have been
prepared in accordance with GAAP applied on a basis consistent with the past
practices of the Company and throughout the periods involved, and (iv) include
all adjustments that, in the opinion of the management of the Company, are
necessary for a fair presentation of the financial condition of the Company, the
results of the operations and cash flows, as applicable, of the Company,
subject, with respect to the Interim Financial Statements, to normal accruals
and year-end adjustments which, in the aggregate, are not expected to be
material.
(b) Any financial projections of the Company which have been
provided to the Purchasers are based upon a number of estimates and assumptions
considered reasonable by the Company taken as a whole and upon specific
assumptions with respect to future business
<PAGE>
20
decisions which are subject to change. Such projections are based on the
Company's current best estimate of the results it reasonably expects and have
not been prepared with a view toward compliance with published guidelines of the
Commission, the American Institute of Certified Public Accountants or GAAP.
SECTION 4.10. Absence of Undisclosed Liabilities. There are no
liabilities or obligations of the Company or its Subsidiaries (whether absolute,
accrued, contingent or otherwise) that would be required to be reflected on a
balance sheet or the footnotes thereto prepared in accordance with GAAP, other
than liabilities (a) reflected or reserved against on the Financial Statements
or Interim Financial Statements or the notes thereto, (b) described in Schedule
4.10 of the Disclosure Schedule or otherwise disclosed in Section 4.11 or (c)
covered by insurance, indemnification, contribution or comparable arrangements.
There are no guaranties made by or on behalf of the Company or its Subsidiaries
other than in connection with the Existing Notes, the New Units, the Foothill
Credit Facility and the McDonald Obligations, as well as any letters of credit
or deposits posted pursuant to any agreements described in Section 4.19.
SECTION 4.11. Absence of Certain Changes, Events and
Conditions; Conduct in the Ordinary Course. (a) Except as described in the
Offering Circular (i) there has not been any change having a Material Adverse
Effect and (ii) there are no conditions known to the Company to be existing,
with respect to the markets, proposed marketing plans, facilities, capabilities
or personnel of the Company, that reasonably could be expected to have a
Material Adverse Effect.
(b) Except as disclosed in Schedule 4.11(b) of the Disclosure
Schedule or in the Offering Circular, neither the Company nor any of its
Subsidiaries has, since March 31, 1998:
(i) made any change in any method of accounting or accounting
practice or policy used by the Company;
(ii) made any material changes in the customary methods of
operation of the Company, including practices and policies relating to
purchasing, marketing, selling or pricing;
(iii) failed to maintain the Company's Tangible Personal
Property in good repair, ordinary wear and tear excepted, other than
such Tangible Personal Property located at the Company's FunCenter
sites which are scheduled to close;
(iv) except as contemplated under this Agreement, redeemed any
of the Company's capital stock or declared, made or paid any dividends
or distributions (whether in cash, securities or other property) to the
holders of the Company's capital stock or otherwise;
<PAGE>
21
(v) issued or sold any of the Company's capital stock, notes,
bonds or other securities, or any option, warrant or other right to
acquire the same, other than the Securities;
(vi) merged with, been merged with, entered into a
consolidation with or acquired an interest of 5% or more in any Person
or acquired (by purchase, merger, consolidation, stock acquisition or
otherwise) a substantial portion of the assets of any Person or any
division or line of business thereof, or otherwise acquired assets
other than in the ordinary course and in accordance with past practice;
(vii) except as disclosed in Schedule 4.13(b), permitted or
allowed any of the assets or properties (whether tangible or
intangible) of the Company to be subjected to any Encumbrance, except
as pledged or given as security in connection with the Offering and as
contemplated by the Collateral Agreements (as such term is defined in
the Indenture);
(viii) made any loan to, guaranteed any Indebtedness of or
otherwise incurred any Indebtedness on behalf of any Person other than
in connection with the New Units and the Preferred Units;
(ix) made any capital expenditure or commitment for any
capital expenditure in excess of $100,000 individually or $2,000,000 in
the aggregate;
(x) entered into any agreement, arrangement or transaction
with any of its directors, officers, employees or shareholders (or with
any relative, beneficiary, spouse or Affiliate of such Person);
(xi) allowed any permit or environmental permit that was
issued or relates to the Company or any Subsidiary or otherwise relates
to any asset to lapse or terminate or failed to renew any such permit
or environmental permit or any insurance policy that is scheduled to
terminate or expire within 45 calendar days of the Closing Date, except
with respect to such permit, environment permit or insurance policy
which the failure to renew would not result in a Material Adverse
Effect;
(xii) incurred any Indebtedness, in excess of $100,000
individually or $500,000 in the aggregate, other than the Indebtedness
to be incurred in connection with the New Units and the Preferred
Units;
(xiii) amended, modified or consented to the termination of
any material contract or the Company's or any Subsidiary's rights
thereunder;
(xiv) disclosed any secret or confidential Intellectual
Property (except by way of issuance of a patent) or permitted to lapse
or go abandoned any material Intellectual
<PAGE>
22
Property (or any registration or grant thereof or any application
relating thereto) to which, or under which, the Company or any
Subsidiary has any right, title, interest or license; or
(xv) agreed, whether in writing or otherwise, to take any of
the actions specified in this Section 4.11(b) except for those
contemplated by this Agreement, the Offering and the issuance and sale
of the Series B Preferred Units.
SECTION 4.12. Employee Benefit Matters. (a) Plans and Material
Documents. Schedule 4.12(a) of the Disclosure Schedule lists, as of the date
hereof and as of the Closing Date, (i) all employee benefit plans (as defined
under Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans, programs
or arrangements, and all employment, termination, severance or other contracts
or agreements, to which the Company is a party, with respect to which the
Company has any obligation or which are maintained, contributed to or sponsored
by the Company for the benefit of any current or former employee, officer or
director of the Company, (ii) each employee benefit plan for which the Company
could incur liability under Section 4069 of ERISA in the event such plan has
been or were to be terminated, (iii) any plan in respect of which the Company
could incur liability under Section 4212(c) of ERISA and (iv) any contracts,
arrangements or understandings between the Company and any of its officers,
including, without limitation, any contracts, arrangements or understandings
relating to the sale of the Company (items (i) through (iv) being referred to
herein collectively as the "Plans"). Except as disclosed on Schedule 4.12(a),
any employee deferred compensation, stock option, "phantom stock" or other
similar types of plans previously in effect have been terminated as of the
Closing Date. Each Plan is in writing and a complete and accurate copy of each
Plan set forth on Schedule 4.12(a) has been made available to the Purchasers and
a complete and accurate copy of each material document prepared in connection
with each such Plan including, without limitation, (i) a copy of each trust or
other funding arrangement, (ii) each summary plan description and summary of
material modifications, (iii) the most recently filed IRS Form 5500, (iv) the
most recently received IRS determination letter for each such Plan, and (v) the
most recently prepared actuarial report and financial statement in connection
with each such Plan, if applicable. Except as disclosed on Schedule 4.12(a) of
the Disclosure Schedule, there are no other employee benefit plans, programs,
arrangements or agreements, whether formal or informal, whether in writing or
not, to which the Company is a party, with respect to which the Company has any
obligation or which are maintained, contributed to or sponsored by the Company
for the benefit of any current or former employee, officer or director of the
Company. The Company does not have any express or implied commitment, whether
legally enforceable or not, (i) to create, incur liability with respect to or
cause to exist any other employee benefit plan, program or arrangement, (ii) to
enter into any contract or agreement to provide compensation or benefits to any
individual or (iii) to modify, change or terminate any Plan, other than with
respect to a modification, change or termination required by ERISA or the Code.
(b) Absence of Certain Types of Plans. Except as set forth in
Schedule 4.12(b) of the Disclosure Schedule, none of the Plans is a
multiemployer plan (within
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23
the meaning of Section 3(37) or 4001(a) (3) of ERISA) (a "Multiemployer Plan"),
a single employer pension plan (within the meaning of Section 4001(a) (15) of
ERISA) or a plan intended to be qualified under Section 401(a) or 401(k) of the
Code. None of the Plans provides for the payment of separation, severance,
termination or similar-type benefits to any Person or obligates the Company to
pay separation, severance, termination or similar-type benefits solely as a
result of any transaction contemplated by this Agreement or as a result of a
"change in control," within the meaning of such term under Section 280G of the
Code. None of the Plans provides for or promises retiree medical, disability or
life insurance benefits to any current or former employee, officer or director
of the Company, except to the extent required by law. Except as set forth in
Schedule 4.12(b) of the Disclosure Schedule, each of the Plans is subject only
to the laws of the United States or a political subdivision thereof.
(c) Compliance with Applicable Law. Except as disclosed on
Schedule 4.12(c) of the Disclosure Schedule, to the knowledge of the Company,
each Plan has been operated in all respects in accordance with the requirements
of all applicable law, including, without limitation, ERISA and the Code, and
all persons who participate in the operation of such Plans and all Plan
"fiduciaries" (within the meaning of Section 3(21) of ERISA) have acted in
accordance in all material respects with the provisions of all applicable law,
including, without limitation, ERISA and the Code. The Company has performed all
material obligations required to be performed by it under, is not in any
material respect in default under or in violation of, and has no knowledge of
any default or violation by any party to, any Plan. Except as disclosed on
Schedule 4.12(c) of the Disclosure Schedule, no legal action, suit or claim is
pending or, to the knowledge of the Company, threatened with respect to any Plan
(other than claims for benefits in the ordinary course) and, to the knowledge of
the Company, no fact or event exists that could give rise to any such action,
suit or claim.
(d) Absence of Certain Liabilities and Events. Except as
provided on Schedule 4.12(d) of the Disclosure Schedule, there has been no
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan. The Company has not incurred any
liability for any penalty or tax arising under Section 4971, 4972, 4960, 4980B
or 6652 of the Code or any liability under Section 502 of ERISA, and no fact or
event exists which could give rise to any such liability. The Company has not
incurred any liability under, arising out of or by operation of Title IV of
ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from
any multiemployer Plan or any single employer plan for which the Company could
incur liability under Section 4063 or 4064 of ERISA, and no fact or event exists
which could give rise to any such liability. Except as disclosed on Schedule
4.12(d) of the Disclosure Schedule, no complete or, to the knowledge of the
Company, partial termination has occurred within the five years preceding the
date hereof with respect to any Plan.
(e) Plan Contributions and Funding. Except as disclosed on
Schedule 4.12(e) of the Disclosure Schedule, all contributions, premiums or
payments required to be made with
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24
respect to any Plan have been made on or before their due dates. All such
contributions have been fully deducted for income tax purposes and no such
deduction has been challenged or disallowed by any government entity and, to the
knowledge of the Company, no fact or event exists which could give rise to any
such challenge or disallowance.
(f) Americans with Disabilities Act. Except as set forth in
Schedule 4.12(f) of the Disclosure Schedule, to the best knowledge of the
Company, the Company is in compliance with the material requirements of the
Americans With Disabilities Act.
(g) WARN Act. The Company is in compliance with the
requirements of the Workers Adjustment and Retraining Notification Act ("WARN")
and has no liabilities pursuant to WARN.
SECTION 4.13. Real Property. (a) Schedule 4.13(a) of the
Disclosure Schedule contains a list of all of the Owned Real Property. The
Company has valid fee interests in all of its Owned Real Property and, subject
to the exceptions expressly reflected in Schedule B of each of the title
insurance policies insuring the mortgage liens securing the Existing Notes, the
New Notes and the McDonald Obligations, good and marketable title thereto and
such Owned Real Property is owned by the Company or a Subsidiary free and clear
of all Encumbrances, except (i) as set forth on Schedule 4.13 (a) of the
Disclosure Schedule and (ii) for Encumbrances in respect of the New Notes and
current taxes not yet due and payable or being contested in good faith by
appropriate proceedings.
(b) Schedule 4.13(b) of the Disclosure Schedule contains a
list of all of the Leased Real Property and a list of all leases and subleases
pertaining to such Leased Real Property. Except as described in Schedule 4.13(b)
of the Disclosure Schedule, (i) there is no material violation of any law, rule
or regulation by the Company or known to the Company relating to any of the
Leased Real Property, (ii) the Company is in peaceful and undisturbed possession
of the Leased Real Property and, so long as the lease remains in effect, there
are no contractual or legal restrictions that preclude or restrict the ability
to use the premises for the purposes for which they are currently being used and
(iii) the Company has not leased or subleased any parcel or any portion of any
parcel of Leased Real Property to any other Person, nor has the Company assigned
its interest under any lease or sublease listed in Schedule 4.13(b) of the
Disclosure Schedule to any third party.
(c) Each of the Company's leases and subleases listed in
Schedule 4.13(b) is in full force and effect and constitutes a legal, valid and
binding obligation of the respective parties thereto, and, except as disclosed
in Schedule 4.13(b), the Company is not in default or breach of (with or without
the giving of notice or the passage of time) any such leases or subleases. To
the knowledge of the Company, no third party is in material breach of any of
such leases or subleases.
SECTION 4.14. Tangible Personal Property. Schedule 4.14 of the
Disclosure Schedule contains a list of all leased Tangible Personal Property
requiring lease payments of
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25
$50,000 or more per year leased by the Company and its Subsidiaries. Except for
changes made in the ordinary course of business since July 21, 1997 as would not
materially adversely affect the present use of such leased Tangible Personal
Property or as would not have a Material Adverse Effect, with respect to each
such lease:
(i) such lease is in full force and effect and is a legal,
valid and binding obligation of the Company or the Subsidiary party
thereto, as applicable, and is enforceable by the Company or such
Subsidiary in accordance with its terms;
(ii) the Company or a Subsidiary is in peaceful and
undisturbed possession of the Tangible Personal Property subject to
such lease; and
(iii) there has been no notice of default under any lease
received by the Company or such Subsidiary which is still in effect;
and neither the Company nor any Subsidiary is in breach or default of
any such lease, and no event has occurred which, with a notice or lapse
or time or both, would constitute such a default or permit the
termination, modification or acceleration of such lease.
SECTION 4.15. Intellectual Property. (a) Schedule 4.15(a)(i)
of the Disclosure Schedule sets forth a true and complete list of each patent
and patent application and each trademark registration or application therefor,
of all Owned Intellectual Property (except unregistered copyrights), and
Schedule 4.15(a)(ii) of the Disclosure Schedule sets forth a true and complete
list of any license or sublicense thereof, of all Licensed Intellectual
Property. Except as otherwise described in Schedule 4.15(a)(i) of the Disclosure
Schedule, in each case where a U.S. trademark registration or patent or
application for trademark registration or patent listed in Schedule 4.15(a)(i)
of the Disclosure Schedule is held by assignment, the assignment has been duly
recorded with the U.S. Patent and Trademark Office. In the case of each foreign
trademark registration or application listed in Schedule 4.15(a)(i) of the
Disclosure Schedule which may be held by assignment, the Company believes that
the assignment has been duly recorded in the State or national Trademark Office
from which the original trademark registration issued or before which the
application for trademark registration is pending or the assignment has been
duly recorded in the national or international Patent Office from which the
original patent issued or before which the application for patent is pending.
The Company represents and warrants to the Purchasers that, to the best
knowledge of the Company, the rights of the Company or any Subsidiary, as the
case may be, in or to such Intellectual Property do not conflict with or
infringe on the rights of any other Person, and neither the Company nor any
Subsidiary has received any claim or written notice from any Person, to the
effect that its use of patented technology infringes on the rights of such
Person.
(b) Except as disclosed in Schedule 4.15(b) of the Disclosure
Schedule: (i) all the Owned Intellectual Property is owned by either the Company
or a Subsidiary, as the case may be, free and clear of any Encumbrance and the
Company or Subsidiary, as the case may be, holds the entire right, title, and
interest in and to same and (ii) no claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before Governmental Authority have been
<PAGE>
26
made or asserted or are pending (nor, to the best knowledge of the Company after
due inquiry, threatened) against the Company or any Subsidiary either (A) based
upon or challenging or seeking to deny or restrict the use by the Company or any
Subsidiary of any of the Owned Intellectual Property (apart from pending patent
applications) or (B) alleging that any services provided, or products
manufactured or sold by the Company or any Subsidiary are being provided,
manufactured or sold in violation of any other rights of any Person. Except as
disclosed in Schedule 4.15(b) of the Disclosure Schedule, neither the Company
nor any Subsidiary has granted any license or other right to any other Person
with respect to the Owned Intellectual Property. The consummation of the
transactions contemplated by this Agreement will not result in the termination
or impairment of any of the Owned Intellectual Property or Licensed Intellectual
Property.
(c) The Company represents and warrants to the Purchasers
that, to the best of the Company's knowledge after due inquiry, none of the
Company, any Subsidiary or the Business infringes any patent, trademark, service
mark, copyright or similar right of any Person or has misappropriated or
wrongfully disclosed any trade secret, proprietary right or similar right of any
Person.
(d) The Company represents and warrants to the Purchasers
that, to the best of the Company's knowledge after due inquiry, no Person has
made any claim or allegation that either the Company or a Subsidiary infringes
any patent, trademark, service mark, copyright or similar right of any Person or
has misappropriated or wrongfully disclosed any trade secret, proprietary right
or similar right of any person.
(e) The Company has, or has caused to be, delivered to the
Purchasers the list of all the licenses and sublicenses for Licensed
Intellectual Property set forth in Schedule 4.15(a) (ii) of the Disclosure
Schedule and any and all ancillary documents pertaining thereto.
With respect to each of such licenses and sublicenses:
(i) such license or sublicense, together with all ancillary
documents delivered pursuant to the first sentence of this Section
4.15(f), is valid and binding and in full force and effect and
represents the entire agreement between the respective licensor and
licensee with respect to the subject matter of such license or
sublicense;
(ii) except as otherwise set forth in Schedule 4.15(a)(ii) of
the Disclosure Schedule, such license or sublicense will not cease to
be valid and binding and in full force and effect on terms identical to
those currently in effect as a result of the consummation of the
transactions contemplated by this Agreement, nor will the consummation
of the transactions contemplated by this Agreement constitute a breach
or default under such license or sublicense or otherwise give the
licensor or sublicensor a right to terminate such license or
sublicense;
(iii) to the Company's knowledge, (A) neither the Company nor
any Subsidiary has received any notice or threat of termination or
cancellation under such license or
<PAGE>
27
sublicense and no licensor or sublicensor has any right of termination
or cancellation under such license or sublicense except in connection
with the default of the Company or any Subsidiary thereunder, (B)
neither the Company nor any Subsidiary has received any notice of a
breach or default under such license or sublicense, which breach or
default has not been cured, and (C) neither the Company nor any
Subsidiary has granted to any other Person any rights, adverse or
otherwise, under such license or sublicense, except for such events
which would not, individually or in the aggregate, have a Material
Adverse Effect;
(iv) none of the Company, any Subsidiary or (to the best
knowledge of the Company after due inquiry) any other party to such
license or sublicense is in breach or default in any material respect,
and, to the best knowledge of the Company after due inquiry, no event
has occurred that, with notice or lapse of time would constitute such a
breach or default or permit termination, modification or acceleration
under such license or sublicense; and
(v) no claim, action, suit, arbitration, inquiry, proceeding
or investigation by or before Governmental Authority has been made or
asserted or is pending (nor, to the best knowledge of the Company after
due inquiry, threatened) against the Company or any Subsidiary either
(A) based upon or challenging or seeking to deny or restrict the use by
the Company or any Subsidiary of any of the Licensed Intellectual
Property or (B) alleging that any Licensed Intellectual Property is
being licensed, sublicensed or used in violation of any patents or
trademarks, or any other rights of any Person.
(f) The Intellectual Property described in Schedules
4.15(a)(i) and (ii) of the Disclosure Schedule constitutes all of the
Intellectual Property used or held or intended to be used by the Company or any
Subsidiary and constitutes all such Intellectual Property necessary for the
conduct of, the Business, and there are no other items of Intellectual Property
that are material to the Company, any Subsidiary or the Business.
(g) The Company is not aware of anything or reason that would
prevent any pending applications to register trademarks, service marks or
copyrights or any pending patent applications from being granted.
SECTION 4.16. Environmental Matters. (1) To the Company's
knowledge:
(a) All facilities and property presently owned or leased by
the Company or any of its Subsidiaries have been, and continue to be,
owned and operated by the Company and its Subsidiaries in material
compliance with all applicable Environmental Laws.
(b) Neither the Company nor any of its Subsidiaries has
received notice of any pending or threatened claims, complaints or
requests for information with respect to any alleged violation of any
Environmental Laws.
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28
(c) There have been no material releases, as defined under any
Environmental Laws, of Hazardous Substances that give rise to necessary
costs of response at, on, from or under any property now or previously
owned or leased by the Company or any of its Subsidiaries during the
period in which any such property was owned or leased by the Company or
a Subsidiary.
(d) The Company and its Subsidiaries have been issued and are
in material compliance with all permits, certificates, approvals,
licenses, registrations, orders, administrative consent orders and any
other authorizations, approvals or consents relating to Environmental
Laws or Hazardous Substances necessary to the operation of their
businesses.
(e) Neither the Company nor any of its Subsidiaries has
received notice that property presently owned or leased, or previously
owned or leased, by the Company or any of its Subsidiaries is listed or
proposed for listing in the National Priorities List created pursuant
to CERCLA or on the CERCLIS or any similar state list of sites
requiring investigation or cleanup.
(f) Neither the Company nor any of its Subsidiaries has
transported or arranged for the transportation of any Hazardous
Substances to any location which is listed on the National Priorities
List or any similar state list, nor has any of them received notice of
pending or threatened claims as a result of transporting or arranging
to transport Hazardous Substances to any location.
(g) There are no polychlorinated biphenyls (other than may be
contained in electrical transformers which are labeled, operated and
maintained in accordance with all Environmental Laws) or
asbestos-containing materials present at any property now or previously
owned or leased by the Company or by any Subsidiary during the period
in which any such property was owned or leased by the Company or a
Subsidiary, except as would not, individually or in the aggregate, have
a Material Adverse Effect.
(h) Neither the Company nor any of its Subsidiaries has
received notice of pending or threatened claims against the Company or
any of its Subsidiaries arising out of any operations, action, inaction
or status of any previously divested property, whether or not the
subject of any indemnity, under any Environmental Laws or involving any
Hazardous Substances.
(2) The environmental indemnities in respect of the Owned Real
Property and Leased Real Property as set forth in Schedule 4.16 of the
Disclosure Schedule acquired by the Company pursuant to the terms of the Merger
Agreement, dated as of August 30, 1994, by and between the Company and
McDonald's Corporation have been assumed and are in full force and effect.
<PAGE>
29
(3) The Company has not assumed any environmental obligations
on any Leased Real Property.
SECTION 4.17. Litigation. Schedule 4.17 of the Disclosure
Schedule indicates those Actions (a) involving claims for potential damages in
excess of $250,000 that, if adversely determined, could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect or (b) which
relate to, or could affect the legality or validity of, this Agreement or the
transactions contemplated hereby. Except as set forth in Schedule 4.17 of the
Disclosure Schedule, there are no material citations, fines or penalties
heretofore asserted against the Company or its Subsidiaries under any federal,
state or local law which remain unpaid or which otherwise bind the assets of the
Company or its Subsidiaries.
SECTION 4.18. Insurance. Schedule 4.18 of the Disclosure
Schedule lists each material insurance policy (including policies providing
property, casualty, liability, workers compensation, theft, bond and surety
arrangements) to which the Company or any Subsidiary is a party, a named insured
or otherwise the beneficiary of coverage. Each such Policy is in full force and
effect.
SECTION 4.19. Material Contracts. (a) Schedule 4.19(a) of the
Disclosure Schedule lists each of the material contracts and agreements, whether
written or oral (each, a "Material Contract"), of the Company and the
Subsidiaries. Except as set forth on Schedule 4.19(a) of the Disclosure
Schedule, each Material Contract: (i) is valid and binding on the respective
parties thereto and is in full force and effect and (ii) upon consummation of
the transactions contemplated by this Agreement and, to the best knowledge of
the Company, except to the extent that any consents set forth in Section 4.8 are
not obtained, shall continue in full force and effect without penalty or other
adverse consequence. Neither the Company nor any Subsidiary is in breach of, or
default under, any Material Contract.
(b) No other party to any Material Contract is in breach
thereof or default thereunder.
(c) There is no contract, agreement or other arrangement
granting any Person any preferential right to purchase, other than in the
ordinary course of business consistent with past practice, any of the properties
or assets of the Company or any Subsidiary.
SECTION 4.20. Licenses and Permits. Except as would not have a
Material Adverse Effect, the Company has all governmental licenses, permits and
other governmental authorizations and approvals required for the conduct of its
Business as now conducted, and all such material licenses, permits,
authorizations and approvals will remain in full force and effect immediately
following the consummation of the transactions contemplated hereunder.
SECTION 4.21. Labor Matters. Neither the Company nor any
Subsidiary is a party to any currently effective collective bargaining agreement
or other labor union contract. There are presently no (a) material violations of
any federal, state or local statutes, laws,
<PAGE>
30
ordinances, rules, regulations, orders or directives with respect to the
employment of individuals by, or the employment practices or work conditions of,
or the terms and conditions of employment, wages and hours of the Company or any
Subsidiary; (b) unfair labor practice or other unlawful employment practice and
no charges of unfair labor practices or other employee-related complaints
pending or threatened against the Company or any Subsidiary before the National
Labor Relations Board, the Equal Employment Opportunity Commission, the
Occupational Safety and Health Review Commission, the Department of Labor or any
other Federal, state, local or other governmental authority; (c) strike,
picketing, slowdown or work stoppage or organizational attempt actually pending,
threatened against or involving the Company or any Subsidiary; or (d) material
issues with respect to union representation pending or threatened with respect
to the employees of the Company or any Subsidiary.
SECTION 4.22. Taxes. Each of the Company and its Subsidiaries
has filed all federal, state and foreign income and franchise tax returns that
are required to be filed by each of them, except where the failure to so file
such returns would not, individually or in the aggregate, have a Material
Adverse Effect, and, except as set forth in the Offering Circular, has paid all
taxes, assessments, fees and other charges (including, without limitation,
withholding taxes, penalties and interest) due or claimed to be due thereon that
are due and payable, other than tax deficiencies which (i) the Company or any
Subsidiary is contesting in good faith and for which the Company or such
Subsidiary has provided adequate reserves in accordance with GAAP or (ii) the
failure to make any such payments which would not, individually or in the
aggregate, have a Material Adverse Effect. As of the Closing Date, there is no
tax deficiency or actual or proposed tax assessment that has been asserted
against the Company or any Subsidiary that would have, individually or in the
aggregate, a Material Adverse Effect.
SECTION 4.23. Private Offering. (a) Assuming the accuracy of
the representations and warranties of the Purchasers set forth herein, the sale
of the Series A Preferred Units hereunder is exempt from the registration and
prospectus delivery requirements of the Securities Act.
(b) No form of general solicitation or general advertising
(including, without limitation, advertisements, articles, notices or other
communications published in any newspaper, magazine or other medium or broadcast
over television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising) was used by the
Company or any other Person acting on behalf of the Company in respect of the
Series A Preferred Units or in connection with the offer and sale of the Series
A Preferred Units.
SECTION 4.24. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions hereunder based upon arrangements made by or on behalf of
the Company, other than Jefferies & Company, Inc. (who is entitled to a fee for
its underwriter's discount and commission solely in the amount of $1,000,000
which is payable in shares of Series B Preferred Units consisting of shares of
Series B Preferred Stock having an aggregate liquidation preference of
$1,000,000 and 40 Series B Preferred Warrants).
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31
SECTION 4.25. Accuracy of Information. The Company has
provided the Purchasers with all the information reasonably available to it that
each Purchaser has requested for deciding whether to purchase the Series A
Preferred Units and all information that the Company believes is reasonably
necessary to enable each Purchaser to make such decision. The Company is not
aware of any facts pertaining to the Company, any Subsidiary or its Business
which could have a Material Adverse Effect and which have not been disclosed in
this Agreement, the Disclosure Schedule, the Financial Statements or the Interim
Financial Statements, the Offering Circular or otherwise disclosed to the
Purchasers in writing. Neither this Agreement nor any other written statements
or certificates made or delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
SECTION 4.26. Investment Company. The Company is not and,
after giving effect to the issuance and sale of the Series A Preferred Units,
the Series B Preferred Units and the New Units, the Company will not be an
"investment company" or a company "controlled by" an "investment company" or
"promoter" or "principal underwriter" for an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchasers, severally and not jointly, represent and
warrant to the Company that:
SECTION 5.1. Organization. (a) WAF-6 is a limited partnership
duly organized, validly existing and in good standing under the laws of the
State of Delaware, organized for the purpose of investing in the Company, and
has the requisite power and authority and any necessary governmental authority
to own, operate or lease the properties that it purports to own, operate or
lease and to carry on its business as it is now being conducted.
(b) WFML is a company duly organized, validly existing and in
good standing under the laws of Bermuda, and has the requisite corporate power
and authority and any necessary governmental authority to own, operate or lease
the properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted
SECTION 5.2. Authority. Each Purchaser has all necessary power
and authority to execute and deliver this Agreement and to perform its
obligations and to consummate the transactions contemplated hereunder. The
execution and delivery of this Agreement by each Purchaser and the purchase of
the Series A Preferred Units as provided in Section 2.1 hereof by each Purchaser
hereunder have been duly and validly authorized by all necessary action of such
Purchaser and no other proceedings on the part of each Purchaser are necessary
to authorize this
<PAGE>
32
Agreement or the purchase of the Series A Preferred Units by each Purchaser as
contemplated hereby. This Agreement has been duly and validly executed and
delivered by each Purchaser and, assuming the due authorization, execution and
delivery of this Agreement by the Company, constitutes the legal, valid and
binding obligation of each Purchaser enforceable against each Purchaser in
accordance with its terms.
SECTION 5.3. No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by each Purchaser do not, and the
performance of this Agreement by each Purchaser will not, (i) conflict with or
violate the partnership agreement or by-laws or equivalent organizational
documents of each Purchaser, (ii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to each Purchaser or by which
it or its properties are bound or affected, or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any of the property or assets of each Purchaser pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which each Purchaser is a
party or by which each Purchaser or any of its properties is bound or affected,
except, in the case of clauses (ii) and (iii) above, for any such breaches,
defaults or other occurrences which would not, individually or in the aggregate,
have a material adverse effect on the business, operations, properties
(including intangible properties), condition (financial or otherwise), assets or
liabilities of each Purchaser.
(b) The execution and delivery of this Agreement by each
Purchaser do not, and the performance of this Agreement by each Purchaser
(including, without limitation, the consummation of the transactions hereunder)
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Authority, except for consents,
approvals authorization, permits, filings or notifications which have been made
or obtained.
SECTION 5.4. Funds. WFML has and, immediately prior to the
Closing, will have the funds necessary to consummate the purchase of the Series
A Preferred Units to be purchased by it in Section 2.1 hereof.
SECTION 5.5. Convertible Preferred Shares. WAF-6 has the full
right, power and authority to enter into this Agreement and to sell, transfer
and deliver the Convertible Preferred Shares hereunder. WAF-6 has and will on
the Closing Date have good and marketable title to the Convertible Preferred
Shares to be transferred by WAF-6 to the Company hereunder, free and clear of
any security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind, other than pursuant to this Agreement; and upon
delivery of such Convertible Preferred Shares and the issuance and sale of the
Series A Preferred Units to WAF-6 in consideration therefor as herein
contemplated, assuming the Company has no notice of any adverse claim, the
Company will receive good and marketable title to the Convertible Preferred
Shares received by it from WAF-6, free and clear of any security interest,
mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. No
filing with, or consent, approval,
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33
authorization, order, registration, qualification or decree of, any Governmental
Authority is necessary or required for the performance by WAF-6 of its
obligations hereunder or in connection with delivery and transfer of the
Convertible Preferred Shares hereunder or the consummation of the transactions
contemplated by this Agreement, except such as may have previously been made or
obtained or as may be required under the Securities Act, the rules and
regulations thereunder or state securities laws.
SECTION 5.6. Delivery of Certificates. Certificates for all of
the Convertible Preferred Shares to be transferred to the Company by WAF-6
pursuant to this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in blank with
signatures guaranteed, will be delivered in escrow not later than one full
business day prior to the Closing Date with conditional instructions to deliver
such Convertible Preferred Shares to the Company pursuant to this Agreement.
SECTION 5.7. Investment Purpose. Each Purchaser has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of purchasing the Series A Preferred Units. The
Series A Preferred Units purchased by each Purchaser pursuant to this Agreement
are being acquired for investment only and not with a view to any sale or
distribution (within the meaning of the Securities Act) of the Series A
Preferred Units or any part thereof. Each Purchaser acknowledges that Series A
Preferred Units, the Series A Preferred Stock, the Series A Preferred Warrants
have not been registered under the Securities Act. Each Purchaser agrees at all
times to sell or otherwise dispose of all or any part of the Series A Preferred
Units, the Series A Preferred Stock and the Series A Preferred Warrants so
acquired by such Purchaser (and any securities issued in exchange therefor) only
pursuant to a registration under the Securities Act, or an exemption therefrom,
and in compliance with the Securities Act and applicable state securities laws.
SECTION 5.8. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions hereunder based upon arrangements made by or on behalf of
each Purchaser.
ARTICLE VI.
INDEMNIFICATION
SECTION 6.1. Survival of Representations and Warranties. The
representations and warranties of the Company in Article III shall survive the
Closing until the expiration of 30 days following the later of the (i) receipt
by the Purchasers of audited consolidated financial statements of the Company
and its Subsidiaries in respect of the year ended December 31, 1999 and (ii) the
receipt of any material restatement, amendment or supplement thereto; provided
that the representations and warranties of the Company set forth in Section 4.22
in respect of Tax matters shall survive for a period of ending five months after
the expiration of the applicable statute of limitations. Neither the period of
survival nor the liability of any party with respect to
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34
the parties, representations and warranties shall be reduced by any
investigation made at any time by or on behalf of any party.
SECTION 6.2. Indemnification by the Company. Each Purchaser,
and each of their respective Affiliates, officers, directors, employees, agents,
successors and assigns, shall be indemnified and held harmless by the Company
for any and all Liabilities, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties (including, without limitation, any
legal costs and expenses) actually suffered or incurred by them (hereinafter a
"Purchaser Loss"), arising out of or resulting from:
(a) the breach of any representation or warranty made by the
Company contained herein or in any document delivered by the Company
hereunder at the Closing; or
(b) the breach of any covenant or agreement by the Company
contained herein.
Notwithstanding the foregoing, there shall be no Purchaser Loss for any item set
forth on Schedule 4.09, or for any normal and customary year end adjustments,
that in the aggregate are not material.
SECTION 6.3. Indemnification by the Purchasers. The Company,
and its Affiliates, officers, directors, employees, agents, successors and
assigns, shall be indemnified and held harmless, severally and not jointly, by
the respective Purchasers for any and all Liabilities, losses, damages, claims,
costs and expenses, interest, awards, judgments and penalties (including,
without limitation, legal costs and expenses) actually suffered or incurred by
them (hereinafter a "Company Loss" and, together with a Purchaser Loss, a
"Loss"), arising out of or resulting from:
(a) the breach of any representation or warranty made by such
Purchaser contained herein or in any document delivered by such
Purchaser hereunder at the Closing; or
(b) the breach of any covenant or agreement by such Purchaser
contained herein.
SECTION 6.4. Materiality. Notwithstanding anything in this
Agreement to the contrary, for purposes of application of the indemnity
provisions of this Article VI, the amount of any Purchaser Loss or Company Loss
arising from the breach of such representation, warranty, covenant or agreement
shall be the entire amount of any such Loss actually incurred by the respective
indemnitee as a result of such breach and not just that portion of such Loss
that exceeds the relevant level of materiality.
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35
SECTION 6.5. Time Period; Dollar Threshold. (a) The respective
indemnification obligations of the Company, on the one hand, and the several
indemnification obligations of each Purchaser, on the other hand, under this
Article VI shall continue for the same period of survival specified in Section
6.1 for each such representation and warranty and shall terminate with the
expiration of the applicable survival period for each such representation,
warranty and covenant. Any claim or demand against the Company or any Purchaser
which is pending or asserted at or prior to the expiration of any survival
period may continue to be asserted and indemnified against.
