THE PAYMENT OF THIS INSTRUMENT, BOTH PRINCIPAL AND INTEREST, AND ALL OTHER
INDEBTEDNESS EVIDENCED HEREBY, IS SUBJECT TO THE PRIOR RIGHTS OF THE
COMPANY'S SENIOR LENDERS (AS DEFINED HEREIN).
THE SECURITIES REPRESENTED BY THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT
BE SOLD, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED FOR VALUE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS
COVERING SUCH SECURITIES OR UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL
ACCEPTABLE TO THE ISSUER STATING THAT SUCH SALE, ASSIGNMENT, PLEDGE OR
TRANSFER IS EXEMPT FROM THE REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
Series 1997 10% Subordinated Convertible Debenture
Due ____________, 2004
No. 1997/10-______________ $________________
Chicago, Illinois _______________, 1997
KNOW ALL PERSONS BY THESE PRESENTS that TRO Learning Inc., a Delaware
corporation (the "Issuer"), for value received, promises to pay to
___________________________, or registered assignee (the "Holder"), the
principal sum of ____________________Dollars ($_____________) on
______________, 2004 (or at an earlier redemption date as provided for
herein), together with interest on said principal amount from the date hereof
until the principal amount is paid at the rate of ten percent (10%) per
annum, compounded annually (this "Debenture"). Interest will be paid on
July 1, and January 1 of each year, commencing July 1, 1997. Principal shall be
payable at the office of the Issuer upon representation and surrender of this
Debenture. Interest shall be paid by Issuer's check payable to the person
listed as the registered owner of the Debenture on any interest payment date
on the Debenture register maintained by the Issuer, and mailed on each
interest payment date (other than a date which is a principal payment date)
to said registered owner at the address shown on said Debenture register.
1. DEFINITIONS.
Certain terms used herein and not otherwise defined (including
capitalized terms used in the foregoing Recitals) shall have the following
meanings:
"CONVERSION PRICE" shall have the meaning set forth in Section 4(b)
hereof.
"ISSUER OBLIGATION" means the Senior Secured Obligations or the
Subordinate Obligations, as the context requires.
"PAYMENT IN FULL" or "PAID IN FULL" or any similar term(s) with respect
to any Issuer Obligation means (a) the satisfaction and final payment in full
of such Issuer Obligation in cash or cash equivalents reasonably acceptable
to the payee, the termination of any obligation on the part of the holder of
such Issuer Obligation to make any future loans or to afford any further
financial accommodation to Issuer, and the full and timely performance of all
obligations, or (b) in the case of any Issuer Obligation consisting of
contingent obligations (including without limitation contingent obligations
in respect of letters of credit or other indemnifications under the Senior
Loan Documents), the setting apart of cash sufficient to discharge such
portion of such Issuer Obligation in an account for the exclusive benefit of
the holders thereof, in which account such holders shall be granted by Issuer
a first priority perfected security interest in a manner acceptable to such
holders, which payment or perfected security interest shall have been
retained by the holders, in the case of each of (a) and (b) above, for a
period of time in excess of all applicable preference or other similar
periods under applicable bankruptcy, insolvency or creditors' rights law.
"SENIOR LENDER" means Sanwa Business Credit Corporation and its
successors and assigns and/or any other lender under a Senior Loan Agreement.
"SENIOR LOAN AGREEMENT" means that certain Amended and Restated Loan
and Security Agreement dated effective as of March 5, 1997, among the Senior
Lender, The Roach Organization, Inc. and TRO Learning (Canada), Inc., as the
same may hereafter be amended, supplemented, modified, replaced or refinanced
from time to time and/or any other agreement for secured indebtedness
refinancing or replacing such credit agreement in whole or in part.
"SENIOR LOAN DOCUMENTS" means the Senior Loan Agreement and all other
instruments, agreements and documents which create, evidence or secure the
Senior Secured Obligations from time to time (including but not limited to
any promissory notes, security agreements, guarantees, pledge agreements,
hypothecation agreements, mortgages, financing statements, and all other
agreements of any type whatsoever), delivered by Issuer, any guarantor or any
other person or entity, as any of the same may be amended, supplemented,
modified, replaced or refinanced by the Senior Lender from time to time.
"SENIOR SECURED OBLIGATIONS" means all "Liabilities" as that term is
defined in the Senior Loan Documents owing to the Senior Lender, including
but not limited to principal, interest, fees and all other amounts owing to
the Senior Lender under the Senior Loan Documents, from time to time. There
is no limitation on the amount of Senior Secured Obligations that Issuer can
incur.
"SUBORDINATE CONVERTIBLE DEBENTURES" means those debentures of the
Issuer designated as its Series 1997 10% Subordinated Convertible Debentures
in the aggregate amount up to $7,000,000, also referred to herein as
"Debentures".
2
"SUBORDINATE OBLIGATIONS" means all principal, interest, fees and all
other amounts owing to the Holder under the Subordinate Convertible Debentures
from time to time, whether in respect of principal, interest or otherwise.
2. SERIES.
This Debenture is one of the Subordinate Convertible Debentures. All
payments with respect to the Debentures shall be made to all holders of the
Debentures PRO RATA, based upon amounts then due or owing.
3. REDEMPTION.
(a) Except as set forth herein, this Debenture may not be prepaid or
redeemed.
