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PURCHASE AGREEMENT
dated as of December 24, 1997
by and between
MARKETING SERVICES GROUP, INC.
and
GENERAL ELECTRIC CAPITAL CORPORATION
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TABLE OF CONTENTS
PURCHASE AGREEMENT
Section Page
I. DEFINITIONS.................................................... 1
II. THE PURCHASE OF CONVERTIBLE PREFERRED STOCK................... 11
2.1. Authorization of Issue............................ 11
2.2. Purchase of Convertible Preferred Stock
and Warrants...................................... 11
2.3. Closing........................................... 12
2.4. Use of Proceeds................................... 12
2.5. Tax Allocation.................................... 12
III. PURCHASER'S REPRESENTATIONS AND COVENANTS.................... 13
3.1. Investment Intention.............................. 13
3.2. Accredited Investor............................... 13
3.3. Corporate Existence............................... 13
3.4. Corporate Power; Authorization;
Enforceable Obligations........................... 13
3.5. Purchaser Covenants............................... 14
IV. COMPANY'S REPRESENTATIONS AND WARRANTIES...................... 14
4.1. Authorized and Outstanding Shares of
Capital Stock..................................... 14
4.2. Authorization and Issuance of Convertible
Preferred Stock................................... 15
4.3. Securities Laws................................... 15
4.4. Corporate Existence; Compliance with Law.......... 16
4.5. Subsidiaries...................................... 16
4.6. Corporate Power; Authorization;
Enforceable Obligations........................... 17
4.7. Financial Statements.............................. 18
4.8. Ownership of Property............................. 18
4.9. Material Contracts; Indebtedness.................. 19
4.10. Environmental Protection.......................... 20
4.11. Labor Matters..................................... 21
4.12. Other Ventures.................................... 22
4.13. Taxes ............................................ 22
4.14. No Litigation..................................... 23
4.15. Brokers........................................... 23
4.16. Employment and Labor Agreements................... 23
4.17. Patents, Trademarks, Copyrights and
Licenses.......................................... 23
4.18. No Material Adverse Effect........................ 24
i
Section Page
4.19. ERISA ............................................ 24
4.20. SEC Documents..................................... 27
4.21. Ordinary Course of Business....................... 27
4.22. Insurance......................................... 27
4.23. Accounts Receivable............................... 28
4.24. Minute Books...................................... 28
4.25. Year 2000 Systems................................. 28
4.26. Full Disclosure................................... 28
V. COVENANTS...................................................... 28
5.1. Affirmative and Financial Covenants............... 28
(a) Books and Records............................ 29
(b) Financial and Business Information........... 29
(c) Communication with Accountants............... 31
(d) Tax Compliance............................... 31
(e) Insurance.................................... 31
(f) Employee Plans............................... 32
(g) Compliance with Law.......................... 33
(h) Financial Covenants.......................... 33
(i) Maintenance of Existence and Conduct
of Business.................................. 33
(j) Access....................................... 34
(k) Excess Cash.................................. 34
(l) Exchange of Stock Certificates............... 34
(m) Lost, Stolen, Destroyed or Mutilated
Stock Certificates........................... 34
(n) NASDAQ....................................... 35
5.2. Negative Covenants................................ 35
(a) Permitted Acquisitions or
Investments.................................. 35
(b) Sales of Assets; Liquidation................. 35
(c) Agreements................................... 36
(d) Employee Loans............................... 36
(e) Capital Stock................................ 36
(f) Transactions with Affiliates................. 36
(g) Indebtedness................................. 37
(h) Restricted Payments.......................... 37
(i) Mergers and Subsidiaries..................... 37
(j) Management Compensation...................... 37
(k) Amendments to Certificate of
Incorporation and By-Laws.................... 38
(l) Capital Expenditures......................... 38
5.3. Remedies for Breach of Covenants.................. 38
5.4. Certain Tax Matters............................... 38
5.5. Status of Dividends............................... 40
ii
Section Page
VI. CONDITIONS PRECEDENT........................................ 41
6.1. Conditions Precedent.............................. 41
6.2. Additional Conditions to Closing.................. 42
VII. SECURITIES LAW MATTERS.......................................43
7.1. Legends........................................... 43
VIII. INDEMNIFICATION............................................. 43
IX. EXPENSES.................................................... 44
X. MISCELLANEOUS............................................... 44
10.1. Notices.......................................... 44
10.2. Binding Effect; Benefits......................... 45
10.3. Amendment........................................ 45
10.4. Successors and Assigns; Assignability............ 46
10.5. Remedies......................................... 46
10.6. Section and Other Headings....................... 47
10.7. Severability..................................... 47
10.8. Counterparts..................................... 47
10.9. Publicity........................................ 47
10.10. Governing Law.................................... 47
iii
Schedules
Schedule 4.1 - Stock and Warrants
Schedule 4.5 - Subsidiaries
Schedule 4.7 - Financial Statements; Other Obligations
Schedule 4.8 - Properties
Schedule 4.9 - Material Contracts and Indebtedness
Schedule 4.10 - Environmental Matters
Schedule 4.12 - Other Ventures
Schedule 4.13 - Taxes
Schedule 4.14 - Litigation
Schedule 4.15 - Brokers
Schedule 4.16 - Employment Contracts
Schedule 4.17 - Patents, Trademarks, Etc.
Schedule 4.18 - Material Adverse Effect
Schedule 4.19 - ERISA
Schedule 4.22 - Insurance
Exhibits
Exhibit A Certificate of Designation - Convertible
Preferred Stock
Exhibit B Registration Rights Agreement
Exhibit C Stockholders Agreement
Exhibit D Form of Warrant
Exhibit E Opinion of Company Counsel
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PURCHASE AGREEMENT
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PURCHASE AGREEMENT, dated as of December 24, 1997, between
Marketing Services Group, Inc., a Nevada corporation having an office at ▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ("Company"), and General
Electric Capital Corporation, a New York corporation having an office at ▇▇▇
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ("GE Capital" or "Purchaser").
W I T N E S S E T H :
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WHEREAS, Company has agreed to issue and sell to Purchaser,
and Purchaser has agreed to purchase from Company, upon the terms and conditions
hereinafter provided, 50,000 shares of Company's Series D Convertible Preferred
Stock, $0.01 par value per share, the terms, preferences and limitations of
which are set forth in Exhibit A hereto (the "Convertible Preferred Stock"), and
Warrants to purchase up to 10,670,000 shares of Common Stock of Company (the
"Warrants");
NOW, THEREFORE, in consideration of the premises and the
covenants hereinafter contained, it is agreed as follows:
I. DEFINITIONS
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"Affiliate" shall mean, with respect to any Person, (i) each
Person that, directly or indirectly, owns or controls, whether beneficially, or
as a trustee, guardian or other fiduciary, 5% or more of the Stock having
ordinary voting power in the election of directors of such Person, (ii) each
Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person, (iii) each of such Person's officers,
directors, joint venturers and partners, (iv) any trust or beneficiary of a
trust of which such Person is the sole trustee or (v) any lineal descendants,
ancestors, spouse or former spouses (as part of a marital dissolution) of such
Person (or any trust for the benefit of such Person). For the purpose of this
definition, "control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by
contract or otherwise. GE Capital and its Affiliates shall
not be deemed Affiliates of Company.
"Balance Sheet" shall have the meaning set forth
in Section 4.7(a) hereof.
"Business Day" shall mean any day that is not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of New York.
"Capital Expenditures" shall mean all payments for any fixed
assets or improvements or for replacements, substitutions or additions thereto,
that have a useful life of more than one year and which are required to be
capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any
lease of any property (whether real, personal or mixed) by such Person as lessee
that, in accordance with GAAP, either would be required to be classified and
accounted for as a capital lease on a balance sheet of such Person or otherwise
be disclosed as a capital lease in a note to such balance sheet, other than, in
the case of Company or a Subsidiary of Company, any such lease under which
Company or such Subsidiary is the lessor.
"Capital Lease Obligation" shall mean, with respect to any
Capital Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in respect
of such Capital Lease or otherwise be disclosed in a note to such balance sheet.
"Cash Equivalents" shall mean (i) marketable direct
obligations issued or unconditionally guaranteed by the United States of America
or any agency thereof maturing within one year from the date of acquisition
thereof; (ii) commercial paper maturing no more than one year from the date of
creation thereof and at the time of their acquisition having the highest rating
obtainable from either Standard & Poor's Corporation or ▇▇▇▇▇'▇ Investors
Service, Inc.; and (iii) certificates of deposit, maturing not more than one
year from the date of creation thereof, issued by commercial banks incorporated
under the laws of the United States of America, each having combined capital,
surplus and undivided profits of not less than $200,000,000 and having a rating
of "A" or better by a nationally recognized rating agency.
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"Certificate of Designation" shall mean the Certificate of
Designation setting forth the rights and preferences of the Convertible
Preferred Stock attached as Exhibit A hereto.
"Charges" shall mean all federal, state, county, city,
municipal, local, foreign or other governmental (including, without limitation,
PBGC) taxes at the time due and payable, levies, assessments, charges, liens,
claims or encumbrances upon or relating to (i) Company's or any of its
Subsidiaries' employees, payroll, income or gross receipts, (ii) Company's or
any of its Subsidiaries' ownership or use of any of its assets, or (iii) any
other aspect of Company's or any of the Subsidiaries' business.