(b) Neither the Company nor any Purchaser shall be entitled to
indemnification under this Article VI unless and until the aggregate amount of
the claims against the other party exceeds $250,000, in which case, the party
entitled to indemnification may bring a claim for such excess amount. If the
aggregate amount of such claims against either party exceeds $500,000, then that
party may claim indemnification for the entire aggregate amount of such claims.
SECTION 6.6. Notice and Defense. Each party shall, within 90
days of learning of any asserted liability or damage claimed to give rise to
indemnification hereunder, notify the party obligated to indemnify it hereof in
writing; provided, however, that the failure of the indemnified party to so
notify the indemnifying party shall not relieve the indemnifying party of its
obligations hereunder unless, and only to the extent that, such failure to
notify prejudices the indemnifying party. Thereafter, the indemnifying party
shall have, at its election, the right to compromise or defend any such matter
at its sole cost and expense through counsel chosen by it. If the indemnifying
party so undertakes to compromise and defend, the indemnifying party shall
notify the other party of its intention to do so. If the indemnifying party
fails to defend such matter diligently, the indemnified party may assume control
of the defense of such matter. Each party agrees in all cases to cooperate with
the defending party and its counsel in the compromise of or defending of any
such liabilities or claims. The defending party and the nondefending party may
be represented by the same counsel unless such representation would be
inappropriate due to actual or potential differing interests between them. In
addition, the nondefending party shall at all times be entitled to monitor such
defense through the appointment of counsel of its own choosing, at it own cost
and expense.
ARTICLE VII.
COVENANTS OF THE COMPANY, BIRCH AND THE PURCHASERS
SECTION 7.1. Legends. The certificates evidencing the Series A
Preferred Units, the Series A Preferred Stock, the Series A Preferred Warrants
and the shares of Common Stock issuable upon exercise of the Series A Preferred
Warrants shall bear the following legends reflecting the restrictions on the
transfer of such stock contained in this Agreement:
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36
"The shares [warrants] evidenced hereby are subject to the
terms of that certain Purchase Agreement, dated as of July 13,
1998, by and among the Company, Birch Holdings L.L.C., Birch
Acquisition L.L.C., Wafra Acquisition Fund 6, L.P., and Wafra
Fund Management Ltd. including certain restrictions on
transfer. A copy of this Agreement has been filed with the
Secretary of the Company and is available upon request."
"The stock evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be
transferred except pursuant to an effective registration under
the Act or in a transaction which, in the opinion of counsel
reasonably satisfactory to the Company, qualifies as an exempt
transaction under the Act and the rules and regulations
promulgated thereunder."
SECTION 7.2. Resale of Stock. Neither Birch nor either
Purchaser shall Transfer any shares of capital stock of the Company other than
in accordance with the provisions of this Article 7, as applicable; and provided
that the Transferee of such shares has agreed to be bound by the terms of this
Article 7, as applicable, and has executed and delivered to the Company, Birch
and the Purchasers a counterpart hereof. Any Transfer or purported Transfer made
in violation of this Article 7, as applicable, shall be null and void and of no
effect, and the Company shall be entitled to treat the purported transferor of
such noncomplying Transfer as the holder of such capital shares. For purposes of
this Agreement, "Transfer" means any direct or indirect transfer, sale,
assignment, gift, pledge, mortgage, hypothecation or other disposition of any
interest, other than by means of an underwritten public offering. The term
"Transferee" shall have a correlative meaning. Notwithstanding anything herein
to the contrary, the provisions of Section 7.3 shall not apply to Transfers by
Birch to any of its Affiliates.
SECTION 7.3. Drag-Along Right. (a) If at any time and from
time to time after the date of this Agreement, Birch, for so long as Birch shall
hold at least 50% of the shares of Common Stock held by Birch as of the Closing
Date, wishes to Transfer in a bona fide arm's- length single transaction or
series of related transactions at least 75% of its shares of Series B Preferred
Stock held at the time of such Transfer (the "Birch Shares") to any Person or
Persons who are not Affiliates of Birch (the "Birch Transferee"), Birch shall
have the right (a "Drag- Along Right") to require each other Purchaser and its
Affiliates to sell to the Birch Transferee, on the same terms and at least the
same price as Birch, such number of shares of Series A Preferred Stock
beneficially owned by each Purchaser and its Affiliates at such time as shall
equal the same percentage of the shares then beneficially owned by each
Purchaser and its Affiliates, as the percentage of shares of Series B Preferred
Stock then beneficially owned by Birch which are proposed to be sold by Birch in
such Transfer; provided that each Purchaser and its Affiliates, shall receive as
consideration for the sale of the shares of Series A Preferred Stock
beneficially owned by such parties as of the date of such Transfer the higher of
(i) the purchase price per share to be received by Birch in the Transfer or (ii)
the aggregate liquidation preference of such shares plus accrued and unpaid
dividends.
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37
(b) To exercise a Drag-Along Right, Birch shall give each
Purchaser a written notice (a "Drag-Along Notice") containing the name and
address of the Birch Transferee and the proposed purchase price, terms of
payment, number of shares being sold by Birch and other material terms and
conditions of Birch's offer. Each Purchaser shall thereafter be obligated to
sell such number of shares of Series A Preferred Stock, subject to such
Drag-Along Notice; provided that the sale to the Birch Transferee is consummated
within 150 days of delivery of the Drag-Along Notice. If such sale is not
consummated within such 150-day period, then the Corporation shall in good faith
promptly notify each Purchaser of such fact and each Purchaser shall no longer
be obligated to sell its shares pursuant to that specific Drag-Along Right, but
shall remain subject to the provisions of this Section 7.3.
(c) Notwithstanding anything contained in this Section 7.3, in
the event that all or a portion of the purchase price in respect of the Birch
Shares consists of stock of the Birch Transferee, and such stock shall not
either (i) be listed on a national securities exchange or the Nasdaq National
Market at the time of such Transfer or (ii) be received by either Purchaser
pursuant to a transaction whereby such stock is registered under the Securities
Act, then, at the sole and exclusive option of each Purchaser, such Purchaser
may receive, in lieu of such stock, the fair market value of such stock in cash,
as determined in good faith by the Board as of the date of the Drag-Along
Notice.
(d) The rights and obligations provided by this Section 7.3
shall terminate on the earliest to occur of (i) such date as Birch shall hold
less than 10% of the then outstanding shares of Common Stock and (ii) such date
as the Purchasers and their Affiliates shall hold less than 5% of the then
outstanding shares of Common Stock.
SECTION 7.4. Tag-Along Rights. In the event that Birch intends
to Transfer all or a portion of the shares of Series B Preferred Stock then held
by it to any Person or Persons, other than to an Affiliate of Birch, (a "Birch
Transaction"), except in the case where a Drag- Along Right has been exercised
by Birch, Birch shall notify each Purchaser, not less than 30 days nor more than
45 days prior to such proposed Transfer, of such Transfer and its terms and
conditions (the "Sale Notice"). Such Sale Notice shall set forth: (i) the number
of shares of Series B Preferred Stock proposed to be Transferred by Birch, (ii)
the name and address of the proposed Birch Transferee, (iii) the proposed amount
and form of consideration and terms and conditions of payment offered by such
proposed Birch Transferee and (iv) that the proposed Birch Transferee has been
informed of the Purchasers' tag-along right provided for in this Section 7.4 and
has agreed to purchase shares of Series A Preferred Stock in accordance with the
terms hereof.
Within 15 days of the date of receipt of the Sale Notice, each
Purchaser shall notify Birch in writing (a "Tag-Along Notice") whether it elects
to participate in such Transfer. If either Purchaser shall so notify Birch in
writing of its election to participate in such Transfer, such Purchaser shall
have the right to sell to the Proposed Transferee, at the same price and the
same terms, such number of shares of Series A Preferred Stock beneficially owned
by such Purchaser at such time as shall equal the same percentage of the shares
then beneficially owned
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38
by such Purchaser as the percentage of shares of Series B Preferred Stock then
beneficially owned by Birch which are proposed to be sold by Birch in such
Transfer at the same price and on the same terms as Birch.
In the event that the proposed Birch Transferee does not
purchase shares from any Purchaser on the same terms and conditions as specified
in the Sale Notice, then Birch shall not be permitted to sell any shares of
Series B Preferred Stock to the proposed Birch Transferee in the proposed
Transfer. If no Tag-Along Notice is received during the 15-day period referred
to above, Birch shall have the right, for a 45-day period after the expiration
of the 15-day period referred to above, to transfer the shares of Series B
Preferred Stock specified in the Sale Notice on terms and conditions no more
favorable than those stated in the Tag-Along Notice and without regard to the
tag-along rights described in this Section 7.4.
The rights and obligations provided by this Section 7.4 shall
terminate on the earliest to occur of (i) such date as Birch shall hold less
than 10% of the then outstanding shares of Common Stock and (ii) such date as
the Purchasers and their Affiliates shall hold less than 5% of the then
outstanding shares of Common Stock.
SECTION 7.5. Exchange Rights. In the event that Birch shall
consummate a public or private offering of shares of common stock of Birch or
any security convertible into common stock of Birch, each Purchaser shall have
the right to convert the shares of Series A Preferred Stock then held by it into
such number of shares of common stock of Birch as have an equivalent fair market
value to the fair market value of the number of the shares of Series A Preferred
Stock then held by such Purchaser as of the date of any such offering, as
determined by an independent financial advisor selected by Birch and reasonably
acceptable to the Purchaser. For purposes of this Section 7.5 only, "Birch"
means Birch Holdings L.L.C. and Birch Acquisitions L.L.C. and their respective
Related Parties that are engaged primarily in the business of holding equity
securities of the Company.
SECTION 7.6. Right of First Offer (a) Other than any Transfer
of shares of Series A Preferred Stock to an Affiliate of the Purchasers, neither
Purchaser shall not Transfer any shares of Series A Preferred Stock except in
compliance with the provisions of this Section 7.6. In the event that either
Purchaser proposes to Transfer any shares of Series A Preferred Stock then owned
by it (other than (i) to the Company, Birch or any of their respective
Affiliates, (ii) pursuant to an offering registered under the Securities Act or
(iii) in the public market subsequent to such an offering), such Purchaser shall
notify the Company in writing (the "First Offer Notice") as to the number of
shares of Series A Preferred Stock then owned by it which it proposes to
Transfer (the "Subject Shares") and all other material terms of such proposed
Transfer. The Company and/or Birch, as the case may be, may offer in writing
(the "Company Notice" and/or the "Birch Notice," as the case may be) within 15
days of receipt of the First Offer Notice, to purchase all of the Subject Shares
on the same terms and conditions as described in the First Offer Notice. In the
event that such Purchaser shall not receive the Company Notice and/or the Birch
Notice, as the case may be, within such 15 day period, or in the event the
Company
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39
and/or Birch shall not elect to exercise their right pursuant to this Section
7.6, such Purchaser may Transfer the Subject Shares without application of the
provisions of this Section 7.6.
SECTION 7.7. Reporting and Information. (a) Investor Financial
Information. From and after the date hereof, the Company shall deliver to each
Purchaser or its successor or permitted transferees and assignees so as long as
any of them owns any shares of Series A Preferred Stock:
(i) Monthly Financial Statements. As soon as practicable, and
in any event within 30 days after the close of each month of each
fiscal year of the Corporation, a consolidated balance sheet and
statement of income of the Corporation and its Subsidiaries as of the
close of such month and the portion of the Corporation's fiscal year
ending on the last day of such month, all in reasonable detail and
subject to audit and year end adjustments, setting forth in each case
in comparative form the figures for the comparable period of the
previous year;
(ii) Quarterly Statements. As soon as practicable, and in any
event within 45 days after the close of each fiscal quarter of the
Company, a consolidated balance sheet, statement of results of
operations and statement of changes in cash flow of the Company and its
Subsidiaries as of the close of such month and the portion of the
Company's fiscal year ending on the last day of such month, all in
reasonable detail and prepared in accordance with GAAP, consistently
applied, subject to audit and year end adjustments, setting forth in
each case in comparative form the figures for the comparable period of
the previous year;
(iii) Annual Statements. As soon as practicable after the end
of each fiscal year of the Company, and in any event within 120 days
thereafter, a copy of the consolidated balance sheet and consolidated
statements of income, stockholders' equity and changes in cash flow of
the Company and its Subsidiaries for such year, setting forth in each
case in comparative form the figures for the previous fiscal year, all
in reasonable detail and accompanied by an opinion thereon of
independent certified public accountants of recognized national
standing selected by the Company, which opinion shall state that such
financial statements fairly present the financial position and results
of operations of the Company and its Subsidiaries on a consolidated
basis and have been prepared in accordance with GAAP (except for
changes in application in which such accountants concur) and that the
examination of such accountants has been made in accordance with
generally accepted auditing standards, and accordingly included such
tests of the accounting records and such other auditing procedures as
were considered necessary in the circumstances; and
(iv) Other Reports. Promptly upon their becoming available,
one copy of each financial statement, report, notice or proxy statement
sent by the Company to its stockholders generally, of each financial
statement, report, notice or proxy statement sent by the Company or any
of its Subsidiaries to the SEC or any successor agency, if
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40
applicable, and of each regular or periodic report and any registration
statement, prospectus or written communication (other than transmittal
letters) in respect thereof publicly filed by the Company or any of its
Subsidiaries with any securities exchange or the SEC or any successor
agency, and of any press release issued by the Company or any of its
Subsidiaries.
(b) Confidentiality. As to so much of the information and
other material furnished under or in connection with this Agreement (whether
furnished before, on or after the date hereof) as constitutes or contains
confidential business, financial or other information of the Company or its
Subsidiaries (which information shall have been expressly identified as
confidential), each Purchaser covenants for itself and its directors, officers,
partners and stockholders that it will use due care to prevent its respective
officers, directors, employees, counsel, accountants and other representatives
from disclosing such information to persons other than their respective
authorized employees, counsel, accountants, stockholders, partners, limited
partners and other authorized representatives; provided, however, that each
Purchaser may disclose or deliver any information or other material disclosed to
or received by each Purchaser should such disclosure or delivery be required by
law or should such information be disclosed by the Company or any of its
Affiliates or become publicly available through disclosure by a person other
than either Purchaser or their Affiliates.
SECTION 7.8. Fees and Expenses. The Company shall pay all
reasonable fees and expenses of each Purchaser (including the reasonable fees
and expenses of its counsel and accountants) incurred in connection with the
negotiation and consummation of the transactions contemplated hereunder as soon
as reasonably possible on or after the Closing Date.
SECTION 7.9. Antidilution Adjustments. The Company agrees with
WAF-6 that, if any Person shall successfully assert in connection with any
transaction (an "Adjustment Transaction") any right to antidilution or other
protections set forth in any agreement in effect on the date hereof similar to
those set forth in Article VI of the Certificate of Designations relating to the
Convertible Preferred Stock, then the Company shall effect an antidilution
adjustment in favor of WAF-6 in connection with such Adjustment Transaction.
SECTION 7.10. Injunctive Relief. The Company, Birch and each
Purchaser hereby declare that it is impossible to measure in money the damages
which will accrue to the parties hereto by reason of the failure of any party to
perform any of its obligations set forth in this Article 7. Therefore, the
Company, Birch and each Purchaser shall have the right to specific Performance
of such obligations, and if any party hereto shall institute any action or
proceeding to enforce the provisions hereof, the other parties hereby waive the
claim or defense that the party instituting such action or proceeding has an
adequate remedy at law.
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41
ARTICLE VIII.
REGISTRATION RIGHTS
SECTION 8.1. Definitions. As used in this Article 8:
(a) the terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act (and any post-effective
amendments filed or required to be filed) and the declaration or
ordering of effectiveness of such registration statement;
(b) the term "Registrable Stock" means (A) all shares of
Common Stock issued to the Purchasers upon exercise of the Series A
Preferred Warrants purchased hereunder and (B) any capital stock of the
Company issued as a dividend or other distribution with respect to, or
in exchange for or in replacement of, the shares of Common Stock
referred to in clause (A) of this definition;
(c) "Qualified Initial Public Offering" shall mean the
completion of an underwritten initial public offering of Common Stock
pursuant to a registration statement under the Securities Act
representing at least 15% of the outstanding shares of Common Stock on
a fully diluted basis and resulting in net proceeds to the Company of
not less than $20.0 million;
(d) "Registration Expenses" shall mean all expenses incurred
by the Company in compliance with Sections 8.2 and 8.3 hereof,
including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company,
blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid
in any event by the Company); and
(e) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Stock and
all fees and disbursements of counsel for the Purchasers in respect of
any registration pursuant to this Article 8.
SECTION 8.2. Demand Registration. (a) Demand Registration. If
the Company shall receive from either Purchaser a written request that the
Company effect any registration with respect to all shares of Registrable Stock
owned by it, the Company shall, as soon as practicable, use its diligent best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all shares of Registrable Stock; provided that the Company shall
not be obligated to effect, or take any action to effect, any such registration
pursuant to this Section 8.2:
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42
(x) in any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act or applicable rules or
regulations thereunder; and
(y) after the Company has effected one such registration
pursuant to this Section 8.2 and such registration shall have been
declared or ordered effective and the sale of all shares of Registrable
Stock shall have closed. Notwithstanding the foregoing, in the event
that less than all of the shares of Registrable Stock are sold in any
such registration and distribution, each Purchaser shall have the right
upon written notice to the Company to request one additional
registration (the "Additional Registration") by the Company of all
remaining shares of Registrable Stock (the "Unsold Shares"); provided
that in the event that the Unsold Shares represent less than 5% of the
aggregate number of shares of Common Stock then outstanding on a fully
diluted basis, the Company may, in lieu of effecting the Additional
Registration, deliver written notice to such Purchaser within 10 days
of written notice by such Purchaser pursuant to this Section 8.2(a)(y)
of its election to file as promptly as practicable thereafter a shelf
registration covering such Unsold Shares. The Company shall use its
best efforts to keep effective such shelf registration statement until
the earlier of (A) the expiration of one year following the initial
filing thereof and (B) such time as all of the Unsold Shares have been
sold thereunder.
Notwithstanding the foregoing, the Company shall not be
required to effect any registration pursuant to this Section 8.2 prior to July
27, 2000.
The registration rights set forth in this Section 8.2 shall be
assignable, in whole or in part, to any transferee of Registrable Stock;
provided that such transferee agrees to be bound by all provisions of this
Article 8.
(b) Underwriting. If either Purchaser intends to distribute
the Registrable Stock covered by its request by means of an underwriting, such
Purchaser shall so advise the Company as a part of its request made pursuant to
Section 8(b). If officers and directors of the Company holding other securities
of the Company or if holders of securities of the Company who are entitled, by
contract with the Company or otherwise, to have securities included in such a
registration (the "Other Stockholders") request inclusion in any such
underwritten registration, the Purchaser shall offer to include the shares of
such officers, directors and Other Stockholders in the underwriting and may
condition such offer on their acceptance of the further applicable provisions of
this Section 8. Each Purchaser requesting such underwriting and the Company
shall (together with all officers, directors and Other Stockholders proposing to
distribute their shares through such underwriting) enter into an underwriting
agreement in customary form with the representative(s) of the underwriter(s)
selected for such underwriting by the Company and acceptable to such Purchaser.
Notwithstanding any other provision of this Section 8.2, if the representatives
advise such Purchaser in writing that marketing factors require a limitation on
the
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43
number of shares to be underwritten, the shares held by such officers, directors
and the Other Stockholders shall be excluded from such registration to the
extent so required by such limitation. No shares so excluded from the
underwriting shall be included in such registration. If any Purchaser requesting
such underwriting or any officer, director or Other Stockholder who has
requested inclusion in such registration as provided above disapproves of the
terms of the underwriting, such Person may elect to withdraw therefrom by
written notice to the Company, the underwriter and the Purchasers. The shares so
withdrawn shall also be withdrawn from registration. If the underwriter has not
limited the number of shares of Registrable Stock or other shares to be
underwritten, the Company may include shares of Common Stock for its own account
in such registration if the representatives so agree and if the number of shares
of Registrable Stock and other shares which would otherwise have been included
in such registration and underwriting will not thereby be limited.
SECTION 8.3. Piggyback Registration. (a) Notice of
Registration. If the Company shall determine to register any shares of Common
Stock either for its own account or for the account of any other shareholder of
the Company other than a registration relating solely to employee benefit plans,
or a registration relating solely to a transaction pursuant to Rule 145 under
the Securities Act, or a registration on any registration form which does not
permit secondary sales or does not include substantially the same information as
would be required to be included in a registration statement covering the sale
of Registrable Stock, the Company shall:
(x) promptly give to each Purchaser written notice thereof
(which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such stock under the applicable blue sky
or other state securities laws, if any); and
(y) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Stock specified by
the Purchaser requesting such registration within 15 days after receipt
of the written notice from the Company described in clause (i) above,
except as set forth in Section 8.3(b) below. Such written request may
specify all or a part of the Registrable Stock.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise each Purchaser as a part of the written notice given
pursuant to Section 8.3(a)(x). In such event, the right of each Purchaser to
registration pursuant to this Section 8.3 shall be conditioned upon such
Purchaser's participation in such underwriting and the inclusion of Registrable
Stock in the underwriting to the extent provided herein. Each Purchaser electing
to participate in such underwritten offering shall enter into an underwriting
agreement in customary form with the representative of the underwriter or
underwriters selected for underwriting by the Company. Notwithstanding any other
provision of this Section 8.3, if such representative determines that marketing
factors require a limitation on the number of shares to be underwritten, such
representative may (subject to the allocation priority set forth below) exclude
from such registration and underwriting some or all of the Registrable Stock
which would otherwise be
<PAGE>
44
underwritten pursuant hereto. The Company shall so advise each Purchaser
electing to participate in such underwritten offering, and the number of shares
that are entitled to be included in the registration and underwriting shall be
allocated in the following manner: other than those shares of a Person
exercising a demand registration right for an underwritten public offering which
caused the Company to file the registration statement to which this section
applies, shares beneficially owned, and requested for inclusion in such
registration by, such Purchaser, officers and directors of the Company and Other
Stockholders shall be excluded from such registration and underwriting on a pro
rata basis to the extent required by such limitation. If any Purchaser or any
officer or director of the Company or Other Stockholder disapproves of the terms
of any such underwriting, such Person may elect to withdraw therefrom by written
notice to the Company and the representative. Any Registrable Stock or other
shares so excluded or withdrawn from such underwriting shall be withdrawn from
such registration.
(c) Number and Transferability. Each Purchaser shall be
entitled to have its shares of Registrable Stock included in an unlimited number
of registrations pursuant to this Section 8.3. The registration rights granted
pursuant to this Section 8.3 shall be assignable, in whole or in part, to any
transferee of Registrable Stock; provided that such transferee agrees to be
bound by all provisions of this Article 8.
SECTION 8.4. Expenses of Registration. All Registration
Expenses incurred in connection with any registration, qualification or
compliance pursuant to this Article 8 shall be borne by the Company, and all
Selling Expenses shall be borne by each Purchaser electing to have its shares
registered (hereinafter, a "participating Purchaser") and the other participants
therein pro rata on the basis of the number of their shares so registered;
provided, however, that the Company shall not be required to pay any
Registration Expenses if, as a result of the withdrawal of a request for
registration by any participating Purchaser, the registration statement does not
become effective, in which case each of such Purchaser and such participants
shall bear such Registration Expenses pro rata on the basis of the number of
their shares so included in the registration request.
SECTION 8.5. Procedures. In the case of each registration
effected by the Company pursuant to this Article 8, the Company shall keep the
Purchasers advised in writing as to the initiation of each registration and as
to the completion thereof. At its expense, the Company shall:
(i) keep such registration effective for a period of 120 days,
or until each participating Purchaser or such other participants in the
registration, as applicable, have completed the distribution described
in the registration statement relating thereto, whichever first occurs;
provided, however, that (A) such 120-day period shall be extended for a
period of time equal to the period, if any, during which such Purchaser
and such other participants, as applicable, refrain from selling any
shares included in such registration in accordance with provisions in
Section 8.9 hereof; and (ii) in the case of any registration of
Registrable Stock on Form S-3 which is intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended
until all such
<PAGE>
45
Registrable Stock is sold; provided that Rule 418, or any successor
rule under the Securities Act, permits an offering on a continuous or
delayed basis; and provided further that the applicable rules under the
Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment which
(y) includes any prospectus required by Section 10(a) of the Securities
Act or (z) reflects facts or events representing a material or
fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be
included in clauses (y) and (z) above to be contained in periodic
reports filed pursuant to Section 12 or 15(d) of the Exchange Act in
the registration statement; and
(ii) furnish such number of prospectuses and other documents
incident thereto as each participating Purchaser, such other
participants and their respective counsel and advisers, as applicable,
from time to time may reasonably request.
SECTION 8.6. Indemnification. (a) The Company shall indemnify
each participating Purchaser, each of its officers, directors and partners, and
each person controlling such Purchaser with respect to each registration which
has been effected pursuant to this Article 8, and each underwriter, if any, and
each person who controls any underwriter, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and shall
reimburse each participating Purchaser, each of its officers, directors and
partners, and each person controlling such Purchaser, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action; provided that the Company shall
not be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such
Purchaser or underwriter and stated to be specifically for use therein.
(b) Each participating Purchaser shall, if shares of
Registrable Stock held by it are included in the shares as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and each underwriter, if any, of the
shares covered by such a registration statement, each person who controls the
Company or such underwriter within the meaning of the Securities Act and the
rules and regulations thereunder, each Other Stockholder and each of their
officers, directors, and partners, and each person controlling such Other
Stockholder against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering
<PAGE>
46
circular or other document made by such Purchaser, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements by such Purchaser therein not misleading, and
shall reimburse the Company and such Other Stockholders, directors, officers,
partners, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Purchaser
and stated to be specifically for use therein; provided, however, that the
obligations of each participating Purchaser hereunder shall be limited to an
amount equal to the proceeds to such Purchaser of Registrable Stock sold by it
as contemplated herein.
(c) Each party entitled to indemnification under this Section
8.6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Indemnifying Party and the Indemnified Party in such action, in which case the
fees and expenses of counsel shall be at the expense of the Indemnifying Party);
and provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 8.6 unless the Indemnifying Party is materially prejudiced
thereby. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to the entry
of any judgment or enter into any settlement which does not include, as an
unconditional term thereof, the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 8.6 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party, on the one hand, and of the Indemnified Party, on the other,
in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified
<PAGE>
47
Party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party, and the parties| relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with any underwritten public offering
contemplated by this Agreement are in conflict with the foregoing provisions,
the provisions in such underwriting agreement shall be controlling.
(f) The foregoing indemnity agreement of the Company and
Holders shall be subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a preliminary prospectus but eliminated
or remedied in the amended prospectus on file with the SEC at the time the
registration statement in question becomes effective or the amended prospectus
filed with the Commission pursuant to Rule 424 (b) under the Securities Act (the
"Final Prospectus"), such indemnity agreement shall not inure to the benefit of
any underwriter if a copy of the Final Prospectus was furnished to the
underwriter and was not furnished to the person asserting the loss, liability,
claim or damage at or prior to the time such action was required by the
Securities Act.
SECTION 8.7. Information by the Purchasers. Each participating
Purchaser shall furnish to the Company such information regarding such Purchaser
and the distribution proposed by such Purchaser as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Article 8.
SECTION 8.8. Rule 144 Reporting. With a view to making
available the benefits of certain rules and regulations of the Commission which
may permit the sale of restricted securities to the public without registration,
the Company agrees to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all
times from and after 90 days following the effective date of the first
registration under the Securities Act filed by the Company for an
offering of its securities to the general public;
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act at any time after it has
become subject to such reporting requirements; and
(iii) so long as either Purchaser owns any Registrable Stock,
furnish to such Purchaser upon request, a written statement by the
Company as to its compliance with the
<PAGE>
48
reporting requirements of Rule 144 (at any time from and after 90 days
following the effective date of the first registration statement filed
by the Company for an offering of its capital stock to the public), and
of the Securities Act generally and the Exchange Act (at any time after
it has become subject to such reporting requirements), a copy of the
most recent annual or quarterly report of the Company and such other
reports and documents so filed as either Purchaser may reasonably
request in availing itself of any rule or regulation of the Commission
allowing such Purchaser to sell any such capital stock without
registration.
SECTION 8.9. "Market Stand-off" Agreement. Each Purchaser (for
so long as it and its Affiliates benefically own more than 5% of the Common
Stock on a fully diluted basis) agrees, if requested by the Company and an
underwriter of Common Stock (or other securities convertible into or
exchangeable for Common Stock), not to sell or otherwise transfer or dispose of
any Registerable Stock (or such other equity securities of the Company) held by
each Purchaser during the 180-day period following the effective date of a
registration statement of the Company filed under the Securities Act; provided
that:
(i) such agreement only applies to a Qualified Initial Public
Offering; and
(ii) all officers and directors and holders of 5% or more of
the outstanding shares of capital stock of the Company enter into
similar agreements.
If requested by the underwriters, each Purchaser shall execute a separate
agreement to the foregoing effect. The Company may impose stop-transfer
instructions with respect to the shares (or stock) subject to the foregoing
restriction until the end of said 180-day period. The provisions of this Section
8.9 shall be binding upon any transferee who acquires Registrable Stock, whether
or not such transferee is entitled to the registration rights provided
hereunder.
SECTION 8.10. Termination. The registration set forth in this
Section shall not be available to any Holder if, in the written opinion of
counsel to the Company, all of the Registrable Stock then owned by such
Purchaser could be sold in any 90-day period pursuant to Rule 144 under the
Securities Act.
SECTION 8.11. Suspension of Sales. Subject to the next
sentence of this paragraph, the Company shall be entitled to postpone, for a
reasonable period of time, the effectiveness of, or suspend the rights of the
Purchasers to make sales pursuant to any registration statement otherwise to be
prepared, filed and kept effective by it under this Article 8; provided,
however, that the duration of such postponement or suspension may not exceed the
earlier to occur of (A) 15 days after the cessation of the circumstances
described in the next sentence of this paragraph on which such postponement or
suspension is based or (B) 120 days after the date of the determination of the
Board referred to in the next sentence. Such postponement or suspension may only
be effected if the Board determines in good faith that the effectiveness of,
<PAGE>
49
or sales pursuant to, such registration statement would materially impede, delay
or interfere with any significant financing, offer or sale of securities,
acquisition, corporate reorganization or significant transaction involving the
Company or any of its affiliates or require disclosure of material information
which the Company has a bona fide business purpose for preserving as
confidential. If the Company shall so postpone the effectiveness of, or suspend
the rights of the Purchasers to make sales pursuant to, a registration
statement, it shall, as promptly as possible, notify the Purchasers of such
determination and each Purchaser shall (y) have the right, in the case of a
postponement of the effectiveness of a registration statement, to withdraw the
request for registration by giving written notice to the Company within 10 days
after receipt of such notice or (z) in the case of a suspension of the right to
make sales, receive an extension of the registration period referred to in
Section 8.2(a)(y) hereof equal to the number of days of the suspension.
ARTICLE IX.
AMENDMENT AND WAIVER
SECTION 9.1. Amendment. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto; provided that
if any amendment does not adversely affect the rights of, or impose any
additional obligations on, Birch under this Agreement, then such amendment need
not be signed by Birch.
SECTION 9.2. Waiver. Any party hereto may (a) extend the time
for the performance of any of the obligations or other acts of any other party
hereto which run in favor of such waiving party, (b) waive any inaccuracies in
the representations and warranties contained herein which run in favor of such
waiving party or in any document delivered to it pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein which run
in favor of such waiving party. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party to be bound thereby.
The failure of any party hereto to assert any of its rights hereunder shall not
constitute a waiver of any such rights.
ARTICLE X.
GENERAL PROVISIONS
SECTION 10.1. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telecopy, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
<PAGE>
50
(a) if to the Purchasers:
Wafra Acquisition Fund 6, L.P.
345 Park Avenue
41st Floor
New York, New York 10154
Attention: Mr. Christopher R. Smith
Fax: (212) 486-2678
Telephone: (212) 759-3700
Wafra Fund Management Ltd.
c/o Wafra Partners Ltd.
345 Park Avenue
41st Floor
New York, New York 10154
Attention: Mr. Christopher R. Smith
Fax: (212) 486-2678
Telephone: (212) 759-3700
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
Attention: Peter J. Hanlon, Esq.
Fax: (212) 728-8111
Tel: (212) 728-8000
(b) if to the Company:
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
Suite 570
Elmsford, NY 10523
Attention: Chief Financial Officer
Fax: (914) 345-4516
Telephone: (914) 345-4506
with a copy to:
<PAGE>
51
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Stephen T. Giove, Esq.
Fax: (212) 648-7179
Telephone: (212) 848-4000
<PAGE>
52
(c) if to Birch:
Birch Acquisitions L.L.C.
c/o Wellspring Associates L.L.C.
620 Fifth Avenue
New York, NY 10020 - 1579
Attention: Douglas Rotatori
Fax: (212) 332-7575
Telephone: (212) 332-7555
with a copy to:
Paul, Weiss Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: James H. Schwab
Fax: (212) 757-3990
Telephone: (212) 373-3000
SECTION 10.2. Entire Agreement; Assignment. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof. This Agreement shall not be assigned by operation of law or
otherwise, except that either Purchaser may assign all or any of its rights and
obligations hereunder to an Affiliate of such Purchaser on substantially similar
terms without the consent of the Company.
SECTION 10.3. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
SECTION 10.4. Governing Law. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.
SECTION 10.5. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in any such New York State or, to the extent permitted by law, such
federal court. Each of the parties hereto agrees that a final
<PAGE>
53
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this June 25, 1998 Agreement shall affect any right
that any party may otherwise have to bring any action or proceeding relating to
this Agreement, in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any such
New York State court or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 10.6. Headings. The descriptive headings contained in
this Agreement are included for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 10.7. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 10.8. Termination. This Agreement shall terminate if
the Closing shall not have occurred on or prior to August 1, 1998, with no
further obligations hereunder to either party hereto.
<PAGE>
IN WITNESS WHEREOF, each of the Purchasers and the Company
have each caused this Agreement to be executed by its duly authorized officer as
of the date first written above.
DISCOVERY ZONE, INC.
By: /s/ Scott W. Bernstein
-----------------------------------
Name: Scott W. Bernstein
Title: President & CEO
WAFRA ACQUISITION FUND 6, L.P.
By: WAFRA PARTNERS, L.P.,
General Partner
By: WAFRA PARTNERS, INC.,
General Partner
By: /s/ John T. Shea
----------------------------
Name: John T. Shea
Title: Senior Vice
President
WAFRA FUND MANAGEMENT LTD.
By: /s/ Anthony G. Barbuto
------------------------------------
Name: Anthony G. Barbuto
Title: Vice President
<PAGE>
The undersigned hereby agree as of the date first written
above to be bound by the provisions of Article 7 of this Agreement insofar as
the terms and conditions of such Article 7 relate to the obligations of the
undersigned.
BIRCH HOLDINGS L.L.C.
By: /s/ Martin S. Davis
------------------------------------
Name: Martin S. Davis
Title: Member
BIRCH ACQUISITION L.L.C.
By: /s/ Martin S. Davis
------------------------------------
Name: Martin S. Davis
Title: Member
<PAGE>
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATIONS OF SERIES A
SENIOR CUMULATIVE PREFERRED STOCK
OF
DISCOVERY ZONE, INC.
<PAGE>
EXHIBIT B
FORM OF SERIES A PREFERRED
WARRANT AGREEMENT
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
with respect to
SERIES B PREFERRED UNITS
by and among
DISCOVERY ZONE, INC.,
and
BIRCH ACQUISITION L.L.C.,
and
DZ INVESTORS L.L.C.
and
JEFFERIES & COMPANY, INC.
Dated as of July 13, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definitions.................................................. 1
ARTICLE II.
PURCHASE AND SALE OF SERIES B PREFERRED UNITS; CLOSING
SECTION 2.1. Authorization; Purchase and Sale of Series B Preferred Units;
Closing......................................................10
ARTICLE III.