(b) This Debenture may be redeemed by the Issuer, at its option, in
whole or in part, if (i) the closing bid price of a single share of the
Issuer's Common Stock, as reported in the principal market upon which the
Issuer's public registered Common Stock is traded, is at least 200% of the
Conversion Price for twenty consecutive trading days; (ii) the average
daily trading volume of the Issuer's Common Stock for such twenty day
period is not less than 40,000 shares; and (iii) the shares into which the
Debentures are convertible are subject to an effective registration
statement under the Securities Act of 1933 (the "Securities Act") or are
saleable under Rule 144(k) thereunder. In the event of a redemption
pursuant to this Section 3(b), the Issuer shall redeem this Debenture at
101% of the principal sum stated herein, together with all interest accrued
and unpaid on said principal sum to the date of redemption.
(c) The Issuer shall redeem Debentures representing at least 25% of
the total principal amount of this Series, on a pro rata basis, on each of
March ___, 2001, 2002, 2003 and 2004.
(d) In the event of any redemption under Section 3(b) or Section 3(c),
the Issuer shall provide a notice of redemption (the "Redemption Notice") to
the registered Holder of this Debenture, at the address shown on the
Issuer's Debenture register. If conversion is not elected in accordance with
Section 4, the redemption shall take place on the date specified in the
Redemption Notice, which shall not be earlier than 30 days subsequent to the
date of the Redemption Notice (a "Redemption Date"). On a Redemption Date,
this Debenture, if redeemed in whole, shall be deemed cancelled, null and
void and of no further force and effect, provided that the Issuer pays to
the holder hereof the redemption price. In the event of a partial
redemption of this Debenture, the holder of this Debenture shall submit this
Debenture to the Issuer, which shall make a notation on the face of this
Debenture as to the amount which has been redeemed and, with respect to such
amount redeemed, this Debenture shall be cancelled, null and void and of no
further force and effect, provided that the Issuer pays the redemption
price for the amount of this Debenture so redeemed.
3
4. CONVERSION.
(a) This Debenture may be converted into shares of the Issuer's Common
Stock, at the option of the holder, in whole but not in part, at the
Conversion Price. No fractional shares of Common Stock shall be issued. Upon
conversion of this Debenture, fractional shares, if applicable, shall be paid
in cash based on the Conversion Price.
(b) For purposes hereof, the term "Conversion Price" shall mean
initially $_______per share. [120% of the average closing bid price for the
twenty days prior to closing], and shall be subject to adjustment, as follows:
(i) In case the Issuer shall at anytime hereafter subdivide or
combine the outstanding shares of Common Stock or declare a dividend
payable in Common Stock, the Conversion Price in effect immediately prior
to the subdivision, combination or record date for such dividend payable in
Common Stock shall forthwith be proportionately increased, in the case of
combination, or decreased, in the case of subdivision or dividend payable
in Common Stock, and each share of Common Stock issuable upon conversion of
this Debenture shall be changed to the number determined by dividing the
then current Conversion Price by the Conversion Price as adjusted after the
subdivision, combination, or dividend payable in Common Stock.
(ii) If any capital reorganization or reclassification of the
capital stock of the Issuer, or consolidation or merger of the Issuer with
another corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way that holders
of Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition of
such reorganization, reclassification, consolidation, merger or sale, lawful
and adequate provision shall be made whereby the holder hereof shall
hereafter have the right to receive upon the basis and upon the terms and
conditions specified in this Debenture and in lieu of the shares of the
Common Stock of the Issuer into which this Debenture was immediately
theretofore convertible, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of
such stock into which this Debenture was immediately theretofore convertible
had such reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of Holder to the end that the
provisions hereof (including without limitation provisions for adjustments
of the Conversion Price and of the number of shares into which this
Debenture may be converted) shall thereafter be applicable, as nearly as
may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the conversion hereof. The Issuer shall not effect any
such
4
consolidation, merger or sale, unless prior to the consummation
thereof the successor corporation (if other than the Issuer)
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed
and mailed to the registered holder hereof at the last address of
such holder appearing on the books of the Issuer, the obligation to
deliver to such holder such shares of stock, securities or assets
into which, in accordance with the foregoing provisions, such
holder may be entitled to convert this Debenture.
(iii) If the Issuer distributes to all holders of Common Stock
any assets (excluding ordinary cash dividends) or debt securities or
any rights or warrants to purchase debt securities, assets or other
securities (including Common Stock), the Conversion Price shall be
adjusted in accordance with the formula:
C(1) = C x (O x M) - F
---------------
O x M
where:
C(1) = the adjusted Conversion Price.
C = the current Conversion Price.
M = the average market price of
Common Stock for the 30
consecutive trading days
commencing 45 trading days before
the record date mentioned below.
O = the number of shares of Common
Stock outstanding on the record
date mentioned below.
F = the fair market value on the record
date of the aggregate of all assets,
securities, rights or warrants
distributed. The Issuer's Board of
Directors shall determine the fair
market value in the exercise of its
reasonable judgment.