"Closing" shall have the meaning set forth in
Section 2.3 hereof.
"Closing Date" shall have the meaning set forth in
Section 2.3 hereof.
"COBRA" shall have the meaning set forth in
Section 4.19(m) hereof.
"Common Stock" shall mean the common stock, $.01 par value per
share, of Company.
"Company Certificate of Incorporation" shall mean
the Certificate of Incorporation of Company, as amended.
"Compensation" shall mean, with respect to any Person, all
payments and accruals commonly considered to be compensation, including, without
limitation, all wages, salary, deferred payment arrangements, bonus payments and
accruals, profit sharing arrangements, payments in respect of stock option or
phantom stock option or similar arrangements, stock appreciation rights or
similar rights, incentive payments, pension or employment benefit contributions
or similar payments, made to or accrued for the account of such Person or
otherwise for the direct or indirect benefit of such Person.
"Convertible Preferred Stock" shall have the
meaning set forth in the recitals hereto.
"Core Business" shall mean marketing information
services, including but not limited to databases, direct
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marketing, telemarketing, internet marketing and primary and
secondary research.
"Default" shall mean any event which, with the passage of time
or notice or both, would, unless cured or waived, become an Event of Default.
"EBITDA" shall mean the consolidated operating income (before
extraordinary items, interest, taxes, depreciation and amortization) of such
Person and its consolidated Subsidiaries determined in accordance with GAAP.
"Environmental Laws" shall mean all federal, state and local
laws, statutes, ordinances and regulations, now or hereafter in effect, and in
each case as amended or supplemented from time to time, and any judicial or
administrative interpretation thereof, including, without limitation, any
applicable judicial or administrative order, consent decree or judgment,
relative to the applicable Real Estate, relating to the regulation and
protection of human health, safety, the environment and natural resources
(including, without limitation, ambient air, surface water, groundwater,
wetlands, land surface or subsurface strata, wildlife, aquatic species and
vegetation). Environmental Laws include but are not limited to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. ss. 9601 et seq.) ("CERCLA"); the Hazardous Material Transportation Act,
as amended (49 U.S.C. ss. 1801 et seq.); the Federal Insecticide, Fungicide, and
Rodenticide Act, as amended (7 U.S.C. ss. 136 et seq.); the Resource
Conservation and Recovery Act, as amended (42 U.S.C. ss. 6901 et seq.) ("RCRA");
the Toxic Substance Control Act, as amended (15 U.S.C. ss. 2601 et seq.); the
Clean Air Act, as amended (42 U.S.C. ss. 740 et seq.); the Federal Water
Pollution Control Act, as amended (33 U.S.C. ss. 1251 et seq.); the Occupational
Safety and Health Act, as amended (29 U.S.C. ss. 651 et seq.) ("OSHA"); and the
Safe Drinking Water Act, as amended (42 U.S.C. ss. 300f et seq.), and any and
all regulations promulgated thereunder, and all analogous state and local
counterparts or equivalents and any transfer of ownership notification or
approval statutes.
"Environmental Liabilities and Costs" shall mean all
liabilities, obligations, responsibilities, remedial actions, losses, damages,
punitive damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all fees, disbursements and expenses of
4
counsel, experts and consultants and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
claim, suit, action or demand by any person or entity, whether based in
contract, tort, implied or express warranty, strict liability, criminal or civil
statute or common law (including, without limitation, any thereof arising under
any Environmental Law, permit, order or agreement with any Governmental
Authority) and which relate to any health or safety condition regulated under
any Environmental Law or in connection with any other environmental matter or
Spill or the presence of a hazardous substance or threatened Spill of any
Hazardous Substance.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974 (or any successor legislation thereto), as amended from time to time and
any regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to Company, any
trade or business (whether or not incorporated) under common control with
Company and which, together with Company, are treated as a single employer
within the meaning of Sections 414(b), (c), (m) or (o) of the IRC, excluding
Purchaser and each other person which would not be an ERISA Affiliate if
Purchaser did not own any issued and outstanding shares of Stock of Company.
"Event of Default" shall mean the occurrence of any breach of
any representation or warranty in any material respect, or of any covenant or
agreement of Company under this Agreement, which in the case of the covenants
set forth in Section 5.1 (other than Sections (f)(iii) and (iv) and (h)) of this
Agreement remain uncured for a period of ten days after receipt by Company of
written notice thereof by the Required Holders.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and all rules and regulations promulgated thereunder.
"Financials" shall mean the financial statements
referred to in Section 4.7(a) hereof.
"Fiscal Year" shall mean the twelve month period ending June
30. Subsequent changes of the fiscal year of Company shall not change the term
"Fiscal Year," unless the Required Holders shall consent in writing to such
changes.
5
"Fixed Charges" shall mean, with respect to Company for any
period, the aggregate of all consolidated interest expenses paid or accrued,
plus scheduled payments of principal with respect to Indebtedness (other than
Indebtedness permitted pursuant to Section 5.2(g)(iii) hereof and, during the
Fiscal Year ending June 30, 1998, repayments of Indebtedness owed to ▇▇▇▇▇▇▇
▇▇▇▇ and to the former shareholders of Metro Services Group, Inc. and other
earnout payments associated with past or future acquisitions), plus scheduled
payments of dividends on and scheduled mandatory redemption payments (which have
not been waived) on Company's outstanding preferred stock other than the
Convertible Preferred Stock, in all cases during such period by Company and its
Subsidiaries.
"GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time, except that for
purposes of the financial covenants contained in Section 5.1(h) hereof, GAAP
shall be as in effect on the date of the most recent Financials and shall be
applied in a manner consistent therewith.
"Governmental Authority" shall mean any nation or government,
any state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any
obligation of such Person guaranteeing any Indebtedness, lease, dividend, or
other obligation ("primary obligations") of any other Person (the "primary
obligor") in any manner including, without limitation, any obligation or
arrangement of such Person (a) to purchase or repurchase any such primary
obligation, (b) to advance or supply funds (i) for the purchase or payment of
any such primary obligation or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet condition of the primary obligor, (c) to purchase
property, securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to make
payment of such primary obligation, or (d) to indemnify the owner of such
primary obligation against loss in respect thereof.
"Indebtedness" of any Person shall mean (i) all
indebtedness of such Person for borrowed money or for the
6
deferred purchase price of property or services (including, without limitation,
reimbursement and all other obligations with respect to surety bonds, letters of
credit and bankers' acceptances, whether or not matured, but not including
obligations to trade creditors incurred in the ordinary course of business),
(ii) all obligations evidenced by notes, bonds, debentures or similar
instruments, (iii) all indebtedness created or arising under any conditional
sale or other title retention agreements with respect to property acquired by
such Person (even though the rights and remedies of the seller or lender under
such agreement in the event of default are limited to repossession or sale of
such property), (iv) all Capital Lease Obligations, (v) all Guaranteed
Indebtedness, (vi) all Indebtedness referred to in clause (i), (ii), (iii), (iv)
or (v) above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or in
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness and (vii) all liabilities under Title IV of ERISA.
"IRC" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto.
"IRS" shall mean the Internal Revenue Service, or
any successor thereto.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing, and
the filing of, or agreement to give, any financing statement perfecting a
security interest as to assets owned by the relevant Person under the Uniform
Commercial Code or comparable law of any jurisdiction).
"Material Adverse Effect" shall mean a material adverse effect
on the business, assets, operations, prospects or financial or other condition
of Company and its Subsidiaries, taken as a whole.
7
"Material Contracts" means (i) all of Company's and its
Subsidiaries' contracts, agreements, leases or other instruments to which
Company or any of its Subsidiaries is a party or by which Company, its
Subsidiaries or its properties are bound, which involve payments by or to
Company or its Subsidiaries of more than $100,000 or which extend for a term of
more than a year from the date hereof, (ii) all of Company's and its
Subsidiaries' loan agreements, bank lines of credit agreements, indentures,
mortgages, deeds of trust, pledge and security agreements, factoring agreements,
conditional sales contracts, letters of credit or other debt instruments, (iii)
all material operating or capital leases for equipment to which Company or any
of its Subsidiaries is a party, (iv) all non-competition and similar agreements
to which Company is a party, (v) all contracts for the employment of any officer
or employee, (vi) all consulting agreements, (vii) any guarantees by the Company
or any of its Subsidiaries, (viii) all distributor and sales agency agreements
and (ix) all other material contracts not made in the ordinary course of
business.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA, and to which Company, any of its
Subsidiaries or any ERISA Affiliate is making, is obligated to make, has made or
been obligated to make, contributions on behalf of participants who are or were
employed by any of them.
"PBGC" shall mean the Pension Benefit Guaranty
Corporation or any successor thereto.
"Pension Plan" shall have the meaning set forth in
Section 4.19(a) hereof.
"Permitted Indebtedness" means, with respect to Company, (i)
taxes or assessments or other governmental charges or levies, either not yet due
and payable or to the extent that nonpayment thereof is permitted by the terms
of this Agreement; (ii) obligations under workmen's compensation, unemployment
insurance, social security or public liability laws or similar legislation;
(iii) bids, tenders, contracts (other than contracts for the payment of money)
or leases to which Company or any of its Subsidiaries is a party as lessee made
in the ordinary course of business; (iv) public or statutory obligations of
Company or any of its Subsidiaries; (v) all deferred taxes and (vi) all unfunded
pension fund and other employee benefit plan
8
obligations and liabilities but only to the extent permitted to remain unfunded
under applicable law.