CONDITIONS TO THE CLOSING
SECTION 3.1. Conditions to Obligations of the Purchasers..................11
SECTION 3.2. Conditions to Obligations of the Company.....................13
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.1. Organization and Qualification; Subsidiaries.................15
SECTION 4.2. Charter of Incorporation and By-Laws.........................15
SECTION 4.3. Capitalization...............................................15
SECTION 4.4. Authority....................................................17
SECTION 4.5. No Conflict; Required Filings and Consents; Certain Rights...17
SECTION 4.6. Preferred Stock; Warrants....................................18
SECTION 4.7. Compliance with Laws.........................................19
SECTION 4.8. Governmental Consents and Approvals..........................19
SECTION 4.9. Financial Statements; Financial Projections..................19
SECTION 4.10. Absence of Undisclosed Liabilities..........................20
SECTION 4.11. Absence of Certain Changes, Events and Conditions;
Conduct in the Ordinary Course..............................20
SECTION 4.12. Employee Benefit Matters....................................22
SECTION 4.13. Real Property...............................................24
SECTION 4.14. Tangible Personal Property..................................25
SECTION 4.15. Intellectual Property.......................................25
SECTION 4.16. Environmental Matters.......................................28
SECTION 4.17. Litigation..................................................29
<PAGE>
- ii -
Page
SECTION 4.18. Insurance...................................................29
SECTION 4.19. Material Contracts..........................................29
SECTION 4.20. Licenses and Permits........................................30
SECTION 4.21. Labor Matters...............................................30
SECTION 4.22. Taxes.......................................................30
SECTION 4.23. Private Offering............................................31
SECTION 4.24. Brokers.....................................................31
SECTION 4.25. Accuracy of Information.....................................31
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
SECTION 5.1. Organization.................................................32
SECTION 5.2. Authority....................................................32
SECTION 5.3. No Conflict; Required Filings and Consents...................32
SECTION 5.4. Funds........................................................33
SECTION 5.5. Investment Purpose...........................................33
SECTION 5.8. Brokers......................................................34
ARTICLE VI.
INDEMNIFICATION
SECTION 6.1. Survival of Representations and Warranties...................34
SECTION 6.2. Indemnification by the Company...............................34
SECTION 6.3. Indemnification by the Purchasers............................35
SECTION 6.4. Materiality..................................................35
SECTION 6.5. Time Period; Dollar Threshold................................35
SECTION 6.6. Notice and Defense...........................................35
ARTICLE VII.
COVENANTS OF THE COMPANY AND THE PURCHASERS
SECTION 7.1. Legends......................................................36
SECTION 7.2. Resale of Stock..............................................36
SECTION 7.3. Drag-Along Right.............................................37
SECTION 7.4. Tag-Along Rights.............................................38
SECTION 7.5. Reporting and Information....................................38
SECTION 7.6. Fees and Expenses............................................40
<PAGE>
- iii -
Page
ARTICLE VIII.
REGISTRATION RIGHTS
SECTION 8.1. Definitions..................................................40
SECTION 8.2. Demand Registration..........................................41
SECTION 8.3. Piggyback Registration.......................................43
SECTION 8.4. Expenses of Registration.....................................44
SECTION 8.5. Procedures...................................................44
SECTION 8.6. Indemnification..............................................45
SECTION 8.7. Information by the Purchasers................................47
SECTION 8.8. Rule 144 Reporting...........................................47
SECTION 8.9. "Market Stand-off" Agreement.................................48
SECTION 8.10. Termination.................................................48
SECTION 8.11. Suspension of Sales.........................................48
ARTICLE IX.
AMENDMENT AND WAIVER
SECTION 9.1. Amendment....................................................49
SECTION 9.2. Waiver.......................................................49
ARTICLE X.
GENERAL PROVISIONS
SECTION 10.1. Notices.....................................................49
SECTION 10.2. Entire Agreement; Assignment................................51
SECTION 10.3. Parties in Interest.........................................51
SECTION 10.4. Governing Law...............................................51
SECTION 10.5. Jurisdiction, Etc...........................................51
SECTION 10.6. Headings....................................................52
SECTION 10.7. Counterparts................................................52
SECTION 10.8. Termination.................................................52
EXHIBIT A -- Certificate of Designations of Series B Junior Cumulative
Preferred Stock of Discovery Zone, Inc.
EXHIBIT B -- Form of Series B Junior Preferred Warrant Agreement
<PAGE>
1
PURCHASE AGREEMENT (this "Agreement"), dated as of July 13,
1998, by and among DISCOVERY ZONE, INC., a Delaware corporation (the "Company"),
BIRCH ACQUISITION L.L.C., a New York limited liability company ("Birch
Acquisition"), JEFFERIES & COMPANY, INC. ("Jefferies") and DZ Investors L.L.C.
("DZ Investors" and, together with BIRCH HOLDINGS and DZ Investors, the
"Purchasers" and, each individually, a "Purchaser").
W I T N E S S E T H:
WHEREAS, the Company desires to authorize, issue, and sell to
each Purchaser, and each Purchaser, severally and not jointly, desires to
purchase from the Company the respective number of Series B Preferred Units (as
hereinafter defined) set forth in Section 2.1 hereof;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definitions. As used in this Agreement, the
following terms shall have the following meanings:
"Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority.
"Affiliate" of a Person means a Person that directly or
indirectly, through one or more intermediates, controls, is controlled
by, or is under common control with, the first mentioned Person.
"Amendment" means the amendment to the Certificate of
Incorporation adopted by the Board and approved by the written consent
of the holders of a majority of the capital stock of the Company and to
be filed with the Secretary of the State of Delaware prior to the
Closing Date, which amendment, among other things, increases the
authorized share capital of the Company.
"Bankruptcy Code" means title 11 of the United States Code, as
now in effect or hereafter amended.
"Birch" means, collectively, Birch Holdings L.L.C., Birch
Acquisition L.L.C. and any of their respective Related Parties.
<PAGE>
2
"Board" means the Board of Directors of the Company.
"Business" means the operation by the Company and its
Subsidiaries of indoor entertainment and fitness facilities.
"Business Day" means any day other than a Saturday, Sunday, or
federal holiday and consists of the time period from 12:01 a.m. through
12:00 midnight, Eastern Standard Time.
"By-Laws" means the Amended and Restated By-Laws of the
Company in the form attached as Exhibit A to the Disclosure Statement
to be adopted by the Board and approved by the Court pursuant to the
Confirmation Order.
"CERCLA" has the meaning specified in the definition of
"Environmental Laws."
"CERCLIS" means the Comprehensive Environmental Responsive,
Compensation and Liability Information System, 42 U.S.C. ss. 9616(a).
"Certificate of Designations" means, as applicable, the
Certificate of Designations relating to the Convertible Preferred
Stock, the Series A Preferred Stock or the Series B Preferred Stock, as
the case may be, filed with the Secretary of State of Delaware on or
prior to the Closing Date. The Certificate of Designations for the
Series B Preferred Stock is attached hereto as Exhibit A.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company in the form attached as
Exhibit A to the Disclosure Statement, as amended by the Amendment and
the Certificate of Designations for each of the Convertible Preferred
Stock, the Series A Preferred Stock and the Series B Preferred Stock,
and filed with the Secretary of State of Delaware.
"Closing" means the completion of the transactions specified
herein relating to the purchase and sale of the Series B Preferred
Units as contemplated by Article II hereof.
"Closing Date" means July 17, 1998, the date on which the
Closing shall occur.
"Code" means the Internal Revenue Code of 1986, as amended,
together with the rules and regulations promulgated thereunder.
"Common Stock" means, collectively, the Class A Voting Common
Stock, par value $0.00017 per share, of the Company and the the Class B
Nonvoting Common Stock, par value $0.00017 per share, of the Company,
authorized for issuance pursuant to the Certificate of Incorporation.
<PAGE>
3
"Company Loss" has the meaning specified in Section 6.3.
"control" (including the terms "controlled by" and "under
common control with") means the possession, directly or indirectly or
as trustee or executor, of the power to direct or cause the direction
of the management and/or policies of a Person, whether through the
ownership of stock, as trustee or executor, by contract or credit
arrangement or otherwise.
"Convertible Preferred Stock" means $15,000,000 aggregate
stated value of Series A Convertible Preferred Stock, par value $0.01
per share, of the Company issued pursuant to the Certificate of
Incorporation and having the rights set forth in the Certificate of
Designations with respect thereto.
"Disclosure Schedule" means the Disclosure Schedule dated as
of the date hereof delivered to the Purchasers by the Company and
forming a part of this Agreement.
"Encumbrance" means any security interest, pledge, mortgage,
lien (including environmental liens), charge or (as determined to the
best of the Company's knowledge after due inquiry) adverse claim,
including, without limitation, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of
ownership, but excluding such Encumbrances which, taken as a whole,
would not have a Material Adverse Effect.
"Environmental Laws" means any federal, state or local
statute, code, ordinance, rule, regulation, principal of environmental
common law, permit, consent, approval, license, judgment, order, writ,
judicial decision, decree, agency interpretation, injunction or other
authorization or requirement whenever promulgated, issued, or modified,
relating to:
(a) emissions, discharges, spills, releases or
threatened releases of pollutants, contaminants, Hazardous
Substances, materials containing Hazardous Substances, or
hazardous or toxic materials or wastes into ambient air,
surface water, groundwater, watercourses, publicly or
privately owned treatment works, drains, sewer systems,
wetlands, septic systems or onto land; or
(b) the use, treatment, storage, disposal, handling,
manufacturing, transportation, or shipment of Hazardous
Substances, materials containing Hazardous Substances or
hazardous and/or toxic wastes, material, products or
by-products (or of equipment or apparatus containing Hazardous
Substances) as defined in or regulated under the following
statutes and their implementing regulations: the Hazardous
Materials Transportation Act, 49 U.S.C. ss.ss. 1801 et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss.
6901 et seq., the
<PAGE>
4
Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. ss.ss. 9601 et seq. ("CERCLA"), The Clean Water Act, 33
U.S.C. ss.ss. 1251 et seq., The Clean Air Act, 42 U.S.C. ss.ss. 7401 et
seq., and/or the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et
seq., each as amended from time to time.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, together with the rules and regulations promulgated
thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated
thereunder.
"Existing Notes" means $85.0 million aggregate principal
amount of 13.5% Senior Secured Notes due 2002 issued by the Company
under the Indenture, dated as of July 22, 1997, among the Company, the
Subsidiary Guarantors listed therein and State Street Bank and Trust
Company, trustee.
"Existing Warrants" means 85,000 warrants, each to purchase
one share of Common Stock at an exercise price of $0.01 per share,
issued by the Company pursuant to the Warrant Agreement, dated as of
July 22, 1997, among the Company and Boston Equiserve, Inc., warrant
agent.
"Financial Statements" has the meaning specified in Section
4.9.
"Foothill Credit Facility" means the revolving credit facility
dated as of March 31, 1998, between the Company and Foothill Capital
Corporation in the amount of $10,000,000.
"GAAP" means U.S. generally accepted accounting principles and
practices in effect from time to time, applied consistently throughout
the periods involved.
"Governmental Authority" means any United States federal,
state or local or any foreign government, governmental, regulatory or
administrative authority, agency or commission or any court, tribunal,
or judicial or arbitral body.
"Hazardous Substances" means (a) hazardous materials,
hazardous wastes and hazardous substances as defined or regulated under
any Environmental Laws, (b) any mixtures, blends, compounds or liquids
containing any hazardous substances in any proportions, (c) petroleum
and petroleum products including crude oil and any fractions thereof,
(d) asbestos and/or any material which contains any hydrated mineral
silicates, whether friable or non-friable, (e) PCBs, or PCB-containing
materials or fluids, (f) any other hazardous radioactive, toxic or
noxious substance, material, pollutant, or solid,
<PAGE>
5
liquid or gaseous waste and (g) any substance with respect to which a
federal, state or local agency requires environmental investigation,
monitoring or remediation.
"Indebtedness" means, with respect to any Person, (a) any
indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in
respect thereof) or representing the balance deferred and unpaid of the
purchase price of any property (including pursuant to capital leases)
or representing any Interest Swap Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing Indebtedness (other than Interest Swap
Obligations) would appear as a liability upon a balance sheet of such
person prepared in accordance with GAAP, (b) all obligations of such
Person to purchase, redeem, retire or defease or otherwise acquire for
value any capital stock of such Person or any warrants, rights or
options to acquire such capital stock, valued, in the case of
redeemable preferred stock, at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid dividends,
and (c) to the extent not otherwise included, the guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, by such Person in any manner
(including, without limitation, letters of credit and reimbursement
agreements in respect thereof), of all or any part of any of the items
that would be included within this definition.
"Intellectual Property" means trademarks, service marks,
trademark rights, trade names, trade name rights, registered copyrights
and trade secrets owned or used by the Company or any of its
Subsidiaries in the conduct of its business.
"Interest Swap Obligations" means the obligations of any
Person pursuant to any arrangement with any other Person, whereby,
directly or indirectly, such Person is entitled to receive from time to
time periodic payments calculated by applying either a floating or a
fixed rate of interest to a stated notional amount in exchange for
periodic payments made by such other Person calculated by applying a
fixed or a floating rate of interest to the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Interim Financial Statements" has the meaning specified in
Section 4.9.
"IRS" means the United States Internal Revenue Service.
"Leased Real Property" means the real property leased by the
Company or its Subsidiaries, together with, to the extent leased by the
Company, all buildings and other structures, facilities or improvements
presently or hereafter located thereon, all fixtures and systems of the
Company or its Subsidiaries attached or appurtenant thereto and all
easements, licenses, rights and appurtenances relating to the
foregoing.
<PAGE>
6
"Liabilities" means any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, mature
or unmatured or determined or determinable, including, without
limitation, those arising under any law, rule, regulation, or order by
a Governmental Authority and those arising under any contract,
agreement, commitment or undertaking.
"Licensed Intellectual Property" means all Intellectual
Property licensed or sublicensed to the Company or any Subsidiary from
a third party for a term of 1 year or greater.
"Loss" has the meaning specified in Section 6.3.
"Material Adverse Effect" means any circumstance, change,
event, transaction, loss, failure, effect or other occurrence that is,
or is reasonably likely to be, materially adverse to the Business,
operations, condition (financial or otherwise), assets, Liabilities or
results of operations or prospects of the Company and its Subsidiaries,
taken as a whole.
"McDonald Obligations" mean, collectively, the McDonald's Rent
Deferral Secured Notes and the McDonald's Secured Note, as such terms
are defined in the New Indenture.
"Multiemployer Plan" has the meaning specified in Section
4.12(b).
"Nasdaq" means any tier of the National Association of
Securities Dealers, Inc. Automated Quotation System.
"New Indenture" means the indenture, dated as of the Closing
Date, among the Company, each of the Subsidiary Guarantors named
therein and Firststar Bank of Minnesota, trustee, pursuant to which the
New Notes are to be issued in connection with the Offering.
"New Notes" means $20.0 million aggregate principal amount of
14 1/2% Senior Collateralized Notes due 2002 of the Company to be
issued pursuant to the terms of the New Indenture.
"New Units" means the 20,000 Units, each consisting of $1,000
principal amount of New Notes and seventeen New Series A Warrants to
purchase shares of Common Stock and seventeen New Series B Warrants to
purchase shares of Common Stock, to be sold in the Offering.
<PAGE>
7
"New Series A Warrants" means 340,000 Series A Warrants, each
to purchase 1,769.3683 shares of Common Stock (voting or nonvoting) at
an exercise price of $.00017 per share, issued by the Company pursuant
to the Series A Warrant Agreement, dated as of July 15, 1998, between
the Company and Firststar Bank of Minnesota, warrant agent.
"New Series B Warrants" means 340,000 Series B Warrants, each
to purchase 780.6036 shares of Common Stock (voting or nonvoting) at an
exercise price of $.00017 per share, issued by the Company pursuant to
the Series B Warrant Agreement, dated as of July 15, 1998, between the
Company and Firststar Bank of Minnesota, warrant agent.
"New Warrants" means, collectively, the New Series A Warrants
and the New Series B Warrants.
"Offering" means the offering of the New Units pursuant to the
Offering Circular.
"Offering Circular" means the Final Offering Circular, dated
July 9, 1998, of the Company with respect to the issuance and sale of
the New Units.
"Other Shareholders" has the meaning specified in Section
8.2(b).
"Owned Intellectual Property" means all Intellectual Property
in and to which the Company or any Subsidiary holds, or has a right to
hold, right, title and interest.
"Owned Real Property" means the real property owned by the
Company or its Subsidiaries, together with all buildings and other
structures, facilities or improvements presently or hereafter located
thereon, all fixtures, systems, equipment and items of personal
property of the Company or its Subsidiaries attached or appurtenant
thereto and all easements, licenses, rights and appurtenances relating
to the foregoing.
"Person" means an individual, corporation, limited liability
company, partnership, limited partnership, association, trust, joint
venture, unincorporated organization, other entity or group (as defined
in Section 13(d)(3) of the Exchange Act).
"Plan of Reorganization" means the Third Amended Joint Plan of
Reorganization, which became effective on July 29, 1997.
"Plans" has the meaning specified in Section 4.12(a).
"Preferred Units" means the Series A Preferred Units and the
Series B Preferred Units.
<PAGE>
8
"Preferred Warrants" means the Series A Preferred Warrants and
the Series B Preferred Warrants.
"Purchase Price" has the meaning specified in Section 2.1.
"Purchaser Loss" has the meaning specified in Section 6.2.
"Related Party" means, with respect to any Person: (A) any
other Person directly or indirectly controlling, controlled by, or
under direct or indirect common control with, such Person, (B) any
spouse or immediate family member of such Person or (C) a trust,
corporation, limited liability company, partnership, limited
partnership, or other entity, the beneficiaries, stockholders, members,
partners, owners or Persons holding a 75% or more controlling interest
of which consist of such Person and/or such other Persons or entities
referred to in the immediately preceding clause (A). A Person shall be
deemed to control another Person if such Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of such other Person, whether through the
ownership of voting securities, by contract or otherwise.
"Real Property" means the Leased Real Property and the Owned
Real Property.
"SEC" means the United States Securities and Exchange
Commission.
"Securities" means the New Units and the Series A Preferred
Units.
"Securities Act" means the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Series A Preferred Stock" means the Series A Senior
Cumulative Preferred Stock, par value $0.01 per share, liquidation
preference $25.00 per share, of the Company, authorized for issuance by
the Company pursuant to the Certificate of Incorporation and having the
rights set forth in the Certificate of Designations with respect
thereto.
"Series A Preferred Units" means 80 units, each consisting of
$25,000 aggregate stated value of Series A Preferred Stock and one
Series A Preferred Warrant.
"Series A Preferred Warrant" means a warrant to acquire
2,131,667.4631 shares of Common Stock at an exercise price of $0.00017
per share until August 1, 2007, to be issued pursuant to the Series A
Preferred Warrant Agreement, dated as of the Closing Date, between the
Company and Firststar Bank of Minnesota warrant agent.
<PAGE>
9
"Series B Preferred Stock" means the Series B Junior
Cumulative Preferred Stock, par value $0.01 per share, liquidation
preference $25.00 per share, of the Company authorized for issuance by
the Company pursuant to the Certificate of Incorporation and having the
rights set forth in the Certificate of Designations for the Series B
Preferred Stock attached hereto as Exhibit A.
"Series B Preferred Units" means 340 units, each consisting of
$25,000 aggregate stated value of Series B Preferred Stock and one
Series B Preferred Warrant.
"Series B Preferred Warrant" means a warrant to acquire
2,131,667.4631 shares of Common Stock at an exercise price of $0.00017
per share until August 1, 2007, to be issued pursuant to the Series B
Preferred Warrant Agreement dated as of the Closing Date, between the
Company and Firststar Bank of Minnesota, warrant agent, a copy of which
is attached hereto as Exhibit B.
"Stock Incentive Plan" means the 1997 Stock Incentive Plan of
Discovery Zone, Inc.
"Subsidiary" or "Subsidiaries" means any corporation, limited
liability company, partnership, limited partnership, joint venture or
other legal entity of which the Company or any other Person, as the
case may be (either alone or through or together with any other
Subsidiary), owns, directly or indirectly, 50% or more of the stock or
other equity interests, the holders of which are generally entitled to
vote for the election of the board of directors or other governing body
of such corporation or other legal entity.
"Tangible Personal Property" means machinery, equipment,
vehicles and other tangible personal property.
"Tax" or "Taxes" means all income, gross receipts, sales, use,
transfer, employment, franchise, profits, property, excise or other
similar taxes, estimated import duties, fees, stamp taxes and duties,
value added taxes, assessments or charges of any kind whatsoever
(whether payable directly or by withholding), together with any
interest and any penalties, additions to tax or additional amounts
imposed by any taxing authority with respect thereto.
"Ten-Year Warrants" means warrants issued by the Company to
acquire up to an aggregate of 444,444 shares of Common Stock pursuant
to a warrant agreement, dated as of July 29, 1997, between the Company
and State Street Bank and Trust Company, warrant agent.
<PAGE>
10
ARTICLE II.
PURCHASE AND SALE OF SERIES B PREFERRED UNITS; CLOSING
SECTION 2.1. Authorization; Purchase and Sale of Series B
Preferred Units; Closing. (a) Upon the terms and subject to the conditions set
forth herein, at the Closing (i) the Company shall authorize, issue and sell to
Birch, and Birch shall purchase from the Company, 200 Series B Preferred Units
for an aggregate purchase price of $5,000,000 in cash (the "Birch Purchase
Price"), (ii) the Company shall authorize, issue and sell to DZ Investors, and
DZ Investors shall purchase from the Company, 100 Series B Preferred Units for
an aggregate purchase price of $2,500,000 in cash (the "DZ Purchase Price") and
(iii) the Company shall authorize, issue and sell to Jefferies, and Jefferies
shall purchase from the Company, 40 Series B Preferred Units for an aggregate
purchase price of $1,000,000 (the "Jefferies Purchase Price"). Delivery of, and
payment for, the Series B Preferred Units shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, on the
Closing Date, or at such other time and place as the Company and the Purchasers
may mutually agree in writing (such time and date of delivery against payment
being referred to herein as the "Closing Date").
(b) On the Closing Date, (A) (i) Birch shall deliver the Birch
Cash Purchase Price, and DZ Investors shall deliver the DZ Cash Purchase Price,
to the Company by wire transfer of same-day funds to an account or accounts
designated by the Company at least one Business Day prior to the Closing Date,
(ii) the Jefferies Purchase Price shall be netted against the underwriting
discount and commission in the amount of $1,000,000 owed to Jefferies out of the
proceeds of the Offering and shall be deemed paid in full, and (iii) each
Purchaser shall deliver to the Company (x) the certificates referred to in
Section 3.2(a) and Section 3.2(d) and (y) receipts for the Series B Preferred
Units delivered to each Purchaser; and (B) the Company shall deliver to the
Purchasers (i) receipt for the Birch Cash Purchase Price delivered by Birch and
a receipt for the DZ Purchase Price delivered to DZ Investors; (ii) a
certificate evidencing the respective Series B Preferred Units registered in the
name of each Purchaser (or its designee); (iii) the certificates referred to in
Section 3.1(d) and Section 3.1(g); (iv) the legal opinion referred to in Section
3.1(l); and (v) such other documents as the Purchasers shall reasonably request.
<PAGE>
11
ARTICLE III.
CONDITIONS TO THE CLOSING
SECTION 3.1. Conditions to Obligations of the Purchasers. The
obligations of the Purchasers to effect the Closing shall be subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Simultaneous Closings. Consummation by the Company of (i)
the Offering pursuant to Rule 144A under the Securities Act and (ii)
the issuance and sale of the Series A Preferred Units to Wafra
Acquisition Fund 6, L.P. and Wafra Fund Management Ltd, in each case
simultaneously with the closing of the issuance and sale by the Company
of the Series B Preferred Units to the Purchasers hereunder.
(b) Representations and Warranties; Agreements and Covenants.
(i) The representations and warranties of the Company contained in this
Agreement which are qualified as to materiality shall be true and
correct in all respects and all other representations and warranties
shall be true and correct in all material respects on and as of the
Closing Date, with the same force and effect as if made as of the
Closing, (ii) all the agreements and covenants contained in this
Agreement to be performed or complied with by the Company at or before
the Closing shall have been performed or complied with in all material
respects and (iii) the Purchasers shall have received a certificate of
the Company signed by a duly authorized officer thereof, as to the
fulfillment of the conditions set forth in the foregoing clauses (i)
and (ii).
(c) Litigation. There shall have been no order or preliminary
or permanent injunction entered in any Action or proceeding before any
Governmental Authority, or no other Action taken or threatened, or
statute, rule, regulation, legislation, interpretation, judgment or
order enacted, entered, enforced, promulgated, amended, issued or
deemed applicable to the Purchasers, the Company or any of its
Subsidiaries or Affiliates, by any Government Authority which shall
have remained in effect and which shall have had the effect of: (i)
making illegal, materially delaying or otherwise directly or indirectly
restraining or prohibiting the consummation of the transactions
hereunder (including, without limitation, the purchase of the Series B
Preferred Units or the conversion or redemption of the Series B
Preferred Stock or the exercise of the Series B Preferred Warrants),
except that the enforcement of this Agreement may be subject to (x)
bankruptcy, insolvency, reorganization, receivership, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally, (y) general principles of
equity (whether applied by a court of law or equity) and the discretion
of the court before which any proceeding therefore may be brought and
(z) with respect to Section 8.6 hereof, federal or state securities
laws or principles of public policy affecting enforcement of rights to
indemnity or contribution; (ii) prohibiting or materially
<PAGE>
12
limiting the ownership of the Series B Preferred Units; (iii) imposing
material limitations on the ability of each Purchaser to exercise full
rights of ownership of any of the Series B Preferred Units, including,
without limitation, the right to vote any shares of Series B Preferred
Stock pursuant to the Certificate of Designations for the Series B
Preferred Stock; or (iv) requiring divestiture by either Purchaser of
any Series B Preferred Units.
(d) Resolutions. On or prior to the Closing Date, the
Purchasers shall have received a true and complete copy, certified by
the Secretary of the Company, of the resolutions duly and validly
adopted by the Board evidencing its authorization of the execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby.
(e) Incumbency Certificate of the Company. On or prior to the
Closing Date, the Purchasers shall have received a certificate of the
Secretary or an Assistant Secretary of the Company certifying the names
and signatures of the officers of the Company authorized to sign this
Agreement and the other documents to be delivered hereunder.
(f) Consents and Approvals. On or prior to the Closing Date,
the Purchasers and the Company shall have received, each in form and
substance reasonably satisfactory to the Purchasers, all
authorizations, consents, orders and approvals of all Governmental
Authorities and officials and all third party consents and estoppel
certificates identified to the Company and necessary or desirable for
the consummation of the transactions contemplated by this Agreement.
(g) Organizational Documents. On or prior to the Closing Date,
the Purchasers shall have received a copy of (i) the Certificate of
Incorporation, certified by the Secretary of State of Delaware, as of a
date not earlier than five Business Days prior to the Closing Date and
accompanied by a certificate of the Secretary or Assistant Secretary of
the Company, dated as of the Closing Date, stating that no amendments
have been made to such Certificate of Incorporation (or similar
organizational documents) since such date, and (ii) the By-Laws of the
Company, certified by a certificate of the Secretary or Assistant
Secretary of the Company, dated as of the Closing Date, stating that no
amendments have been made to such By-Laws.
(h) Calamities. There shall not have occurred and be
continuing (i) any general suspension of, or limitation on prices for
or trading in, securities on any United States securities exchange,
(ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States, (iii) any limitation
(whether or not mandatory) by any Governmental Authority or other event
that materially adversely affects the ability of either Purchaser to
purchase the Series B Preferred Units hereunder or (iv) a commencement
of a war or armed hostilities or other national or international
calamity directly involving the United States.
<PAGE>
13
(i) No Material Adverse Effect. No fact, event or condition
(financial or otherwise) shall have occurred with respect to the
Company or any of its Subsidiaries having, or which is likely to have,
individually or in the aggregate, a Material Adverse Effect.
(j) Opinion. Each Purchaser shall have received an opinion
from Shearman & Sterling on no less favorable terms than the opinion of
such counsel to be delivered to the initial purchaser of the New Units;
provided, however, that such form of opinion shall not include the
matters set forth in the penultimate paragraph of Section 7(a) of the
Purchase Agreement dated July 9, 1998, between the Company and
Jefferies & Company, Inc., as initial purchaser, with respect to the
Offering.
(k) Filing of Corporate Certificates. On or prior to the
Closing Date, the Company shall have filed the Amendment and the
Certificate of Designations for each of the Series A Preferred Stock
and the Series B Preferred Stock with the Secretary of State of
Delaware.
(l) Offering Circular. The Purchasers shall have approved the
terms of the Offering Circular, which approval shall not be
unreasonably withheld.
SECTION 3.2. Conditions to Obligations of the Company. The
obligations of the Company to effect the Closing shall be subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) Representations and Warranties. (i) The representations
and warranties of the Purchasers contained in this Agreement shall be
true and correct in all material respects on and as of the Closing
Date, with the same force and effect as if made as of the Closing, (ii)
all the agreements and covenants contained in this Agreement to be
performed or complied with by the Purchasers at or before the Closing
shall have been performed or complied with in all material respects and
(iii) the Company shall have received a certificate of each Purchaser
signed by a duly authorized officer thereof, as to the fulfillment of
the conditions set forth in the foregoing clauses (i) and (ii).
(b) Litigation. There shall have been no order or preliminary
or permanent injunction entered in any Action or proceeding before any
federal, state or foreign court or governmental, administrative or
regulatory authority or agency by any federal, state or foreign
legislative body, court, government or governmental, administrative or
regulatory authority or agency which shall have remained in effect and
which shall have had the effect of making illegal the consummation of
any of the transactions hereunder, except that the enforcement of this
Agreement may be subject to (x) bankruptcy, insolvency, reorganization,
receivership, moratorium, fraudulent conveyance or other similar laws
now or hereafter in effect relating to creditors' rights generally, (y)
general principles of
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14
equity (whether applied by a court of law or equity) and the discretion
of the court before which any proceeding therefore may be brought and
(z) with respect to Section 8.6 hereof, federal or state securities
laws or principles of public policy affecting enforcement of rights to
indemnity or contribution.
(c) Resolutions. On or prior to the Closing Date, the Company
shall have received a true and complete copy, certified by the
Secretary of each Purchaser, of the resolutions duly and validly
adopted by each Purchaser, if any, evidencing its authorization of the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
(d) Incumbency Certificate of the Company. On or prior to the
Closing Date, the Company shall have received a certificate of the
Secretary or an Assistant Secretary of each Purchaser certifying the
names and signatures of the officer(s) of the Purchaser authorized to
sign this Agreement and the other documents to be delivered hereunder.
(e) Organizational Documents. On or prior to the Closing Date,
the Company shall have received a copy of (i) the charter or other
organizational document of each Purchaser, certified by the Secretary
of State of the state of its organization, as of a date not earlier
than ten Business Days prior to the Closing Date and accompanied by a
certificate of the Secretary or Assistant Secretary of each Purchaser,
dated as of the Closing Date, stating that no amendments have been made
to such charter or other organizational document since such date and
(ii) the Operating Agreement or Bylaws, as the case may be, of each
Purchaser certified by the Secretary or Assistant Secretary of each
Purchaser.
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15
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that:
SECTION 4.1. Organization and Qualification; Subsidiaries. On
the Closing Date, each of the Company and its Subsidiaries will be duly
organized, validly existing and, where applicable, in good standing as a
corporation under the laws of its respective jurisdiction of incorporation or
formation, with all requisite corporate power and authority to own, lease and
operate its properties and carry on its business as presently owned or conducted
and as is described in the Offering Circular. The Company and each of its
Subsidiaries is duly qualified or licensed as a foreign corporation to do
business and, where applicable, is in good standing, in each jurisdiction where
the character of its properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except those
jurisdictions, if any, in which the failure to be so duly qualified or licensed
and in good standing would not, individually or in the aggregate, have a
Material Adverse Effect. Schedule 4.1 of the Disclosure Schedule sets forth a
complete and correct list of each of the Subsidiaries of the Company. Each such
Subsidiary is wholly owned by the Company, unless otherwise indicated in
Schedule 4.1 of the Disclosure Schedule, which sets forth all other owners of
each such Subsidiary not wholly owned by the Company. Other than the
Subsidiaries, there are no other corporations, partnerships, joint ventures,
associations or other entities in which the Company owns, of record or
beneficially, any direct or indirect equity or other interest or any right
(contingent or otherwise) to acquire the same. Other than the Subsidiaries, the
Company is not a member of (nor is any part of its business conducted through)
any partnership, nor is the Company a participant in any joint venture or
similar arrangement.
SECTION 4.2. Charter of Incorporation and By-Laws. The Company
has heretofore furnished to the Purchasers a complete and correct copy of the
Certificate of Incorporation and the By-Laws, each of which shall be in full
force and effect on the Closing Date. As of the Closing Date, the Board shall
have adopted the Amendment and the Certificate of Designations with respect to
each of the Series A Preferred Stock and the Series B Preferred Stock of the
Company and the Company shall have filed the Amendment and each Certificate of
Designations with the Secretary of State of Delaware. The Company is not in
violation of any of the provisions of the Certificate of Incorporation or
By-Laws, and its Subsidiaries are not in violation of any of the provisions of
their charters of incorporation, by-laws or equivalent organizational documents,
except where such violation would not, taken as a whole, have a Material Adverse
Effect.
SECTION 4.3. Capitalization. (a) As of the Closing Date, (i)
the authorized capital stock of the Company shall consist of (x) 2,200,000,000
shares of Class A Voting Common Stock (of which 4,000,000 shall represent all
issued and outstanding shares of Class A
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16
Voting Common Stock on the Closing Date), (y) 190,000,000 shares of Class B
Nonvoting Common Stock and (z) 10,000,000 shares of Preferred Stock (of which
420,933.33 shall represent all issued and outstanding shares of Preferred Stock
on the Closing Date); (ii) no shares of Common Stock shall be held in the
treasury of the Company; (iii) an aggregate of 715,691 shares of Class A Voting
Common Stock issuable in respect of options issued and outstanding under the
Stock Incentive Plan have been reserved for issuance; (iv) an aggregate of
805,154 shares of Class A Voting Common Stock shall be reserved for issuance
upon exercise of the Existing Warrants; (v) an aggregate of 444,444 shares of
Class A Voting Common Stock shall be reserved for issuance upon exercise of the
Ten-Year Warrants; (vi) an aggregate of 1,191,626 shares of Class A Voting
Common Stock are reserved for issuance upon conversion of the Convertible
Preferred Stock (of which 79,411 shares shall cease to be reserved by the
Company for future issuance upon the transfer by WAF-6 of the Convertible
Preferred Shares to the Company at the Closing); (vii) an aggregate of
866,990,443 shares of Class A Voting Common Stock shall have been reserved for
issuance upon the exercise of the New Warrants; (viii) an aggregate of
170,533,397 shares of Class A Voting Common Stock shall have been reserved for
issuance upon the exercise of the Series A Preferred Warrants; (ix) an aggregate
of 724,766,937 shares of Class A Voting Common Stock shall have been reserved
for issuance upon the exercise of the Series B Preferred Warrants.
(b) Except as set forth in this Section 4.3 or in Schedule
4.3(b) of the Disclosure Schedule, as of the Closing Date, there are no options,
Warrants or other rights, agreements, arrangements or material commitments of
any character to which the Company or any of its Subsidiaries or Affiliates is a
party or obligating the Company or any of its Subsidiaries or Affiliates to
issue or sell any shares of capital stock of, or other equity interests in, the
Company or any of its Subsidiaries or Affiliates. Except as set forth in
Schedule 4.3(b) of the Disclosure Schedule, as of the Closing Date, there are no
outstanding contractual obligations of the Company or any of its Subsidiaries or
Affiliates to repurchase, redeem or otherwise acquire any of the capital stock
of the Company or any Subsidiary or Affiliate or to provide funds to or make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or Affiliate or any other entity. As of the Closing Date, each of the
outstanding shares of capital stock of the Company and each of the Subsidiaries
will be duly authorized, validly issued, fully paid and nonassessable and will
not have been issued in violation of any preemptive or similar rights. All of
the outstanding shares of capital stock of each of the Subsidiaries as of the
Closing Date will be owned by the Company, directly or indirectly, free and
clear of all Encumbrances (other than restrictions on transferability imposed by
the Securities Act and the securities or "Blue Sky" laws of certain
jurisdictions).