The adjustment shall be made successively whenever any such distribution
is made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
5
(iv) If the Issuer issues or sells any shares of Common Stock
for a consideration per share less than the Conversion Price then in
effect (other than dividends payable in shares of Common Stock), or
issues any options, warrants, or other rights to purchase Common
Stock at a consideration per share less than the Conversion Price
then in effect, or issues securities convertible into Common Stock
at a conversion price per share of less than the Conversion Price
then in effect, then the Conversion Price in effect immediately
prior to such issuance or sale shall be adjusted by multiplying
such Conversion Price by a fraction, (a) the numerator of which
shall be an amount equal to the sum of (A) the aggregate number of
shares of Common Stock outstanding immediately prior to such issuance
or sale multiplied by the applicable Conversion Price in effect
immediately prior to such issuance or sale, and (B) the total
consideration payable to the Issuer upon such issuance or sale of
such Common Stock and/or such purchase rights or convertible
securities, plus the consideration payable to the Issuer upon the
exercise of such purchase rights or upon conversion of such
convertible securities, and (b) the denominator of which shall be
an amount equal to the aggregate number of shares of Common Stock
outstanding immediately after such issuance or sale plus the number
of shares of Common Stock issuable upon the exercise of any purchase
rights and/or upon the conversion of convertible securities issued
in such issuance. If the Conversion Price is adjusted as the result
of the issuance of any options, warrants or other purchase rights or
upon the issuance of convertible securities, no further adjustments
of such Conversion Price shall be made at the time of the exercise
of such options, warrants or other purchase rights or convertible
securities. If securities are sold for a consideration other than
cash, the amount of the consideration other than cash received by
the Issuer shall be deemed to be the fair value of such
consideration as determined by the Board of Directors of the Issuer.
(v) Upon any adjustment of the Conversion Price, then and in
each such case, the Issuer shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered
holder of this Debenture at the address of such holder as shown on
the books of the Issuer, which notice shall state the Conversion
Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares into which this Debenture may be
converted, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(c) The number of shares of Common Stock to be received upon
conversion of this Debenture shall be equal to (x) the principal amount
of this Debenture, divided by (y) the per share Conversion Price.
Conversion shall be effected by the Holder completing and duly executing
the conversion election form attached hereto (the "Conversion Election")
and surrendering this Debenture, together with such Conversion Election,
to the Issuer at its
6
principal office on or before the date for such conversion stated in
the Conversion Election or before the Redemption Date stated in the
Redemption Notice. This Debenture, or any part thereof called for
redemption, must be covered in whole and not in part.
(d) As soon as practicable after the receipt of the Conversion
Election, the Company will cause to be issued in the name of and
delivered to the Holder hereof, or as such Holder may direct, a
certificate or certificates representing the shares of Common Stock
acquired upon such exercise. No fractional shares of Common Stock
shall be issued; in lieu of any fractional shares to which the Holder
would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the then effective Conversion Price. The
Company shall also pay the Holder an amount equal to the interest
accrued on the Debenture to the date of conversion.
(e) Any shares of Common Stock issued upon conversion shall not
be freely tradeable and shall be "restricted shares," shall be subject
to the same restrictions on transfer as are the Debentures, and the
certificate therefor shall contain a legend in substantially the form
set forth on the face of this Debenture. In addition, all shares of
Common Stock so issued shall be entitled to certain registration
rights, as set forth herein and limited hereby.
(f) A number of shares of Common Stock sufficient to provide for
the exercise of the conversion rights upon the basis herein set forth
shall at all items be reserved for the exercise thereof, subject to
any required action of the shareholders. If any such shareholder
action is required, the Issuer shall use its best efforts to cause
such action to be taken.
5. SUBORDINATION.
This Debenture is not, nor shall it ever be, secured by any collateral
and is not, nor shall it ever be, the subject of any guaranty. The
Subordinate Obligations are and shall be expressly subordinate and junior in
right of payment to all Senior Secured Obligations until the Senior Secured
Obligations have been Paid In Full. Holder's interest in and to the payment
of principal, interest and premium or any other amounts due hereunder, is
subordinate to the interest of the Senior Lender and subject to the terms of
this Agreement. The Senior Lender has advanced funds and may from time to
time advance additional funds in reliance upon the subordination of the
Subordinate Obligations to the Senior Secured Obligations. Holder agrees to
be fully unsecured with respect to the Subordinate Obligations and, to that
end, Holder agrees to execute, file and/or record all such releases,
termination statements and satisfactions as are requested by the Senior
Lender in order to cause the Subordinate Obligations to be fully unsecured.
6. DEFAULT.
Each of the following events shall be an Event of Default ("Event of
Default") for purposes of this Debenture:
7
(a) The Issuer fails to pay when due any installment of interest on
this Debenture within fifteen (15) days of the due date.
(b) The Issuer fails to pay when due any principal or premium within
30 days of the due date.
(c) The Issuer defaults in the due and punctual performance or
observance of any material term contained in this Debenture, and such default
continues for a period of sixty (60) days after written notice thereof to the
Issuer; provided, however, that if such default cannot be cured within 60
days, corrective action must be instituted within such period, and such
default must be cured as promptly as practicable, but in any event within 120
days.
(d) Any representation or warranty made by or on behalf of the Issuer
in this Debenture or in any certificate or other instrument delivered under
or pursuant to any term hereof shall prove to have been untrue or incorrect
in any material respect as of the date such representation or warranty was
made or if any certificate, financial statement or financial schedule or
other instrument prepared by the Issuer or any executive officer of the
Issuer furnished or delivered under or pursuant to this Debenture after the
date hereof shall prove to be untrue or incorrect in any material respect as
of the date it was made, furnished or delivered.