"Person" shall mean any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal or
otherwise, including, without limitation, any instrumentality, division, agency,
body or department thereof).
"Plan" shall have the meaning set forth in Section
4.19(a) hereof.
"Registration Rights Agreement" shall mean the Registration
Rights Agreement by and between Company and Purchaser, substantially in the form
attached hereto as Exhibit B, as such agreement may be amended, supplemented or
otherwise modified from time to time in accordance with the terms thereof.
"Required Holders" shall mean Persons who hold at least a
majority of the outstanding Convertible Preferred Stock.
"Restricted Payment" shall mean (i) the declaration of any
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of Company's Stock
or (ii) any payment on account of the purchase, redemption or other retirement
of Company's Stock or any other payment or distribution made in respect of any
Stock of Company, either directly or indirectly.
"Retiree Welfare Plan" shall refer to any Welfare Plan
providing for continuing coverage or benefits for any participant or any
beneficiary of a participant after such participant's termination of employment,
other than continuation coverage provided pursuant to Section 4980B of the IRC
and at the sole expense of the participant or the beneficiary of the
participant.
"SEC" shall mean the U.S. Securities and Exchange
Commission, or any successor thereto.
9
"Securities Act" shall mean the Securities Act of 1933, as
amended, and all rules and regulations promulgated thereunder.
"Spill" shall have the meaning set forth in
Section 4.10.
"Stock" shall mean all shares, options, warrants, general or
limited partnership interests, limited liability company membership interest,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including, without limitation, common stock, preferred
stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of
the General Rules and Regulations promulgated by the SEC under the Exchange
Act).
"Stockholders Agreement" shall mean the Stockholders Agreement
by and among Company, Purchaser and each of the other stockholders party
thereto, substantially in the form attached hereto as Exhibit C, as such
agreement may be amended, supplemented or otherwise modified from time to time.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than 50% of the outstanding Stock
having ordinary voting power to elect a majority of the board of directors of
such corporation (irrespective of whether, at the time, Stock of any other class
or classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time, directly or indirectly,
owned legally or beneficially by such Person and/or one or more Subsidiaries of
such Person, and (b) any partnership or other entity in which such Person and/or
one or more Subsidiaries of such Person shall have an interest (whether in the
form of voting or participation in profits or capital contribution) of more than
50%.
"Tangible Net Worth" shall mean, with respect to any Person,
at any date, the excess of total assets of such Person at such date over the
total liabilities of such Person at such date, each determined on a consolidated
basis in accordance with GAAP but excluding from total assets all intangible
assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses
and similar intangible items).
10
"Transaction Documents" shall mean this Agreement,
the Certificate of Designation, the Stockholders Agreement, the Registration
Rights Agreement and the Warrants.
"Warrants" shall have the meaning set forth in the
recitals hereto.
"Welfare Plan" shall mean any welfare plan, as defined in
Section 3(1) of ERISA, which is maintained or contributed to by Company, any of
its Subsidiaries or any ERISA Affiliate.
References to this "Agreement" shall mean this Purchase
Agreement, including all amendments, modifications and supplements and any
exhibits or schedules to any of the foregoing, and shall refer to the Agreement
as the same may be in effect at the time such reference becomes operative.
Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given such term
in accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
consistently applied. That certain terms or computations are explicitly modified
by the phrase "in accordance with GAAP" shall in no way be construed to limit
the foregoing. The words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole, including the Exhibits and
Schedules hereto, as the same may from time to time be amended, modified or
supplemented, and not to any particular section, subsection or clause contained
in this Agreement. Wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter.
II. THE PURCHASE OF CONVERTIBLE PREFERRED STOCK
-------------------------------------------
2.1. Authorization of Issue. Prior to the Closing, Company
----------------------
shall have duly authorized the issuance and sale to Purchaser of the number of
shares of Convertible Preferred Stock set forth in Section 2.2 below and the
Warrants.
2.2. Purchase of Convertible Preferred Stock and Warrants.
----------------------------------------------------
Subject to the terms and conditions set forth in
11
this Agreement, on the Closing Date, GE Capital agrees to subscribe for and
purchase from Company, and Company agrees to issue and sell to GE Capital, (i)
an aggregate of 50,000 shares of Convertible Preferred Stock containing the
terms, preferences and limitations set forth in Exhibit A to this Agreement, and
(ii) an aggregate of 10,670,000 Warrants containing the terms set forth herein
and in Exhibit D to this Agreement.
The aggregate purchase price for the shares of Convertible
Preferred Stock and Warrants purchased on the Closing Date shall be $15,000,000,
payable in full on the Closing Date.
2.3. Closing. The closing of the purchase and sale of the
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Convertible Preferred Stock and the Warrants (the "Closing") shall take place
within five Business Days after the satisfaction or waiver of the conditions set
forth in Article VI hereof or such date and time as shall be mutually agreed to
by the parties hereto (the "Closing Date") at the offices of Weil, Gotshal &
▇▇▇▇▇▇ LLP, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, or such other place as shall
be mutually agreed to by the parties hereto.
On the Closing Date, Company will deliver to Purchaser
certificates representing the Convertible Preferred Stock and Warrants purchased
on such date registered in such names and in such denominations as Purchaser
requests against delivery by Purchaser of the purchase price therefor by wire
transfer of funds to the account of Company.
2.4. Use of Proceeds. Company shall use the net proceeds of
---------------
the sale of the Convertible Preferred Stock and the Warrants to finance
acquisitions approved by Purchaser, up to $1,000,000 for computer systems
upgrades and up to $2,000,000 for earnout payments or repayment of existing
Indebtedness to Senior Management employees.
2.5. Tax Allocation. Company and Purchaser hereby acknowledge
--------------
and agree that the Warrants are part of an investment unit, which includes the
Convertible Preferred Stock. Notwithstanding anything to the contrary contained
herein, Company and Purchaser hereby further acknowledge and agree that for
United States federal, state and local income tax purposes the aggregate
purchase price shall be allocated among the Warrants and the Convertible
Preferred Stock as follows: $4,200,000 and $10,800,000, respectively. Company
12
and Purchaser agree to use the foregoing allocation for all income tax purposes
with respect to this transaction.
III. PURCHASER'S REPRESENTATIONS AND COVENANTS
-----------------------------------------
Purchaser makes the following representations and warranties
to Company, each and all of which shall survive the execution and delivery of
this Agreement and the Closing hereunder:
3.1. Investment Intention. Purchaser is purchasing the
--------------------
Convertible Preferred Stock and Warrants for its own account, for investment
purposes and not with a view to the distribution thereof. Purchaser will not,
directly or indirectly, offer, transfer, sell, assign, pledge, hypothecate or
otherwise dispose of any of the Convertible Preferred Stock or Warrants (or the
Common Stock issuable on conversion or exercise thereof) (or solicit any offers
to buy, purchase, or otherwise acquire any of the Convertible Preferred Stock or
Warrants or such Common Stock), except in compliance with the Securities Act.
3.2. Accredited Investor. Purchaser is an "accredited
-------------------
investor" (as that term is defined in Rule 501 of Regulation D under the
Securities Act) and by reason of its business and financial experience, it has
such knowledge, sophistication and experience in business and financial matters
as to be capable of evaluating the merits and risks of the prospective
investment, is able to bear the economic risk of such investment and is able to
afford a complete loss of such investment.
3.3. Corporate Existence. Purchaser is a corporation duly
-------------------
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
3.4. Corporate Power; Authorization; Enforceable Obligations.
-------------------------------------------------------
The execution, delivery and performance by Purchaser of this Agreement and the
other Transaction Documents to be executed by it: (i) are within Purchaser's
corporate power; (ii) have been duly authorized by all necessary corporate
action; (iii) are not in contravention of any provision of Purchaser's
certificate of incorporation or by-laws; and (iv) will not violate any law or
regulation, or any order or decree of any court or governmental instrumentality
binding on Purchaser. This Agreement and the other Transaction Documents to
which Purchaser is a
13
party have each been duly executed and delivered by Purchaser and constitute the
legal, valid and binding obligations of Purchaser, enforceable against it in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
3.5. Purchaser Covenants. GE Capital shall not purchase or
-------------------
otherwise acquire, unless approved by the affirmative vote of a majority of the
Board of Directors, additional equity securities of Company (other than pursuant
to conversion or exercise of the Convertible Preferred Stock or Warrants, or
pursuant to this Agreement) to the extent that, upon consummation of such
purchase or acquisition, GE Capital would own in excess of 49.99% of the
outstanding Common Stock on a fully diluted basis. For purposes of the
immediately preceding sentence, the term "fully diluted" shall mean with
reference to Common Stock, at any date as of which the number of shares thereof
is to be determined, all shares of Common Stock outstanding at such date and all
shares of Common Stock issuable upon the conversion of the Convertible Preferred
Stock outstanding on such date, and other options or warrants to purchase, or
securities convertible into, shares of Common Stock outstanding on such date
which would be deemed outstanding in accordance with GAAP for purposes of
determining book value or net income per share.