(c) As of the Closing Date, except as set forth in Schedule
4.3(c) of the Disclosure Schedule and as set forth herein, neither the Company
nor any of its Affiliates shall be a party to any agreement granting
registration rights to any Person with respect to any equity or debt securities
of the Company.
<PAGE>
17
(d) Schedule 4.3(d) of the Disclosure Schedule sets forth a
complete and accurate list of (i) the names of each Person or group of Persons
known by the Company to beneficially own more than 5% of the outstanding shares
of capital stock of the Company as of the Closing Date and the corresponding
number of such shares beneficially owned by such Person as of the Closing Date.
SECTION 4.4. Authority. The Company has all necessary
corporate power and authority to execute, deliver and perform its obligations
under this Agreement, the Series B Warrant Agreement and the Certificates of
Designations relating to the Series B Preferred Stock and to consummate the
transactions contemplated hereunder and thereunder. The execution, delivery and
performance of this Agreement, the Series B Warrant Agreement and the
Certificates of Designations relating to the Series B Preferred Stock by the
Company have been duly and validly authorized by all necessary corporate action
and no other corporate proceedings on the part of the Company are necessary to
authorize, or to consummate the transactions contemplated by, this Agreement,
the Series B Warrant Agreement and the Certificates of Designations relating to
the Series B Preferred Stock. This Agreement, the Series B Warrant Agreement and
the Certificates of Designations relating to the Series B Preferred Stock have
been duly and validly executed and delivered by the Company and, assuming the
due authorization, execution and delivery hereof by the Purchasers and payment
for the Series B Preferred Units as contemplated by this Agreement, constitute
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except that the enforcement hereof may
be subject to (i) bankruptcy, insolvency, reorganization, receivership,
moratorium, fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditors' rights generally, (ii) general principles of
equity (whether applied by a court of law or equity) and the discretion of the
court before which any proceeding therefore may be brought and (iii) with
respect to Section 8.6 hereof, federal or state securities laws or principles of
public policy affecting enforcement of rights to indemnity or contribution.
SECTION 4.5. No Conflict; Required Filings and Consents;
Certain Rights. (a) The execution and delivery of this Agreement, the Series B
Warrant Agreement and the Certificates of Designations relating to the Series B
Preferred Stock by the Company do not, and the performance of this Agreement,
the Series B Warrant Agreement and the Certificates of Designations relating to
the Series B Preferred Stock (including, without limitation, the consummation of
the transactions contemplated hereunder) will not, (i) conflict with or violate
the Certificate of Incorporation or By-Laws, (ii) conflict with or violate the
certificates of incorporation or bylaws or equivalent organizational documents
of any of the Subsidiaries, (iii) conflict with or violate any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
Subsidiaries or by which its or any of their respective properties are bound or
affected, or (iv) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or Encumbrance on any of
the properties or assets of the Company or any of its Subsidiaries pursuant to
any note,
<PAGE>
18
bond, mortgage, indenture, contract, agreement, lease, license, permit,
insurance policy or other instrument or obligation to which the Company or any
of its Subsidiaries is a party, or by which the Company or any of its
Subsidiaries or its or any of their respective properties are bound or affected,
except in the case of clauses (ii) , (iii) and (iv) above, for such conflicts,
breaches or defaults with respect to which waivers or consents have been
obtained or which would not, individually or in the aggregate, have a Material
Adverse Effect.
(b) Except as disclosed in Schedule 4.13(b), as of the date
hereof and as of the Closing Date, the Company is not in breach of or in default
under (nor has any event occurred which, with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or Encumbrance on any of the properties or assets of the Company or any of its
Subsidiaries pursuant to any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, insurance policy or other instrument or
obligation to which the Company or any of its Subsidiaries is a party, or by
which the Company or any of its Subsidiaries or its or any of their respective
properties are bound or affected, except for any such breach, default, violation
or event which would not, individually or in the aggregate, have a Material
Adverse Effect. The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company (including, without
limitation, the consummation of the transactions hereunder and the conversion or
redemption, if any, of the Series B Preferred Stock) will not, require any
consent, approval, authorization or permit of, or filing with or notification to
(in each case, a "Consent") any Governmental Authority on the part of the
Company or any of its Subsidiaries, except for such consents as have been
obtained and other than such other consents as may be required under the
Securities Act or state securities or "Blue Sky" laws in connection with the
issuance and sale of the Series B Preferred Units.
(c) No antidilution protections or substantially similar
provisions in respect of any outstanding security of the Company are triggered
with respect to the issuance of the New Units, the Series A Preferred Units or
the Series B Preferred Units, except for such as have been expressly waived in
writing on or prior to the date hereof.
SECTION 4.6. Preferred Stock; Warrants. On the Closing Date,
following the consummation of the transactions hereunder, the Series B Preferred
Stock, upon issuance against payment therefor as contemplated by this Agreement,
shall be duly authorized, validly issued, fully paid and nonassessable, free of
all preemptive or similar rights, and entitled to the rights set forth in the
Certificate of Designations relating thereto and will not be subject to any
Encumbrances.
The Series B Preferred Warrants have been duly authorized by
the Company and, at the Closing, will have been duly executed by the Company
and, when executed and issued in the manner provided for in the Series B
Preferred Warrant Agreement and delivered against payment of the Purchase Price
therefor as provided in this Agreement, (A) will constitute valid
<PAGE>
19
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as the enforcement thereof may be subject to
(I) bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect relating to
creditors' rights generally, (II) general principles of equity (whether applied
by a court of law or equity) and the discretion of the court before which any
proceeding therefor may be brought and (III) with respect to the indemnity and
contribution provisions thereof, federal or state securities laws or principles
of public policy affecting enforcement of rights to indemnity or contribution
and (B) will be in the form contemplated by, and entitled to the benefits of,
the Series B Preferred Warrant Agreement. The shares of Common Stock issuable
upon exercise of the Series B Preferred Warrants have been duly authorized and
reserved by the Company and, when issued and delivered upon exercise of the
Series B Preferred Warrants in accordance with the terms of the Series B
Preferred Warrants and the Series B Preferred Warrant Agreement, will be validly
issued, fully paid and non-assessable.
SECTION 4.7. Compliance with Laws. Except as set forth in the
Offering Circular, neither the Company nor any of its Subsidiaries is in
conflict with, or in violation of, any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its Subsidiaries or by which the
Company or any of its Subsidiaries or any of its or their respective properties
are bound or affected, except for any such conflicts or violations which would
not, individually or in the aggregate, have a Material Adverse Effect.
SECTION 4.8. Governmental Consents and Approvals. The
execution, delivery and performance of this Agreement by the Company do not and
will not require any consent, approval, authorization or other order of, action
by, filing with or notification to any Governmental Authority, except for any
required filings which have been made or pursuant to the Securities Act and all
applicable state securities or "Blue Sky" laws.
SECTION 4.9. Financial Statements; Financial Projections. (a)
Set forth in Schedule 4.9 of the Disclosure Statement are true and complete
copies of (i) the audited balance sheets of the Company for the fiscal year
ended December 31, 1997 and the related audited statements of results of
operations and cash flows of the Company, together with all related notes
thereto, accompanied by the reports thereon or management letters from the
Company's accountants (collectively, the "Financial Statements") and (ii) the
unaudited balance sheets of the Company for the fiscal quarter ended March 31,
1998; and the related unaudited statements of results of operations and cash
flows, which statements include all material known adjustments as of the date of
such statements, subject to ordinary year-end adjustments which in the aggregate
would not be material (the aforementioned item (ii) being referred to herein as
the "Interim Financial Statements"). The Financial Statements and the Interim
Financial Statements (i) were prepared in accordance with the books of account
and other financial records of the Company, (ii) present fairly the financial
condition, results of operations and cash flows of the Company as of the dates
thereof or for the periods covered thereby, (iii) such statements have been
prepared in accordance with GAAP applied on a basis consistent with the past
practices of the Company and
<PAGE>
20
throughout the periods involved, and (iv) include all adjustments that, in the
opinion of the management of the Company, are necessary for a fair presentation
of the financial condition of the Company, the results of the operations and
cash flows, as applicable, of the Company, subject, with respect to the Interim
Financial Statements, to normal accruals and year-end adjustments which, in the
aggregate, are not expected to be material.
(b) Any financial projections of the Company which have been
provided to the Purchasers are based upon a number of estimates and assumptions
considered reasonable by the Company taken as a whole and upon specific
assumptions with respect to future business decisions which are subject to
change. Such projections are based on the Company's current best estimate of the
results it reasonably expects and have not been prepared with a view toward
compliance with published guidelines of the Commission, the American Institute
of Certified Public Accountants or GAAP.
SECTION 4.10. Absence of Undisclosed Liabilities. There are no
liabilities or obligations of the Company or its Subsidiaries (whether absolute,
accrued, contingent or otherwise) that would be required to be reflected on a
balance sheet or the footnotes thereto prepared in accordance with GAAP, other
than liabilities (a) reflected or reserved against on the Financial Statements
or Interim Financial Statements or the notes thereto, (b) described in Schedule
4.10 of the Disclosure Schedule or otherwise disclosed in Section 4.11 or (c)
covered by insurance, indemnification, contribution or comparable arrangements.
There are no guaranties made by or on behalf of the Company or its Subsidiaries
other than in connection with the Existing Notes, the New Units, the Foothill
Credit Facility and the McDonald Obligations, as well as any letters of credit
or deposits posted pursuant to any agreements described in Section 4.19.
SECTION 4.11. Absence of Certain Changes, Events and
Conditions; Conduct in the Ordinary Course. (a) Except as described in the
Offering Circular (i) there has not been any change having a Material Adverse
Effect and (ii) there are no conditions known to the Company to be existing,
with respect to the markets, proposed marketing plans, facilities, capabilities
or personnel of the Company, that reasonably could be expected to have a
Material Adverse Effect.
(b) Except as disclosed in Schedule 4.11(b) of the Disclosure
Schedule or in the Offering Circular, neither the Company nor any of its
Subsidiaries has, since March 31, 1998:
(i) made any change in any method of accounting or accounting
practice or policy used by the Company;
(ii) made any material changes in the customary methods of
operation of the Company, including practices and policies relating to
purchasing, marketing, selling or pricing;
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21
(iii) failed to maintain the Company's Tangible Personal
Property in good repair, ordinary wear and tear excepted, other than
such Tangible Personal Property located at the Company's FunCenter
sites which are scheduled to close;
(iv) except as contemplated under this Agreement, redeemed any
of the Company's capital stock or declared, made or paid any dividends
or distributions (whether in cash, securities or other property) to the
holder of the Company's capital stock or otherwise;
(v) issued or sold any of the Company's capital stock, notes,
bonds or other securities, or any option, warrant or other right to
acquire the same, other than the Securities;
(vi) merged with, been merged with, entered into a
consolidation with or acquired an interest of 5% or more in any Person
or acquired (by purchase, merger, consolidation, stock acquisition or
otherwise) a substantial portion of the assets of any Person or any
division or line of business thereof, or otherwise acquired assets
other than in the ordinary course and in accordance with past practice;
(vii) Except as disclosed in Schedule 4.13(b), permitted or
allowed any of the assets or properties (whether tangible or
intangible) of the Company to be subjected to any Encumbrance, except
as pledged or given as security in connection with the Offering and as
contemplated by the Collateral Agreements (as such term is defined in
the Indenture);
(viii) made any loan to, guaranteed any Indebtedness of or
otherwise incurred any Indebtedness on behalf of any Person other than
in connection with the New Units and the Preferred Units;
(ix) made any capital expenditure or commitment for any
capital expenditure in excess of $100,000 individually or $2,000,000 in
the aggregate;
(x) entered into any agreement, arrangement or transaction
with any of its directors, officers, employees or shareholders (or with
any relative, beneficiary, spouse or Affiliate of such Person);
(xi) allowed any permit or environmental permit that was
issued or relates to the Company or any Subsidiary or otherwise relates
to any asset to lapse or terminate or failed to renew any such permit
or environmental permit or any insurance policy that is scheduled to
terminate or expire within 45 calendar days of the Closing Date, except
with respect to such permit, environment permit or insurance policy
which the failure to renew would not result in a Material Adverse
Effect;
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22
(xii) incurred any Indebtedness, in excess of $100,000
individually or $500,000 in the aggregate, other than the Indebtedness
to be incurred in connection with the New Units and the Preferred
Units;
(xiii) amended, modified or consented to the termination of
any material contract or the Company's or any Subsidiary's rights
thereunder;
(xiv) disclosed any secret or confidential Intellectual
Property (except by way of issuance of a patent) or permitted to lapse
or go abandoned any material Intellectual Property (or any registration
or grant thereof or any application relating thereto) to which, or
under which, the Company or any Subsidiary has any right, title,
interest or license; or
(xv) agreed, whether in writing or otherwise, to take any of
the actions specified in this Section 4.11(b) except for those
contemplated by this Agreement, the Offering and the issuance and sale
of the Series A Preferred Units.
SECTION 4.12. Employee Benefit Matters. (a) Plans and Material
Documents. Schedule 4.12(a) of the Disclosure Schedule lists, as of the date
hereof and as of the Closing Date, (i) all employee benefit plans (as defined
under Section 3(3) of ERISA) and all bonus, stock option, stock purchase,
restricted stock, incentive, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans, programs
or arrangements, and all employment, termination, severance or other contracts
or agreements, to which the Company is a party, with respect to which the
Company has any obligation or which are maintained, contributed to or sponsored
by the Company for the benefit of any current or former employee, officer or
director of the Company, (ii) each employee benefit plan for which the Company
could incur liability under Section 4069 of ERISA in the event such plan has
been or were to be terminated, (iii) any plan in respect of which the Company
could incur liability under Section 4212(c) of ERISA and (iv) any contracts,
arrangements or understandings between the Company and any of its officers,
including, without limitation, any contracts, arrangements or understandings
relating to the sale of the Company (items (i) through (iv) being referred to
herein collectively as the "Plans"). Except as disclosed on Schedule 4.12(a),
any employee deferred compensation, stock option, "phantom stock" or other
similar types of plans previously in effect have been terminated as of the
Closing Date. Each Plan is in writing and a complete and accurate copy of each
Plan set forth on Schedule 4.12(a) has been made available to the Purchasers and
a complete and accurate copy of each material document prepared in connection
with each such Plan including, without limitation, (i) a copy of each trust or
other funding arrangement, (ii) each summary plan description and summary of
material modifications, (iii) the most recently filed IRS Form 5500, (iv) the
most recently received IRS determination letter for each such Plan, and (v) the
most recently prepared actuarial report and financial statement in connection
with each such Plan, if applicable. Except as disclosed on Schedule 4.12(a) of
the Disclosure Schedule, there are no other employee benefit plans, programs,
arrangements or agreements, whether formal or informal, whether in writing or
not, to which the Company is a
<PAGE>
23
party, with respect to which the Company has any obligation or which are
maintained, contributed to or sponsored by the Company for the benefit of any
current or former employee, officer or director of the Company. The Company does
not have any express or implied commitment, whether legally enforceable or not,
(i) to create, incur liability with respect to or cause to exist any other
employee benefit plan, program or arrangement, (ii) to enter into any contract
or agreement to provide compensation or benefits to any individual or (iii) to
modify, change or terminate any Plan, other than with respect to a modification,
change or termination required by ERISA or the Code.
(b) Absence of Certain Types of Plans. Except as set forth in
Schedule 4.12(b) of the Disclosure Schedule, none of the Plans is a
multiemployer plan (within the meaning of Section 3(37) or 4001(a) (3) of ERISA)
(a "Multiemployer Plan"), a single employer pension plan (within the meaning of
Section 4001(a) (15) of ERISA) or a plan intended to be qualified under Section
401(a) or 401(k) of the Code. None of the Plans provides for the payment of
separation, severance, termination or similar-type benefits to any Person or
obligates the Company to pay separation, severance, termination or similar-type
benefits solely as a result of any transaction contemplated by this Agreement or
as a result of a "change in control," within the meaning of such term under
Section 280G of the Code. None of the Plans provides for or promises retiree
medical, disability or life insurance benefits to any current or former
employee, officer or director of the Company, except to the extent required by
law. Except as set forth in Schedule 4.12(b) of the Disclosure Schedule, each of
the Plans is subject only to the laws of the United States or a political
subdivision thereof.
(c) Compliance with Applicable Law. Except as disclosed on
Schedule 4.12(c) of the Disclosure Schedule, to the knowledge of the Company,
each Plan has been operated in all respects in accordance with the requirements
of all applicable law, including, without limitation, ERISA and the Code, and
all persons who participate in the operation of such Plans and all Plan
"fiduciaries" (within the meaning of Section 3(21) of ERISA) have acted in
accordance in all material respects with the provisions of all applicable law,
including, without limitation, ERISA and the Code. The Company has performed all
material obligations required to be performed by it under, is not in any
material respect in default under or in violation of, and has no knowledge of
any default or violation by any party to, any Plan. Except as disclosed on
Schedule 4.12(c) of the Disclosure Schedule, no legal action, suit or claim is
pending or, to the knowledge of the Company, threatened with respect to any Plan
(other than claims for benefits in the ordinary course) and, to the knowledge of
the Company, no fact or event exists that could give rise to any such action,
suit or claim.
(d) Absence of Certain Liabilities and Events. Except as
provided on Schedule 4.12(d) of the Disclosure Schedule, there has been no
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan. The Company has not incurred any
liability for any penalty or tax arising under Section 4971, 4972, 4960, 4980B
or 6652 of the Code or any liability under Section 502 of ERISA, and no fact or
<PAGE>
24
event exists which could give rise to any such liability. The Company has not
incurred any liability under, arising out of or by operation of Title IV of
ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from
any multiemployer Plan or any single employer plan for which the Company could
incur liability under Section 4063 or 4064 of ERISA, and no fact or event exists
which could give rise to any such liability. Except as disclosed on Schedule
4.12(d) of the Disclosure Schedule, no complete or, to the knowledge of the
Company, partial termination has occurred within the five years preceding the
date hereof with respect to any Plan.
(e) Plan Contributions and Funding. Except as disclosed on
Schedule 4.12(e) of the Disclosure Schedule, all contributions, premiums or
payments required to be made with respect to any Plan have been made on or
before their due dates. All such contributions have been fully deducted for
income tax purposes and no such deduction has been challenged or disallowed by
any government entity and, to the knowledge of the Company, no fact or event
exists which could give rise to any such challenge or disallowance.
(f) Americans with Disabilities Act. Except as set forth in
Schedule 4.12(f) of the Disclosure Schedule, to the best knowledge of the
Company, the Company is in compliance with the material requirements of the
Americans With Disabilities Act.
(g) WARN Act. The Company is in compliance with the
requirements of the Workers Adjustment and Retraining Notification Act ("WARN")
and has no liabilities pursuant to WARN.
SECTION 4.13. Real Property. (a) Schedule 4.13(a) of the
Disclosure Schedule contains a list of all of the Owned Real Property. The
Company has valid fee interests in all of its Owned Real Property and, subject
to the exceptions expressly reflected in the title insurance policies insuring
the mortgage liens securing the Existing Notes, the New Notes and the McDonald
Obligations, good and marketable title thereto, and such Owned Real Property is
owned by the Company or a Subsidiary free and clear of all Encumbrances, except
(i) as set forth on Schedule 4.13 (a) of the Disclosure Schedule and (ii) for
Encumbrances in respect of the New Notes and current taxes not yet due and
payable or being contested in good faith by appropriate proceedings.
(b) Schedule 4.13(b) of the Disclosure Schedule contains a
list of all of the Leased Real Property and a list of all leases and subleases
pertaining to such Leased Real Property. Except as described in Schedule 4.13(b)
of the Disclosure Schedule, (i) there is no material violation of any law, rule
or regulation by the Company or known to the Company relating to any of the
Leased Real Property, (ii) the Company is in peaceful and undisturbed possession
of the Leased Real Property and, so long as the lease remains in effect, there
are no
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25
contractual or legal restrictions that preclude or restrict the ability to use
the premises for the purposes for which they are currently being used and (iii)
the Company has not leased or subleased any parcel or any portion of any parcel
of Leased Real Property to any other Person, nor has the Company assigned its
interest under any lease or sublease listed in Schedule 4.13(b) of the
Disclosure Schedule to any third party.
(c) Each of the Company's leases and subleases listed in
Schedule 4.13(b) is in full force and effect and constitutes a legal, valid and
binding obligation of the respective parties thereto, and, except as disclosed
in Schedule 4.13(b), the Company is not in default or breach of (with or without
the giving of notice or the passage of time) any such leases or subleases. To
the knowledge of the Company, no third party is in material breach of any of
such leases or subleases.
SECTION 4.14. Tangible Personal Property. Schedule 4.14 of the
Disclosure Schedule contains a list of all leased Tangible Personal Property
requiring lease payments of $50,000 or more per year leased by the Company and
its Subsidiaries. Except for changes made in the ordinary course of business
since July 21, 1997 as would not materially adversely affect the present use of
such leased Tangible Personal Property or as would not have a Material Adverse
Effect, with respect to each such lease:
(i) such lease is in full force and effect and is a legal,
valid and binding obligation of the Company or the Subsidiary party
thereto, as applicable, and is enforceable by the Company or such
Subsidiary in accordance with its terms;
(ii) the Company or a Subsidiary is in peaceful and
undisturbed possession of the Tangible Personal Property subject to
such lease; and
(iii) there has been no notice of default under any lease
received by the Company or such Subsidiary which is still in effect;
and neither the Company nor any Subsidiary is in breach or default of
any such lease, and no event has occurred which, with a notice or lapse
or time or both, would constitute such a default or permit the
termination, modification or acceleration of such lease.
SECTION 4.15. Intellectual Property. (a) Schedule 4.15(a)(i)
of the Disclosure Schedule sets forth a true and complete list of each patent
and patent application and each trademark registration or application therefor,
of all Owned Intellectual Property (except unregistered copyrights), and
Schedule 4.15(a)(ii) of the Disclosure Schedule sets forth a true and complete
list of any license or sublicense thereof, of all Licensed Intellectual
Property. Except as otherwise described in Schedule 4.15(a)(i) of the Disclosure
Schedule, in each case where a U.S. trademark registration or patent or
application for trademark registration or patent listed in Schedule 4.15(a)(i)
of the Disclosure Schedule is held by assignment, the assignment has been duly
recorded with the U.S. Patent and Trademark Office. In the case of each foreign
trademark
<PAGE>
26
registration or application listed in Schedule 4.15(a)(i) of the Disclosure
Schedule which may be held by assignment, the Company believes that the
assignment has been duly recorded in the State or national Trademark Office from
which the original trademark registration issued or before which the application
for trademark registration is pending or the assignment has been duly recorded
in the national or international Patent Office from which the original patent
issued or before which the application for patent is pending. The Company
represents and warrants to the Purchasers that, to the best knowledge of the
Company, the rights of the Company or any Subsidiary, as the case may be, in or
to such Intellectual Property do not conflict with or infringe on the rights of
any other Person, and neither the Company nor any Subsidiary has received any
claim or written notice from any Person, to the effect that its use of patented
technology infringes on the rights of such Person.
(b) Except as disclosed in Schedule 4.15(b) of the Disclosure
Schedule: (i) all the Owned Intellectual Property is owned by either the Company
or a Subsidiary, as the case may be, free and clear of any Encumbrance and the
Company or Subsidiary, as the case may be, holds the entire right, title, and
interest in and to same and (ii) no claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before Governmental Authority have been made
or asserted or are pending (nor, to the best knowledge of the Company after due
inquiry, threatened) against the Company or any Subsidiary either (A) based upon
or challenging or seeking to deny or restrict the use by the Company or any
Subsidiary of any of the Owned Intellectual Property (apart from pending patent
applications) or (B) alleging that any services provided, or products
manufactured or sold by the Company or any Subsidiary are being provided,
manufactured or sold in violation of any other rights of any Person. Except as
disclosed in Schedule 4.15(b) of the Disclosure Schedule, neither the Company
nor any Subsidiary has granted any license or other right to any other Person
with respect to the Owned Intellectual Property. The consummation of the
transactions contemplated by this Agreement will not result in the termination
or impairment of any of the Owned Intellectual Property or Licensed Intellectual
Property.
(c) The Company represents and warrants to the Purchasers
that, to the best of the Company's knowledge after due inquiry, none of the
Company, any Subsidiary or the Business infringes any patent, trademark, service
mark, copyright or similar right of any Person or has misappropriated or
wrongfully disclosed any trade secret, proprietary right or similar right of any
Person.
(d) The Company represents and warrants to the Purchasers
that, to the best of the Company's knowledge after due inquiry, no Person has
made any claim or allegation that either the Company or a Subsidiary infringes
any patent, trademark, service mark, copyright or similar right of any Person or
has misappropriated or wrongfully disclosed any trade secret, proprietary right
or similar right of any person.
<PAGE>
27
(e) The Company has, or has caused to be, delivered to the
Purchasers the list of all the licenses and sublicenses for Licensed
Intellectual Property set forth in Schedule 4.15(a) (ii) of the Disclosure
Schedule and any and all ancillary documents pertaining thereto.
With respect to each of such licenses and sublicenses:
(i) such license or sublicense, together with all ancillary
documents delivered pursuant to the first sentence of this Section
4.15(f), is valid and binding and in full force and effect and
represents the entire agreement between the respective licensor and
licensee with respect to the subject matter of such license or
sublicense;
(ii) except as otherwise set forth in Schedule 4.15(a)(ii) of
the Disclosure Schedule, such license or sublicense will not cease to
be valid and binding and in full force and effect on terms identical to
those currently in effect as a result of the consummation of the
transactions contemplated by this Agreement, nor will the consummation
of the transactions contemplated by this Agreement constitute a breach
or default under such license or sublicense or otherwise give the
licensor or sublicensor a right to terminate such license or
sublicense;
(iii) to the Company's knowledge, (A) neither the Company nor
any Subsidiary has received any notice or threat of termination or
cancellation under such license or sublicense and no licensor or
sublicensor has any right of termination or cancellation under such
license or sublicense except in connection with the default of the
Company or any Subsidiary thereunder, (B) neither the Company nor any
Subsidiary has received any notice of a breach or default under such
license or sublicense, which breach or default has not been cured, and
(C) neither the Company nor any Subsidiary has granted to any other
Person any rights, adverse or otherwise, under such license or
sublicense, except for such events which would not, individually or in
the aggregate, have a Material Adverse Effect;
(iv) none of the Company, any Subsidiary or (to the best
knowledge of the Company after due inquiry) any other party to such
license or sublicense is in breach or default in any material respect,
and, to the best knowledge of the Company after due inquiry, no event
has occurred that, with notice or lapse of time would constitute such a
breach or default or permit termination, modification or acceleration
under such license or sublicense; and
(v) no claim, action, suit, arbitration, inquiry, proceeding
or investigation by or before Governmental Authority has been made or
asserted or is pending (nor, to the best knowledge of the Company after
due inquiry, threatened) against the Company or any Subsidiary either
(A) based upon or challenging or seeking to deny or restrict the use by
the Company or any Subsidiary of any of the Licensed Intellectual
Property or (B) alleging that any Licensed Intellectual Property is
being licensed, sublicensed or used in violation of any patents or
trademarks, or any other rights of any Person.
<PAGE>
28
(f) The Intellectual Property described in Schedules
4.15(a)(i) and (ii) of the Disclosure Schedule constitutes all of the
Intellectual Property used or held or intended to be used by the Company or any
Subsidiary and constitutes all such Intellectual Property necessary for the
conduct of, the Business, and there are no other items of Intellectual Property
that are material to the Company, any Subsidiary or the Business.
(g) The Company is not aware of anything or reason that would
prevent any pending applications to register trademarks, service marks or
copyrights or any pending patent applications from being granted.
SECTION 4.16. Environmental Matters. (1) To the Company's
knowledge:
(a) All facilities and property presently owned or leased by
the Company or any of its Subsidiaries have been, and continue to be,
owned and operated by the Company and its Subsidiaries in material
compliance with all applicable Environmental Laws.
(b) Neither the Company nor any of its Subsidiaries has
received notice of any pending or threatened claims, complaints or
requests for information with respect to any alleged violation of any
Environmental Laws.
(c) There have been no material releases, as defined under any
Environmental Laws, of Hazardous Substances that give rise to necessary
costs of response at, on, from or under any property now or previously
owned or leased by the Company or any of its Subsidiaries during the
period in which any such property was owned or leased by the Company or
a Subsidiary.
(d) The Company and its Subsidiaries have been issued and are
in material compliance with all permits, certificates, approvals,
licenses, registrations, orders, administrative consent orders and any
other authorizations, approvals or consents relating to Environmental
Laws or Hazardous Substances necessary to the operation of their
businesses.
(e) Neither the Company nor any of its Subsidiaries has
received notice that property presently owned or leased, or previously
owned or leased, by the Company or any of its Subsidiaries is listed or
proposed for listing in the National Priorities List created pursuant
to CERCLA or on the CERCLIS or any similar state list of sites
requiring investigation or cleanup.
(f) Neither the Company nor any of its Subsidiaries has
transported or arranged for the transportation of any Hazardous
Substances to any location which is listed on the National Priorities
List or any similar state list, nor has any of them received
<PAGE>
29
notice of pending or threatened claims as a result of transporting or
arranging to transport Hazardous Substances to any location.
(g) There are no polychlorinated biphenyls (other than may be
contained in electrical transformers which are labeled, operated and
maintained in accordance with all Environmental Laws) or
asbestos-containing materials present at any property now or previously
owned or leased by the Company or by any Subsidiary during the period
in which any such property was owned or leased by the Company or a
Subsidiary, except as would not, individually or in the aggregate, have
a Material Adverse Effect.
(h) Neither the Company nor any of its Subsidiaries has
received notice of pending or threatened claims against the Company or
any of its Subsidiaries arising out of any operations, action, inaction
or status of any previously divested property, whether or not the
subject of any indemnity, under any Environmental Laws or involving any
Hazardous Substances.
(2) The environmental indemnities in respect of the Owned Real
Property and Leased Real Property as set forth in Schedule 4.16 of the
Disclosure Schedule acquired by the Company pursuant to the terms of the Merger
Agreement, dated as of August 30, 1994, by and between the Company and
McDonald's Corporation have been assumed and are in full force and effect.
(3) The Company has not assumed any environmental obligations
on any Leased Real Property.
SECTION 4.17. Litigation. Schedule 4.17 of the Disclosure
Schedule indicates those Actions (a) involving claims for potential damages in
excess of $250,000 that, if adversely determined, could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect or (b) which
relate to, or could affect the legality or validity of, this Agreement or the
transactions contemplated hereby. Except as set forth in Schedule 4.17 of the
Disclosure Schedule, there are no material citations, fines or penalties
heretofore asserted against the Company or its Subsidiaries under any federal,
state or local law which remain unpaid or which otherwise bind the assets of the
Company or its Subsidiaries.
SECTION 4.18. Insurance. Schedule 4.18 of the Disclosure
Schedule lists each material insurance policy (including policies providing
property, casualty, liability, workers compensation, theft, bond and surety
arrangements) to which the Company or any Subsidiary is a party, a named insured
or otherwise the beneficiary of coverage. Each such Policy is in full force and
effect.
SECTION 4.19. Material Contracts. (a) Schedule 4.19(a) of the
Disclosure Schedule lists each of the material contracts and agreements, whether
written or oral (each, a
<PAGE>
30
"Material Contract"), of the Company and the Subsidiaries. Except as set forth
on Schedule 4.19(a) of the Disclosure Schedule, each Material Contract: (i) is
valid and binding on the respective parties thereto and is in full force and
effect and (ii) upon consummation of the transactions contemplated by this
Agreement and, to the best knowledge of the Company, except to the extent that
any consents set forth in Section 4.8 are not obtained, shall continue in full
force and effect without penalty or other adverse consequence. Neither the
Company nor any Subsidiary is in breach of, or default under, any Material
Contract.
(b) No other party to any Material Contract is in breach
thereof or default thereunder.
(c) There is no contract, agreement or other arrangement
granting any Person any preferential right to purchase, other than in the
ordinary course of business consistent with past practice, any of the properties
or assets of the Company or any Subsidiary.
SECTION 4.20. Licenses and Permits. Except as would not have a
Material Adverse Effect, the Company has all governmental licenses, permits and
other governmental authorizations and approvals required for the conduct of its
Business as now conducted, and all such material licenses, permits,
authorizations and approvals will remain in full force and effect immediately
following the consummation of the transactions contemplated hereunder.
SECTION 4.21. Labor Matters. Neither the Company nor any
Subsidiary is a party to any currently effective collective bargaining agreement
or other labor union contract. There are presently no (a) material violations of
any federal, state or local statutes, laws, ordinances, rules, regulations,
orders or directives with respect to the employment of individuals by, or the
employment practices or work conditions of, or the terms and conditions of
employment, wages and hours of the Company or any Subsidiary; (b) unfair labor
practice or other unlawful employment practice and no charges of unfair labor
practices or other employee-related complaints pending or threatened against the
Company or any Subsidiary before the National Labor Relations Board, the Equal
Employment Opportunity Commission, the Occupational Safety and Health Review
Commission, the Department of Labor or any other Federal, state, local or other
governmental authority; (c) strike, picketing, slowdown or work stoppage or
organizational attempt actually pending, threatened against or involving the
Company or any Subsidiary; or (d) material issues with respect to union
representation pending or threatened with respect to the employees of the
Company or any Subsidiary.
SECTION 4.22. Taxes. Each of the Company and its Subsidiaries
has filed all federal, state and foreign income and franchise tax returns that
are required to be filed by each of them, except where the failure to so file
such returns would not, individually or in the aggregate, have a Material
Adverse Effect, and, except as set forth in the Offering Circular, has paid all
taxes, assessments, fees and other charges (including, without limitation,
withholding taxes, penalties and interest) due or claimed to be due thereon that
are due and payable, other than tax
<PAGE>
31
deficiencies which (i) the Company or any Subsidiary is contesting in good faith
and for which the Company or such Subsidiary has provided adequate reserves in
accordance with GAAP or (ii) the failure to make any such payments which would
not, individually or in the aggregate, have a Material Adverse Effect. As of the
Closing Date, there is no tax deficiency or actual or proposed tax assessment
that has been asserted against the Company or any Subsidiary that would have,
individually or in the aggregate, a Material Adverse Effect.
SECTION 4.23. Private Offering. (a) Assuming the accuracy of
the representations and warranties of the Purchasers set forth herein, the sale
of the Series B Preferred Units hereunder is exempt from the registration and
prospectus delivery requirements of the Securities Act.
(b) No form of general solicitation or general advertising
(including, without limitation, advertisements, articles, notices or other
communications published in any newspaper, magazine or other medium or broadcast
over television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising) was used by the
Company or any other Person acting on behalf of the Company in respect of the
Series B Preferred Units or in connection with the offer and sale of the Series
B Preferred Units.
SECTION 4.24. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions hereunder based upon arrangements made by or on behalf of
the Company, other than Jefferies (which is entitled to an underwriter's
discount and commission in connection with the Offering in the amount of
$1,000,000 which is payable in Series B Preferred Units pursuant to this
Agreement).
SECTION 4.25. Accuracy of Information. The Company has
provided the Purchasers with all the information reasonably available to it that
each Purchaser has requested for deciding whether to purchase the Series B
Preferred Units and all information that the Company believes is reasonably
necessary to enable each Purchaser to make such decision. The Company is not
aware of any facts pertaining to the Company, any Subsidiary or its Business
which could have a Material Adverse Effect and which have not been disclosed in
this Agreement, the Disclosure Schedule, the Financial Statements or the Interim
Financial Statements, the Offering Circular or otherwise disclosed to the
Purchaser in writing. Neither this Agreement nor any other written statements or
certificates made or delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
SECTION 4.26. Investment Company. The Company is not and,
after giving effect to the issuance and sale of the Series B Preferred Units,
the Series A Preferred Units or the New Units, the Company will not be an
"investment company" or a company "controlled by" an "investment company" or
"promoter" or "principal underwriter" for an "investment company" as
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32
such terms are defined in the Investment Company Act of 1940, as amended, and
the rules and regulations thereunder.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchasers, severally and not jointly, represent and
warrant to the Company that:
SECTION 5.1. Organization. (a) Each Purchaser is duly
organized, validly existing and in good standing under the laws of the
respective state of its organization, and has the requisite power and authority
and any necessary governmental authority to own, operate or lease the properties
that it purports to own, operate or lease and to carry on its business as it is
now being conducted.