(e) The Issuer shall fail to deliver the appropriate number of shares of
Common Stock in satisfaction of a Conversion Election by a Holder as provided
herein and such default shall continue for a period of ten (10) days after
written notice of such default to the Issuer.
(f) The Issuer or any subsidiary shall default in any material respect
in the due and punctual performance of any covenant or agreement in any note,
bond, indenture, loan agreement, note agreement, mortgaged security agreement
or other instrument evidencing indebtedness for borrowed money, excluding the
Senior Loan Documents, in the principal amount of at least $250,000, and such
default shall continue uncured or unwaived for more than 60 days after
written notice to the Issuer thereof; the parties hereto agreeing that an
event of default under the Senior Loan Documents shall not constitute an
Event of Default hereunder.
(g) The Issuer makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts as they become due, or files
a voluntary petition in bankruptcy, or is adjudicated as bankrupt or
insolvent, or files any petition or answer seeking for itself a
reorganization arrangement composition readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, or
files any answer admitting the material allegations of a petition filed
against the Issuer for any such relief, or a petition is filed against the
Issuer and the petition is not dismissed within 60 days after the filing
thereof, or if a trustee, receiver or similar officer is appointed for the
Issuer for the
8
Issuer's property and such appointment is not dismissed within 60 days
after such appointment.
Upon the occurrence of an Event of Default, then not fewer than three
Holders holding not less than an aggregate of twenty-five percent (25%) of
the principal amount of the Debentures then outstanding may declare
immediately due and payable the outstanding amounts under all the Debentures,
and the same shall thereupon be immediately due and payable, and, subject to
the terms contained in Sections 7 and 8 hereof, may exercise any and all
remedies available under Illinois law or in equity.
Upon the occurrence of an Event of Default as described in Section 6(e)
hereof, the Holder hereof shall have the option to declare the principal
amount hereof, and all accrued but unpaid interest thereon, to be immediately
due and payable upon written notice from the Holder to the Issuer and,
subject to the terms contained in Sections 7 and 8 hereof, to exercise any
and all remedies available to it under Illinois law or at equity.
7. STANDBY; NON-INTERFERENCE.
(a) At any time prior to the date the Senior Secured Obligations
are Paid in Full, Holder shall not, except as expressly provided in
Sections 7(d) and 7(f) hereof or with respect to the Issuer's
obligations in Sections 4 and 14 hereof, (i) exercise any rights or
remedies Holder may have under the Subordinate Convertible Debentures
or otherwise; (ii) commence or join with any other creditors of Issuer
(except the Senior Lender) in commencing any bankruptcy,
reorganization, receivership or insolvency proceeding against Issuer;
(iii) commence any action or proceeding against Issuer to enforce or
collect any Subordinate Obligation; (iv) commence any action to obtain
possession of property of Issuer, to exercise control over property of
Issuer or to create, perfect or enforce any lien against property of
Issuer; (v) exercise any control over or power to direct the use or
distribution of insurance proceeds, condemnation proceeds, proceeds of
sale of any property of Issuer; or (vi) take any action which
interferes with or impairs Senior Lender's rights and remedies, in any
manner whatsoever.
(b) In the event Issuer defaults on its obligations to Senior
Lender and, as a result, Senior Lender undertakes to enforce Senior
Lender's security interests and liens in Issuer's assets, Holder agrees
that Holder will not hinder, delay or otherwise prevent Senior Lender
from taking any and all action which Senior Lender deems necessary to
enforce Senior Lender's security interests and liens in Issuer's assets
and to realize thereon or to take any action which interferes with or
impairs Senior Lender's rights and remedies, in any manner whatsoever.
(c) If any insolvency, bankruptcy, receivership, liquidation,
reorganization or other similar proceedings are commenced by or against
Issuer or its property, or if any proceedings for involuntary
liquidation, dissolution or other winding up of Issuer whether or not
involving insolvency or bankruptcy are commenced by or against Issuer,
then
9
Senior Lender shall be entitled in any such proceeding to receive
Payment in Full of all Senior Secured Obligations before Holder is
entitled in any such proceedings to receive any payment on account of
the Subordinate Obligations, and to that end, in any such proceedings,
any payment or distribution of any kind or character, (whether in cash,
cash equivalents, property (excluding the Issuer's Common Stock), by
set-off or otherwise) to which Holder would be entitled but for the
provisions hereof, shall be delivered to Senior Lender to the extent
necessary to make Payment in Full of all Senior Secured Obligations
remaining unpaid, after giving effect to any concurrent payment or
distribution to or for Senior Lender in respect thereof.
(d) At any time prior to the date the Senior Secured Obligations
are Paid in Full, upon the occurrence of an Event of Default under the
terms of the Subordinate Convertible Debentures, Holder may subject to
the limitations on remedies contained in Section 6, on a date not
earlier than two hundred seventy (270) days from the date an Event of
Default occurs hereunder, (i) accelerate payments due pursuant to the
Subordinate Convertible Debentures; (ii) demand payment from Issuer;
(iii) bring suit against Issuer; and (iv) obtain a judgement against
Issuer. Until the Senior Secured Obligations are Paid in Full, Holder
may not record, register, or file such judgement or take any further
actions to enforce its judgement against the assets of Issuer or do any
of the other acts or exercise any other of the rights described in
Section 7(a); provided, however, that this Section 7(d) shall not limit
or impair Holder's rights to enforce the provisions of Sections 4 and
14 hereof.