IV. COMPANY'S REPRESENTATIONS AND WARRANTIES
----------------------------------------
Company makes the following representations and warranties to
Purchaser, each and all of which shall survive the execution and delivery of
this Agreement and the Closing hereunder:
4.1. Authorized and Outstanding Shares of Capital Stock. After
--------------------------------------------------
giving effect to the Closing, the authorized capital stock of Company consists
of 36,250,000 shares of Common Stock, $.01 par value per share, of which
12,722,871 shares are issued and outstanding, and 50,000 shares of Convertible
Preferred Stock, $.01 par value per share, of which 50,000 shares will be issued
and outstanding. All of such issued and outstanding shares, including, without
14
limitation, the Convertible Preferred Stock, are validly issued, fully paid and
non-assessable. Except as set forth on Schedule 4.1(a), (i) there is no existing
option, warrant, call, commitment or other agreement to which Company is a party
requiring, and there are no convertible securities of Company outstanding which
upon conversion would require, the issuance of any additional shares of Stock of
Company or other securities convertible into shares of equity securities of
Company, other than the Convertible Preferred Stock and the Warrants, and (ii)
there are no agreements to which Company is a party or, to the knowledge of
Company, to which any stockholder or warrant holder of Company is a party, with
respect to the voting or transfer of the Stock of Company or with respect to any
other aspect of Company's affairs, other than the Stockholders Agreement. Except
as set forth on Schedule 4.1(a), there are no stockholders' preemptive rights or
rights of first refusal or other similar rights with respect to the issuance of
Stock by Company, other than pursuant to the Transaction Documents. True and
correct copies of the certificate of incorporation and by-laws of Company have
been delivered to Purchaser.
4.2. Authorization and Issuance of Convertible Preferred Stock
---------------------------------------------------------
and Warrants. The issuance of the Convertible Preferred Stock and Warrants have
------------
been duly authorized by all necessary corporate action on the part of Company
and, upon delivery to Purchaser of certificates therefor against payment in
accordance with the terms hereof, the Convertible Preferred Stock will have been
validly issued and fully paid and non-assessable, free and clear of all pledges,
liens, encumbrances and preemptive rights, except as provided in the
Stockholders Agreement. The issuance of shares of Common Stock upon conversion
of the Convertible Preferred Stock and upon exercise of the Warrants has been
duly authorized by all necessary corporate action on the part of Company and,
when issued upon conversion of the Convertible Preferred Stock, or upon exercise
of the Warrants, such Common Stock will have been validly issued and fully paid
and non-assessable. Company has duly reserved 15,085,612 shares of Common Stock
for issuance pursuant to the terms of the Convertible Preferred Stock and the
Warrants.
4.3. Securities Laws. In reliance on the investment
---------------
representations contained in Section 3.1, the offer, issuance, sale and delivery
of the Convertible Preferred Stock and the Warrants, as provided in this
15
Agreement, are exempt from the registration requirements of the Securities Act
and all applicable state securities laws, and are otherwise in compliance with
such laws. Neither Company nor any Person acting on its behalf has taken or will
take any action (including, without limitation, any offering of any securities
of Company under circumstances which would require the integration of such
offering with the offering of the Convertible Preferred Stock and the Warrants
under the Securities Act and the rules and regulations of the SEC thereunder)
which might subject the offering, issuance or sale of the Convertible Preferred
Stock and the Warrants to the registration requirements of Section 5 of the
Securities Act.
4.4. Corporate Existence; Compliance with Law. Company and
----------------------------------------
each of its Subsidiaries, (i) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Nevada in the case of
Company and as set forth on Schedule 4.5 in the case of its Subsidiaries; (ii)
is duly qualified as a foreign corporation and in good standing under the laws
of each jurisdiction where its ownership or lease of property or the conduct of
its business requires such qualification (except for jurisdictions in which such
failure to so qualify or to be in good standing would not have a Material
Adverse Effect); (iii) has the requisite corporate power and authority and the
legal right to own, pledge, mortgage or otherwise encumber and operate its
properties, to lease the property it operates under lease, and to conduct its
business as now being conducted; (iv) has, or has applied for, all material
licenses, permits, consents or approvals from or by, and has made all material
filings with, and has given all material notices to, all Governmental
Authorities having jurisdiction, to the extent required for such ownership,
operation and conduct; (v) is in compliance with its certificate or articles of
incorporation and by-laws; and (vi) is in compliance with all applicable
provisions of law, including, without limitation, the Telephone Consumer
Protection Act of 1991 and the Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 and the regulations of the Federal Trade Commission
issued thereunder, except for such non-compliance which would not have a
Material Adverse Effect.
4.5. Subsidiaries. There currently exist no Subsidiaries of
------------
Company other than as set forth on Schedule 4.5 hereto, which sets forth such
Subsidiaries, together with their respective jurisdictions of organization, and
the
16
authorized and outstanding capital Stock of each such Subsidiary, by class and
number and percentage of each class owned by Company or a Subsidiary of Company
or any other Person. There are no options, warrants, rights to purchase or
similar rights covering capital Stock for any such Subsidiary.
4.6. Corporate Power; Authorization; Enforceable Obligations.
-------------------------------------------------------
The execution, delivery and performance by Company of this Agreement, the other
Transaction Documents to which it is a party and all instruments and documents
to be delivered by Company, the issuance and sale of the Convertible Preferred
Stock and the Warrants and the consummation of the other transactions
contemplated by any of the foregoing: (i) are within Company's corporate power
and authority; (ii) have been duly authorized by all necessary or proper
corporate action; (iii) are not in contravention of any provision of Company's
certificate of incorporation or by-laws; (iv) will not violate any law or
regulation, or any order or decree of any court or governmental instrumentality;
(v) will not conflict with or result in the breach or termination of, constitute
a default under or accelerate any performance required by, any indenture,
mortgage, deed of trust, lease, agreement or other instrument to which Company
or any of its Subsidiaries is a party or by which Company, any of its
Subsidiaries or any of their property is bound; (vi) will not result in the
creation or imposition of any Lien upon any of the property of Company or any of
its Subsidiaries; and (vii) do not require the consent or approval of, or any
filing with, any Governmental Authority or any other Person (except for (A) the
filing of an amendment to Company's certificate of incorporation to authorize
the Convertible Preferred Stock, substantially in the form of the Certificate of
Designation, (B) those filings required by the Registration Rights Agreement,
(C) to the extent previously obtained or made) and (D) filing of a listing
application with NASDAQ. At or prior to the Closing Date, each of this Agreement
and the other Transaction Documents shall have been duly executed and delivered
by Company and each shall then constitute a legal, valid and binding obligation
of Company, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a
17
proceeding at law or in equity), and the Certificate of Designation shall have
been duly filed with the Secretary of State of the State of Nevada.
4.7. Financial Statements. (a) The audited consolidated
--------------------
balance sheet of Company as at June 30, 1997, and the related consolidated
statements of income, retained earnings and cash flows for the year then ended,
with the opinion thereon of Coopers & ▇▇▇▇▇▇▇ L.L.P. and the unaudited balance
sheet of Company as at September 30, 1997 (the "Balance Sheet") and the related
unaudited statements of income, retained earnings and cash flows for the three
months then ended, copies of which have previously been delivered to Purchaser,
have been, except as noted therein, prepared in conformity with GAAP
consistently applied throughout the periods involved and present fairly in all
material respects the consolidated financial position of Company as at the dates
thereof, and the consolidated results of its operations and cash flows for the
periods then ended, subject in the case of the interim statements to normal year
end audit adjustments.
(b) Except as set forth on Schedule 4.7, neither Company nor
any of its Subsidiaries has any material obligations, contingent or otherwise,
including, without limitation, liabilities for Charges, long-term leases or
unusual forward or long-term commitments which are not reflected in the Balance
Sheet, other than those incurred since September 30, 1997, in the ordinary
course of business.
(c) Except as set forth on Schedule 4.7, no dividends or other
distributions have been declared, paid or made upon any shares of capital Stock
of Company, nor have any shares of capital Stock of Company been redeemed,
retired, purchased or otherwise acquired for value by Company since September
30, 1997.
4.8. Ownership of Property. (a) Neither Company nor any of its
---------------------
Subsidiaries owns any real estate. Each of Company and its Subsidiaries has
valid and marketable leasehold interests in the leases described in Schedule 4.8
hereto, and, except as set forth on Schedule 4.8, good and marketable title to,
or valid leasehold interests in, all of its other properties and assets free and
clear of all Liens.
(b) All real property leased by Company and its
Subsidiaries is set forth on Schedule 4.8. Each of such
18
leases is valid and enforceable in accordance with its terms (subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity)) and is in
full force and effect. Company has delivered to Purchaser true and complete
copies of each of such leases set forth on Schedule 4.8 and all documents
affecting the rights or obligations of Company or any of its Subsidiaries,
including, without limitation, any non-disturbance and recognition agreements,
subordination agreements, attornment agreements and agreements regarding the
term or rental of any of the leases. Except as set forth on Schedule 4.8, none
of Company, any of its Subsidiaries nor, to its knowledge, any other party to
any such lease is in default of its obligations thereunder or has delivered or
received any notice of default under any such lease, nor has any event occurred
which, with the giving of notice, the passage of time or both, would constitute
a default under any such lease.