SECTION 5.2. Authority. Each Purchaser has all necessary power
and authority to execute and deliver this Agreement and to perform its
obligations and to consummate the transactions contemplated hereunder. The
execution and delivery of this Agreement by each Purchaser and the purchase of
the Series B Preferred Units as provided in Section 2.1 hereof by each Purchaser
hereunder have been duly and validly authorized by all necessary action of such
Purchaser and no other proceedings on the part of each Purchaser are necessary
to authorize this Agreement or the purchase of the Series B Preferred Units by
each Purchaser as contemplated hereby. This Agreement has been duly and validly
executed and delivered by each Purchaser and, assuming the due authorization,
execution and delivery of this Agreement by the Company, constitutes the legal,
valid and binding obligation of each Purchaser enforceable against each
Purchaser in accordance with its terms.
SECTION 5.3. No Conflict; Required Filings and Consents. (a)
The execution and delivery of this Agreement by each Purchaser do not, and the
performance of this Agreement by each Purchaser will not, (i) conflict with or
violate the charter or by-laws or equivalent organizational documents of each
Purchaser, (ii) conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to each Purchaser or by which it or its properties
are bound or affected, or (iii) result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of each Purchaser pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which each Purchaser is a party or by which each
Purchaser or any of its properties is bound or affected, except, in the case of
clauses (ii) and (iii) above, for any such breaches, defaults or other
occurrences which would not, individually or in the aggregate, have a material
adverse effect on
<PAGE>
33
the business, operations, properties (including intangible properties),
condition (financial or otherwise), assets or liabilities of each Purchaser.
(b) The execution and delivery of this Agreement by each
Purchaser do not, and the performance of this Agreement by each Purchaser
(including, without limitation, the consummation of the transactions hereunder)
will not, require any consent, approval, authorization or permit of, or filing
with or notification to, any Governmental Authority, except for consents,
approvals authorization, permits, filings or notifications which have been made
or obtained.
SECTION 5.4. Funds. Each of Birch and DZ Investors has and,
immediately prior to the Closing, will have the funds necessary to consummate
the purchase of the Series B Preferred Units to be purchased by it as provided
in Section 2.1 hereof.
SECTION 5.5. Investment Purpose. Each Purchaser is an
"Accredited Investor" within the meaning of Rule 501 under the Securities Act.
Each Purchaser has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of purchasing the
Series B Preferred Units. The Series B Preferred Units purchased by each
Purchaser (other than DZ investors) pursuant to this Agreement are being
acquired for investment only and not with a view to any sale or distribution
(within the meaning of the Securities Act) of the Series B Preferred Units or
any part thereof. DZ Investors is a newly formed entity, each member of which is
either an "Accredited Investor" within the meaning of Rule 501 under the
Securities Act, or a person that is not a "U.S. Person" as defined in Regulation
S under the Securities Act, and DZ Investors is purchasing the Series B
Preferred Units as nominee for, and on behalf of, its members. Each Purchaser
acknowledges that Series B Preferred Units, the Series B Preferred Stock, the
Series B Preferred Warrants have not been registered under the Securities Act.
Each Purchaser agrees at all times to sell or otherwise dispose of all or any
part of the Series B Preferred Units, the Series B Preferred Stock and the
Series B Preferred Warrants so acquired by such Purchaser (and any securities
issued in exchange therefor) only pursuant to a registration under the
Securities Act, or an exemption therefrom, and in compliance with the Securities
Act and applicable state securities laws, or, in the case of DZ Investors, as
contemplated by the following sentence. DZ Investors will not distribute to a
member the Series B Preferred Units (including any shares of Series B Junior
Preferred Stock or the Series B Preferred Warrants) purchased by DZ Investors,
as nominee for and on behalf of such member until it receives and delivers to
the Company and its counsel a copy (redacted to omit information identifying the
member) information from such member on whose behalf DZ Investors purchased the
Series B Preferred Units confirming its status as an "Accredited Investor" or a
person that is not a "U.S. person." From and after the time when the information
described in the preceding sentence has been provided to the Company, the
Company agrees that, at the request of DZ Investors from time to time, the
Company will take such action as DZ Investors may reasonably request to effect
the distribution of the Series B Preferred Units to the members of DZ Investors
as contemplated hereby, including, without limitation, exchanging the
<PAGE>
34
certificates or instruments representing any component of the Series B Preferred
Units for certificates or instruments in such denominations (including
fractions) as DZ Investors may specify.
SECTION 5.8. Brokers. No broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions hereunder based upon arrangements made by or on behalf of
each Purchaser.
ARTICLE VI.
INDEMNIFICATION
SECTION 6.1. Survival of Representations and Warranties. The
representations and warranties of the Company in Article III shall survive the
Closing until the expiration of 30 days following the later of the (i) receipt
by the Purchasers of audited consolidated financial statements of the Company
and its Subsidiaries in respect of the year ended December 31, 1999 and (ii) the
receipt of any material restatement, amendment or supplement thereto; provided
that the representations and warranties of the Company set forth in Section 4.22
in respect of Tax matters shall survive for a period of ending five months after
the expiration of the applicable statute of limitations. Neither the period of
survival nor the liability of any party with respect to the parties,
representations and warranties shall be reduced by any investigation made at any
time by or on behalf of any party.
SECTION 6.2. Indemnification by the Company. Each Purchaser,
and each of their respective Affiliates, officers, directors, employees, agents,
successors and assigns, shall be indemnified and held harmless by the Company
for any and all Liabilities, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties (including, without limitation, any
legal costs and expenses) actually suffered or incurred by them (hereinafter a
"Purchaser Loss"), arising out of or resulting from:
(a) the breach of any representation or warranty made by the
Company contained herein or in any document delivered by the Company
hereunder at the Closing; or
(b) the breach of any covenant or agreement by the Company
contained herein.
Notwithstanding the foregoing, there shall be no Purchaser Loss for any item set
forth on Schedule 4.09, or for any normal and customary year end adjustments,
that in the aggregate are not material.
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35
SECTION 6.3. Indemnification by the Purchasers. The Company,
and its Affiliates, officers, directors, employees, agents, successors and
assigns, shall be indemnified and held harmless, severally and not jointly, by
the respective Purchaser for any and all Liabilities, losses, damages, claims,
costs and expenses, interest, awards, judgments and penalties (including,
without limitation, legal costs and expenses) actually suffered or incurred by
them (hereinafter a "Company Loss" and, together with a Purchaser Loss, a
"Loss"), arising out of or resulting from:
(a) the breach of any representation or warranty made by such
Purchaser contained herein or in any document delivered by such
Purchaser hereunder at the Closing; or
(b) the breach of any covenant or agreement by such Purchaser
contained herein.
SECTION 6.4. Materiality. Notwithstanding anything in this
Agreement to the contrary, for purposes of application of the indemnity
provisions of this Article VI, the amount of any Purchaser Loss or Company Loss
arising from the breach of such representation, warranty, covenant or agreement
shall be the entire amount of any such Loss actually incurred by the respective
indemnitee as a result of such breach and not just that portion of such Loss
that exceeds the relevant level of materiality.
SECTION 6.5. Time Period; Dollar Threshold. (a) The respective
indemnification obligations of the Company, on the one hand, and the several
indemnification obligations of each Purchaser, on the other hand, under this
Article VI shall continue for the same period of survival specified in Section
6.1 for each such representation and warranty and shall terminate with the
expiration of the applicable survival period for each such representation,
warranty and covenant. Any claim or demand against the Company or any Purchaser
which is pending or asserted at or prior to the expiration of any survival
period may continue to be asserted and indemnified against.
(b) Neither the Company nor any Purchaser shall be entitled to
indemnification under this Article VI unless and until the aggregate amount of
the claims against the other party exceeds $100,000, in which case, the party
entitled to indemnification may claim indemnification for the entire aggregate
amount of such claims.
SECTION 6.6. Notice and Defense. Each party shall, within 90
days of learning of any asserted liability or damage claimed to give rise to
indemnification hereunder, notify the party obligated to indemnify it hereof in
writing; provided, however, that the failure of the indemnified party to so
notify the indemnifying party shall not relieve the indemnifying party of its
obligations hereunder unless, and only to the extent that, such failure to
notify prejudices the indemnifying party. Thereafter, the indemnifying party
shall have, at its election, the right to
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36
compromise or defend any such matter at its sole cost and expense through
counsel chosen by it. If the indemnifying party so undertakes to compromise and
defend, the indemnifying party shall notify the other party of its intention to
do so. If the indemnifying party fails to defend such matter diligently, the
indemnified party may assume control of the defense of such matter. Each party
agrees in all cases to cooperate with the defending party and its counsel in the
compromise of or defending of any such liabilities or claims. The defending
party and the nondefending party may be represented by the same counsel unless
such representation would be inappropriate due to actual or potential differing
interests between them. In addition, the nondefending party shall at all times
be entitled to monitor such defense through the appointment of counsel of its
own choosing, at it own cost and expense.
ARTICLE VII.
COVENANTS OF THE COMPANY AND THE PURCHASERS
SECTION 7.1. Legends. The certificates evidencing the Series B
Preferred Units, the Series B Preferred Stock, the Series B Preferred Warrants
and the shares of Common Stock issuable upon exercise of the Series B Preferred
Warrants shall bear the following legends reflecting the restrictions on the
transfer of such stock contained in this Agreement:
"The stock evidenced hereby have not been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be
transferred except pursuant to an effective registration under
the Act or in a transaction which, in the opinion of counsel
reasonably satisfactory to the Company, qualifies as an exempt
transaction under the Act and the rules and regulations
promulgated thereunder."
SECTION 7.2. Resale of Stock. None of the Purchasers shall
Transfer any shares of capital stock of the Company other than in accordance
with the provisions of this Article 7, as applicable; and provided that the
Transferee of such shares has agreed to be bound by the terms of this Article 7,
as applicable, and has executed and delivered to the Company and the Purchasers
a counterpart hereof. Any Transfer or purported Transfer made in violation of
this Article 7, as applicable, shall be null and void and of no effect, and the
Company shall be entitled to treat the purported transferor of such noncomplying
Transfer as the holder of such capital shares. For purposes of this Agreement,
"Transfer" means any direct or indirect transfer, sale, assignment, gift,
pledge, mortgage, hypothecation or other disposition of any interest, other than
by means of an underwritten public offering. The term "Transferee" shall have a
correlative meaning. Notwithstanding anything herein to the contrary, the
provisions of Section 7.3 shall not apply to Transfers by Birch to any of its
Affiliates.
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37
SECTION 7.3. Drag-Along Right. (a) If at any time and from
time to time after the date of this Agreement, Birch, for so long as Birch shall
hold at least 50% of the shares of Common Stock held by Birch as of the Closing
Date, wishes to Transfer in a bona fide arm's-length single transaction or
series of related transactions at least 75% of its shares of Series B Preferred
Stock held at the time of such Transfer (the "Birch Shares") to any Person or
Persons who are not Affiliates of Birch (the "Birch Transferee"), Birch shall
have the right (a "Drag-Along Right") to require each other Purchaser and its
Affiliates to sell to the Birch Transferee, on the same terms and at least the
same price as Birch, such number of shares of Series B Preferred Stock
beneficially owned by each Purchaser and its Affiliates, at such time as shall
equal the same percentage of the shares then beneficially owned by each
Purchaser and its Affiliates, as the percentage of shares then beneficially
owned by Birch which are proposed to be sold by Birch in such Transfer; provided
that each Purchaser and its Affiliates shall receive as consideration for the
sale of the shares of Series B Preferred Stock beneficially owned by such
parties as of the date of such Transfer the higher of (i) the purchase price per
share to be received by Birch in the Transfer or (ii) the aggregate liquidation
preference of such shares to plus accrued and unpaid dividends.
(b) To exercise a Drag-Along Right, Birch shall give each
Purchaser a written notice (a "Drag-Along Notice") containing the name and
address of the Birch Transferee and the proposed purchase price, terms of
payment, number of shares being sold by Birch and other material terms and
conditions of Birch's offer. Each Purchaser shall thereafter be obligated to
sell such number of shares of Series B Preferred Stock, subject to such
Drag-Along Notice, provided that the sale to the Birch Transferee is consummated
within 150 days of delivery of the Drag-Along Notice. If such sale is not
consummated within such 150-day period, then the Corporation shall in good faith
promptly notify each Purchaser of such fact and each Purchaser shall no longer
be obligated to sell its shares pursuant to that specific Drag-Along Right, but
shall remain subject to the provisions of this Section 7.3.
(c) Notwithstanding anything contained in this Section 7.3, in
the event that all or a portion of the purchase price in respect of the Birch
Shares consists of stock of the Birch Transferee, and such stock shall not
either (i) be listed on a national securities exchange or the Nasdaq National
Market at the time of such Transfer or (ii) be received by either Purchaser
pursuant to a transaction whereby such stock is registered under the Securities
Act, then, at the sole and exclusive option of each Purchaser, such Purchaser
may receive, in lieu of such stock, the fair market value of such stock in cash,
as determined in good faith by the Board as of the date of the Drag-Along
Notice.
(d) The rights and obligations provided by this Section 7.3
shall terminate on the earliest to occur of (i) such date as Birch shall hold
less than 10% of the then outstanding shares of Common Stock originally issued
on the Closing Date and (ii) such date as the Purchasers and their Affiliates
shall hold less than 5% of the then outstanding shares of Common Stock.
<PAGE>
38
SECTION 7.4. Tag-Along Rights. In the event that Birch intends
to Transfer all or a portion of the shares of Series B Preferred Stock then held
by it to any Person or Persons, other than to an Affiliate of Birch (a "Birch
Transaction"), except in the case where a Drag-Along Right has been exercised by
Birch, Birch shall notify each Purchaser, not less than 30 days nor more than 45
days prior to such proposed Transfer, of such Transfer and its terms and
conditions (the "Sale Notice"). Such Sale Notice shall set forth: (i) the number
of shares of Series B Preferred Stock proposed to be Transferred by Birch, (ii)
the name and address of the proposed Birch Transferee, (iii) the proposed amount
and form of consideration and terms and conditions of payment offered by such
proposed Birch Transferee and (iv) that the proposed Birch Transferee has been
informed of the Purchasers' tag-along right provided for in this Section 7.4 and
has agreed to purchase shares of Series B Preferred Stock in accordance with the
terms hereof.
Within 15 days of the date of receipt of the Sale Notice, each
Purchaser shall notify Birch in writing (a "Tag-Along Notice") whether it elects
to participate in such Transfer. If either Purchaser shall so notify Birch in
writing of its election to participate in such Transfer, such Purchaser shall
have the right to sell to the Proposed Transferee, at the same price and the
same terms, such number of shares of Series B Preferred Stock beneficially owned
by such Purchaser at such time as shall equal the same percentage of the shares
then beneficially owned by such Purchaser as the percentage of shares then
beneficially owned by Birch which are proposed to be sold by Birch in such
Transfer at the same price and on the same terms as Birch.
In the event that the proposed Birch Transferee does not
purchase shares from any Purchaser on the same terms and conditions as specified
in the Sale Notice, then Birch shall not be permitted to sell any shares of
Series B Preferred Stock to the proposed Birch Transferee in the proposed
Transfer. If no Tag-Along Notice is received during the 15-day period referred
to above, Birch shall have the right, for a 45-day period after the expiration
of the 15-day period referred to above, to transfer the shares of Series B
Preferred Stock specified in the Sale Notice on terms and conditions no more
favorable than those stated in the Tag-Along Notice and without regard to the
tag-along rights described in this Section 7.4.
The rights and obligations provided by this Section 7.4 shall
terminate on the earliest to occur of (i) such date as Birch shall hold less
than 10% of the then outstanding shares of Common Stock originally issued on the
Closing Date and (ii) such date as the Purchasers and their Affiliates shall
hold less than 5% of the then outstanding shares of Common Stock.
SECTION 7.5. Reporting and Information. (a) Investor Financial
Information. From and after the date hereof, the Company shall deliver to each
Purchaser or its successor or permitted transferees and assignees so as long as
any of them owns any shares of Series B Preferred Stock:
<PAGE>
39
(i) Monthly Financial Statements. As soon as practicable, and
in any event within 30 days after the close of each month of each
fiscal year of the Corporation, a consolidated balance sheet and
statement of income of the Corporation and its Subsidiaries as of the
close of such month and the portion of the Corporation's fiscal year
ending on the last day of such month, all in reasonable detail and
subject to audit and year end adjustments, setting forth in each case
in comparative form the figures for the comparable period of the
previous year;
(ii) Quarterly Statements. As soon as practicable, and in any
event within 45 days after the close of each fiscal quarter of the
Company, a consolidated balance sheet, statement of results of
operations and statement of changes in cash flow of the Company and its
Subsidiaries as of the close of such month and the portion of the
Company's fiscal year ending on the last day of such month, all in
reasonable detail and prepared in accordance with GAAP, consistently
applied, subject to audit and year end adjustments, setting forth in
each case in comparative form the figures for the comparable period of
the previous year;
(iii) Annual Statements. As soon as practicable after the end
of each fiscal year of the Company, and in any event within 120 days
thereafter, a copy of the consolidated balance sheet and consolidated
statements of income, stockholders' equity and changes in cash flow of
the Company and its Subsidiaries for such year, setting forth in each
case in comparative form the figures for the previous fiscal year, all
in reasonable detail and accompanied by an opinion thereon of
independent certified public accountants of recognized national
standing selected by the Company, which opinion shall state that such
financial statements fairly present the financial position and results
of operations of the Company and its Subsidiaries on a consolidated
basis and have been prepared in accordance with GAAP (except for
changes in application in which such accountants concur) and that the
examination of such accountants has been made in accordance with
generally accepted auditing standards, and accordingly included such
tests of the accounting records and such other auditing procedures as
were considered necessary in the circumstances; and
(iv) Other Reports. Promptly upon their becoming available,
one copy of each financial statement, report, notice or proxy statement
sent by the Company to its stockholders generally, of each financial
statement, report, notice or proxy statement sent by the Company or any
of its Subsidiaries to the SEC or any successor agency, if applicable,
and of each regular or periodic report and any registration statement,
prospectus or written communication (other than transmittal letters) in
respect thereof publicly filed by the Company or any of its
Subsidiaries with any securities exchange or the SEC or any successor
agency, and of any press release issued by the Company or any of its
Subsidiaries.
<PAGE>
40
(b) Confidentiality. As to so much of the information and
other material furnished under or in connection with this Agreement (whether
furnished before, on or after the date hereof) as constitutes or contains
confidential business, financial or other information of the Company or its
Subsidiaries (which information shall have been expressly identified as
confidential), each Purchaser covenants for itself and its directors, officers,
partners and stockholders that it will use due care to prevent its respective
officers, directors, employees, counsel, accountants and other representatives
from disclosing such information to persons other than their respective
authorized employees, counsel, accountants, stockholders, partners, limited
partners and other authorized representatives; provided, however, that each
Purchaser may disclose or deliver any information or other material disclosed to
or received by each Purchaser should such disclosure or delivery be required by
law or should such information be disclosed by the Company or any of its
Affiliates or become publicly available through disclosure by a person other
than either Purchaser or their Affiliates. The Company shall give prior notice
to the Purchaserss before delivering any confidential information and,
notwithstanding the foregoing, each Purchaser shall have the right to elect not
to receive any such information prior to its delivery by the Company
SECTION 7.6. Fees and Expenses. The Company shall pay all
reasonable fees and expenses of each Purchaser (including the reasonable fees
and expenses of its counsel and accountants) incurred in connection with the
negotiation and consummation of the transactions contemplated hereunder as soon
as reasonably possible on or after the Closing Date.
ARTICLE VIII.
REGISTRATION RIGHTS
SECTION 8.1. Definitions. As used in this Article 8:
(a) the terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act (and any post-effective
amendments filed or required to be filed) and the declaration or
ordering of effectiveness of such registration statement;
(b) the term "Registrable Stock" means (A) all shares of
Common Stock issued to the Purchasers upon exercise of the Series B
Preferred Warrants purchased hereunder and (B) any capital stock of the
Company issued as a dividend or other distribution with respect to, or
in exchange for or in replacement of, the shares of Common Stock
referred to in clause (A) of this definition;
(c) "Qualified Initial Public Offering" shall mean the
completion of an underwritten initial public offering of Common Stock
pursuant to a registration statement
<PAGE>
41
under the Securities Act representing at least 15% of the outstanding
shares of Common Stock on a fully diluted basis and resulting in net
proceeds to the Company of not less than $20.0 million;
(d) "Registration Expenses" shall mean all expenses incurred
by the Company in compliance with Sections 8.2 and 8.3 hereof,
including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company,
blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the
compensation of regular employees of the Company, which shall be paid
in any event by the Company); and
(e) "Selling Expenses" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Stock and
all fees and disbursements of counsel for the Purchasers in respect of
any registration pursuant to this Article 8.
SECTION 8.2. Demand Registration. (a) Demand Registration. If
the Company shall receive from either Purchaser a written request that the
Company effect any registration with respect to all shares of Registrable Stock
owned by it, the Company shall, as soon as practicable, use its diligent best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all shares of Registrable Stock; provided that the Company shall
not be obligated to effect, or take any action to effect, any such registration
pursuant to this Section 8.2:
(x) in any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act or applicable rules or
regulations thereunder; and
(y) after the Company has effected one such registration
pursuant to this Section 8.2 and such registration shall have been
declared or ordered effective and the sale of all shares of Registrable
Stock shall have closed. Notwithstanding the foregoing, in the event
that less than all of the shares of Registrable Stock are sold in any
such registration and distribution, each Purchaser shall have the right
upon written notice to the Company to request one additional
registration (the "Additional Registration") by the Company of all
remaining shares of Registrable Stock (the "Unsold Shares"); provided
that in the event that the Unsold Shares represent less than 5% of the
aggregate number of shares of Common Stock then outstanding on a fully
diluted basis, the Company may, in lieu of effecting the Additional
Registration, deliver written notice to such Purchaser
<PAGE>
42
within 10 days of written notice by such Purchaser pursuant to this
Section 8.2(a)(y) of its election to file as promptly as practicable
thereafter a shelf registration covering such Unsold Shares. The
Company shall use its best efforts to keep effective such shelf
registration statement until the earlier of (A) the expiration of one
year following the initial filing thereof and (B) such time as all of
the Unsold Shares have been sold thereunder.
Notwithstanding the foregoing, the Company shall not be
required to effect any registration pursuant to this Section 8.2 prior to July
27, 2000.
The registration rights set forth in this Section 8.2 shall be
assignable, in whole or in part, to any transferee of Registrable Stock;
provided that such transferee agrees to be bound by all provisions of this
Article 8.
(b) Underwriting. If either Purchaser intends to distribute
the Registrable Stock covered by its request by means of an underwriting, such
Purchaser shall so advise the Company as a part of its request made pursuant to
Section 8(b). If officers and directors of the Company holding other securities
of the Company or if holders of securities of the Company who are entitled, by
contract with the Company or otherwise, to have securities included in such a
registration (the "Other Stockholders") request inclusion in any such
underwritten registration, the Purchaser shall offer to include the shares of
such officers, directors and Other Stockholders in the underwriting and may
condition such offer on their acceptance of the further applicable provisions of
this Section 8. Each Purchaser requesting such underwriting and the Company
shall (together with all officers, directors and Other Stockholders proposing to
distribute their shares through such underwriting) enter into an underwriting
agreement in customary form with the representative(s) of the underwriter(s)
selected for such underwriting by the Company and acceptable to such Purchaser.
Notwithstanding any other provision of this Section 8.2, if the representatives
advise such Purchaser in writing that marketing factors require a limitation on
the number of shares to be underwritten, the shares held by such officers,
directors and the Other Stockholders shall be excluded from such registration to
the extent so required by such limitation. No shares so excluded from the
underwriting shall be included in such registration. If any Purchaser requesting
such underwriting or any officer, director or Other Stockholder who has
requested inclusion in such registration as provided above disapproves of the
terms of the underwriting, such Person may elect to withdraw therefrom by
written notice to the Company, the underwriter and the Purchasers. The shares so
withdrawn shall also be withdrawn from registration. If the underwriter has not
limited the number of shares of Registrable Stock or other shares to be
underwritten, the Company may include shares of Common Stock for its own account
in such registration if the representatives so agree and if the number of shares
of Registrable Stock and other shares which would otherwise have been included
in such registration and underwriting will not thereby be limited.
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43
SECTION 8.3. Piggyback Registration. (a) Notice of
Registration. If the Company shall determine to register any shares of Common
Stock either for its own account or for the account of any other shareholder of
the Company other than a registration relating solely to employee benefit plans,
or a registration relating solely to a transaction pursuant to Rule 145 under
the Securities Act, or a registration on any registration form which does not
permit secondary sales or does not include substantially the same information as
would be required to be included in a registration statement covering the sale
of Registrable Stock, the Company shall:
(x) promptly give to each Purchaser written notice thereof
(which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such stock under the applicable blue sky
or other state securities laws, if any); and
(y) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Stock specified by
the Purchaser requesting such registration within 15 days after receipt
of the written notice from the Company described in clause (i) above,
except as set forth in Section 8.3(b) below. Such written request may
specify all or a part of the Registrable Stock.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise each Purchaser as a part of the written notice given
pursuant to Section 8.3(a)(x). In such event, the right of each Purchaser to
registration pursuant to this Section 8.3 shall be conditioned upon such
Purchaser's participation in such underwriting and the inclusion of Registrable
Stock in the underwriting to the extent provided herein. Each Purchaser electing
to participate in such underwritten offering shall enter into an underwriting
agreement in customary form with the representative of the underwriter or
underwriters selected for underwriting by the Company. Notwithstanding any other
provision of this Section 8.3, if such representative determines that marketing
factors require a limitation on the number of shares to be underwritten, such
representative may (subject to the allocation priority set forth below) exclude
from such registration and underwriting some or all of the Registrable Stock
which would otherwise be underwritten pursuant hereto. The Company shall so
advise each Purchaser electing to participate in such underwritten offering, and
the number of shares that are entitled to be included in the registration and
underwriting shall be allocated in the following manner: other than those shares
of a Person exercising a demand registration right for an underwritten public
offering which caused the Company to file the registration statement to which
this section applies, shares beneficially owned, and requested for inclusion in
such registration by, such Purchaser, officers and directors of the Company and
Other Stockholders shall be excluded from such registration and underwriting on
a pro rata basis to the extent required by such limitation. If any Purchaser or
any officer or director of the Company or Other Stockholder disapproves of the
terms of any such underwriting, such Person may elect to withdraw therefrom by
written notice
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44
to the Company and the representative. Any Registrable Stock or other shares so
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(c) Number and Transferability. Each Purchaser shall be
entitled to have its shares of Registrable Stock included in an unlimited number
of registrations pursuant to this Section 8.3. The registration rights granted
pursuant to this Section 8.3 shall be assignable, in whole or in part, to any
transferee of Registrable Stock; provided that such transferee agrees to be
bound by all provisions of this Article 8.
SECTION 8.4. Expenses of Registration. All Registration
Expenses incurred in connection with any registration, qualification or
compliance pursuant to this Article 8 shall be borne by the Company, and all
Selling Expenses shall be borne by each Purchaser electing to have its shares
registered (hereinafter, a "participating Purchaser") and the other participants
therein pro rata on the basis of the number of their shares so registered;
provided, however, that the Company shall not be required to pay any
Registration Expenses if, as a result of the withdrawal of a request for
registration by any participating Purchaser, the registration statement does not
become effective, in which case each of such Purchaser and such participants
shall bear such Registration Expenses pro rata on the basis of the number of
their shares so included in the registration request.
SECTION 8.5. Procedures. In the case of each registration
effected by the Company pursuant to this Article 8, the Company shall keep the
Purchasers advised in writing as to the initiation of each registration and as
to the completion thereof. At its expense, the Company shall:
(i) keep such registration effective for a period of 120 days,
or until each participating Purchaser or such other participants in the
registration, as applicable, have completed the distribution described
in the registration statement relating thereto, whichever first occurs;
provided, however, that (A) such 120-day period shall be extended for a
period of time equal to the period, if any, during which such Purchaser
and such other participants, as applicable, refrain from selling any
shares included in such registration in accordance with provisions in
Section 8.9 hereof; and (ii) in the case of any registration of
Registrable Stock on Form S-3 which is intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended
until all such Registrable Stock is sold; provided that Rule 418, or
any successor rule under the Securities Act, permits an offering on a
continuous or delayed basis; and provided further that the applicable
rules under the Securities Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective
amendment which (y) includes any prospectus required by Section 10(a)
of the Securities Act or (z) reflects facts or events representing a
material or fundamental change in the information set forth in the
registration statement, the incorporation by reference of information
required to be
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45
included in clauses (y) and (z) above to be contained in periodic
reports filed pursuant to Section 12 or 15(d) of the Exchange Act in
the registration statement; and
(ii) furnish such number of prospectuses and other documents
incident thereto as each participating Purchaser, such other
participants and their respective counsel and advisers, as applicable,
from time to time may reasonably request.
SECTION 8.6. Indemnification. (a) The Company shall indemnify
each participating Purchaser, each of its officers, directors and partners, and
each person controlling such Purchaser with respect to each registration which
has been effected pursuant to this Article 8, and each underwriter, if any, and
each person who controls any underwriter, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and shall
reimburse each participating Purchaser, each of its officers, directors and
partners, and each person controlling such Purchaser, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action; provided that the Company shall
not be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such
Purchaser or underwriter and stated to be specifically for use therein.
(b) Each participating Purchaser shall, if shares of
Registrable Stock held by it are included in the shares as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and each underwriter, if any, of the
shares covered by such a registration statement, each person who controls the
Company or such underwriter within the meaning of the Securities Act and the
rules and regulations thereunder, each Other Stockholder and each of their
officers, directors, and partners, and each person controlling such Other
Stockholder against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document made by such
Purchaser, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements by such
Purchaser therein not misleading, and shall reimburse the Company and such Other
Stockholders, directors, officers, partners, persons, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such
<PAGE>
46
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Purchaser
and stated to be specifically for use therein; provided, however, that the
obligations of each participating Purchaser hereunder shall be limited to an
amount equal to the proceeds to such Purchaser of Registrable Stock sold by it
as contemplated herein.
(c) Each party entitled to indemnification under this Section
8.6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Indemnifying Party and the Indemnified Party in such action, in which case the
fees and expenses of counsel shall be at the expense of the Indemnifying Party);
and provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 8.6 unless the Indemnifying Party is materially prejudiced
thereby. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to the entry
of any judgment or enter into any settlement which does not include, as an
unconditional term thereof, the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 8.6 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party, on the one hand, and of the Indemnified Party, on the other,
in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party, and the parties| relative
intent,
<PAGE>
47
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with any underwritten public offering
contemplated by this Agreement are in conflict with the foregoing provisions,
the provisions in such underwriting agreement shall be controlling.
(f) The foregoing indemnity agreement of the Company and
Holders shall be subject to the condition that, insofar as they relate to any
loss, claim, liability or damage made in a preliminary prospectus but eliminated
or remedied in the amended prospectus on file with the SEC at the time the
registration statement in question becomes effective or the amended prospectus
filed with the Commission pursuant to Rule 424 (b) under the Securities Act (the
"Final Prospectus"), such indemnity agreement shall not inure to the benefit of
any underwriter if a copy of the Final Prospectus was furnished to the
underwriter and was not furnished to the person asserting the loss, liability,
claim or damage at or prior to the time such action was required by the
Securities Act.
SECTION 8.7. Information by the Purchasers. Each participating
Purchaser shall furnish to the Company such information regarding such Purchaser
and the distribution proposed by such Purchaser as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Article 8.
SECTION 8.8. Rule 144 Reporting. With a view to making
available the benefits of certain rules and regulations of the Commission which
may permit the sale of restricted securities to the public without registration,
the Company agrees to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all
times from and after 90 days following the effective date of the first
registration under the Securities Act filed by the Company for an
offering of its securities to the general public;
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company
under the Securities Act and the Exchange Act at any time after it has
become subject to such reporting requirements; and
(iii) so long as either Purchaser owns any Registrable Stock,
furnish to such Purchaser upon request, a written statement by the
Company as to its compliance with the reporting requirements of Rule
144 (at any time from and after 90 days following the effective date of
the first registration statement filed by the Company for an offering
of its capital stock to the public), and of the Securities Act
generally and the Exchange Act (at
<PAGE>
48
any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed as either Purchaser may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such Purchaser to sell any such capital stock
without registration.
SECTION 8.9. "Market Stand-off" Agreement. Each Purchaser
agrees, for so long as it and its Affiliates benefically own more than 5% of the
Common Stock on a fully diluted basis, if requested by the Company and an
underwriter of Common Stock (or other securities convertible into or
exchangeable for Common Stock), not to sell or otherwise transfer or dispose of
any Registrable Stock (or such other equity securities of the Company) held by
each Purchaser during the 180-day period following the effective date of a
registration statement of the Company filed under the Securities Act; provided
that:
(i) such agreement only applies to a Qualified Initial Public
Offering; and
(ii) all officers and directors and holders of 5% or more of
the outstanding shares of capital stock of the Company enter into
similar agreements.
If requested by the underwriters, each Purchaser shall execute a separate
agreement to the foregoing effect. The Company may impose stop-transfer
instructions with respect to the shares (or stock) subject to the foregoing
restriction until the end of said 180-day period. The provisions of this Section
8.9 shall be binding upon any transferee who acquires Registrable Stock, whether
or not such transferee is entitled to the registration rights provided
hereunder.
SECTION 8.10. Termination. The registration set forth in this
Section shall not be available to any Holder if, in the written opinion of
counsel to the Company, all of the Registrable Stock then owned by such
Purchaser could be sold in any 90-day period pursuant to Rule 144 under the
Securities Act.
SECTION 8.11. Suspension of Sales. Subject to the next
sentence of this paragraph, the Company shall be entitled to postpone, for a
reasonable period of time, the effectiveness of, or suspend the rights of the
Purchasers to make sales pursuant to any registration statement otherwise to be
prepared, filed and kept effective by it under this Article 8; provided,
however, that the duration of such postponement or suspension may not exceed the
earlier to occur of (A) 15 days after the cessation of the circumstances
described in the next sentence of this paragraph on which such postponement or
suspension is based or (B) 120 days after the date of the determination of the
Board referred to in the next sentence. Such postponement or suspension may only
be effected if the Board determines in good faith that the effectiveness of, or
sales pursuant to, such registration statement would materially impede, delay or
interfere with any significant financing, offer or sale of securities,
acquisition, corporate reorganization or significant transaction involving the
Company or any of its affiliates or require disclosure of
<PAGE>
49
material information which the Company has a bona fide business purpose for
preserving as confidential. If the Company shall so postpone the effectiveness
of, or suspend the rights of the Purchasers to make sales pursuant to, a
registration statement, it shall, as promptly as possible, notify the Purchasers
of such determination and each Purchaser shall (y) have the right, in the case
of a postponement of the effectiveness of a registration statement, to withdraw
the request for registration by giving written notice to the Company within 10
days after receipt of such notice or (z) in the case of a suspension of the
right to make sales, receive an extension of the registration period referred to
in Section 8.2(a)(y) hereof equal to the number of days of the suspension.
ARTICLE IX.
AMENDMENT AND WAIVER
SECTION 9.1. Amendment. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto..
SECTION 9.2. Waiver. Any party hereto may (a) extend the time
for the performance of any of the obligations or other acts of any other party
hereto which run in favor of such waiving party, (b) waive any inaccuracies in
the representations and warranties contained herein which run in favor of such
waiving party or in any document delivered to it pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein which run
in favor of such waiving party. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party to be bound thereby.
The failure of any party hereto to assert any of its rights hereunder shall not
constitute a waiver of any such rights.