(e) Holder shall have no right to receive any payments or monies
resulting from such action or proceeding until the Senior Secured
Obligations are Paid in Full and Holder shall not take any action which
interferes with or impairs Senior Lender's rights and remedies, in any
manner whatsoever.
(f) Subject to the provisions of Section 7(e), Holder may, in any
proceeding described in Section 7(c) hereof, in the name of Holder,
file claims, proofs of claims and other instruments of similar
character necessary to enforce the obligations of Issuer in respect of
the Subordinate Obligations. Neither this Section 7(f) nor any other
provision hereof shall be construed to give Holder any right to vote
any Issuer Obligation held by Senior Lender, any related claim or any
portion of such claim, whether in connection with any resolution,
arrangement, plan or reorganization, compromise, settlement, election
of trustees or otherwise.
(g) Nothing in this Agreement shall restrict the ability of the
Senior Lender to declare a default, accelerate all or any portion of
the Senior Secured Obligations and/or exercise any and all rights and
remedies contained in the Senior Loan Documents.
10
8. PERMITTED PAYMENTS; RIGHT TO RETAIN PAYMENTS.
(a) Holder shall not be entitled to receive or retain any direct or
indirect payment (in cash, cash equivalents, property (excluding the Issuer's
Common Stock), by set-off or otherwise) from Issuer of or on account of any
Subordinate Obligations: (i) if the payment from Issuer to Holder would
create a Default or an Event of Default under the terms of the Senior Loan
Documents, or (ii) if there has occurred and is continuing an Event of
Default under the terms of the Senior Loan Documents. Provided that no Event
of Default or Default (as defined in the Senior Loan Agreement) shall have
occurred and is continuing under the terms of the Senior Loan Agreement,
Issuer shall be entitled to make to, and Holder shall be entitled to receive
and retain (i) semi-annual installments of interest at the interest rate set
forth in the Subordinated Loan Documents, commencing on July 1, 1997 and
thereafter until Paid in Full and (ii) the redemption payments pursuant to
Section 3(c) hereof. Nothing herein shall limit or impair Holder's rights to
enforce the provisions of Sections 4 and 14 hereof.
(b) Except as expressly provided in Section 8(a), at any time that any
Senior Secured Obligation is outstanding, Issuer shall not make and Holder
shall not receive or accept any payment (in cash, cash-equivalents, property,
by set-off or otherwise) of any kind or nature with respect to the
Subordinate Obligations, including but not limited to any prepayment of
principal or interest.
(c) If Issuer shall make any payments which the Holder is not permitted
to receive and retain pursuant to this Agreement, then such payment shall be
held in trust by Holder for the benefit of, and shall be paid over promptly
to the Senior Lender, for application to the payment of the Senior Secured
Obligations, in such order of priority as Senior Lender shall determine, in
its sole and exclusive discretion. If Holder pays over any payment or
distribution as provided above, then such payment or distribution shall be
deemed to have been made by Issuer directly to Senior Lender and not to
Holder and no Subordinate Obligation shall be discharged by reason of its
receipt of any payment or distribution which is so paid over to Senior Lender.
9. COVENANTS.
(a) The Issuer agrees that until this Debenture is paid in full, the
Issuer will:
(1) Do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence, rights (charter
and statutory) and franchises and those of its subsidiaries.
(2) Deliver to the Holder hereof:
(i) as soon as practicable, but in any event within 45 days
after the close of each of the Issuer's first three fiscal quarters,
unaudited summary
11
consolidated operating results, balance sheets and cash flow
statements and cash flow statements of the Company and its subsidiaries
as of the end of such fiscal quarter, and in comparative form figures
for the corresponding fiscal quarter of the previous fiscal year, all
in reasonable detail, and certified by an authorized accounting officer
of the Company, subject to year-end adjustments;
(ii) as soon as practicable, but in any event within 90 days
after the end of each fiscal year, a consolidated balance sheet of
the Issuer and its subsidiaries, as of the end of such fiscal year,
together with the related consolidated statements of operations,
shareholders' equity and cash flow for such fiscal year, setting
forth in comparative form figures for the previous fiscal year, all
in reasonable detail, and duly certified by the Issuer's independent
public accountants;
(iii) concurrently with the delivery of the financial
statements referred to in paragraphs (i) and (ii) above, a
certificate of the Issuer signed by the President or Chief Financial
Officer, stating that, to the best of such officer's knowledge after
due inquiry, the Issuer has performed and observed each and every
covenant contained in this Debenture to be performed by it and that
no event has occurred and no condition then exists which constitutes
an Event of Default or would constitute each an Event of Default
upon the lapse of time or upon the giving of notice and the lapse of
time; or, if any such event has occurred or any such condition
exists, specifying the nature thereof; and
(iv) provided that, if the Issuer is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), delivery to the Holder of annual and quarterly
reports, proxy statements and registration statements filed with the
Securities and Exchange Commission as and when delivered to the
public security holders of the Issuer shall be sufficient to satisfy
the Issuer's obligations under this Section 9(a)(2).
(3) Pay, and cause each subsidiary to pay, all taxes, assessments
and other governmental charges imposed upon it or any of its properties
or assets, except where the failure to so pay such taxes would not have a
material adverse effect on the business or financial condition of the
Issuer and its subsidiaries, taken as a whole, or where the Issuer is in
good faith contesting the imposition of a tax or the amount due
thereunder.