(c) Except as disclosed on Schedule 4.8, neither Company nor
any of its Subsidiaries is obligated under or a party to, any option, right of
first refusal or any other contractual right to purchase, acquire, sell, assign
or dispose of any real property owned or leased by Company or such Subsidiary.
4.9. Material Contracts; Indebtedness. Schedule 4.9 contains a
--------------------------------
true, correct and complete list and description of all Material Contracts. Each
Material Contract is a valid and binding agreement of Company or its
Subsidiaries (as the case may be) enforceable against Company or such Subsidiary
in accordance with its terms (subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally, and subject, as to enforceability, to
general principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity)), and neither Company nor any of its
Subsidiaries has any knowledge that any Material Contract is not a valid and
binding agreement against the other parties thereto. Company and each of its
Subsidiaries has fulfilled all
19
obligations required pursuant to the Material Contracts to have been performed
by Company or such Subsidiary on its part. Except as set forth in Schedule 4.9,
neither Company nor any of its Subsidiaries is in default or breach, nor to
Company's or such Subsidiary's knowledge is any third party in default or
breach, under or with respect to any Material Contract. Except as set forth on
Schedule 4.9, neither Company nor any of its Subsidiaries has any Indebtedness
except Permitted Indebtedness.
4.10. Environmental Protection. (a) Except as set forth on
------------------------
Schedule 4.10, to Company's and its Subsidiaries' knowledge, all real property
owned, leased or otherwise operated by Company and its Subsidiaries (each, a
"Facility") is free of contamination from any substance, waste or material (i)
currently identified to be toxic or hazardous pursuant to, or which may result
in liability under, any Environmental Law or (ii) within the definition of a
substance which is toxic or hazardous under any Environmental Law, including,
without limitation, any asbestos, pcb, radioactive substance, methane, volatile
hydrocarbons, industrial solvents, oil or petroleum or chemical liquids or
solids, liquid or gaseous products, or any other material or substance which has
in the past or could at any time in the future cause or constitute a health,
safety, or environmental hazard to any Person or property or result in any
Environmental Liabilities and Costs ("Hazardous Substance") of more than
$100,000 or which, in either case, could have a Material Adverse Effect. Except
as set forth on Schedule 4.10, neither Company nor any of its Subsidiaries has
caused or suffered to occur any release, spill, migration, leakage, discharge,
spillage, uncontrolled loss, seepage, or filtration of Hazard Substances at or
from the Facility (a "Spill") which could result in Environmental Liabilities
and Costs in excess of $100,000.
(b) Company and each Subsidiary has generated, treated, stored
and disposed of any Hazardous Substances in full compliance with applicable
Environmental Laws, except for such non-compliances which would not have a
Material Adverse Effect.
(c) Company and each Subsidiary has obtained, or has applied
for, and is in full compliance with and in good standing under all permits
required under Environmental Laws (except for such failures which would not have
a Material Adverse Effect) and neither Company nor any of its
20
Subsidiaries has any knowledge of any proceedings to substantially modify or to
revoke any such permit.
(d) Except as set forth on Schedule 4.10, there are no
investigations, proceedings or litigation pending or, to Company's or its
Subsidiaries' knowledge, threatened affecting or against Company, any of its
Subsidiaries or the Facilities relating to Environmental Laws or Hazardous
Substances.
(e) Since January 1, 1997, except for communications in
connection with the matters listed on Schedule 4.10, neither Company nor any of
its Subsidiaries has received any communication or notice (including, without
limitation, requests for information) indicating the potential of Environmental
Liabilities and Costs against Company or its Subsidiaries.
4.11. Labor Matters. (a) There are no strikes or other labor
-------------
disputes against Company or any of its Subsidiaries pending or, to Company's or
its Subsidiaries' knowledge, threatened. Hours worked by and payment made to
employees of Company and its Subsidiaries have not been in violation of the Fair
Labor Standards Act or any other applicable law dealing with such matters. All
payments due from Company and each of its Subsidiaries on account of employee
health and welfare insurance have been paid or accrued as a liability on the
books of Company or such Subsidiary. There is no organizing activity involving
Company or any of its Subsidiaries pending or, to Company's or its Subsidiaries'
knowledge, threatened by any labor union or group of employees. There are no
representation proceedings pending or, to Company's or its Subsidiaries'
knowledge, threatened with the National Labor Relations Board, and no labor
organization or group of employees of Company or its Subsidiaries has made a
pending demand for recognition. There are no complaints or charges against
Company or any of its Subsidiaries pending or, to Company's or its Subsidiaries'
knowledge, threatened to be filed with any federal, state, local or foreign
court, governmental agency or arbitrator based on, arising out of, in connection
with, or otherwise relating to the employment or termination of employment by
Company or any of its Subsidiaries of any individual.
(b) Neither Company nor any of its Subsidiaries is, or during
the five years preceding the date hereof was, a party to any labor or collective
bargaining agreement and
21
there are no labor or collective bargaining agreements which pertain to
employees of Company or its Subsidiaries.
4.12. Other Ventures. Except as set forth on Schedule 4.12,
--------------
neither Company nor any of its Subsidiaries is engaged in any joint venture or
partnership with any other Person.
4.13. Taxes. Except as set forth on Schedule 4.13, all
-----
federal, state, local and foreign tax returns, reports and statements required
to be filed by Company and its Subsidiaries have been timely filed with the
appropriate Governmental Authority and all such returns, reports and statements
are true, correct and complete in all material respects. All Charges and other
impositions due and payable for the periods covered by such returns, reports and
statements have been paid prior to the date on which any fine, penalty, interest
or late charge may be added thereto for nonpayment thereof, or any such fine,
penalty, interest, late charge or loss has been paid. Proper and accurate
amounts have been withheld by Company and its Subsidiaries from its employees
for all periods in full and complete compliance with the tax, social security
and unemployment withholding provisions of applicable federal, state, local and
foreign law and such withholdings have been timely paid to the respective
governmental agencies. Neither Company nor any of its Subsidiaries has executed
or filed with the IRS or any other Governmental Authority any agreement or other
document extending, or having the effect of extending, the period for assessment
or collection of any Charges. No tax audits or other administrative or judicial
proceedings are pending or threatened with regard to any Charges for which
Company or any Subsidiary may be liable and no assessment of Charges is proposed
against the Company or any Subsidiary. Neither Company nor any of its
Subsidiaries has filed a consent pursuant to IRC Section 341(f) or agreed to
have IRC Section 341(f)(2) apply to any dispositions of subsection (f) assets
(as such term is defined in IRC Section 341(f)(4)). None of the property owned
by Company or any of its Subsidiaries is property which such company is required
to treat as being owned by any other Person pursuant to the provisions of
Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and in
effect immediately prior to the enactment of the Tax Reform Act of 1986 or is
"tax-exempt use property" within the meaning of IRC Section 168(h). Neither
Company nor any of its Subsidiaries has agreed or has been requested to make any
adjustment under IRC Section 481(a) by reason of a change in
22
accounting method or otherwise. Neither Company nor any of its Subsidiaries has
any obligation under any written tax sharing agreement.
4.14. No Litigation. Except as disclosed on Schedule 4.14, no
-------------
action, claim or proceeding is now pending or, to the knowledge of Company or
its Subsidiaries, threatened against Company or any of its Subsidiaries, at law,
in equity or otherwise, before any court, board, commission, agency or
instrumentality of any federal, state, or local government or of any agency or
subdivision thereof, or before any arbitrator or panel of arbitrators.
4.15. Brokers. Except as set forth on Schedule 4.15, no broker
-------
or finder acting on behalf of Company or any of its Subsidiaries brought about
the consummation of the transactions contemplated pursuant to this Agreement and
neither Company nor any of its Subsidiaries has any obligation to any Person in
respect of any finder's or brokerage fees (or any similar obligation) in
connection with the transactions contemplated by this Agreement. Company is
solely responsible for the payment of all such finder's or brokerage fees.
4.16. Employment and Labor Agreements. Except as set forth on
-------------------------------
Schedule 4.16, there are no employment, consulting or management agreements
covering management of Company or any of its Subsidiaries.
4.17. Patents, Trademarks, Copyrights and Licenses. Company
--------------------------------------------
and each of its Subsidiaries owns all licenses, patents, patent applications,
copyrights, service marks, trademarks and registrations and applications for
registration thereof, and trade names necessary to continue to conduct its
business as heretofore conducted by it and now being conducted by it, each of
which is listed, together with Patent and Trademark Office or Copyright Office
application or registration numbers, where applicable, on Schedule 4.17 hereto.
To Company's knowledge, Company and each of its Subsidiaries conducts its
businesses without infringement or claim of infringement of any license, patent,
copyright, service ▇▇▇▇, trademark, trade name, trade secret or other
intellectual property right of others, except as set forth on Schedule 4.17
hereto. To Company's knowledge, there is no infringement by others of any
license, patent, copyright, service ▇▇▇▇, trademark, trade name, trade secret or
other intellectual
23
property right of Company or any of its Subsidiaries, except as set forth on
Schedule 4.17 hereto.