ARTICLE X.
GENERAL PROVISIONS
SECTION 10.1. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in person, by
cable, telecopy, telegram or telex or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
<PAGE>
50
(a) if to Birch:
Birch Acquisitions L.L.C.
c/o Wellspring Associates L.L.C.
620 Fifth Avenue
New York, NY 10020 - 1579
Attention: Douglas Rotatori
Fax: (212) 332-7575
Telephone: (212) 332-7555
with a copy to:
Paul, Weiss Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: James H. Schwab
Fax: (212) 757-3990
Telephone: (212) 373-3000
(b) if to Jefferies:
Jefferies & Company, Inc.
11100 Santa Monica Blvd.
10th Floor
Los Angeles, CA 90025
Attention: Andrew Whittaker
Fax: (212) 903-2600
Telephone: (212) 903-2526
with a copy to:
Anderson Kill & Olick, P.C.
1251 Avenue of the Americas
New York, NY 10020 - 1182
Attention: Ronald S. Brody
Fax: 212 - 278-1733
Tel: 212 - 278-1700
(c) if to the Company:
Discovery Zone, Inc.
565 Taxter Road, 5th Floor
<PAGE>
51
Suite 570
Elmsford, NY 10523
Attention: Chief Financial Officer
Fax: (914) 345-4516
Telephone: (914) 345-4506
with a copy to:
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Stephen T. Giove, Esq.
Fax: (212) 648-7179
Telephone: (212) 848-4000
SECTION 10.2. Entire Agreement; Assignment. This Agreement
constitutes the entire agreement between the parties with respect to the subject
matter hereof. This Agreement shall not be assigned by operation of law or
otherwise, except that either Purchaser may assign all or any of its rights and
obligations hereunder to an Affiliate of such Purchaser on substantially similar
terms without the consent of the Company.
SECTION 10.3. Parties in Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and nothing
in this Agreement, express or implied, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement.
SECTION 10.4. Governing Law. THIS AGREEMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.
SECTION 10.5. Jurisdiction, Etc. (a) Each of the parties
hereto hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or
federal court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in any such New York State or, to the extent permitted by law, such
federal court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this June 25, 1998 Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement,
in the courts of any jurisdiction.
<PAGE>
52
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any such
New York State court or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 10.6. Headings. The descriptive headings contained in
this Agreement are included for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
SECTION 10.7. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this Agreement.
SECTION 10.8. Termination. This Agreement shall terminate if
the Closing shall not have occurred on or prior to August 1, 1998, with no
further obligations hereunder to either party hereto.
<PAGE>
IN WITNESS WHEREOF, each Purchaser and the Company have each
caused this Agreement to be executed by its duly authorized officer as of the
date first written above.
DISCOVERY ZONE, INC.
By: /s/ Scott W. Bernstein
------------------------------------
Name: Scott W. Bernstein
Title: President & CEO
BIRCH ACQUISITION L.L.C.
By: /s/ Martin S. Davis
------------------------------------
Name: Martin S. Davis
Title: Member
DZ INVESTORS L.L.C.
By: /s/ Joseph E. Sarachek
------------------------------------
Name: Joseph E. Sarachek
Title: Authorized Signatory
JEFFERIES & COMPANY, INC.
By: /s/ Andrew Booth
------------------------------------
Name: Andrew Booth
Title: Senior Vice President
<PAGE>
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATIONS OF SERIES B
JUNIOR CUMULATIVE PREFERRED STOCK
OF
DISCOVERY ZONE, INC.
<PAGE>
EXHIBIT B
FORM OF SERIES B PREFERRED
WARRANT AGREEMENT
AMENDMENT NUMBER ONE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), is entered into as of July 17, 1998, between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of business
located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California
90025-3333, and DISCOVERY ZONE, INC., a Delaware corporation ("Borrower"), with
its chief executive office located at 565 Taxter Road, Fifth Floor, Elmsford,
New York 10523.
This Amendment is entered into with reference to the following facts:
A. Foothill and Borrower heretofore entered into that certain Loan and
Security Agreement, dated as of March 31, 1998 (herein the
"Agreement");
B. Borrower has requested Foothill to consent to Borrower's issuance of
new 13 1/2% Senior Collateralized Notes due 2002 in the original
principal amount not to exceed $20,000,000, and to amend the Agreement
to permit the foregoing transaction;
C. Foothill is willing to so amend the Agreement in accordance with the
terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises contained herein, Foothill and Borrower hereby agree as follows:
1. Amendments to the Agreement.
a. Section 1.1 of the Agreement hereby is amended by adding or
modifying, as the case may be, the following definitions:
"First Amendment Date" means July 17, 1998.
"Loan Documents" means this Agreement, the Letters of Credit, the Stock
Pledge Agreement, the Trademark Security Agreement, the Guaranty, the Guarantor
Security Agreement, the Intercreditor Agreement, the Disbursement Letter, the
Concentration Account Agreements, the Collateralized Notes Intercreditor
Agreement, any note or notes executed by Borrower and payable to Foothill, and
any other agreement entered into, now or in the future, in connection with this
Agreement.
<PAGE>
2
"Permitted Indebtedness" means:
(a) Indebtedness incurred by the Obligors in connection with or
arising out of Capital Lease Obligations or Purchase Money Obligations;
provided that the aggregate principal amount at any one time
outstanding of all such Capital Lease Obligations and Purchase Money
Obligations does not exceed $5,000,000;
(b) Indebtedness owed by Borrower to any Subsidiary of Borrower
for so long as (i) any such Indebtedness is held by a Subsidiary of
Borrower, (ii) any such Indebtedness shall not be secured by a Lien on
any asset of Borrower or its Subsidiaries, and (iii) any such
Indebtedness shall be subordinated, pursuant to a written agreement, to
Borrower's obligations under this Agreement; provided, however, that,
as of any date that (1) any Person other than a Subsidiary of Borrower
owns or holds any such Indebtedness of Borrower or (2) any such
Indebtedness of Borrower is secured by a Lien on any asset of Borrower
or its Subsidiaries, any such date shall be deemed the date of
incurrence of Indebtedness not constituting Permitted Indebtedness;
(c) Indebtedness of any Subsidiary of Borrower to Borrower or to
any other Subsidiary of Borrower for so long as (i) such Indebtedness
is held by Borrower or a Subsidiary of Borrower, (ii) any such
Indebtedness from any Subsidiary of Borrower to Borrower in excess of
$500,000 in aggregate principal amount shall be evidenced by a written
promissory note or other instrument in form and substance reasonably
satisfactory to Foothill, and (iii) any such Indebtedness shall not be
secured by a Lien on any asset of any Subsidiary of Borrower held by a
Person other than Borrower or a Subsidiary of Borrower; provided,
however, that, as of any date that (1) any Person other than Borrower
or a Subsidiary of Borrower owns or holds such Indebtedness or (2) any
such Indebtedness is secured by a Lien on any asset of Borrower or its
Subsidiaries held by any Person other than Borrower or a Subsidiary of
Borrower, any such date shall be deemed the date of incurrence of
Indebtedness not constituting Permitted Indebtedness;
(d) Interest Swap Obligations of Borrower covering Indebtedness
of Borrower or any of its Subsidiaries and Interest Swap Obligations of
any Subsidiary covering Indebtedness of such Subsidiary; provided,
however, that such Interest Swap Obligations are entered into to
protect Borrower and its Subsidiaries from fluctuations in interest
rates on Indebtedness incurred in accordance with this Agreement to the
extent the notional principal amount of such Interest Swap Obligation
does not exceed the principal amount of the Indebtedness to which such
Interest Swap Obligation relates;
(e) Indebtedness of Borrower outstanding on the Closing Date
pursuant to the McDonald's Secured Note, the McDonald's Rent Deferral
Secured Notes (including Indebtedness resulting from future rent
deferrals to the extent and in the manner contemplated by the
McDonald's Rent Deferral Secured Notes as in effect on the Closing
<PAGE>
3
Date)and the Pre-petition Tax Payables, as reduced by the amount of any
prepayments permitted by this Agreement or scheduled amortization
payments when actually paid or by any permanent reductions thereof;
(f) Indebtedness of Borrower outstanding on the Closing Date
incurred under the Subordinated Creditor Indenture; and
(g) up to $20,000,000 of Indebtedness of Borrower outstanding on
the First Amendment Date incurred under the Collateralized Notes
Indenture.
"Collateralized Notes Intercreditor Agreement" means that certain
Intercreditor Agreement among Foothill and Collateralized Notes Subordinated
Creditor, and acknowledged by Borrower in form and substance satisfactory to
Foothill, in its sole discretion.
"Collateralized Notes Indenture" means that certain Indenture, dated as
of July 14, 1998 among Borrower, as issuer, the subsidiary guarantor's named
therein, and Firstar Bank of Minnesota, N.A., as trustee (as such agreement may
be amended, modified, supplemented, refinanced, or replaced from time to time in
accordance with the provisions of this Agreement and the Intercreditor
Agreement) in form and substance satisfactory to Foothill, in its sole
discretion.
"Collateralized Notes Subordinated Creditor" means Firstar Bank of
Minnesota, N.A. in its capacity as trustee and collateral agent.
2. Representations and Warranties. Borrower hereby represents and
warrants to Foothill that (a) the execution, delivery, and performance of this
Amendment and of the Agreement, as amended by this Amendment, are within its
corporate powers, have been duly authorized by all necessary corporate action,
and are not in contravention of any law, rule, or regulation, or any order,
judgment, decree, writ, injunction, or award of any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its properties
may be bound or affected, and (b) this Amendment and the Agreement, as amended
by this Amendment, constitute Borrower's legal, valid, and binding obligation,
enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of each of the
following, on or before July 31, 1998, unless waived or deferred by Foothill in
its sole discretion, shall constitute conditions precedent to the effectiveness
of this Amendment:
a. Foothill shall have received each of the following documents,
in form and substance satisfactory to Foothill and its counsel, duly executed,
and each such document shall be in full force and effect:
(1) this Amendment;
<PAGE>
4
(2) the Reaffirmation and Consent (as hereinafter defined); and
(3) the Collateralized Notes Intercreditor Agreement.
b. Foothill shall have received a copy of the Collateralized
Notes Indenture, certified by the Secretary of Borrower as being true, correct,
and complete; which Collateralized Notes Indenture shall be in form and
substance satisfactory to Foothill in its sole discretion (it being understood
that the Indebtedness issued pursuant to the Collateralized Notes Indenture
shall (1) be on terms and conditions at least as favorable to Borrower as the
terms and conditions of the Subordinated Creditor Indenture, and (2) require the
establishment of an interest reserve for a period coterminus with the interest
reserve created pursuant to the Subordinated Creditor Indenture);
c. Borrower shall have received not less than $7,500,000 in Net
Issuance Proceeds from an issuance of equity securities of Borrower, which such
equity securities may be shares of Borrower's common Stock or preferred Stock,
the terms of any such preferred Stock to be satisfactory to Foothill.
d. Foothill shall have received an opinion of Borrower's counsel
with respect to Borrower's execution, delivery, and performance of this
Amendment and the Collateralized Notes Indenture, in form and substance
satisfactory to Foothill in its sole discretion;
e. The representations and warranties in this Amendment, the
Agreement as amended by this Amendment, and the other Loan Documents shall be
true and correct in all respects on and as of the date hereof, as though made on
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
f. No Event of Default or event which with the giving of notice
or passage of time would constitute an Event of Default shall have occurred and
be continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein;
g. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance satisfactory to Foothill
and its counsel.
4. Reaffirmation and Consent. Concurrently herewith, Borrower shall
cause each current Guarantor to execute and deliver to Foothill the
Reaffirmation and Consent attached hereto as Exhibit "A" (the "Reaffirmation and
Consent").
5. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory to
Foothill, and take all actions as
<PAGE>
5
Foothill reasonably may request from time to time fully to consummate the
transactions contemplated under this Amendment and the Agreement, as amended by
this Amendment.
6. Effect on Agreement. The Agreement, as amended hereby, shall be and
remain in full force and effect in accordance with its terms and hereby is
ratified and confirmed in all respects. The execution, delivery, and performance
of this Amendment shall not operate as a waiver of or, except as expressly set
forth herein, as an amendment of any right, power, or remedy of Foothill under
the Agreement, as in effect prior to the date hereof.
7. Miscellaneous.
a. Upon the effectiveness of this Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like
import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in the
Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or
words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. This Amendment shall be governed by and construed in accordance
with the laws of the State of New York.
d. This Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument and any of
the parties hereto may execute this Amendment by signing any such counterpart.
Delivery of an executed counterpart of this Amendment by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Amendment. Any party delivering an executed counterpart of this Amendment by
telefacsimile also shall deliver a manually executed counterpart of this
Amendment but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Amendment.
[Signature page to follow.]
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
DISCOVERY ZONE, INC.,
a Delaware corporation
By:/s/ Scott W. Bernstein
--------------------------
Title: President and CEO
-----------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By:/s/ Bruce Rivers
--------------------------
Title: Vice President
-----------------------
<PAGE>
EXHIBIT A
Reaffirmation and Consent
All capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in that certain Amendment Number One to
Loan and Security Agreement dated as of July 14, 1998 (the "Amendment"). Each of
the undersigned hereby (a) represents and warrants to Foothill that the
execution, delivery, and performance of this Reaffirmation and Consent are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court or governmental authority, or of the terms of its charter or bylaws, or of
any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) consents to the amendment of the
Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing
to Foothill under the Guaranty and any other Loan Documents to which it is a
party; and (d) agrees that each of the Guaranty and any other Loan Documents to
which it is a party is and shall remain in full force and effect. Although each
of the undersigned has been informed of the matters set forth herein and has
acknowledged and agreed to same, it understands that Foothill has no obligations
to inform it of such matters in the future or to seek its acknowledgment or
agreement to future amendments, and nothing herein shall create such a duty.
This Reaffirmation and Consent may be executed in any number of counterparts and
by different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Reaffirmation and Consent.
Delivery of an executed counterpart of this Reaffirmation and Consent by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Reaffirmation and Consent. Any party delivering an executed
counterpart of this Reaffirmation and Consent by telefacsimile also shall
deliver an original executed counterpart of this Reaffirmation and Consent but
the failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Reaffirmation and Consent.
This Reaffirmation and Consent shall be governed by the laws of the State of New
York, as more fully set forth in Section 20 of the Guaranty.
DISCOVERY ZONE (CANADA) LIMITED
a corporation organized under the
laws of Canada
By: /s/ Scott W. Bernstein
-----------------------
Title: President and CEO
--------------------
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), is entered into as of December 18, 1998, between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of business
located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California
90025-3333, and DISCOVERY ZONE, INC., a Delaware corporation ("Borrower"), with
its chief executive office located at 565 Taxter Road, Fifth Floor, Elmsford,
New York 10523.
This Amendment is entered into with reference to the following
facts:
A. Foothill and Borrower heretofore entered into that certain
Loan and Security Agreement, dated as of March 31, 1998, as amended by
that certain Amendment Number One to Loan and Security Agreement, dated
as of July 17, 1998 (herein the "Agreement");
B. Borrower has requested that the Agreement be amended to
increase the Maximum Amount from $10,000,000 to $12,500,000 through
March 15, 1999, and to $12,000,000 thereafter, and to revise the
Borrowing Base calculation;
C. Foothill is willing to so amend the Agreement in accordance
with the terms and conditions hereof;
D. Borrower has advised Foothill that Borrower intends to sell
the Fort Bend County Real Property and has requested Foothill's consent
to such sale; and
E. All capitalized terms used herein and not defined herein
shall have the meanings ascribed to them in the Agreement, as amended
hereby.
NOW THEREFORE, in consideration of the above recitals and the
mutual promises contained herein, Foothill and Borrower hereby agree as follows:
1. Amendments to the Agreement.
a. Section 1.1 of the Agreement hereby is amended by
adding or modifying, as the case may be, the following definitions:
"Add-Back Credit" means the Top 50 Store Add-Back
Credit plus the Second 50 Store Add-Back Credit.
"Adjusted Aggregate Second 50 Store Contribution"
means, (a) as of any date of determination occurring in each of the
first 24 months following the Closing Date, Aggregate Second 50 Store
Contribution for the relevant trailing 12 month period, plus, the
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Second 50 Store Add-Back Credit, and (b) as of any date of
determination occurring after the first 24 months following the Closing
Date, Aggregate Second 50 Store Contribution for the relevant trailing
12 month period.
"Adjusted Aggregate Top 50 Store Contribution" means,
(a) as of any date of determination occurring in each of the first 24
months following the Closing Date, Aggregate Top 50 Store Contribution
for the relevant trailing 12 month period, plus, the Top 50 Store
Add-Back Credit, and (b) as of any date of determination occurring
after the first 24 months following the Closing Date, Aggregate Top 50
Store Contribution for the relevant trailing 12 month period.
"Adjusted EBITDA" means, with respect to each fiscal
month of Borrower, Borrower's EBITDA for such fiscal month, plus the
sum of Borrower's Excess EBITDA for each of the 2 immediately preceding
fiscal months.
"Adjusted Store EBITDA" means, with respect to each
fiscal month of Borrower, Borrower's Store EBITDA for such fiscal
month, plus the sum of Borrower's Excess Store EBITDA for each of the 2
immediately preceding fiscal months.
"Adjusted Value" means, with respect to any parcel of
Real Property: (a) until such time as Foothill shall have received, in
each case, with respect to such parcel of Real Property (i) a Mortgage,
(ii) a Mortgage Policy assuring Foothill that the Mortgage with respect
thereto is a valid and enforceable first priority mortgage Lien thereon
free and clear of all defects and encumbrances except Permitted Liens,
and (iii) an opinion of Borrower's counsel in form and substance
satisfactory to Foothill, $0.00; and (b) thereafter, the appraised
value of such parcel of Real Property, as reasonably determined by
Foothill.
"Aggregate Second 50 Store Contribution" means, as of
any date of determination, the sum of the individual Store Contribution
of each of Borrower's Second 50 Stores.
"Aggregate Store Contribution" means the sum of (a)
the Aggregate Top 50 Store Contribution, plus (b) the Aggregate Second
50 Store Contribution.
"Aggregate Top 50 Store Contribution" means, as of
any date of determination, the sum of the individual Store Contribution
of each of Borrower's Top 50 Stores.
"Borrower Collateral" means all of Borrower's
interests in each of the following:
(a) the Accounts,
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(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) the Real Property Collateral,
(h) any month, or other assets of Borrower that now
or hereafter come into the possession, custody, or control of Foothill,
and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance
covering any or all of the Borrower Collateral, and any an all
Accounts, Borrower's Books, Equipment, General Intangibles, Inventory,
Negotiable Collateral, real property, money, deposit accounts, or other
tangible or intangible property resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof;
provided, however, that anything in the foregoing to the contrary
notwithstanding, the Borrower Collateral shall not include the Escrowed
Interest Account or the McDonald's Collateral.
"Borrower Personal Property Collateral" means all
Borrower Collateral other than the Real Property Collateral.
"Borrower's Second 50 Stores" means, as of any date
of determination, Borrower's 50 store locations (calculated to include
any store that would have been included but for the commencement of
renovations) which are ranked 51 through 100 on the basis of highest
levels of Store Contribution on a per-store basis, as compared to
Borrower's other store locations, computed on a trailing 12 month
basis.
"Borrower's Top 50 Stores" means, as of any date of
determination, Borrower's 50 store locations (calculated to include any
store that would have been included but for the commencement of
renovations) reporting highest levels of Store Contribution on a
per-store basis, as compared to Borrower's other store locations,
computed on a trailing 12 month basis.
"Dallas County Real Property" means that certain
tract of land owned by Borrower in the City of Dallas, Dallas County,
Texas, a part of the Robert Wilburn Survey, Abstract No. 1580, and
being all of Lot 2B, Block 2/8708, Prestonwood Towers, an addition
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to the City of Dallas according to the replat of Lot 2, Block 2/8708 of
Prestonwood Towers recorded in Volume 92208, Page 3668, Dallas County
Map Records.
"EBITDA" means, with respect to any fiscal period of
a Person, determined on a consolidated basis, such Persons' net income
(or net loss) during such fiscal period (exclusive of extraordinary or
non-recurring items), plus (except to the extent attributable to
extraordinary or non-recurring items) the amount of interest, taxes,
depreciation, amortization, and non-cash rent adjustments deducted in
arriving at such net income (or net loss), in each case determined in
accordance with GAAP.
"Excess EBITDA" means, (a) with respect to each
fiscal period of Borrower set forth in Section 7.19(c), the amount by
which Borrower's EBITDA for such fiscal period exceeds the Minimum
Adjusted EBITDA for such fiscal period (including any negative amount,
in the event that Borrower's EBITDA for such fiscal period is less than
the Minimum Adjusted EBITDA for such fiscal period), and (b) with
respect to each fiscal period of Borrower not set forth in Section
7.19(c), $0.
"Excess Store EBITDA" means, (a) with respect to each
fiscal period of Borrower set forth in Section 7.19(b), the amount by
which Borrower's Store EBITDA for such fiscal period exceeds the
Minimum Adjusted Store EBITDA for such fiscal period (including any
negative amount, in the event that Borrower's Store EBITDA for such
fiscal period is less than the Minimum Adjusted Store EBITDA for such
fiscal period), and (b) with respect to each fiscal period of Borrower
not set forth in Section 7.19(b), $0.
"Foothill Expenses" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by
Borrower under any of the Loan Documents that are paid or incurred by
Foothill; fees or charges paid or incurred by Foothill in connection
with Foothill's transactions with Borrower, including, fees or charges
for photocopying, notarization, couriers and messengers,
telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor
vehicles), filing, recording, publication, appraisal (including
periodic Personal Property Collateral or Real Property Collateral
appraisals), real estate surveys, real estate title policies and
endorsements, and environmental audits; costs and expenses incurred by
Foothill in the disbursement of funds to Borrower (by wire transfer or
otherwise); charges paid or incurred by Foothill resulting from the
dishonor of checks; costs and expenses paid or incurred by Foothill to
correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing,
shipping, selling, preparing for sale, or advertising to sell the
Property Collateral or the Real Property Collateral, or any portion
thereof, irrespective of whether a sale is consummated; costs and
expenses paid or incurred by Foothill in examining Borrower's Books;
costs and expenses of third party claims or any other suit paid or
incurred by Foothill in enforcing or defending the Loan Documents or in
connection with the transactions contemplated by the Loan Documents or
Foothill's
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relationship with Borrower or any guarantor; and Foothill's reasonable
attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing
(including attorneys fees and expenses incurred in connection with a
"workout," a restructuring," or an Insolvency Proceeding concerning
Borrower or any guarantor of the Obligations) defending, or concerning
the Loan Documents, irrespective of whether suit is brought.
"Fort Bend County Real Property" means that certain
parcel of Real Property owned by Borrower consisting of Reserve "G" of
Creekside at Town Center, a subdivision in Fort Bend County, Texas,
according to the map or plat thereof recorded under Slide Number 1281/B
of the Plat Records of Fort Bend County, Texas.
"Lien" means any interest in property securing an
obligation owed to, or a claim by, any Person other than the owner of
the property, whether such interest shall be based on the common law,
statute, or contract, whether such interest shall be recorded or
perfected, and whether such interest shall be contingent upon the
occurrence of some future event or events or the existence of some
future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a
lease, consignment, or bailment for security purposes and also
including reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases, and other
title exceptions and encumbrances affecting Real Property.
"Loan Documents" means this Agreement, the Letters of
Credit, the Stock Pledge Agreement, the Trademark Security Agreement,
the Guaranty, the Guarantor Security Agreement, the Intercreditor
Agreement, the Disbursement Letter, the Concentration Account
Agreements, the Collateralized Notes Intercreditor Agreement, the
Mortgages, any note or notes executed by Borrower and payable to
Foothill, and any other agreement entered into, now or in the future,
in connection with this Agreement.
"Maximum Revolving Amount" means, (a) prior to the
Second Amendment Date, $10,000,000, (b) from the Second Amendment Date
through March 15, 1999, $12,500,000, and (c) thereafter, $12,000,000.
"Minimum Adjusted EBITDA" means, for any fiscal
period of Borrower, the amount set forth in Section 7.19(c) in the
column labeled "Minimum Adjusted EBITDA" for such fiscal period.
"Minimum Adjusted Store EBITDA" means, for any fiscal
period of Borrower, the amount set forth in Section 7.l.(b) in the
column labeled "Minimum Adjusted Store EBITDA" for such fiscal period.
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"Mortgage Policy" means, with respect to any parcel
of Real Property, a mortgagee title insurance policy (or marked
commitment to issue the same) in form and substance satisfactory to
Foothill for such parcel of Real Property issued by a title insurance
company satisfactory to Foothill.
"Mortgages" means on more mortgages, deeds of trust,
or deeds to secure debt, executed by Borrower in favor of Foothill, the
form and substance of which shall be satisfactory to Foothill, that
encumber the Real Property Collateral and the related improvements
thereto.
"Permitted Liens" means:
(a) Liens held by Foothill;
(b) Liens for taxes, assessments or governmental
charges or claims either (i) not delinquent or (ii) are the subject of
Permitted Protests;
(c) Liens to secure Indebtedness of Borrower incurred
under the Subordinated Creditor Indenture, the Collateralized Notes
Indenture, and the McDonald's Senior Liens;
(d) Liens arising by operation of law in favor of
warehousemen, landlords, carriers, mechanics, materialmen, laborers, or
suppliers, incurred in the ordinary course of business of any Obligor
and not in connection with the borrowing of money, and which Liens
either, (i) are for sums not year delinquent, or (ii) are the subject
of Permitted Protests;
(e) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation,
unemployment insurance and other types of social security, including
any Lien securing letters of credit issued in the ordinary course of
business consistent with past practice in connection therewith, or to
see the performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed
money);
(f) Liens or deposits to secure performance of bids,
tenders, or leases (to the extent permitted under this Agreement),
incurred in the ordinary course of business of any Obligor and not in
connection with the borrowing of money;
(g) Liens arising by reason of security for surety or
appeal bonds in the ordinary course of business of any Obligor;
(h) Liens of or resulting from any judgement or award
against any Obligor that reasonably could not be expected to result in
a Material Adverse Change and as to which the time for the appeal or
petition for rehearing of which has not yet expired, or in respect
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of which such Obligor is in good faith prosecuting an appeal or
proceeding for a review and in respect of which a stay of execution
pending such appeal or proceeding for review has been secured;
(i) Liens with respect to the Real Property
Collateral that are exceptions to the commitments for title insurance
issued in connection with the Mortgages, as accepted by Foothill;
(j) with respect to any Real Property that is not
part of the Real Property Collateral, easements, rights-of-way, zoning
restrictions and other similar charges or encumbrances in respect of
such Real Property not interfering in any material respect with the
ordinary conduct of the business of any Obligor, or impair the use or
operation of the Collateral by any Obligor, or impair the value of
Foothill's Lien thereon or therein;
(k) any interest or title of a lessor under any
Capital Lease Obligation permitted to be incurred under this Agreement
pursuant to clause (a) of the definition of "Permitted Indebtedness"
provided that such Liens do not extend to any property or assets which
are not leased property subject to such Capital Lease Obligation;
(l) Purchase Money Liens of any Obligor acquired in
the ordinary course of business; provided, however, that (i) the
related Purchase Money Obligation shall not exceed the cost of such
property or assets and shall not be secured by any property or assets
of Borrower or any Subsidiary of Borrower other than the property and
assets so acquired and (ii) the Lien securing such Indebtedness shall
be created within 90 days of such acquisition;
(m) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual, or
warranty requirements of any Obligor, including rights of offset and
set-off;
(n) Liens securing Interest Swap Obligations, which
Interest Swap Obligations relate to Indebtedness that is otherwise
permitted under this Agreement;
(o) Liens in favor of Borrower or any Subsidiary of
Borrower on assets of any other Subsidiary of Borrower; and
(p) Acquisition Liens.
"Personal Property Collateral" means all Collateral
other than the Real Property Collateral.
"Projections" means, with respect to any fiscal
period of Borrower, Borrower's forecasted (a) balance sheets, (b)
profit and loss statements, and (c) cash flow statements, in each case,
for such fiscal period, and prepared on a consistent basis with
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Borrower's historical financial statements, together with appropriate
supporting details and a statement of underlying assumptions.
"Real Property" means any estates or interest in real
property now owned or hereafter acquired by Borrower.
"Real Property Collateral" means the parcel or
parcels of Real Property and the related improvements thereto
identified on Schedule R-1, and any Real Property hereafter acquired by
Borrower.
"Second Amendment Date" means December 18, 1998.
"Second 50 Store Add-Back Credit" means, as of any
date of determination, an amount equal to (a) $10,000 multiplied by (b)
the number of store renovations commenced among Borrower's Second 50
Stores during the 15 month period preceding such date of determination.
"Store EBITDA" means, with respect to any fiscal
period of Borrower, Borrower's EBITDA for such fiscal period, plus
(except to the extent attributable to extraordinary or non-recurring
items) the amount of selling, general, and administrative expenses
deducted in arriving at Borrower's EBITDA for such fiscal period, in
each case determined in accordance with GAAP.
"Top 50 Store Add-Back Credit" means, as of any date
of determination, an amount equal to (a) $10,000 multiplied by (b) the
number of store renovations commenced among Borrower's Top 50 Stores
during the 15 month period preceding such date of determination.
b. Section 2.1(a) and (b) of the Loan Agreement are
hereby amended and restated in their entirety to read as follows:
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to make advances ("Advances") to Borrower in
an amount outstanding not to exceed at any one time the lesser of (i)
the Maximum Revolving Amount less the Letter of Credit Usage, or (ii)
the Borrowing Base less (A) the Letter of Credit Usage. For purposes of
this Agreement, "Borrowing Base", as of any date of determination,
shall mean the result of:
(v) the lesser of (1) $1,200,000, and (2)
75% of the Adjusted Value of the Dallas County Real Property;
plus
(w) the lesser of (1) $600,000, and (2) 75%
of the Adjusted Value of the Fort Bend County Real Property;
plus
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(x) 150% of the Adjusted Aggregate Top 50
Store Contribution, plus
(y) 120% of the Adjusted Aggregate Second 50
Store Contribution, minus
(z) the aggregate amount of reserves, if
any, established and maintained by Foothill from time to time
pursuant to the Loan Documents, including such reserves
established under Sections 2.1(b), 2.1(e), 6.15, 8.8 or 10 or
under the definition of Permitted Protest.
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its
advance rate based upon the appraised value of the Dallas County Real
Property, the appraised value of the Fort Bend County Real Property,
Adjusted Aggregate Top 50 Store Contribution or Adjusted Aggregate
Second 50 Store Contribution if it determines in good faith that there
has occurred a Material Adverse Change.
c. Section 4.1 of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
4.1 Grant of Security Interest. Borrower hereby
grants to Foothill a continuing security interest in all currently
existing and hereafter acquired or arising Borrower Personal Property
Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Foothill's
security interests in all of the Collateral shall attach to all of the
Collateral without further act on the part of Foothill or any Obligor.
Anything contained in this Agreement or any other Loan Document to the
contrary notwithstanding, except for Permitted Dispositions, no Obligor
has any authority, express or implied, to dispose of any item or
portion of the Collateral.
d. Section 6.2 of the Loan Agreement hereby is
amended and restated in its entirety to read as follows:
6.2. Collateral Reporting. Provide Foothill with the
following documents at the following times in form satisfactory to
Foothill:
(a) a detailed calculation of the Aggregate Top 50
Store Contribution, the Aggregate Second 50 Store Contribution, the
Aggregate Store Contribution, and a detailed report of the Store
Contribution of each of Borrower's individual stores measured on a
trailing 12-month basis as of the last day of each fiscal month, by no
later than (i) with respect to any fiscal month ending on a date that
is the last day of any fiscal year, the date
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that is 60 days after the last day of such fiscal month, and (ii) with
respect to any other fiscal month, the date that is 30 days after the
last day of such fiscal month.
(b) concurrent with the reporting delivered pursuant
to clause (a) above during the first 24 months following the Closing
Date, a detailed calculation of the Top 50 Store Add-Back Credit, the
Second 50 Store Add-Back Credit, the Add-Back Credit, and a report
detailing each store renovation completed during the last 15 month
period;
(c) concurrent with the reporting delivered pursuant
to clause (a) above during the first 24 months following the Closing
Date, a certificate representing Borrower's good faith, reasonable
estimate (based upon the advice of its professional advisors) of the
Disputed Amount; and
(d) such other reports as to the Collateral or the
financial condition of each Obligor as Foothill may reasonably request
from time to time.
e. Section 6.10 of the Loan Agreement hereby is
amended and restated in its entirety to read as follows:
6.10 Insurance.
(a) At its expense, keep the Personal Property
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as
are ordinarily insured against by other owners in similar businesses.
Borrower also shall maintain business interruption, public liability,
product liability, and property damage insurance relating to each
Obligor's ownership and use of the Personal Property Collateral, as
well as insurance against larceny, embezzlement, and criminal
misappropriation.
(b) At its expense, obtain and maintain (i) insurance
of the type necessary to insure the improvements to and fixtures
located on the Real Property Collateral for the full replacement cost
thereof, against any loss by fire, lightning, windstorm, hail,
explosion, aircraft, smoke damage, vehicle damage, earthquakes,
elevator collision, and other risks from time to time included under
"extended coverage" policies, in such amounts as Foothill may require,
but in any event in amounts sufficient to prevent Borrower from
becoming a co- insurer under such policies, (ii) combined single limit
bodily injury and property damages insurance against any loss,
liability, or damages on, about, or relating to each parcel of Real
Property Collateral, in such amounts, as are ordinarily insurance
against by other owners in similar businesses, (iii) business rental
insurance covering annual receipts from a 12 month period for each
parcel of Real Property Collateral; and (iv) insurance for such other
risks as Foothill may require. Replacement costs, at Foothill's option,
may be re-determined by an insurance appraiser, satisfactory to
Foothill, not more frequently than once every 12 months at Borrower's
expense.
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(c) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All insurance required herein shall be
written by companies which are authorized to do insurance business in
the State of California. All hazard insurance and such other insurance
as Foothill shall specify, shall contain a Form 438BFU (NS) mortgagee
endorsement, or an equivalent endorsement satisfactory to Foothill,
showing Foothill as loss payee thereof, as its interests may appear,
and shall contain a waiver of warranties. Every policy of insurance
referred to in this Section 6.10 shall contain an agreement by the
insurer that it will not cancel such policy except after 30 days' prior
written notice to Foothill and that any loss payable thereunder shall
be payable notwithstanding (i) occupancy or use of the Real Property
Collateral for purposes more hazardous than permitted by the terms of
such policy, (ii) any foreclosure or other action or proceeding taken
by Foothill pursuant to the Mortgages upon the happening of an Event of
Default, or (iii) any change in title or ownership of the Real Property
Collateral. Borrower shall deliver to Foothill certified copies of such
policies of insurance and evidence of the payment of all premiums
therefor.