(4) Conduct, and cause its subsidiaries to conduct, their
respective businesses in substantial compliance with all laws and
regulations governing the operation of such businesses, except where the
failure to so conduct such businesses
12
would not have a material adverse effect on the business or
financial condition of the Issuer and its subsidiaries, taken as a
whole.
(5) Maintain, and cause its subsidiaries to maintain, their
respective properties and assets in generally good repair, working
order and condition and maintain, with financially sound and reputable
insurers, insurance with respect to such properties and assets
against such losses, hazards, liabilities and risks, and in
amounts, to the extent and in the manner customary for companies in
similar businesses similarly situated, except where the failure to
so maintain properties and assets or to so maintain insurance would
not have a material adverse effect on the business or financial
condition of the Issuer and its subsidiaries, taken as a whole.
(b) The Issuer agrees that until this Debenture is paid in full,
the Issuer will not declare or pay any dividend or make any other
distribution on (i) the Common Stock or (ii) any class of preferred
stock, unless (x) such dividend or distribution is permitted under the
terms of the Senior Loan Documents AND (y) there is no Event of Default
existing AND (z) the shareholders' equity of the Issuer, determined on a
consistent basis in accordance with GAAP, after payment of the dividend,
shall not be less than $20,812,000.
10. MODIFICATION OF DOCUMENTS
(a) Senior Lender may amend, modify, extend, restate, replace or
otherwise alter any Senior Loan Document in any manner whatsoever,
without notice to or consent of Holder, including, but not limited to
granting additional financial accommodations to Issuer, extending the
term thereof, modifying the payment terms, increasing the principal
amount of the loans, and interest rate thereof, and events of default.
Any such amendment, modification, supplement, restatement or replacement
shall not affect or impair the obligations of Holder and the Subordinate
Obligations shall be subordinated to the Senior Secured Obligations as
evidenced by the Senior Loan Documents, as amended, modified,
supplemented, restated or replaced. Senior Lender shall have the right
to exercise any and all rights and remedies granted to Senior Lender
pursuant to the Senior Loan Documents, without notice to or consent of
Holder.
(b) At any time prior to the time the Senior Secured Obligations
are Paid in Full, neither the Holder nor the Issuer shall, without the
prior written consent of the Senior Lender, which consent may be
withheld in Senior Lender's sole and absolute discretion, (i) amend,
modify or otherwise alter the Subordinated Convertible Debentures in any
manner whatsoever, including but not limited to modifications of the
interest rate, payment terms, time for payments, or events of default,
(ii) accept, retain, request or take any collateral for the Subordinated
Obligations, (iii) increase the Subordinated Debt, or (v) except as
expressly permitted pursuant to Section 8(a), accept payment of, demand
payment of, sue for or receive all or any part of the Subordinated Debt.
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11. REVIVAL OF SUBORDINATION. Notwithstanding the Payment in Full of
any Issuer Obligation, if any payment on account of any Issuer Obligation or
any proceeds of collateral thereunder which are received by Senior Lender or
Holder are subsequently rescinded or otherwise required to be repaid to
issuer or any other person for any reason, then, to the extent such
payment(s) and/or proceeds are repaid to Issuer or such other person, the
subordination effected hereby with respect to such Issuer Obligation shall be
revived and continued in full force and effect as if such payment(s) and/or
proceeds had not been received by the original recipient thereof.
12. MISCELLANEOUS PROVISIONS.
The Issuer will not, by amendment of its Articles of Incorporation or
through reorganization consolidation, merger, dissolution or sale of assets,
or by any other voluntary act or deed, avoid or seek to avoid the observance
or performance of any of the covenants, stipulations or conditions to be
observed or performed hereunder by the Issuer, but will, at all times in good
faith, assist, insofar as it is able, in the carrying out of all provisions
hereof.
This Debenture is issued in fully registered form without interest
coupons. Transfer of this Debenture is restricted. The Issuer shall be
entitled to treat the person or entity listed as the registered owner on its
Debenture Register as the owner of this Debenture for all purposes.
Upon receipt of evidence satisfactory to the Issuer of the loss, theft,
destruction or mutilation of this Debenture and in the case of any such loss,
theft or destruction, upon delivery of a bond of indemnity satisfactory to the
Issuer if requested by the Issuer, or in the case of any such mutilation,
upon surrender and cancellation of such Debenture, the Issuer shall issue a
new Debenture identical in form to the lost, stolen, destroyed or mutilated
Debenture.
13. NOTICES: ETC.
(a) Any notice to a holder shall be in writing addressed to the
Holder at the address last shown on the Issuer's Debenture register, shall
be deemed given when delivered in person or three (3) days after deposit in
the United States mail, postage prepaid and addressed in accordance with
this section. Any notice to the Issuer shall be deemed given when delivered
in person or three (3) days after deposit in the United States mail,
postage prepaid and addressed as follows:
If to Issuer: TRO Learning, Inc.
1721 Moon Lake Boulevard
Suite 555
Hoffman Estates, IL 60194
Attn: Chief Financial Officer
A party may change its address by notice given in conformity with this
section.
14
(b) This Debenture shall be governed and interpreted under the laws
of the State of Illinois, without regard to the conflicts of laws
provision thereof.
(c) Whenever reference is made herein to the issue or sale of
shares of Common Stock, the term "Common Stock" shall include any stock
of any class of the Company other than preferred stock with a fixed
limit on dividends and a fixed amount payable in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company.