4.18. No Material Adverse Effect. Except as set forth on
--------------------------
Schedule 4.18, no event has occurred since June 30, 1997 which has had or could
be reasonably expected to have a Material Adverse Effect.
4.19. ERISA. (a) Schedule 4.19 sets forth: (i) all "employee
-----
benefit plans", as defined in Section 3(3) of ERISA, and any other employee
benefit arrangements or payroll practices, including, without limitation,
severance pay, sick leave, vacation pay, salary continuation for disability,
consulting or other compensation agreements, retirement, deferred compensation,
bonus, stock purchase, hospitalization, medical insurance, life insurance and
scholarship programs (the "Plans") maintained by Company and any of its
Subsidiaries or to which Company or and of its Subsidiaries contributed or is
obligated to contribute thereunder, and (ii) all "employee pension plans", as
defined in Section 3(2) of ERISA (the "Pension Plans"), maintained by Company,
any of its Subsidiaries or any of its ERISA Affiliates to which Company, any of
its Subsidiaries or any of its ERISA Affiliates contributed or is obligated to
contribute thereunder.
(b) Purchaser will not have (i) any obligation to make any
contribution to any Multiemployer Plan or (ii) any withdrawal liability from any
such Multiemployer Plan under Section 4201 of ERISA which it would not have had
if it had not purchased the Convertible Preferred Stock and Warrants from
Company at the Closing in accordance with the terms of this Agreement.
(c) The Pension Plans intended to be qualified under Section
401 of the IRC are so qualified and the trusts maintained pursuant thereto are
exempt from federal income taxation under Section 501 of the IRC, and nothing
has occurred with respect to the operation of the Pension Plans which could
cause the loss of such qualification or exemption or the imposition of any
liability, penalty, or tax under ERISA or the IRC.
(d) All contributions required by law or pursuant to the terms
of the Plans (without regard to any waivers granted under Section 412 of the
IRC) to any funds or trusts established thereunder or in connection therewith
have been made by the due date thereof (including any valid extension)
24
and no accumulated funding deficiencies exist in any of the Pension Plans.
(e) There is no "amount of unfunded benefit liabilities" as
defined in Section 4001(a)(18) of ERISA in any of the respective Pension Plans,
which are subject to Title IV of ERISA. Each of the respective Pension Plans are
fully funded in accordance with the actuarial assumptions used by the PBGC to
determine the level of funding required in the event of the termination of the
Pension Plan and all benefit liabilities do not exceed the assets of such
Pension Plans.
(f) There has been no "reportable event" as that term is
defined in Section 4043 of ERISA and the regulations thereunder with respect to
the Pension Plans which would require the giving of notice, or any event
requiring disclosure under Section 4041(c)(3)(C), 4063(a) or 4068(f) of ERISA.
(g) There is no material violation of ERISA with respect to
the filing of applicable reports, documents, and notices regarding the Plans
with the Secretary of Labor and the Secretary of the Treasury or the furnishing
of such documents to the participants or beneficiaries of the Plans.
(h) True, correct and complete copies of the following
documents, with respect to each of the Plans, have been made available or
delivered to Purchaser by Company: (A) any plans and related trust documents,
and amendments thereto, (B) the most recent Forms 5500 (including any schedules
thereto) and the most recent actuarial valuation report, if any, (C) the last
IRS determination letter, (D) summary plan descriptions, (E) written
communications to employees relating to the Plans and (F) written descriptions
of all non-written agreements relating to the Plans.
(i) There are no pending actions, claims or lawsuits which
have been asserted or instituted against the Plans, the assets of any of the
trusts under such Plans or the Plan sponsor or the Plan administrator, or
against any fiduciary of the Plans with respect to the operation of such Plans
(other than routine benefit claims), nor does Company or any of its Subsidiaries
have knowledge of facts which could form the basis for any such claim or
lawsuit.
(j) All amendments and actions required to bring the Plans
into conformity in all material respects with all
25
of the applicable provisions of ERISA and other applicable laws have been made
or taken except to the extent that such amendments or actions are not required
by law to be made or taken until a date after the Closing Date.
(k) The Plans have been maintained, in all material respects,
in accordance with their terms and with all provisions of ERISA (including rules
and regulations thereunder) and other applicable Federal and state law, and
neither Company nor any of its Subsidiaries or "party in interest" or
"disqualified person" with respect to the Plans has engaged in a "prohibited
transaction" within the meaning of Section 4975 of the IRC or Section 406 of
ERISA.
(l) None of Company, any of its Subsidiaries or any ERISA
Affiliate has terminated any Pension Plan, or incurred any outstanding liability
under Section 4062 of ERISA to the PBGC, or to a trustee appointed under Section
4042 of ERISA.
(m) None of Company, any of its Subsidiaries or any ERISA
Affiliate maintains retired life and retired health insurance plans which are
Welfare Plans and which provide for continuing benefits or coverage for any
participant or any beneficiary of a participant except as may be required under
the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA")
and at the expense of the participant or the participant's beneficiary. Company,
all of its Subsidiaries and all ERISA Affiliates which maintains a Welfare Plan
has complied with the notice and continuation requirements of COBRA and the
regulations thereunder.
(n) None of Company, any of its Subsidiaries or any ERISA
Affiliate has contributed or been obligated to contribute to a Multiemployer
Plan as of either Closing.
(o) None of Company, any of its Subsidiaries or any ERISA
Affiliate has withdrawn in a complete or partial withdrawal from any
Multiemployer Plan prior to either Closing Date, nor has any of them incurred
any liability due to the termination or reorganization of a Multiemployer Plan.
(p) None of Company, any of its Subsidiaries, any ERISA
Affiliate or any organization to which Company is a successor or parent
corporation, within the meaning of
26
Section 4069(b) of ERISA, has engaged in any transaction, within the meaning of
Section 4069 of ERISA.
4.20. SEC Documents. Company has made available to Purchaser a
-------------
true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Company with the SEC since January 1, 1997
and prior to the date of this Agreement (the "Company SEC Documents"), which are
all the documents (other than preliminary material) that Company was required to
file with the SEC since such date. As of their respective dates, the Company SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such Company SEC Documents, and
none of the Company SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of Company
(including, in each case, the notes thereto) included in the Company SEC
Documents complied as to form in all material respects with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and present
fairly in all material respects and in accordance with applicable requirements
of GAAP (subject, in the case of the unaudited statements, to normal, recurring
adjustments, none of which were or are expected, individually or in the
aggregate, to be material in amount) the consolidated financial position of
Company and its consolidated Subsidiaries as of their respective dates and the
consolidated results of operations and the consolidated cash flows of Company
and its consolidated Subsidiaries for the periods presented therein.
4.21. Ordinary Course of Business. Except as set forth on
---------------------------
Schedule 4.7 or in response to the events described therein, since June 30,
1997, Company and each of its Subsidiaries has conducted its operations only in
the ordinary course of business consistent with past practice.
4.22. Insurance. Schedule 4.22 hereto contains a
---------
complete and correct list of all policies of insurance of any kind or nature
covering Company and its Subsidiaries,
27
including, without limitation, policies of life, fire, theft, officer and
director coverage, employee fidelity and other casualty and liability insurance,
indicating the type of coverage, name of insured, the insurer, the premium, the
expiration date of each policy and the amount of coverage, and such policies are
in full force and effect. Complete and correct copies of each such policy have
been furnished or made available to Purchaser. Such policies are in amounts
customary for the industry in which Company or such Subsidiary operates.
4.23. Accounts Receivable. All accounts receivable of Company
-------------------
and its Subsidiaries as shown on the Balance Sheet are collectible in the
ordinary course of business by Company or such Subsidiary, net of the reserves
for bad debts shown on the Balance Sheet.
4.24. Minute Books. The minute books of Company, as previously
------------
made available to Purchaser accurately reflect all formal corporate action of
the stockholders and Board of Directors of Company.
4.25. Year 2000 Systems. Company has made and will continue to
-----------------
make reasonable efforts to enable Company's computer systems and software to
accurately process date data, including but not limited to, calculating,
comparing and sequencing from, into and between the twentieth century (through
year 1999), the year 2000 and the twenty-first century, including leap year
calculations.
4.26. Full Disclosure. No information contained in this
---------------
Agreement, any other Transaction Document, the Financial Statements or any
written statement furnished by or on behalf of Company pursuant to the terms of
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading in light of the circumstances under which made.
V. COVENANTS
---------
5.1. Affirmative and Financial Covenants. Company covenants
-----------------------------------
and agrees that from and after the date hereof (except as otherwise provided
herein, or unless the Required Holders have given their prior written consent)
so long as at least 20% of the shares of Convertible Preferred Stock issued on
the Closing Date are outstanding:
28
(a) Books and Records. Company shall, and shall cause its
-----------------
Subsidiaries to, keep adequate records and books of account with respect to
their business activities, in which proper entries, reflecting all of their
financial transactions, are made in accordance with GAAP.
(b) Financial and Business Information.
----------------------------------
(i) Monthly Information. Commencing with
-------------------
the month ending December 31, 1997, Company will deliver to Purchaser
as soon as practicable after the end of each month, but in any event
within 30 days thereafter: (A) monthly sales reports by client; (B)
monthly accounts receivable reports; and (C) monthly accounts payable
reports.