(d) Each Obligor shall give Foothill prompt notice of
any loss or damage to its properties and assets by fire, lightning,
windstorm, hail, explosion, aircraft, smoke damage, vehicle damage,
earthquake, elevator collision, and other risks included under an
"extended coverage" endorsement covered by such insurance. Upon the
occurrence and during the continuance of an Event of Default, Foothill
shall have the exclusive right to adjust all losses payable under the
applicable insurance policies without any liability to any Obligor
whatsoever in respect of such adjustments. Any monies received as
payment for any loss or damage to their properties and assets by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle
damage, earthquake, elevator collision, and other risks included under
an "extended coverage" endorsement under the applicable insurance
policy (exclusive of any casualty loss wherein the insurance proceeds
are less than $100,000), shall be paid over to Foothill, and Borrower
shall have the right to designate in writing to Foothill within 30 days
of such payment whether such payment shall be (i) applied to the
prepayment of the Obligations without premium, in such order or manner
as Foothill may elect (together with a commensurate reduction of the
Maximum Revolving Amount), or (ii) disbursed to Borrower under staged
payment terms satisfactory to Foothill for application to the cost of
repairs, replacements, or restorations and subject to the conditions
set forth in this Section 6.10(d). In the event Foothill fails to
receive timely such written designation or the conditions set forth in
the following sentence are not satisfied, the payment shall be applied
in the manner set forth in clause (i) of the immediately preceding
sentence. If Borrower elects to cause Foothill to disburse any monies
received as payment for any loss pursuant to this Section 6.10(d),
Foothill only shall be obligated to disburse such money for the repair,
replacement, or restoration of the affected property or assets if all
of the following conditions are satisfied: (A) no Default or Event of
Default has occurred and is continuing or would result from the
disbursement or application of such monies; (B) Borrower has cash, cash
equivalents, borrowing availability under Section 2.1 and/or business
interruption insurance proceeds in amounts sufficient, in Foothill's
reasonable judgment, to ensure that Borrower
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will be able to make payment as and when due of each of its Obligations
that will be payable during the period of such repair, replacement, or
restoration; (C) Foothill is reasonably satisfied that the amount of
such cash, cash equivalents, borrowing availability, and/or insurance
proceeds will be sufficient fully to repair, replace, or restore the
affected property or assets; (D) construction, completion of the
repair, replacement or restoration of the affected property or assets
shall be completed in accordance with plans, specifications, and
drawings submitted to and approved by Foothill, which approval shall
not be unreasonably withheld or delayed; and (E) all construction and
completion of the repair, replacement, or restoration shall be effected
with reasonable promptness and shall be of a value (the "Replaced
Value") (i) at least equal to the replacement value (the "Destroyed
Value") of such items of property destroyed or condemned prior to such
destruction or condemnation, or (ii) of a value less than the Destroyed
Value so long as the difference between the Destroyed Value and the
Replaced Value is applied to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect (together with a
commensurate reduction of the Maximum Revolving Amount). All monies
paid by Borrower to Foothill pursuant to this Section 6.10(d) may be
commingled with other funds of Foothill and will not bear interest
pending disbursement hereunder. Upon the occurrence and during the
continuance of an Event of Default, Foothill shall have the right to
apply all prepaid premiums to the payment of the Obligations in such
order or form as Foothill shall determine.
(e) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that
required to be maintained under this Section 6.10, unless Foothill is
included thereon as named insured with the loss payable to Foothill
under a standard 438BFU (NS) Mortgagee endorsement, or its local
equivalent. Borrower immediately shall notify Foothill whenever such
separate insurance is taken out, specifying the insurer thereunder and
full particulars as to the policies evidencing the same, and originals
of such policies immediately shall be provided to Foothill.
f. The following is added as a new Section 6.17 to
the Loan Agreement:
Section 6.17 Projections. Not later than 30 days
prior to the end of each fiscal year of Borrower, deliver to Foothill
Projections of Borrower, in form and substance (including as to scope
and underlying assumptions) satisfactory to Foothill in its discretion,
for the forthcoming fiscal year, month by month, certified by the chief
financial officer of Borrower as being such officer's good faith best
estimate of the financial performance of Borrower during the period
covered thereby.
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g. Section 7.19 of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
Section 7.19 Financial Covenants. Fail to:
(a) Minimum Aggregate Store Contribution. Maintain
Aggregate Store Contribution of (1) as of the end of each of the first
12 months following the Closing Date in an amount equal to or greater
than $5,000,000, minus the lesser of (i) the Add-Back Credit or (ii)
$1,000,000, and (2) thereafter, equal to or greater than $5,000,000, in
each case measured as of the end of each calendar month on a trailing
12 month basis.
(b) Minimum Adjusted Store EBITDA. Achieve Adjusted
Store EBITDA of not less than the amount shown below for the period
corresponding thereto:
Minimum Adjusted
Period Store EBITDA
------ ------------
Month ending January 31, 1999 $2,765,000
Month ending February 28, 1999 $3,327,000
Month ending March 31, 1999 $3,636,000
Month ending April 30, 1999 $2,298,000
Month ending May 31, 1999 $1,497,000
Month ending June 30, 1999 $1,984,000
Month ending July 31, 1999 $1,471,000
Month ending August 31, 1999 $1,844,000
Month ending September 30, 1999 $365,000
Month ending October 31, 1999 $961,000
Month ending November 30, 1999 $1,843,000
Month ending December 31, 1999 $425,000
For each calendar month thereafter during each of
Borrower's fiscal years, Foothill shall establish, in its reasonable
credit judgment, Minimum Adjusted Store EBITDA for each such calendar
month during such fiscal year based upon the Projections for such
fiscal year delivered pursuant to Section 6.17.
13
<PAGE>
(c) Minimum Adjusted EBITDA. Achieve Adjusted EBITDA
of not less than the amount shown below for the period corresponding
thereto:
Minimum Adjusted
Period EBITDA
------ ------
Quarter ending December 31, 1998 ($9,250,000)
Month ending January 31, 1999 $600,000
Month ending February 28, 1999 $1,250,000
Month ending March 31, 1999 $1,864,000
Month ending April 30, 1999 $196,000
Month ending May 31, 1999 ($316,000)
Month ending June 30, 1999 ($241,000)
Month ending July 31, 1999 ($641,000)
Month ending August 31, 1999 ($175,000)
Month ending September 30, 1999 ($1,634,000)
Month ending October 31, 1999 ($1,377,000)
Month ending November 30, 1999 ($372,000)
Month ending December 31, 1999 ($1,521,000)
For each calendar month thereafter during each of
Borrower's fiscal years, Foothill shall establish, in its reasonable
credit judgment, Minimum Adjusted EBITDA for each such calendar month
during such fiscal year based upon the Projections for such fiscal year
delivered to Foothill pursuant to Section 6.17.
h. Section 8.2 of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
8.2 (a) If any Obligor fails or neglects to perform,
keep, or observe any term, provision, condition, covenant, or agreement
applicable to such Obligor contained in Sections 6.1 (Accounting
System), 6.2 (Collateral Reporting), 6.3 (Financial Statements,
Reports, Certificates), 6.4 (Tax Returns), 6.7 (Title to Equipment),
6.8 (Maintenance of Equipment), 6.12 (Location of Equipment), 6.13
(Compliance with Laws), 6.14 (Employee Benefits), or 6.15 (Leases) of
this Agreement and such failure continues for a period of 30 days; (b)
so long as no Event of Default shall have occurred and be continuing,
if any Obligor fails or neglects to perform, keep, or observe any term,
provision, condition, covenant, or agreement applicable to such Obligor
contained in Section 7.19 (Financial Covenants), and such Obligor fails
to deliver to Foothill within 60 days after such failure a detailed
written plan, in form and substance satisfactory to Foothill in its
sole discretion, for remedying such failure, including a set of
Projections, in form and substance (including as to scope and
underlying assumptions) satisfactory to Foothill in its sole and
absolute discretion, for the next succeeding 12 months on a month by
month basis; or (c) if any Obligor fails or neglects
14
<PAGE>
to perform, keep, or observe any other term, provision, condition,
covenant, or agreement applicable to such Obligor contained in this
Agreement (including, upon the occurrence and during the continuance of
an Event of Default, under Section 7.19, or in any of the other Loan
Documents (giving effect to any grace periods, cure periods, or
required notices, if any, expressly provided for in such Loan
Documents); in each case, other than any such term, provision,
condition, covenant, or agreement that is the subject of another
provision of this Section 8, in which event such other provision of
this Section 8 shall govern); provided that, during any period of time
that any such failure or neglect of any Obligor referred to in this
paragraph exists, even if such failure or neglect is not yet an Event
of Default by virtue of the existence of a grace or cure period or the
pre-condition of the giving of a notice, Foothill shall be relieved of
its obligation to extend credit hereunder;
i. Section 9.1(f) of the Loan Agreement hereby is
amended and restated in its entirety to read as follows:
(f) Without notice to or demand upon any Obligor or any
guarantor, make such payments and do such acts as Foothill considers
necessary or reasonable to protect its security interests in the
Collateral. Borrower agrees to assemble the Personal Property
Collateral if Foothill so requires, and to make the Personal Property
Collateral available to Foothill as Foothill may designate. Borrower
authorizes Foothill to enter the premises where the Personal Property
Collateral is located, to take and maintain possession of the Personal
Property Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Foothill's
determination appears to conflict with its security interests and to
pay all expenses incurred in connection therewith. With respect to any
of Borrower's owned or leased premises, Borrower hereby grants Foothill
a license to enter into possession of such premises and to occupy the
same, without charge, for up to 120 days in order to exercise any of
Foothill's rights or remedies provided herein, at law, in equity, or
otherwise;
j. Section 9.1(i), (j), and (k) of the Loan Agreement
hereby are amended and restated in their entirety to read as follows:
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Personal Property Collateral. Foothill is
hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Personal Property Collateral, in completing production of, advertising
for sale, and selling any Personal Property Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to
Foothill's benefit;
(j) Sell the Personal Property Collateral at either a
public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner
15
<PAGE>
and at such places (including Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that the
Personal Property Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of
the Collateral as follows:
(1) Foothill shall give Borrower and each
holder of a security interest in the Personal Property
Collateral who has filed with Foothill a written request for
notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some other
disposition other than a public sale is to be made of the
Personal Property Collateral, then the time on or after which
the private sale or other disposition is to be made;
(2) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in Section
12, at least 5 days before the date fixed for the sale, or at
least 5 days before the date on or after which the private
sale or other disposition is to be made; no notice needs to be
given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily
in value or that is of a type customarily sold on a recognized
market. Notice to Persons other than Borrower claiming an
interest in the Personal Property Collateral shall be sent to
such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale,
Foothill also shall give notice of the time and place by
publishing a notice one time at least 5 days before the date
of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
k. Section 9.1(m) of the Loan Agreement hereby is
amended and restated in its entirety to read as follows:
(m) Any deficiency that exists after disposition of
the Personal Property Collateral as provided above will be paid
immediately by Borrower. Any excess will be returned, without interest
and subject to the rights of third Persons, by Foothill to Borrower.
l. The Loan Agreement hereby is amended by attaching
thereto, Schedule R-1, attached hereto and incorporated herein by this
reference.
2. Representations and Warranties. Borrower hereby represents
and warrants to Foothill that (a) the execution, delivery and performance of
this Amendment and of the Agreement, as amended by this Amendment, are within
its corporate powers, have been duly authorized by all necessary corporate
action, and are not in contravention of any law, rule, or regulation, or any
order, judgment, decree, writ, injunction, or award of any arbitrator, court, or
16
<PAGE>
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its properties
may be bound or affected, and (b) this Amendment and the Agreement, as amended
by this Amendment, constitute Borrower's legal, valid, and binding obligation,
enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of each
of the following, on or before December 18, 1998, unless waived or deferred by
Foothill in its sole discretion, shall constitute conditions precedent to the
effectiveness of this Amendment:
a. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duty
executed, and each such document shall be in full force and effect:
(i) this Amendment; and
(ii) the Reaffirmation and Consent (as
hereinafter defined).
b. The representations and warranties in this
Amendment, the Agreement as amended by this Amendment, and the other Loan
Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
c. No Event of Default or event which with the giving
of notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
d. Foothill shall have received a modification fee of
$40,000, which fee is earned in full by Foothill and non-refundable when paid;
and
e. All other documents and legal matters in
connection with the transactions contemplated by this Amendment shall have been
delivered or executed or recorded and shall be in form and substance
satisfactory to Foothill and its counsel.
4. Conditions Subsequent. As conditions subsequent to the
effectiveness of this Amendment, Borrower shall perform or cause to be performed
the following (the failure by Borrower to so perform or cause to be performed
constituting an Event of Default):
a. On or before January 31, 1999, Foothill shall have
received, in each case with respect to the Dallas County Real Property, (i) an
appraisal satisfactory to Foothill, (ii) a Mortgage, duly executed and in full
force and effect, (iii) a Mortgage Policy assuring Foothill that the Mortgage
thereon is a valid and enforceable first priority mortgage Lien thereon free and
clear of all defects and encumbrances except Permitted Liens, and (iv) a phase-I
environmental report and a real estate survey (the environmental consultants and
surveyors retained for such reports or surveys,
17
<PAGE>
the scope of the reports or surveys, and the results thereof shall be acceptable
to Foothill in its sole discretion);
b. On or before January 31, 1999, Foothill shall have
received (i) evidence, reasonably satisfactory to Foothill, of the consummation
of the sale of the Fort Bend County Real Property, or (ii) in each case, with
respect to Fort Bend County Real Property (A) an appraisal satisfactory to
Foothill, (B) a Mortgages, duly executed and in full force and effect, (C) a
Mortgage Policy assuring Foothill that the Mortgages on the Fort Bend County
Real Property Collateral are valid and enforceable first priority mortgage Liens
on the Fort Bend Country Real Property Collateral free and clear of all defects
and encumbrances except Permitted Liens, and (D) a phase-I environmental report
and a real estate survey (the environmental consultants and surveyors retained
for such reports or surveys, the scope of the reports or surveys, and the
results thereof shall be acceptable to Foothill in its sole discretion); and
c. On or before January 31, 1999, Foothill shall have
received an opinion of Borrower's counsel with respect to Borrower's execution,
delivery, and performance of this Amendment and the Mortgages, in form and
substance satisfactory to Foothill in its sole discretion.
5. Reaffirmation and Consent. Concurrently herewith, Borrower
shall cause each current Guarantor to execute and deliver to Foothill the
Reaffirmation and Consent attached hereto as Exhibit "A" (the "Reaffirmation and
Consent").
6. Further Assurances. Borrower shall execute and deliver all
agreements, documents and instruments, in form and substance satisfactory to
Foothill, and take all actions as Foothill reasonably may request from time to
time fully to consummate the transactions contemplated under this Amendment and
the Agreement, as amended by this Amendment.
7. Effect on Agreement. The Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with its terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
8. Consent to Sale of Fort Bend County Real Property. Nothing
contained herein or in the Agreement, as amended hereby, to the contrary
notwithstanding, Foothill hereby consents to the sale of the Fort Bend County
Real Property. The parties hereto understand, and hereby agree, that upon the
consummation of such sale, the Adjusted Value of the Fort Bend County Real
Property shall by $0.00.
9. Miscellaneous.
18
<PAGE>
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof"
or words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
c. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
d. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
[Signature page to follow.]
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
DISCOVERY ZONE, INC.,
a Delaware corporation
By /s/ Robert Rooney
-----------------------------------
Title: Senior Vice President and CFO
FOOTHILL CAPITAL CORPORATION.
a California corporation
By /s/ Scott Ryan
-----------------------------------
Title: AVP
S-1
<PAGE>
EXHIBIT R-1
REAL PROPERTY COLLATERAL
That certain tract of land owned by Borrower in the City of Dallas, Dallas
County, Texas, a part of the Robert Wilburn Survey, Abstract No. 1580, and being
all of Lot 2B, Block 2/8708, Prestonwood Towers, an addition to the City of
Dallas according to the replat of Lot 2, Block 2/8708 of Prestonwood Towers
recorded in Volume 92208, Page 3668, Dallas County Map Records.
That certain parcel of Real Property owned by the Borrower consisting of Reserve
"G" of Creekside at Town Center, a subdivision of Fort Bend County, Texas,
according to the map or plat thereof recorded under Slide Number 1281/B of the
Plat Records of Fort Bend County, Texas.
R-1
<PAGE>
EXHIBIT A
Reaffirmation and Consent
All capitalized terms used herein but not otherwise defined
herein shall have the meanings ascribed to them in that certain Amendment Number
Two to Loan and Security Agreement dated as of December 18, 1998 (the
"Amendment"). Each of the undersigned hereby (a) represents and warrants to
Foothill that the execution, delivery, and performance of this Reaffirmation and
Consent are within its corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected; (b) consents to the amendment of the
Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing
to Foothill under the Guaranty and any other Loan Documents to which it is a
party; and (d) agrees that each of the Guaranty and any other Loan Documents to
which it is a party is and shall remain in full force and effect. Although each
of the undersigned has been informed of the matters set forth herein and has
acknowledged and agreed to same, it understands that Foothill has no obligations
to inform it of such matters in the future or to seek its acknowledgment or
agreement to future amendments, and nothing herein shall create such a duty.
This Reaffirmation and Consent may be executed in any number of counterparts and
by different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Reaffirmation and Consent.
Delivery of an executed counterpart of this Reaffirmation and Consent by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Reaffirmation and Consent. Any party delivering an executed
counterpart of this Reaffirmation and Consent by telefacsimile also shall
deliver an original executed counterpart of this Reaffirmation and Consent but
the failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Reaffirmation and Consent.
This Reaffirmation and Consent shall be governed by the laws of the State of New
York, as more fully set forth in Section 20 of the Guaranty.
[Signature page to follow.]
1
<PAGE>
DISCOVERY ZONE (CANADA) LIMITED,
a corporation organized under the laws of Canada
By: /s/ Robert Rooney
-----------------------------------
Title: Vice President
DISCOVERY ZONE (PUERTO RICO), INC.,
a Puerto Rico corporation
By: /s/ Robert Rooney
-----------------------------------
Title: Vice President
DISCOVERY ZONE LICENSING, INC.,
a Nevada corporation
By: /s/ Robert Rooney
-----------------------------------
Title: Vice President
2
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated as of August 26, 1999 (the
"Agreement"), by and between Discovery Zone, with principal offices at 565
Taxtor Road, Elmsford, New York 10523 ("DZ") and Carl Marks Consulting Group LLC
with principal offices at 135 East 57th Street, New York, NY 10022 (inclusive of
any senior personnel, employees and associates thereof, "CMCG" or "Consultant").
WHEREAS, DZ desires to engage the financial and management
consulting service of CMCG, subject to the terms and conditions hereinafter set
forth; and
WHEREAS, CMCG has agreed to provide such financial and
management consulting services subject to the terms and conditions hereinafter
set forth;
NOW THEREFORE, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Engagement: DZ hereby agrees to engage CMCG, and CMCG
hereby agrees to serve DZ, as a financial and management consultant. It is
further agreed that Stanley B. Frieze, a Managing Partner of CMCG, shall
supervise this engagement, with whatever resources from CMCG as needed. Stanley
B. Frieze and CMCG will devote substantial time, but not full time to this
engagement. DZ understands and acknowledges that CMCG has and will continue to
have other engagements during the term of this agreement.
2. Scope: Implementation: - To maximize the speed and
effectiveness of implementation efforts, we will install one of our most senior
and experienced consultants to operate as interim Chief Operating Officer, full
time for approximately four to six months and part time for as long as necessary
thereafter. In this capacity we would serve on a day to day basis running store
operations and implementing required operational and financial controls.
During this phase, we will continue to refine strategic
thinking for the business, direct any additional analysis and plan required
infrastructure change in Projects, resource requirements, and time frames will
be firmed and the tracking of those implementation efforts will be followed
carefully.
The advantage of using interim management will be to receive
the benefits of outside business management expertise, while gaining needed
hands-on implementation help.
During the implementation phase, we will provide whatever
additional levels of technical or functional support that you require. These
could include infrastructure, MIS systems or other project-oriented support.
3. Term: The term of this Agreement shall commence as of the
date of this Agreement and shall continue until the engagement is completed
unless canceled with or without
<PAGE>
cause by either party on five (5) business days written notice, in which event
any compensation owing to CMCG pursuant to paragraph 4 below shall be
immediately due and payable.
4. Compensation: DZ shall pay CMCG for its services a fee of
(i) $400.00 per hour for Stanley B. Frieze, (ii) $42,500.00 per month for
Richard Shepperd, and (iii) $42,500.00 per month for Chet Oblieleski, and (iv)
$250.00 per hour for other CMCG employees and associates as required. CMCG shall
make available its personnel as required during the engagement. CMCG shall
receive a retainer from DZ of $50,000.00 upon the execution of this agreement.
When invoices are submitted on a weekly basis they will be deducted from the
$50,000.00 retainer. The $50,000.00 retainer will be maintained at all times.
CMCG will submit subsequent consulting service fee and Expense invoices on the
Monday following each week in which consulting services are provided. It is
agreed that all of those invoices will be paid within five (5) days of the date
of submission.
These arrangements will stay in place for the first thirty
(30) days. At that point we will review with Wellspring Capital Management, LLC
what the arrangements will be going forward.
5. Expenses: CMCG shall be entitled to reimbursement for all
reasonable expenses incurred by it in the performance of its duties (the
"Expenses") upon presentation of appropriate documentation therefor. Such
Expenses shall include, but not be limited to, transportation of any CMCG senior
personnel, employees or associates on business related to the engagement, cost
of hotels, meals, etc. Such Expenses shall also include, but not be limited to,
all reasonable legal fees incurred by CMCG in connection with the performance of
the services contemplated by this Agreement, provided that DZ first consents to
the retention of such counsel for such services. All incurred Expenses will be
reimbursed weekly within seven (7) days of the receipt of invoices therefor.
6. Indemnification: DZ hereby agrees to indemnify CMCG and
hold it harmless for all acts taken or omissions, and all decisions made, by
CMCG (other than as a result of CMCG's gross negligence or willful misconduct)
and CMCG agrees to indemnify DZ and hold it harmless for all acts taken and all
decisions made while performing services for DZ and each party agree to pay
directly, upon presentation thereof, all statements or invoices for all fees and
expenses, including reasonable attorneys' fees actually and necessarily incurred
by the other party in connection with the defense of any such claims based on
alleged acts, omissions or decisions (other than made or taken through gross
negligence or willful misconduct), including any suit or proceeding relating
thereto and any appeal therefrom and the costs of any settlement thereof
("Claim"), provided that with respect to costs incurred in any appeal of a
judgment, the indemnifying party first consents to appealing such judgment. The
indemnified party shall have the sole right to select counsel of its choosing
and control the defense of any such claim, but the indemnifying party shall have
the right to accept or reject any settlement of any claim for which
indemnification is sought hereunder. For purposes of this paragraph CMCG or DZ
as the case may be includes its shareholders, officers, directors, employees
and/or agents, and their affiliates
<PAGE>
and each of their respective shareholders, officers, directors, employees and/or
agents. The provisions of this Section 5 shall survive the Term of this
Agreement.
7. Proprietary Work Product and Confidential Company
Information: CMCG acknowledges and agrees that any work product produced by CMCG
is for the sole use of DZ and the Board of Directors and is not intended for
distribution to, or to be relied upon by, any third parties. The provisions of
this Section 6 shall survive the Term of this Agreement.
In addition, CMCG acknowledges and agrees that as a result of
the services to be provided hereunder, the persons performing such services may
acquire knowledge and information of a secret and confidential nature. CMCG
further acknowledges and agrees that this information constitutes valuable
property of DZ generally not being disseminated or made known to persons or
organizations outside DZ at all, or if made known, being done so only under
specific and restrictive conditions such as to ensure that it does not become
readily available to the public, and also that confidential information of
others may be received by DZ with restrictions on its use and disclosure.
Accordingly, CMCG agrees that:
(i) CMCG and any person performing any services for CMCG
hereunder shall not, during the term of this Agreement
nor at any time thereafter, disclose to anyone outside
DZ or use in other than DZ business any secret or
confidential information of DZ or its subsidiaries or
affiliates, except as authorized by authoritative
personnel of DZ. DZ information which is not readily
available to the public shall be considered secret and
confidential for the purpose of this Agreement and
shall include, but not be limited to, information
relating to DZ, its subsidiaries and affiliates,
customers, processes, products apparatus, data,
compounds, business studies, business and contracting
plans, business procedures and finances;
(ii) CMCG and any person performing any services for CMCG
hereunder shall not, during the term of this Agreement
nor at any time thereafter, disclose to any other
person or use secret or confidential information of
others, which, to the knowledge of CMCG, has been
disclosed to CMCG with restriction on the use or
disclosure thereof, in violation of those
restrictions.
(iii) Notwithstanding the foregoing, CMCG and any person
performing services for CMCG hereunder shall not be
liable for the disclosure of information which may
otherwise be deemed confidential hereunder:
(a) if the information is in, or becomes part of,
the public domain, other than by CMCG's
disclosure of the information; or
(b) if the information is furnished to a third
party by DZ without restriction of the third
party's right to disseminate the information; or
<PAGE>
(c) if the information is already of record in
CMCG's files at the time of disclosure or is
disclosed to CMCG by a third party as a matter
of right; or
(d) if the information is disclosed with DZ written
approval; or
(e) if the information is compelled to be revealed
via subpoena, civil investigative demand or
other judicial or administrative process.
8. Reliance on Client's Information: DZ acknowledge and agrees
that CMCG, in performance of its duties under the Agreement, will be relying on
the truth, completeness and accuracy of the written documentation delivered and
the verbal communication made by DZ and its agents to CMCG and its agents in
connection with any and all matters relating to CMCG's engagement hereunder.
9. Notices: All notices, requests, demands and other
communications provided for by this Agreement shall be in writing addressed to
the parties at the address for such party first set forth above, and shall be
transmitted by either facsimile (fax), personal or overnight courier delivery or
by certified mail. All notices, etc. shall be deemed given when received by the
party to whom it is addressed.
10. Successors and Assigns: This Agreement shall inure to the
benefit of, and be binding upon each of DZ and CMCG and their respective
successors or assigns. Neither party may assign its rights and/or obligations
under this Agreement it without the written consent of the other party, which
consent shall not be unreasonably withheld.
11. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without
reference to principles of conflicts of law.
12. Amendments: No amendment, modification, termination or
waiver of any provision of this Agreement or consent to any departure by any
party therefrom shall be effective unless in writing signed by the parties
hereto, and, in any event, shall be effective only in the specific instance for
the specific purposes for which given.
13. No Waiver; Cumulative Remedies: No failure or delay on the
part of any party in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude the exercise of any other right, power or
remedy. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
14. Headings. Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
<PAGE>
15. Counterparts: This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
16. Waiver Of Jury Trial: Each of the parties to this
Agreement hereby waives its right to a jury trial with respect to any claim,
action, suit or proceeding made or brought by one of the parties against the
other in connection with or arising from this Agreement.
17. Independent Contractor Relationship: CMCG shall serve as
an independent contractor to DZ pursuant to the terms and conditions of this
Agreement and this Agreement does not create and shall not be construed to
create a relationship of principal and agent, joint venturer, co-partners,
employer and employee, master and servant or any similar relationship between
CMCG and DZ, and the parties hereto expressly deny the existence of any such
relationship.
18. Loan Origination Fees, etc.: Should CMCG introduce DZ to
any capital source with whom DZ ultimately closes a transaction, upon such
closing CMCG will be entitled to a fee.
If CMCG is asked to introduce DZ to any capital source the fee
will be on a mutually agreeable negotiated basis before undertaking such
activity.
19. Search Fees: Should CMCG introduce any individual to, and
subsequently hire that individual, DZ will pay CMCG a search fee equal to 25%
of the total first year's compensation package. This applies to any CMCG
personnel which the Company may subsequently hire.
20. Sale of Company. Should CMCG introduce Wellspring Capital
Management, LLC to any person or entity with whom Wellspring ultimately closes a
transaction for a merger, acquisition, sale of substantially all of the assets,
or any similar level of extraordinary transaction for DZ, or for substantially
all of DZ or for any division of subsidiary thereof, upon closing CMCG will be
entitled to a fee of the value of the transaction to be negotiated on a mutually
agreeable basis before CMCG undertakes such activity.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective offices thereunto duly authorized,
as of the date first written above.
DISCOVERY ZONE
By: /s/ Scott W. Bernstein
----------------------------
Scott W. Bernstein
President & CEO
CARL MARKS CONSULTING GROUP, LLC
By: /s/ Stanley B. Frieze
----------------------------
Stanley B. Frieze
Managing Partner
Exhibit 12.1
Discovery Zone, Inc.
Computation of Ratio of Earnings to Fixed Charges:
(Dollars in thousands, except ratios)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY || SUCCESSOR COMPANY
---------------------------------------------- || ----------------------------------------
Seven || Five Two Nine
Year Ended December 31, Months || Months Months Months
------------------------- Ended || Ended Ended Ended
July 31, || December 31, September 30, September 30,
1993 1994 1995 1996 1997 || 1997 1997 1998
------ ------ ------ ------ ------ || ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income ||
taxes, extraordinary item ||
and cumulative effect of ||
change in accounting ||
method ..................... $ 3,306 $ (23,124) $(445,245) $ (83,834) $ (5,453)|| $ (27,966) $ (10,470) $ (43,214)
Adjustments: ||
Fixed charges .............. 1,667 5,137 12,226 6,277 3,249 || 6,076 3,176 11,913
------- --------- --------- --------- --------- || --------- --------- ---------
Earnings before taxes and ||
fixed charges as adjusted .. $ 4,973 $ (17,987) $(443,019) $ (77,557) $ (2,204)|| $ (21,890) $ (7,294) $ (31,301)
======= ========= ========= ========= ========= || ========= ========= =========
Fixed charges: ||
Interest incurred .......... $ 1,667 $ 5,137 $ 12,226 $ 6,277 $ 3,249 || $ 6,076 $ 3,176 $ 11,913
Portion of rent expense ||
which represents interest ||
factor..................... -- -- -- -- -- || -- -- --
------- --------- --------- --------- --------- || --------- --------- ---------
Total fixed charges .......... $ 1,667 $ 5,137 $ 12,226 $ 6,277 $ 3,249 || $ 6,076 $ 3,176 $ 11,913
======= ========= ========= ========= ========= || ========= ========= =========
Ratio of earnings to fixed ||
charges(1).................. 3.0 -- -- -- -- || -- -- --
======= ========= ========= ========= ========= || ========= ========= =========
<FN>
(1) Earnings were insufficient to cover fixed charges by $23.1 million, $445.2 million, $83.8 million, $5.5 million,
$28.0 million, $10.5 million and $43.2 million in each of the years ended December 31, 1994, 1995 and 1996,
the seven months ended July 31, 1997, the five months ended December 31, 1997 and the two months ended
September 30, 1997 and the nine months ended September 30, 1998, respectively.
</FN>
</TABLE>
List of Subsidiaries of the Registrant
1. Discovery Zone (Nevada) Licensing, Inc.
2. Discovery Zone (Canada) Limited
3. DZ Party, Inc.
4. Discovery Zone (Puerto Rico), Inc.
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the caption
"Experts" and to the use of our report dated April 3, 1998 (except for the third
paragraph of Note 15, as to which the date is June 22, 1998), in Amendment No.
1 to the Registration Statement (Form S-4 No. 333-64729) and related Prospectus
of Discovery Zone, Inc. for the registration of $20,000,000 13 1/2% Senior
Collateralized Notes.
/s/ Ernst & Young LLP
West Palm Beach, Florida
December 17, 1998
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUTANT
- -------------------------------------------------
We hereby consent to the use in the Prospectus constituting part of this
registration statement on Form S-4 of Discovery Zone, Inc. of our report, dated
April 13, 1996, on our audit of the financial statements of Discovery Zone, Inc.
and its subsidiaries for the year ended December 31, 1995 listed in the
accompanying index. We also consent to the application of such report to the
Financial Statement Schedule II for the year ended December 31, 1995 when such
schedule is read in conjunction with the financial statements referred to in our
report. The audits referred to in such report also included this schedule. We
also consent to the references to us under the headings "Experts" and "Selected
Historical Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Historical Financial Data".
/s/ PRICEWATERHOUSECOOPERS LLP
Miami, Florida
December 17, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
---------------------------
FIRSTAR BANK OF MINNESOTA, N.A.
(Exact name of Trustee as specified in its charter)
A National Banking Association 41-0122055
(State of incorporation if not a national bank) (IRS Employer Identification
No.)
101 East Fifth Street
Corporate Trust Department
St. Paul, Minnesota 55101
(Address of principal executive offices) (Zip Code)
FIRSTAR BANK OF MINNESOTA, N.A.
101 East Fifth Street
St. Paul, Minnesota 55101
(612) 229-2600
(Exact name, address and telephone number of agent for service)
----------------------------------
Discovery Zone, Inc.
Discovery Zone (Canada) Limited
Discovery Zone (Puerto Rico), Inc.
Discovery Zone (Nevada) Licensing, Inc.
(Exact name of obligor as specified in its charter)
Delaware 36-3877601
Canada N/A
Puerto Rico 36-3892589
Nevada N/A
(State of incorporation or other jurisdiction) (IRS Employer Identification
No.)
565 Taxter Road
Elmsford, New York 10523
(Address of principal executive offices) Zip Code)
---------------------------
13 1/2% Senior Collateralized Notes due 2002
(Title of Indenture securities)
<PAGE>
Item 1. General Information. Furnish the following information as to the
trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency
Treasury Department
Washington, DC
Federal Deposit Insurance Corporation
Washington, DC
The Board of Governors of the Federal Reserve System
Washington, DC
(b) The Trustee is authorized to exercise corporate trust powers.
GENERAL
Item 2. Affiliations with Obligor and Underwriters. If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe
each such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's knowledge the
obligor is not in default under any Indenture for which the Trustee acts as
Trustee.
Item 16. Lists of Exhibits. Listed below are all the exhibits filed as a part
of this statement of eligibility and qualification. Exhibits 1-4 and 7
are incorporated by reference from filing 333-48849.
Exhibit 1. Copy of Articles of Association of the trustee now in
effect.
Exhibit 2. a. A copy of the certificate of the Comptroller
of Currency dated June 1, 1965, authorizing
Firstar Bank of Minnesota, N.A. to act as
fiduciary.
b. A copy of the certificate of authority of the
trustee to commence business issued June 9,
1903, by the Comptroller of the Currency to
Firstar Bank of Minnesota, N.A.
<PAGE>
Exhibit 3. A copy of the authorization of the trustee to
exercise corporate trust powers issued by the Federal
Reserve Board.
Exhibit 4. Copy of the By-Laws of the trustee as now in effect.
Exhibit 5. Copy of each Indenture referred to in Item 4. - Not
Applicable
Exhibit 6. The consent of the trustee required by Section 321(b)
of the Act.
Exhibit 7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements
of its supervising or examining authority.
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligor within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligor, or affiliates, are based
upon information furnished to the Trustee by the obligor. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, a national banking association organized and existing under the laws of
the United States, has duly caused this statement of eligibility and
qualification to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City of
Saint Paul and State of Minnesota on the 17th day of September, 1998.
FIRSTAR BANK OF MINNESOTA, N.A.
(Seal)
/s/ Frank P. Leslie III
-----------------------------------
Frank P. Leslie III
Vice President
<PAGE>
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned, Firstar Bank of Minnesota, N.A., hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: September 17, 1998
FIRSTAR BANK OF MINNESOTA, N.A.
/s/ Frank P. Leslie III
-----------------------------------
Frank P. Leslie III
Vice President
LETTER OF TRANSMITTAL
13 1/2% Senior Collateralized Notes due 2002
of
DISCOVERY ZONE, INC.
Pursuant to the Exchange Offer in Respect of
All of its Outstanding 13 1/2% Senior Collateralized
Notes due 2002
for
13 1/2% Senior Collateralized Notes due 2002
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 22,
1999 (THE "EXPIRATION DATE") UNLESS THE EXCHANGE OFFER IS EXTENDED TO A DATE NOT
LATER THAN FEBRUARY 5, 1999. TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
To: Firstar Bank N.A., Exchange Agent
By Mail, Hand or Overnight Courier:
Firstar Bank N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Attention: Frank Leslie
By Facsimile Transmission:
(612) 229-6415
Confirm By Telephone:
(612) 229-2600
<PAGE>
Delivery of this Letter of Transmittal to an address, or transmission via
telegram, telex or facsimile with confirmation, other than as set forth above
will not constitute a valid delivery. The instructions contained herein should
be read carefully before this Letter of Transmittal is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
(the "Prospectus"), dated December 23, 1998, of Discovery Zone, Inc. (the
"Company"), which, together with this Letter of Transmittal and the instructions
hereto (the "Letter of Transmittal"), constitutes the Company's offer (the
"Exchange Offer") to exchange $20,000,000 aggregate principal amount of its
13 1/2% Senior Collateralized Notes due 2002 (the "New Notes") that have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement of which the Prospectus constitutes a part,
for $20,000,000 aggregate principal amount of its outstanding 13 1/2% Senior
Collateralized Notes due 2002 (the "Old Notes"), upon the terms and subject to
the conditions set forth in the Prospectus.