(d) All shares of Common Stock or other securities issued upon the
exercise of the Conversion Right shall be validly issued, fully paid and
non-assessable, and the Company will pay all taxes in respect of the
issuance thereof, if any.
(e) Notwithstanding anything contained herein to the contrary, the
Holder of this Debenture shall not be deemed a shareholder of the
Company for any purpose whatsoever until and unless this Debenture has
been converted pursuant to Section 3 hereof.
14. REGISTRATION RIGHTS.
The Holder acknowledges and understands that the shares of Common
Stock to be issued hereunder are not required to be registered under any
securities laws except as set forth below. If such shares are not so
registered, they will be "restricted securities" as that term is used
under the Securities Act of 1933, as amended (the "Securities Act"), and
the transferability and liquidity will be substantially restricted by
federal and state securities laws and will bear a legend comparable to
that set forth on the first page hereof.
(a) On or before the nine-month anniversary of the date hereof,
the Company shall file a registration statement under the Securities Act
covering the sale of the Shares of Common Stock issuable upon conversion
of the Debentures. The Company shall use its best efforts to have such
registration statement declared effective by the Securities and Exchange
Commission (the "Commission") by the twelve-month anniversary of the
date hereof. The costs and expenses directly related to such
registration, including but not limited to legal fees of the Company's
counsel, audit fees, printing expense, filing fees and fees and expenses
relating to qualifications under state securities or blue sky laws
incurred by the Company shall be borne entirely by the Company;
provided, however, that the persons for whose account the securities
covered by such registration are sold shall bear the underwriting
commissions, if any, applicable to their shares and fees of their legal
counsel. If the holders of shares of Common Stock underlying the
Debentures are the only persons whose shares are included in the
registration pursuant to this section, such holders shall bear the
expense of inclusion of audited financial statements in the registration
statement which are not dated as of the Company's normal fiscal year or
are not otherwise prepared by the Company for its own business purposes.
The Company shall keep effective and maintain such registration
statement for such period as may be necessary for the holders of such
common stock to dispose of such securities and, from time to time shall
amend or supplement, at the holder's expense, the prospectus or offering
circular used in connection
15
therewith to the extent necessary in order to comply with applicable
law; provided, that the Company shall not be required to maintain the
effectiveness of such registration statement once holders of the
Debentures can sell the shares underlying the Debentures under Rule
144(k) or any successor thereto under the Securities Act.
(b) The managing underwriter of an offering registered pursuant to
Section 14(a), if any, shall be selected by the holders of a majority of
the shares issued or issuable upon the conversion of the Debentures for
which registration has been requested and shall be reasonably acceptable
to the Company. Without the written consent of the holders of a majority
of the shares issued or issuable upon the exercise of the Debentures for
which registration has been requested pursuant to this Section 14(b),
neither the Company nor any other holder of securities of the Company
may include securities in such registration if in the good faith
judgment of the managing underwriter of such public offering the
inclusion of such securities would interfere with the successful
marketing of the share issued upon the conversion of the Debentures or
require the exclusion of any portion of the shares issued upon the
exercise of the Debentures to be registered.
(c) If the Company proposes to claim an exemption under Section
3(b) of the Securities Act for a public offering of any of its
securities or to register under the Securities Act (except by a claim of
exemption or registration statement on a form that does not permit the
inclusion of shares by its security holders) any of its securities, it
will give written notice to all registered holders of the Debentures,
and all registered holders of shares of Common Stock acquired upon the
conversion of Debentures, of its intention to do so and, on the written
request of any such registered holders given within twenty (20) days
after receipt of any such notice (which request must be made within
seven (7) years from the date of this Debenture), the Company will use
its best efforts to cause all such shares, the registered holders of
which shall have requested the registration or qualification thereof, to
be included in such notification or registration statement proposed to
be filed by the Company; provided, however, that (i) the Company shall
not be required to include any such shares of Common Stock in any such
registration for any holder who is able to sell all shares of Common
Stock owned by such holder (or issuable to such holder upon conversion
of this Debenture), and which benefit from the registration rights
granted hereunder, during the three-month period beginning on the date
such notice is received by such holder, without compliance with the
registration requirements of the Securities Act pursuant to Rule 144(k)
or any successor thereto under the Securities Act; (ii) the Company
shall not be required to give such notice with respect to, or to include
such Common Stock in, any such registration which is primarily (A) a
registration of a stock option plan or other employee benefit plan or of
securities issued or issuable pursuant to any such plan such as a
registration on Form S-8, or (B) a registration of securities proposed
to be issued in exchange for securities or assets of, or in connection
with a merger or consolidation with, another corporation such as a
registration on Form S-4; (iii) the Company shall not be required to
include in any such registration any shares of Common Stock previously
duly registered under the Securities Act; (iv) the Company may, in its
sole discretion, withdraw any such registration statement and abandon
the proposed offering in which any such holder had requested to
participate;
16
(v) if the offering to which the registration statement relates is to be
distributed by or through an underwriter, each such holder shall agree, as a
condition to the inclusion of such holder's securities in such registration,
to sell the securities held by such holder through such underwriter on the
same terms and conditions as the underwriter agrees to sell securities on
behalf of the Company and not to sell, transfer, pledge, assign or otherwise
dispose of any shares of Common Stock not sold by such holder in such
offering for such period (up to (90) days after the effective date of the
registration statement) as may be required by the underwriter; and (vi) if
the offering to which the registration statement relates is to be distributed
by or through an underwriter and a greater number of securities is offered
for participation in the proposed underwriting than, in the opinion of the
Company's underwriter, can be accommodated without significantly adversely
affecting the proposed underwriting, the amount of such securities otherwise
to be included in the underwritten offering on behalf of all persons other
than the Company may be reduced pro rata, in accordance with the number of
shares of Common Stock proposed to be sold by each such holder, or may be
eliminated entirely from such underwritten public offering. The costs and
expenses of such offering, including but not limited to legal fees, special
audit fees, printing expenses, filing fees, fees and expenses relating to
qualifications under state securities or blue sky laws and the premiums for
insurance, if any, incurred by the Company in connection with any
registration made pursuant to this Section 14(c) shall be borne entirely by
the Company; PROVIDED, HOWEVER, that any holders participating in such
registration shall bear their own underwriting discounts and commissions and
the fees and expenses of their own counsel or accountants in connection with
any such registration.