(ii) Quarterly Information. Company will
---------------------
deliver to Purchaser as soon as practicable after the end of each of
the first three quarterly fiscal periods in each fiscal year of
Company, but in any event within 45 days thereafter, (A) an unaudited
consolidated balance sheet of Company and its Subsidiaries, as at the
end of such quarter, and (B) unaudited consolidated statements of
income, retained earnings and cash flows of Company and its
Subsidiaries, for such quarter and (in the case of the second and third
quarters) for the portion of the fiscal year ending with such quarter,
setting forth in comparative form in each case the projected
consolidated figures for such period and the actual consolidated
figures for the comparable period of the prior fiscal year. Such
statements shall be (1) prepared in accordance with GAAP consistently
applied, (2) in reasonable detail and (3) certified by the principal
financial or accounting officer of Company.
(iii) Annual Information. Company will
------------------
deliver to Purchaser as soon as practicable after the end of each
fiscal year of Company, but in any event within 90 days thereafter, (A)
an audited consolidated balance sheet of Company and its Subsidiaries,
as at the end of such year, and (B) audited consolidated statements of
income, retained earnings and cash flows of Company and its
Subsidiaries, for such year; setting forth in each case in comparative
form the figures for the previous year. Such statements shall be (1)
prepared in accordance with GAAP consistently applied, (2) in
reasonable detail and (3) certified by
29
Coopers & ▇▇▇▇▇▇▇ L.L.P. or such other firm of independent certified
public accountants of recognized national standing selected by Company
and reasonably acceptable to the Required Holders.
(iv) Filings. Company will deliver to
-------
Purchaser, promptly upon their becoming available, one copy of each
report, notice or proxy statement sent by Company to its stockholders
generally, and of each regular or periodic report (pursuant to the
Exchange Act) and any registration statement, prospectus or other
writing (other than transmittal letters) (including, without
limitation, by electronic means) pursuant to the Securities Act filed
by Company with (i) the SEC or (ii) any securities exchange or NASDAQ
on which shares of Common Stock of Company are listed.
(v) Projections. Company will deliver to
-----------
Purchaser within 15 days prior to the beginning of each Fiscal Year:
(A) projected consolidated balance
sheets of Company and its
Subsidiaries, for such Fiscal
Year, on a monthly basis;
(B) projected consolidated cash flow
statements of Company and its
Subsidiaries, including summary
details of cash disbursements
(including for Capital
Expenditures), for such Fiscal
Year, on a monthly basis; and
(C) projected consolidated income
statements of Company and its
Subsidiaries, for such Fiscal
Year, on a monthly basis;
in each case, approved by the Board of Directors of Company,
together with appropriate supporting details.
(vi) Customer Complaints; Other Information. Company
--------------------------------------
will promptly notify Purchaser of any material customer complaints
concerning Company's products and services. If requested by Purchaser,
Company will deliver to Purchaser such other information respecting
Company's or any of its Subsidiaries' business,
30
financial condition or prospects as Purchaser may, from time to time,
reasonably request.
(c) Communication with Accountants. Company authorizes
------------------------------
Purchaser to communicate directly with its independent certified public
accountants and tax advisors and authorizes those accountants to disclose to
Purchaser any and all financial statements and other supporting financial
documents and schedules including copies of any management letter with respect
to the business, financial condition and other affairs of Company and any of its
Subsidiaries. At or before the Closing Date, Company shall deliver a letter
addressed to such accountants and tax advisors instructing them to comply with
the provisions of this Section 5.1(c).
(d) Tax Compliance. Company shall pay all transfer, excise or
--------------
similar taxes (not including income or franchise taxes) in connection with the
issuance, sale, delivery or transfer by Company to Purchaser of the Convertible
Preferred Stock and Warrants and the Common Stock issuable upon conversion or
exercise thereof, and shall indemnify and save Purchaser harmless without
limitation as to time against any and all liabilities with respect to such
taxes. Company shall not be responsible for any taxes in connection with the
transfer of the Convertible Preferred Stock, Warrants or such Common Stock by
the holder thereof. The obligations of Company under this Section 5.1(d) shall
survive the payment, prepayment or redemption of the Convertible Preferred Stock
and Warrants and the termination of this Agreement.
(e) Insurance. (i) Company shall and shall cause each
---------
Subsidiary of Company to maintain insurance covering, without limitation, fire,
theft, burglary, public liability, property damage, product liability, workers'
compensation, directors' and officers' insurance and insurance on all property
and assets material to the operation of the business, all in amounts customary
for the industry. Company shall, and shall cause each of its Subsidiaries to,
pay all insurance premiums payable by them.
(ii) Company shall purchase, by March 24,
1998, and shall thereafter maintain, a term life insurance policy, owned by
Company, on the life of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ (so long as he remains an employee of
Company) in the amount of $1,000,000, the beneficiary of which shall be Company.
31
(f) Employee Plans. (i) With respect to other than a
--------------
Multiemployer Plan, for each Plan and Pension Plan intended to be qualified
under Section 401(a) of the IRC hereafter adopted or maintained by Company, any
of its Subsidiaries or any ERISA Affiliate, Company shall (A) seek, or cause its
Subsidiaries or ERISA Affiliates to seek, and receive determination letters from
the IRS to the effect that such Plan or Pension Plan is qualified within the
meaning of Section 401(a) of the IRC; and (B) from and after the adoption of any
such Plan or Pension Plan, cause such plan to be qualified within the meaning of
Section 401(a) of the IRC and to be administered in all material respects in
accordance with the requirements of ERISA and Section 401(a) of the IRC.
(ii) With respect to each Welfare Plan
hereafter adopted or maintained by Company, any of its Subsidiaries or any ERISA
Affiliate, Company shall comply, or cause its Subsidiaries or ERISA Affiliates
to comply, with the notice and continuation coverage requirements of Section
4980B of the IRC and the regulations thereunder.
(iii) Company shall not, directly or
indirectly, and shall not permit its Subsidiaries or any ERISA Affiliate to
directly or indirectly by reason of an amendment or amendments to, or the
adoption of, one or more Pension Plans, permit the present value of all benefit
liabilities, as defined in Title IV of ERISA, (using the actuarial assumptions
utilized by the PBGC upon termination of a plan) to exceed the fair market value
of assets allocable to such benefits by more than $50,000, or to increase to the
extent security must be provided to any Pension Plan, under Section 401(a)(29)
of the IRC. Neither Company nor any of its Subsidiaries shall establish or
become obligated to any new Retiree Welfare Plan, which would result in the
present value of future liabilities under any such plans to exceed $50,000.
Neither Company nor any of its Subsidiaries or ERISA Affiliates shall establish
or become obligated to any new unfunded Pension Plan, which would result in the
present value of future liabilities under any such plans to exceed $50,000.
Company shall not directly or indirectly, and shall not permit its Subsidiaries
or any ERISA Affiliate to (a) satisfy any liability under any Pension Plan by
purchasing annuities from an insurance company or (b) invest the assets of any
Pension Plan with an insurance company, unless, in each case, such insurance
company is rated AA by Standard & Poor's Corporation and the equivalent by each
other
32
nationally recognized rating agency at the time of the investment.
(iv) Company, any of its Subsidiaries and any
ERISA Affiliate shall not contribute or become obligated to contribute to any
Multiemployer Plan.
(g) Compliance with Law. Company shall, and shall cause each
-------------------
of its Subsidiaries to, comply with all laws, including Environmental Laws, the
Telephone Consumer Protection Act of 1991 and the Telemarketing and Consumer
Fraud and Abuse Prevention Act of 1994 and the regulations of the Federal Trade
Commission issued thereunder, in each case, applicable to it, except where the
failure to comply would not be reasonably likely to result in a Material Adverse
Effect.
(h) Financial Covenants. Company and its Subsidiaries shall,
-------------------
on a consolidated basis:
(i) maintain, at all times, a Tangible Net Worth of Company
of at least the amount set forth for each Fiscal Year below:
Fiscal Year Ending June 30 Tangible Net Worth
-------------------------- ------------------
1998 $1,500,000
1999 $2,000,000
2000 $3,000,000
2001, and each Fiscal Year thereafter $4,000,000
(ii) maintain, at the end of each fiscal
quarter ending during each Fiscal Year set forth below, a ratio of EBITDA to
Fixed Charges for the latest four quarters of not less than the amounts set
forth below:
Fiscal Year Ending June 30 Minimum Ratio
-------------------------- -------------
1998 1.8 to 1.0
1999 2.0 to 1.0
2000 2.2 to 1.0
2001, and each Fiscal Year thereafter 2.4 to 1.0
(i) Maintenance of Existence and Conduct of Business. Company
------------------------------------------------
shall, and shall cause each of its Subsidiaries to: (i) do or cause to be done
all things necessary to preserve and keep in full force and effect its
33
corporate existence, and its rights and franchises; (ii) at all times maintain,
preserve and protect all of its patents, trademarks and trade names, and
preserve all the remainder of its material assets, in use or useful in the
conduct of its business and keep the same in good repair, working order and
condition (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all needful and proper repairs, renewals and
replacements, betterments and improvements thereto consistent with industry
practices and (iii) continue to conduct a database management and other direct
marketing business and businesses related to the business that Company is
engaged in on the date hereof.