This Letter of Transmittal is to be used by Holders (as defined below) if:
(i) certificates representing Old Notes are to be physically delivered to the
Exchange Agent herewith by Holders; (ii) tender of Old Notes is to be made by
book-entry transfer to the Exchange Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in the Prospectus under
"The Exchange Offer--Procedures for Tendering" by any financial institution that
is a participant in DTC and whose name appears on a security position listing as
the owner of Old Notes (such participants, acting on behalf of Holders, are
referred to herein, together with such Holders, as "Acting Holders"); or (iii)
tender of Old Notes is to be made according to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures." Delivery of documents to DTC does not constitute delivery
to the Exchange Agent.
If delivery of the Old Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC as set forth in (ii) in the
immediately preceding paragraph, this Letter of Transmittal need not be manually
executed; provided, however, that tenders of Old Notes must be effected in
accordance with the procedures mandated by DTC's Automated Tender Offer Program
("ATOP"). To tender Old Notes through ATOP, the electronic instructions sent to
DTC and transmitted by DTC to the Exchange Agent must contain the character by
which the participant acknowledges its receipt of and agrees to be bound by this
Letter of Transmittal.
Unless the context requires otherwise, the term "Holder" for purposes of
this Letter of Transmittal means: (i) any person in whose name Old Notes are
registered or any other person who has obtained a properly completed bond power
from the registered Holder or (ii) any participant in DTC whose Old Notes are
held of record by DTC who desires to deliver such Old Notes by book-entry
transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal. Tenders of Old Notes will be accepted only in
authorized denominations of $1,000.
2
<PAGE>
DESCRIPTION OF OLD NOTES
________________________________________________________________________________
| Certificate | Aggregate
| Number(s)* | Principal
| (Attach signed | Amount
Name(s) and Address(es) of Holder(s) | list if | Tendered (if less
(Please fill in, if blank) | necessary) | than all)**
_______________________________________ |____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
|____________________|__________________
________________________________________|____________________|__________________
TOTAL PRINCIPAL AMOUNT OF NOTES TENDERED| |
________________________________________|____________________|__________________
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all
Old Notes listed. See Instruction 2.
________________________________________________________________________________
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _________________________________________________
DTC Book-Entry Account: ________________________________________________________
Transaction Code No.: __________________________________________________________
3
<PAGE>
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or cannot complete the procedure for book-entry transfer on a
timely basis, may effect a tender according to the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer--Guaranteed Delivery Procedures."
|_| CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Holder(s) of Old Notes: ________________________________________
Window Ticket No. (if any): _______________________________________________
Date of Execution of Notice of Guaranteed Delivery: _______________________
Name of Eligible Institution that Guaranteed Delivery: ____________________
___________________________________________________________________________
DTC Book-Entry Account No.: _______________________________________________
If Delivered by Book-Entry Transfer:
Name of Tendering Institution: ____________________________________________
Transaction Code No.: _____________________________________________________
|_| CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _____________________________________________________________________
Address: __________________________________________________________________
__________________________________________________________________
4
<PAGE>
Ladies and Gentlemen:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Company the principal amount of Old Notes indicated above. Subject to and
effective upon the acceptance for exchange of the principal amount of Old Notes
tendered in accordance with this Letter of Transmittal, the undersigned sells,
assigns and transfers to, or upon the order of, the Company all right, title and
interest in and to the Old Notes tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Company and as Trustee under the Indenture for the Old Notes and
the New Notes) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Company or
transfer ownership of such Old Notes on the account books maintained by DTC,
together, in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Company and (ii) present such Old
Notes for transfer on the books of the Company and receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Company will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Company. The
undersigned also acknowledges that this Exchange Offer is being made in reliance
upon an interpretation by the staff of the Securities and Exchange Commission
that the New Notes issued in exchange for the Old Notes pursuant to the Exchange
Offer may be offered for sale, resold and otherwise transferred by a holder
thereof (other than (i) a broker - dealer that purchased such Old Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders are not participating and have no
arrangement with any person to participate in the distribution of such New
Notes. If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a distribution of
the New Notes. If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Old Notes, the undersigned represents that
such Old Notes were acquired as a result of market-making activities or other
trading activities and acknowledges that it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned represents that (i) any New Notes received by such Holder
will be acquired in the ordinary course of its business, (ii) such Holder will
not participate and will have no arrangements or understanding with any person
to participate in the distribution of the Old or New Notes within the meaning of
the Securities Act, (iii) such Holder is not an "affiliate," as defined in Rule
405 of the Securities Act, of the Company, or if it is an affiliate, such Holder
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if such Holder is not a
broker-dealer, it is not engaged in, and does not intend to engage in, the
distribution of the New Notes and (v) if such Holder is a broker-dealer, it will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities and
that it will be required to acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the assignment and transfer of the Old Notes tendered
hereby.
5
<PAGE>
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted validly tendered Old Notes when, as and if the Company has given oral
or written notice thereof to the Exchange Agent. If any tendered Old Notes are
not accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Old Notes will be returned (except as noted
below with respect to tenders through DTC), without expense, to the undersigned
at the address shown below or at such different address as may be indicated
under "Special Issuance Instructions" as promptly as practicable after the
Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in either such event in the
case of Old Notes tendered by DTC, by credit to the account at DTC). Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signature(s), unless, in either event,
tender is being made through DTC. In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and return any Old Notes not tendered or not exchanged in
the name(s) of, and send said certificates to, the person(s) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Old Notes from the name of the registered holder(s) thereof if the Company
does not accept for exchange any of the Old Notes so tendered.
6
<PAGE>
PLEASE SIGN HERE
(To Be Completed by All Tendering Holders of Old Notes Regardless
of Whether Old Notes Are Being Physically Delivered Herewith)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears on
a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must set forth his
or her full title below under "Capacity" and submit evidence satisfactory to the
Company of such person's authority to so act. See Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of the
Old Notes, then the registered Holder(s) must sign a valid proxy.
x _______________________________________________ Date: ___________________
x _______________________________________________ Date: ___________________
Signature(s) of Holder(s) or Authorized Signatory
Name(s): ________________________________________ Address: ___________________
________________________________________ ___________________
(Please Print) (Including Zip Code)
Capacity(ies): _______________________ Area Code and Telephone No.: __________
Social Security No(s).: ______________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
SIGNATURE GUARANTEE (See Instruction 3 herein)
Certain Signatures Must Be Guaranteed by an Eligible Institution
________________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
________________________________________________________________________________
(Address (including zip code) and Telephone Number
(including area code) of Firm)
________________________________________________________________________________
(Authorized Signature)
________________________________________________________________________________
(Printed Name)
________________________________________________________________________________
(Title)
Date: _______
7
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
PAYOR'S NAME: DISCOVERY ZONE, INC.
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
<S> <C> <C>
Part 1--PLEASE PROVIDE YOUR TIN IN THE
BOX AT RIGHT AND CERTIFY BY SIGNING Social Security Number
AND DATING BELOW or
SUBSTITUTE Employer Identification Number
Form W-9 _______________________
____________________________________________________________________________________________________________________________________
Part 2--Check the box if you are
NOT subject to back-up withholding
under the provisions of Section
3406(a)(1)(C) of the Internal
Revenue Code because
Department of the Treasury
Internal Revenue Service (1) you have not been notified that you are subject to back-up withholding as a
result of failure to report all interest or dividends,
(2) the Internal Revenue Service has notified you that you are no longer subject to
back-up withholding or
(3) you are exempt. |_|
Payor's Request for
Taxpayer Identification CERTIFICATE--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION
Number (TIN) PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE.
____________________________________________________________________________________________________________________________________
Sign Here -- SIGNATURE ________________________ Part 3--
DATE Check if Awaiting TIN |_|
____________________________________________________________________________________________________________________________________
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 4 herein) (See Instruction 4 herein)
<S> <C>
To be completed ONLY if certificates for To be completed ONLY if certificates for
Old Notes in a principal amount not tendered are to Old Notes in a principal amount not tendered or not
be issued in the name of, or the New Notes issued accepted for purchase or the New Notes issued
pursuant to the Exchange Offer are to be issued to pursuant to the Exchange Offer are to be sent to
the order of, someone other than the person or someone other than the person or persons whose
persons whose signature(s) appear(s) within this signature(s) appear(s) within this Letter of
Letter of Transmittal or issued to an address Transmittal or to an address different from that
different from that shown in the box entitled shown in the box entitled "Description of Old
"Description of Old Notes" within this Letter of Notes" within this Letter of Transmittal or to be
Transmittal, or if Old Notes tendered by book-entry credited to an account maintained at DTC other than
transfer that are not accepted for purchase are to be the account at DTC indicated above.
credited to an account maintained at DTC other than
the account at DTC indicated above. Name: _______________________________________________
(Please Print)
Name: _______________________________________________
(Please Print) Address: ____________________________________________
(Please Print)
Address: ____________________________________________
(Please Print) ____________________________________________
____________________________________________ ____________________________________________
Zip Code
____________________________________________
Zip Code
Taxpayer Identification or Social Security Number
(See Substitute Form W-9 herein)
Taxpayer Identification or Social Security Number
(See Substitute Form W-9 herein)
</TABLE>
9
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payer.
- -- Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
Give the Give the
SOCIAL SECURITY SOCIAL SECURITY
For this type of account: number of-- For this type of account: number of--
<S> <C> <C> <C>
1. An individual's account The individual 8. Sole proprietorship The owner(4)
account
2. Two or more individuals The actual owner of the 9. A valid trust, estate, or The legal entity (Do not
(joint account) account or, if combined pension trust furnish the identifying
funds, any one of the number of the personal
individuals(1) representative or trustee
unless the legal entity itself
is not designated in the
account title.)(5)
3. Husband and wife (joint The actual owner of the 10. Corporate account The corporation
account) account or, if joint
funds, either person(1)
4. Custodian account of a The minor(2) 11. Religious, charitable, or The organization
minor (Uniform Gift to educational organization
Minors Act) account
5. Adult and minor (joint The adult or, if the 12. Partnership account held The partnership
account) minor is the only in the name of the business
contributor, the minor(1)
6. Account in the name of The ward, minor, or 13. Association, club or other The organization
guardian or committee incompetent person(3) tax-exempt organization
for a designated ward,
minor, or incompetent
person
7. a. The usual revocable The grantor-trustee(1) 14. A broker or registered The broker or nominee
savings trust account nominee
(grantor is also
trustee)
b. So-called trust The actual owner(1) 15. Account with the The public entity
account that is not a Department of Agriculture
legal or valid trust in the name of a public
under State law entity (such as a State or
local government, school
district, or prison) that
receives agricultural
program payments
- -------------------------------------------------------- -----------------------------------------------------------
<FN>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's Social Security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such person's Social Security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed.
</FN>
</TABLE>
10
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Obtaining a Number
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service
and apply for a number.
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments include the
following:
o A corporation.
o A financial institution.
o An organization exempt from tax under section 501(a), or an individual
retirement plan.
o The United States or any agency or instrumentality thereof.
o A State, the District of Columbia, a possession of the United States,
or any subdivision or instrumentality thereof.
o A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof.
o An international organization or any agency or instrumentality
thereof.
o A registered dealer in securities or commodities registered in the
U.S. or a possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under section 584(a).
o An exempt charitable remainder trust, or a non-exempt trust described
in section 4947(a)(1).
o An entity registered at all times under the Investment Company Act of
1940.
o A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
o Payments to nonresident aliens subject to withholding under section
1441.
o Payments to partnerships not engaged in a trade or business in the
U.S. and which have at least one nonresident partner.
o Payments of patronage dividends where the amount renewed is not paid
in money.
o Payments made by certain foreign organizations.
o Payments made to a nominee.
Payments of interest not generally subject to backup withholding include
the following:
o Payments of interest on obligations issued by individuals. Note: You
may be subject to backup withholding if this interest is $600 or more
and is paid in the course of the payer's trade or business and you
have not provided your correct taxpayer identification number to the
payer.
o Payments of tax-exempt interest (including exempt-interest dividends
under section 852).
o Payments described in section 6049(b)(5) to non-resident aliens.
o Payments on tax-free covenant bonds under section 1451.
o Payments made by certain foreign organizations.
o Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible
erroneous backup withholding.
FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER,
WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE
PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE
FORM.
Certain payments other than interest, dividends and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045 and 6050A.
Privacy Act Notice.--Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to the IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold 31%
of taxable interest, dividend, and certain other payments to a payee who does
not furnish a taxpayer identification number to a payee. Certain penalties may
also apply.
Penalties.
(1) Penalty for Failure to Furnish Taxpayer Identification Number.-If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) Civil Penalty for False Information With Respect to Withholding.-If you make
a false statement with no reasonable basis which results in no imposition of
backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty for Falsifying Information.-Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
11
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer and the Solicitation
1. Delivery of this Letter of Transmittal and Old Notes. The
certificates for the tendered Old Notes (or a confirmation of a book-entry into
the Exchange Agent's account at DTC of all Old Notes delivered electronically),
as well as a properly completed and duly executed copy of this Letter of
Transmittal or facsimile hereof and any other documents required by this Letter
of Transmittal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 P.M., New York City time, on the Expiration Date. The
method of delivery of the tendered Old Notes, this Letter of Transmittal and all
other required documents to the Exchange Agent are at the election and risk of
the Holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. Instead of delivery by
mail, it is recommended that the Holder use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure timely
delivery. No Letter of Transmittal or Old Notes should be sent to the Company.
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available or (ii) who cannot deliver their Old Notes, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to the Expiration Date, or who cannot complete the procedure for
book-entry transfer on a timely basis must tender their Old Notes and follow the
guaranteed delivery procedures set forth in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) prior to the Expiration Date, the Exchange Agent must
have received from the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and guaranteeing
that within five business days after the Expiration Date, this Letter of
Transmittal (or copy thereof) together with the certificate(s) representing the
Old Notes (or a confirmation of electronic mail delivery of book-entry delivery
into the Exchange Agent's account at DTC) and any of the required documents will
be deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal (or copy thereof), as well
as all other documents required by this Letter of Transmittal and the
certificate(s) representing all tendered Old Notes in proper form for transfer
(or a confirmation of electronic mail delivery of book-entry delivery into the
Exchange Agent's account at DTC), must be received by the Exchange Agent within
five business days after the Expiration Date, all as provided in the Prospectus
under the caption "The Exchange Offer - Guaranteed Delivery Procedures." Any
Holder of Old Notes who wishes to tender his Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 P.M., New York
City time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any defects, irregularities or conditions
of tender as to particular Old Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in this Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify Holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Old Notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost by the Exchange Agent to the tendering Holders of Old
Notes, unless otherwise provided in this Letter of Transmittal, as soon as
practicable following the Expiration Date.
12
<PAGE>
2. Partial Tenders. Tenders of Old Notes will be accepted only in
authorized denominations of $1,000. If less than the entire principal amount of
any Old Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the third column of the chart entitled "Description of Old
Notes." The entire principal amount of Old Notes delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated. If the entire
principal amount of all Old Notes is not tendered, Old Notes for the principal
amount of Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated. If the entire principal amount of all Old
Notes is not tendered, Old Notes for the principal amount of Old Notes not
tendered and a certificate or certificates representing New Notes issued in
exchange of any Old Notes accepted will be sent to the Holder at his or her
registered address, unless a different address is provided in the appropriate
box on this Letter of Transmittal or unless tender is made through DTC, promptly
after the Old Notes are accepted for exchange.
3. Signatures on the Letter of Transmittal; Bond Powers and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal (or copy
hereof) is signed by the registered Holder(s) of the Old Notes tendered hereby,
the signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or copy hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes
issued in exchange therefor is to be issued (or any untendered principal amount
of Old Notes is to be reissued) to the registered Holder, such Holder need not
and should not endorse any tendered Old Note, nor provide a separate bond power.
In any other case, such holder must either properly endorse the Old Notes
tendered or transmit a properly completed separate bond power with this Letter
of Transmittal, with the signatures on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal (or copy hereof) is signed by a person
other than the registered Holder(s) listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered Holder, in either case
signed as the name of the registered Holder or Holders appears on the Old Notes.
If this Letter of Transmittal (or copy hereof) or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or copy hereof) or a notice
of withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder (including any participant in DTC whose name appears on a security
position listing as the owner of Old Notes) who has not completed the box set
forth herein entitled "Special Issuance Instructions" or "Special Delivery
Instructions" of this Letter of Transmittal or (ii) for the account of an
Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal (or in the case of tender of the Old
Notes through DTC, if different from the account maintained at DTC indicated
above). In the case of issuance in a different name, the taxpayer identification
or social security number of the person named must also be indicated.
13
<PAGE>
5. Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
6. Waiver of Conditions. The Company reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case of
any Old Notes tendered.
7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instruction.
8. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Prospectus. Holders may also contact their broker, dealer,
commercial bank, trust company or other nominee for assistance concerning the
Exchange Offer.
9. Irregularities. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of Letters of Transmittal or Old
Notes will be resolved by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any or all Letters of
Transmittal or tenders that are not in proper form or the acceptance of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to the particular Old Notes covered by any Letter of Transmittal or tendered
pursuant to such Letter of Transmittal. None of the Company, the Exchange Agent
or any other person will be under any duty to give notification of any defects
or irregularities in tenders or incur any liability for failure to give any such
notification. The Company's interpretation of the terms and conditions of the
Exchange Offer shall be final and binding.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together
with certificates for Old Notes and all other required documents) or a Notice of
Guaranteed Delivery must be received by the Exchange Agent on or prior to 5:00
p.m., New York City time on the Expiration Date.
14
<PAGE>
(DO NOT WRITE IN SPACE BELOW)
________________________________________________________________________________
Certificate Surrendered | Old Notes Tendered | Old Notes Accepted
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
____________________________|__________________________|________________________
Delivery Prepared by _______| Checked by __________ | Date _______________
____________________________|__________________________|________________________
The Exchange Agent for the Exchange Offer is:
To: Firstar Bank N.A., Exchange Agent
By Mail, Hand or Overnight Courier:
Firstar Bank N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Attention: Frank Leslie
By Facsimile Transmission:
(612) 229-6415
Confirm By Telephone:
(612) 229-2600
15
NOTICE OF GUARANTEED DELIVERY
for
13 1/2% Senior Collateralized Notes due 2002
of
DISCOVERY ZONE, INC.
As set forth in the Prospectus dated December 23, 1998 (the
"Prospectus") of Discovery Zone, Inc., a Delaware corporation (the "Company"),
in the accompanying Letter of Transmittal and instructions thereto (the "Letter
of Transmittal"), this form or one substantially equivalent hereto must be used
to accept the Company's exchange offer (the "Exchange Offer") to exchange all of
its outstanding 13 1/2% Senior Collateralized Notes due 2002 (the "Old Notes")
if (i) certificates representing the Old Notes to be tendered for purchase and
payment are not lost but are not immediately available, (ii) time will not
permit the Letter of Transmittal, certificates representing such Old Notes or
other required documents to reach the Exchange Agent prior to the Expiration
Date or (iii) the procedures for book-entry transfer cannot be completed prior
to the Expiration Date. This form may be delivered by an Eligible Institution by
mail or hand delivery or transmitted, via telegram, telex or facsimile, to the
Exchange Agent as set forth below. All capitalized terms used herein but not
defined herein shall have the meanings ascribed to them in the Prospectus.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 22,
1999 (THE "EXPIRATION DATE") UNLESS THE OFFER IS EXTENDED TO A DATE NOT LATER
THAN FEBRUARY 5, 1999. TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
To: Firstar Bank N.A., Exchange Agent
By Mail, Hand or Overnight Courier:
Firstar Bank N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Attention: Frank Leslie
By Facsimile Transmission:
(612) 229-6415
Confirm By Telephone:
(612) 229-2600
Delivery of this instrument to an address, or transmission via telegram,
telex or facsimile, other than as set forth above will not constitute a valid
delivery.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Exchange Offer and the Letter of
Transmittal, receipt of which is hereby acknowledged, the aggregate principal
amount of Old Notes set forth below pursuant to the guaranteed delivery
procedures set forth in the Prospectus.
The undersigned understands that tenders of Old Notes will be accepted
only in authorized denominations. The undersigned understands that tenders of
Old Notes pursuant to the Exchange Offer may not be withdrawn after 5:00 p.m.,
New York City time on the Expiration Date. Tenders of Old Notes may also be
withdrawn if the Exchange Offer is terminated without any such Old Notes being
purchased thereunder or as otherwise provided in the Prospectus.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
<PAGE>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) or Name(s) of Registered Holder(s):_____
Authorized Signatory:___________________ _____________________________________
________________________________________ _____________________________________
________________________________________ Address:_____________________________
Principal Amount of Old Notes Tendered:_ _____________________________________
________________________________________ Area Code and Telephone No.:_________
_____________________________________
Certificate No(s). of Old Notes (if If Old Notes will be delivered by
available):_____________________________ book-entry transfer at the Depository
Date:___________________________________ Trust Company, insert Depository
Account No.:_________________________
________________________________________________________________________________
This Notice of Guaranteed Delivery must be signed by the registered Holder(s) of
Old Notes exactly as its (their) name(s) appear on certificates for Old Notes or
on a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must
provide the following information.
Please print name(s) and address(es)
Name(s): ____________________________________________________________
Capacity: ____________________________________________________________
Address(es): ____________________________________________________________
____________________________________________________________
____________________________________________________________
Do not send Old Notes with this form. Old Notes should be sent to the Exchange
Agent together with a properly completed and duly executed Letter of
Transmittal.
________________________________________________________________________________
________________________________________________________________________________
GUARANTEE
(Not to be used for signature guarantee)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial
bank or trust company having an office or a correspondent in the United
States or an "eligible guarantor institution" as defined by Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
hereby (a) represents that each Holder of Old Notes on whose behalf this
tender is being made "own(s)" the Old Notes covered hereby within the meaning
of Rule 14e-4 under the Exchange Act, (b) represents that such tender of Old
Notes complies with such Rule 14e-4, and (c) guarantees that, within five
business days from the date of this Notice of Guaranteed Delivery, a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof),
together with certificates representing the Old Notes covered hereby in
proper form for transfer (or confirmation of the book-entry transfer of such
Old Notes into the Exchange Agent's account at the Depository Trust Company,
pursuant to the procedure for book-entry transfer set forth in the
Prospectus) and required documents will be deposited by the undersigned with
the Exchange Agent.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period
set forth and that failure to do so could result in financial loss to the
undersigned.
Name of Firm:_________________________ ___________________________________
Authorized Signature
Address:______________________________ Name:______________________________
______________________________________ Title:
Area Code and Telephone No.:__________ Date:______________________________
________________________________________________________________________________
December 22, 1998
EXCHANGE AGENT AGREEMENT
Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Ladies and Gentlemen:
Discovery Zone, Inc. (the "Company") proposes to make an offer (the
"Exchange Offer") to exchange any and all of its outstanding 13 1/2% Senior
Collateralized Notes due 2002 (the "Old Notes") for up to an aggregate principal
amount of $20,000,000 of its 13 1/2% Senior Collateralized Notes due 2002 (the
"New Notes"). The terms and conditions of the Exchange Offer as currently
contemplated are set forth in a prospectus, dated December 23, 1998 (the
"Prospectus"), proposed to be distributed to all record holders of the Old
Notes. The Old Notes and the New Notes are collectively referred to herein as
the "Notes."
The Company hereby appoints Firstar Bank of Minnesota, N.A. to act as
exchange agent (the "Exchange Agent") in connection with the Exchange Offer.
References hereinafter to "you" shall refer to Firstar Bank of Minnesota, N.A.
The Exchange Offer is expected to be commenced by the Company on or
about December 24, 1998. The Letter of Transmittal accompanying the Prospectus
is to be used by the holders of the Old Notes to accept the Exchange Offer, and
contains instructions with respect to the delivery of certificates for Old Notes
tendered.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
January 22, 1999 or on such later date or time to which the Company may extend
the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions
set forth in the Prospectus, the Company expressly reserves the right to extend
the Exchange Offer from time to time and may extend the Exchange Offer by giving
oral (confirmed in writing) or written notice to you before 9:00 A.M., New York
City time, on the business day following the previously scheduled Expiration
Date.
The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified in the Prospectus under the caption "The Exchange Offer
- -- Termination." The Company will give oral (confirmed in writing) or written
notice of any amendment, termination or nonacceptance to you as promptly as
practicable.)
<PAGE>
2
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are
specifically set forth in the section of the Prospectus captioned "The Exchange
Offer" or as specifically set forth herein; provided, however, that in no way
will your general duty to act in good faith be discharged by the foregoing.
2. You will establish an account with respect to the Old Notes at the
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into your account in
accordance with the Book-Entry Transfer Facility's procedure for such transfer.
3. You are to examine each of the Letters of Transmittal and
certificates for Old Notes (or confirmation of book-entry transfer into your
account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation")) and
Agent's Messages (as defined below) and any other documents, including, without
limitation, Notices of Guaranteed Delivery, delivered or mailed to you by or for
holders of the Old Notes to ascertain whether: (i) the Letters of Transmittal,
the Agent's Messages, the Notices of Guaranteed Delivery and any such other
documents are duly executed and properly completed in accordance with
instructions set forth therein; and (ii) the Old Notes have otherwise been
properly tendered. In each case where the Letter of Transmittal or any other
document has been improperly completed or executed or any of the certificates
for Old Notes are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will endeavor
to inform the presenters of the need for fulfillment of all requirements and to
take any other action as may be necessary or advisable to cause such
irregularity to be corrected.
You shall segregate all tenders which are in accordance with the
procedures set forth in the Prospectus, the Letter of Transmittal or the Notice
of Guaranteed Delivery from those in which the Letter of Transmittal, Agent's
Message, Notice of Guaranteed Delivery or any other document has been improperly
completed or executed, or some other irregularity in connection with the
acceptance of the Exchange Offer exists including, with respect to a Notice of
Guaranteed Delivery, the receipt of the Old Notes ("Defective Deposits"). Upon
consultation with the Company or its representatives, you shall use your best
efforts to cause holders who effected any Defective Deposit to cure such
Defective Deposit. The term "Agent's Message" means a message, transmitted by
DTC and received by you and forming part of a Book-Entry Confirmation, that
states that DTC has received an express acknowledgment from a participant in its
system ("Participant") tendering Old Notes that are the subject of such
Book-Entry Confirmation that such Participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such Participant.
<PAGE>
3
4. With the approval of Scott W. Bernstein, Robert G. Rooney or Andrew
M. Smith, whom are officers of the Company (each an "Officer" and together,
"Officers") (such approval, if given orally, to be confirmed in writing) or any
other party designated by such Officer in writing, you are authorized to waive
any irregularities in connection with any tender of Old Notes pursuant to the
Exchange Offer.
5. Tenders of Old Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer
- -- Procedures for Tendering," and Old Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein.
Notwithstanding the provisions of this paragraph 5, Old Notes which an
Officer (or any other party designated by an Officer in writing) shall approve
as having been properly tendered shall be considered to be properly tendered
(such approval, if given orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any Old Notes received
subsequent to the Expiration Date and accept its instructions with respect to
disposition of such Old Notes.
7. You shall accept tenders:
(a) in cases where the Old Notes are registered in two or more names
only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only
when proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Old Notes provided
that customary transfer requirements, including any applicable transfer
taxes, are fulfilled.
You shall accept partial tenders of Old Notes where so indicated and as
permitted in the Letter of Transmittal and deliver certificates for Old Notes to
the transfer agent for split-up and return any untendered Old Notes to the
holder (or such other person as may be designated in the Letter of Transmittal)
as promptly as practicable after expiration or termination of the Exchange
Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be confirmed
in writing) of its acceptance, promptly after the Expiration Date, of all Old
Notes properly tendered and you, on behalf of the
<PAGE>
4
Company, will exchange such Old Notes for New Notes and cause such Old Notes to
be canceled. Delivery of New Notes will be made on behalf of the Company by you
at the rate of $1,000 principal amount of New Notes for each $1,000 principal
amount of the corresponding series of Old Notes tendered promptly after notice
(such notice if given orally, to he confirmed in writing) of acceptance of said
Old Notes by the company; provided, however, that in all cases, Old Notes
tendered pursuant to the Exchange Offer will be exchanged only after timely
receipt by you of a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), with any required signature guarantees, together with
(i) the Note being tendered (if such Note is held in certificated form),
properly endorsed for transfer, or (ii) a Book-Entry Confirmation (if such Note
is held in book-entry form), or (iii) a Notice of Guaranteed Delivery, and any
other required documents. The New Notes shall be issued only in fully registered
form, without coupons, in denominations of $1,000 or multiples thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
Letter of Transmittal, Old Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date.
10. The Company shall not be required to exchange any Old Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Old Notes tendered
shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Old Notes tendered because of an invalid tender, the
occurrence of certain other events set forth in the Prospectus under the caption
"The Exchange Offer -- Termination" or otherwise, you shall as soon as
practicable after the expiration or termination of the Exchange Offer return
those certificates for unaccepted Old Notes (or effect appropriate book-entry
transfer), together with any related required documents and the Letters of
Transmittal relating thereto that are in your possession, to the persons who
deposited them.
12. All certificates for reissued Old Notes or unaccepted Old Notes
shall be forwarded by (a) first-class certified mail, return receipt requested
under a blanket surety bond protecting you and the Company from loss or
liability arising out of the non-receipt or non-delivery of such certificates,
(b) registered mail insured separately for the replacement value of each of
such certificates or (c) Federal Express.
13. You are not authorized to pay or offer to pay any concessions,
commissions or solicitation fees to any broker, dealer, bank or other persons or
to engage or utilize any person to solicit tenders.
<PAGE>
5
14. As Exchange Agent hereunder you:
(a) shall have no duties or obligations other than those specifically
set forth herein or as may be subsequently agreed to in writing by you and
the Company;
(b) will not be required to and will make no representations and have
no responsibilities as to the validity, sufficiency, value or genuineness
of any Notes, Letters of Transmittal or documents deposited with you, or of
any Notes delivered by you, pursuant to the Exchange Offer or of any
signatures or endorsements, other than your own, or any thereof;
(c) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless
you shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in reliance
upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you
to be genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution
and validity and effectiveness of its provisions, but also as to the truth
and accuracy of any information contained therein, which you shall in good
faith believe to be genuine or to have been signed or represented by a
proper person or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions, with respect to any matter relating to your duties as
Exchange Agent, from any officer of the Company;
(g) may consult with your counsel with respect to any questions
relating to your duties and responsibilities and the advice or opinion of
such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted to be taken by you
hereunder in good faith and in accordance with the advice or opinion of
such counsel; and
(h) shall not advise any person tendering Old Notes pursuant to the
Exchange Offer as to the wisdom of making such tender or as to the market
value or decline or appreciation in market value of any Old Notes.
15. You shall take such action as may from time to time he requested by
the
<PAGE>
6
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms
as may be approved from time to time by the Company, to all persons requesting
such documents and to accept and comply with telephone requests for information
relating to the Exchange Offer, provided that such information shall relate only
to the procedures for accepting (or withdrawing from) the Exchange Offer. The
Company will furnish you with copies of such documents at your request. All
other requests for information relating to the Exchange Offer shall be directed
to the Company, Attention: General Counsel.
16. You shall advise by facsimile transmission or telephone, and
promptly thereafter confirm in writing to Andrew M. Smith of the Company and
such other person or persons as it may request, daily (and more frequently
during the week immediately preceding the Expiration Date and if otherwise
requested) up to and including the Expiration Date, as to the number of Old
Notes which have been tendered pursuant to the Exchange Offer and the items
received by you pursuant to this Agreement, separately reporting and giving
cumulative totals as to items properly received and items improperly received.
In addition, you will also inform, and cooperate in making available to, the
Company or any such other person or persons upon oral request made from time to
time prior to the Expiration Date of such other information as it or he or she
reasonably requests. Such cooperation shall include, without limitation, the
granting by you to the Company and such person as the Company may request of
access to those persons on your staff who are responsible for receiving tenders,
in order to ensure that immediately prior to the Expiration Date the Company
shall have received information in sufficient detail to enable it to decide
whether to extend the Exchange offer. You shall prepare a final list of all
persons whose tenders were accepted, the aggregate principal amount of Old Notes
tendered, the aggregate principal amount of Old Notes accepted and deliver said
list to the Company.
17. Letters of Transmittal and Notices of Guaranteed Delivery shall be
stamped by you as to the date and the time of receipt thereof and shall be
preserved by you for a period of time at least equal to the period of time you
preserve other records pertaining to the transfer of notes. You shall dispose of
unused Letters of Transmittal and other surplus materials by returning them to
the Company.
18. You hereby expressly waive any lien, encumbrance or right of
set-off whatsoever that you may have with respect to funds deposited with you
for the payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
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7
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless
in your capacity as Exchange Agent hereunder against any loss, liability, cost
or expense, including reasonable attorneys' fees and expenses, arising out of or
in connection with any act, omission, delay or refusal made by you in reliance
upon any signature, endorsement, assignment, certificate, order, request,
notice, instruction or other instrument or document reasonably believed by you
to be valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Old Notes reasonably believed by you in good faith to be authorized,
and in delaying or refusing in good faith to accept any tenders or effect any
transfer of Old Notes; provided, however, that the Company shall not be liable
for indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of your gross negligence or willful misconduct. In no case
shall the Company be liable under this indemnity with respect to any claim
against you unless the Company shall be notified by you, by letter or cable or
by facsimile confirmed by letter, of the written assertion of a claim against
you or of any other action commenced against you, promptly after you shall have
received any such written assertion or notice of commencement of action. The
Company shall be entitled to participate at its own expense in the defense of
any such claim or other action, and, if the Company so elects, the Company shall
assume the defense of any suit brought to enforce any such claim. In the event
that the Company shall assume the defense of any such suit, the Company shall
not be liable for the fees and expenses of any additional counsel thereafter
retained by you so long as the company shall retain counsel satisfactory to you
to defend such suit.
22. You shall arrange to comply with all requirements under the tax
laws of the United States, including those relating to missing Tax
Identification Numbers, and shall file any appropriate reports with the Internal
Revenue Service. The company understands that you are required to deduct 31% on
payments to holders who have not supplied their correct Taxpayer Identification
Number or required certification. Such funds will be turned over to the Internal
Revenue Service in accordance with applicable regulations.
23. You shall deliver or cause to be delivered, in a timely manner to
each governmental authority to which any transfer taxes are payable in respect
of the exchange of Old Notes, your check in the amount of all transfer taxes so
payable, and the Company shall reimburse you for the amount of any and all
transfer taxes payable in respect of the exchange of Old Notes; provided,
however, that you shall reimburse the Company for amounts refunded to you in
respect of your payment of any such transfer taxes, at such time as such refund
is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder
shall
<PAGE>
8
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and shall inure to the benefit of, and the obligations created hereby shall be
binding upon, the successors and assigns of each of the parties hereto.
25. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
26. In case any provision of this Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
27. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
28. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing), shall be delivered by hand or first class mail, postage
prepaid, shall be deemed given when received and shall be sent to the addresses
listed below or to such other addresses as the addressee shall designate from
time to time by notice:
Company: Discovery Zone, Inc.
565 Taxter Road
Fifth Floor
Elmsford, New York 10523
Facsimile: (914) 345-4527
Attention: Andrew M. Smith
Exchange Agent: Firstar Bank of Minnesota, N.A.
101 East 5th Street
St. Paul, Minnesota 55101
Facsimile: (612) 229-6415
Attention: Corporate Trust Department
29. Unless terminated earlier by the parties hereto, this Agreement
shall terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, Paragraphs 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver to
the Company any certificates for Notes, other related documents, funds or
property then held by you as Exchange Agent under this Agreement.
30. This Agreement shall be binding and effective as of the date
hereof.
<PAGE>
9
Please acknowledge receipt of this Agreement and confirm the
arrangements herein provided by signing and returning the enclosed copy.
DISCOVERY ZONE, INC.
By:
-------------------------------------------------
Name:
Title:
Accepted as the date first above written:
FIRSTAR BANK OF MINNESOTA, N.A., as Exchange Agent
By: /s/ Frank P. Leslie, III
--------------------------------------
Name: Frank P. Leslie, III
Title: Vice President
<PAGE>
SCHEDULE I
The fee for the services of Firstar Bank of Minnesota, N.A., as
exchange agent, is included in the initial fee paid by Discovery Zone, Inc. to
Firstar Bank of Minnesota, N.A.