(d) In connection with the filing of a registration statement under
Sections 14(a) and (c) hereof, the Company shall:
(i) prepare and file with the U.S. Securities and Exchange
Commission (the "Commission") such amendments to such registration
statement and supplements to the prospectus contained therein as may
be necessary to keep such registration statement effective until holders
of the Debentures can sell the shares underlying the Debentures without
restriction under Rule 144(k) or any successor thereto under the
Securities Act;
(ii) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters
may reasonably request in order to facilitate the public offering of such
securities;
(iii) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue
sky laws of such jurisdictions as such participating holders may reasonably
request in writing within thirty (30) days following the original filing of
such registration statement, except that the Company shall not for any
purpose be required to execute a general consent
17
to service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(iv) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the time
when such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(v) notify such holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or
prospectus or for additional information;
(vi) prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for
such holders (and concurred in by counsel for the Company), is required
under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the shares by such holder;
(vii) prepare and promptly file with the Commission and promptly
notify such holders of the filing of such amendment or supplement to
such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus
relating to such securities is required to be delivered under the
Securities Act, any event shall have occurred as the result of which
any such prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light
of the circumstances in which they were made, not misleading;
(viii) advise such holders, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued;
(ix) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders
shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements
of the Securities Act or the rules and regulations thereunder, after having
been furnished with a copy thereof at least five (5) business days prior to
the filing thereof, unless in the opinion of counsel for the Company the
filing of such amendment or supplement is reasonably necessary to protect
the Company from any liabilities under any applicable federal or state law
and such filing will not violate applicable law; and
18
(x) at the request of any such holder, furnish on the
effective date of the registration statement and, if such registration
includes an underwritten public offering, at the closing provided for
in the underwriting agreement: (i) opinions, dated such respective
dates, of the counsel representing the Company for the purposes of
such registration, addressed to the underwriters, if any, and to
the holder or holders making such request, covering such matters as
such underwriters and holder or holders may reasonably request; and
(ii) letters, dated such respective dates, from the independent
certified public accountants of the Company, addressed to the
underwriters, if any, and to the holder or holders making such
request, covering such matters as such underwriters and holder or
holders may reasonably request, in which letter such accountants
shall state (without limiting the generality of the foregoing) that
they are independent certified public accountants within the meaning
of the Securities Act and that in the opinion of such accountants
the financial statements and other financial data of the Company
included in the registration statement or the prospectus or any
amendment or supplement thereto comply in all material respects with
the applicable accounting requirements of the Securities Act.
(e) The Company hereby indemnifies the holder of this Debenture and
of any common stock issued or issuable hereunder, its officers and
directors, and any person who controls such Debenture holder or such
holder of common stock within the meaning of Section 15 of the Securities
Act, against all losses, claims, damages and liabilities caused by any
untrue statement of a material fact contained in any registration
statement, prospectus, notification or offering circular (and as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus or caused by any
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading except insofar
as such losses, claims, damages or liabilities are caused by any untrue
statement or omission contained in information furnished in writing to the
Company by such holder or such holder of Common Stock expressly for use
therein, and each such holder by its acceptance hereof severally agrees
that it will indemnify and hold harmless the Company and each of its
officers who signs such registration statement and each of its directors
and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act with respect to losses, claims, damages
or liabilities which are caused by any untrue statement or omission
contained in information furnished in writing to the Company by such
holder expressly for use therein.
TRO LEARNING, INC.
By
--------------------------------
Its Chief Financial Officer
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TRO LEARNING, INC.
SERIES 1997 10% SUBORDINATED CONVERTIBLE DEBENTURES
DUE , 2004, CONVERSION ELECTION NOTICE
---------
**************
The original Debenture and this completed Conversion Election Notice
shall be delivered to the Issuer.
The undersigned hereby elects to exercise the conversion right contained
in the attached Debenture and to purchase
$ in shares of Common Stock of the Issuer at the applicable per
--------------
share Conversion Price, to be determined as defined in the Debenture.
Dated:
---------, ---- ----------------------------------------------
Notice: The signature must correspond with the
name(s) as it appears on this Debenture in every
particular without any change whatsoever.
(Address)
------------------------------------------------------------
------------------------------------------------------------
(Tax identification number
or Social Security Number)
-------------------------------------------
Signature Guaranty:
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20