(j) Access. Company shall permit representatives of Purchaser
------
to visit and inspect any of the properties of Company and its Subsidiaries, to
examine the corporate books and make copies or extracts therefrom and to discuss
the affairs, finances and accounts of Company and its Subsidiaries with the
principal officers of Company and its Subsidiaries, all at such reasonable
times, upon reasonable notice and as often as Purchaser may reasonably request.
(k) Excess Cash. Company shall invest all excess cash in cash
-----------
and Cash Equivalents.
(l) Exchange of Stock Certificates. Company will, at its
------------------------------
expense, promptly upon surrender of any certificates representing shares of
Convertible Preferred Stock at the office of Company referred to in, or
designated pursuant to, Section 10.1 hereof, execute and deliver to Purchaser so
surrendering such certificates a new certificate or certificates in
denominations specified by Purchaser for an aggregate number of shares of
Convertible Preferred Stock equal to the number of shares of such stock
represented by the certificates surrendered.
(m) Lost, Stolen, Destroyed or Mutilated Stock Certificates.
-------------------------------------------------------
Upon receipt of evidence reasonably satisfactory to Company of the loss, theft,
destruction or mutilation of any certificate for shares of Convertible Preferred
Stock and, in the case of loss, theft or destruction, upon delivery of an
indemnity reasonably satisfactory to Company (which may be an undertaking by a
Purchaser to so indemnify Company), or, in the case of mutilation, upon
surrender and cancellation thereof, Company will issue a new certificate of like
tenor for a number of shares of Convertible Preferred Stock equal to the number
of
34
shares of such stock represented by the certificate lost, stolen, destroyed or
mutilated.
(n) NASDAQ. Company shall take all steps necessary to cause
------
the shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock and upon exercise of the Warrants to be listed on the Nasdaq SmallCap
Market as soon as reasonably practicable.
5.2. Negative Covenants. Company covenants and agrees that
------------------
from and after the date hereof (except as otherwise provided herein, or unless
the Required Holders have given their prior written consent) so long as at least
20% of the shares of Convertible Preferred stock issued on the Closing Date are
outstanding:
(a) Permitted Acquisitions or Investments. Company shall not,
-------------------------------------
and shall not permit any of its Subsidiaries to, directly or indirectly in any
transaction or related series of transactions, acquire or invest in, whether for
cash, debt, Stock, or other property or assets or by guaranty of any obligation,
any assets or business of any Person other than (i) acquisitions of assets in
the ordinary course of business of Company, (ii) acquisitions by Company or
wholly-owned Subsidiaries of Company from Company or any such wholly-owned
Subsidiary or investments therein or (iii) acquisitions involving aggregate
purchase price of not more than $1,000,000, but not to exceed $5,000,000 per
Fiscal Year. Company shall not, and shall not permit any of its Subsidiaries to
invest in any Person if, after giving effect thereto, such Person would be an
Affiliate of Company, other than investments in existing wholly-owned
Subsidiaries of Company.
(b) Sales of Assets; Liquidation. Company shall not, and shall
----------------------------
not permit any Subsidiary of Company to, (i) sell, transfer, convey or otherwise
dispose of any assets or properties or (ii) liquidate, dissolve or wind up
Company or any of its Subsidiaries, except for transfers to Company, whether
voluntary or involuntary; provided, however, that the foregoing shall not
prohibit (i) the sale of assets or property in the ordinary course of business,
(ii) the sale of surplus or obsolete equipment and fixtures, (iii) transfers
resulting from any casualty or condemnation of assets or properties, or (iv)
assets or properties constituting businesses that are not a Core Business.
35
(c) Agreements. Company shall not and shall not permit any
----------
Subsidiary of Company to take or omit to take any action, which act or omission
would constitute a default or an event of default under any agreement, document
or instrument to which it is a party (a "Cross Default"), (A) involving the
failure to make any payment (whether of principal, interest or otherwise) due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) in respect of any Indebtedness of the type described in clauses (i),
(ii) or (iii) of the definition of "Indebtedness" of Company, which Indebtedness
is in an aggregate amount exceeding $100,000, or (B) causing (or permitting any
holder of such Indebtedness or a trustee to cause) such Indebtedness or a
portion thereof in an aggregate amount exceeding $100,000, to become due prior
to its stated maturity or prior to its regularly scheduled dates of payment.
(d) Employee Loans. Company shall not and shall not permit any
--------------
Subsidiary of Company to make or accrue any loans or other advances of money to
any employee of Company or such Subsidiary, other than in the ordinary course of
business in an aggregate amount outstanding not to exceed $100,000 at any one
time.
(e) Capital Stock. Company shall not issue or agree to issue
-------------
any of its authorized but not outstanding shares of Stock (including treasury
shares), except the issuance of Common Stock upon conversion of Convertible
Preferred Stock, or upon exercise of the Warrants, or the issuance of Common
Stock upon exercise of options and warrants outstanding on the Closing Date or
upon issuance of Common Stock pursuant to an existing incentive stock option
plan of Company as presently in effect, or upon issuance of Common Stock
pursuant to an acquisition of another corporation by Company by merger, purchase
of all or substantially all of the assets, or other reorganization which is
permitted hereunder. Company shall not issue any additional shares of
Convertible Preferred Stock. Company's authorized capital Stock shall not
include any Stock senior to or pari passu with the Convertible Preferred Stock.
(f) Transactions with Affiliates. Company shall not and shall
----------------------------
not permit any Subsidiary of Company to enter into or be a party to any
transaction with any Affiliate of Company or such Subsidiary, except (i)
transactions expressly permitted hereby, (ii) ordinary course transactions
between Company and its wholly-owned
36
Subsidiaries or between such Subsidiaries and (iii) payment of compensation to
employees and directors' fees.
(g) Indebtedness. Company shall not and shall not permit any
------------
Subsidiary of Company to incur or suffer to exist any Indebtedness except: (i)
Indebtedness existing on the date hereof and listed on Schedule 4.9; (ii)
Permitted Indebtedness; (iii) other Indebtedness pursuant to a working capital
line of credit in an aggregate amount not to exceed $3,500,000 for the Fiscal
Year ending June 30, 1998, and, for each Fiscal Year thereafter, the greater of
$3,500,000 and an amount not to exceed 5% of Company's gross revenues for the
prior Fiscal Year, provided that no event shall have occurred and be continuing,
or would result from the incurrence of such Indebtedness, which constitutes or
would constitute a Default or an Event of Default; or (iv) Indebtedness owing by
Company to any of its wholly-owned Subsidiaries or by any of Company's
wholly-owned Subsidiaries to any other wholly-owned Subsidiaries or Company.
(h) Restricted Payments. Company shall not and shall not
-------------------
permit any Subsidiary of Company to make any Restricted Payments nor shall
Company permit any Subsidiary to make such payments with respect to Company's
Stock; provided, however, that Company may redeem (i) the Convertible Preferred
Stock in accordance with its terms and (ii) outstanding options or warrants, up
to an aggregate of $2,000,000 in any Fiscal Year.
(i) Mergers and Subsidiaries. Neither Company nor any
------------------------
Subsidiary of Company shall directly or indirectly, by operation of law or
otherwise, merge with, consolidate with, or otherwise combine with any Person,
nor shall Company create any Subsidiary, other than (i) the creation of
wholly-owned Subsidiaries or (ii) mergers of wholly-owned Subsidiaries of
Company into Company or any other of its wholly-owned Subsidiaries.
(j) Management Compensation. Company shall not and shall not
-----------------------
permit any Subsidiary of Company to increase the salary and bonus in any year of
the officers of Company and its Subsidiaries, if as a result of such increase,
any such officer's total Compensation would increase by more than 10% of his or
her total Compensation for the prior year, provided that any mandatory increase
in Compensation paid in accordance with the terms of existing employment
37
agreements, copies of which have been furnished to Purchaser, is permitted
hereunder.
(k) Amendments to Certificate of Incorporation and By-Laws.
------------------------------------------------------
Company shall not authorize, adopt or approve an amendment to the Certificate of
Incorporation of Company or the By-Laws of Company, except to increase the
number of authorized shares of common stock.
(l) Capital Expenditures. Company shall not permit any Capital
--------------------
Expenditures to be made in excess of $2,500,000 for the Fiscal Year ending June
30, 1998, and, for each Fiscal Year thereafter, an amount not to exceed 5% of
Company's gross revenues for the prior Fiscal Year.
5.3. Remedies for Breach of Covenants. Upon the occurrence and
--------------------------------
during the continuance of a breach by Company of any of the covenants contained
in this Article V (subject to notice and opportunity to cure as set forth in the
definition of Event of Default), in addition to any other remedies available at
law or in equity, the holders of the Convertible Preferred Stock shall be
entitled to an increase in the dividend rate on the Convertible Preferred Stock
and an additional director in accordance with the provisions of the Certificate
of Designation.
5.4. Certain Tax Matters. (a) In the event (i) of a Final
-------------------
Determination (as defined below) that, due to any reason (including by reason of
any of the terms of Convertible Preferred Stock) other than an act or failure to
act of Purchaser (including by reason of the application of IRC Section 246(c)
or IRC Section 246A) or Purchaser being other than a corporation, dividends paid
or accrued on the Convertible Preferred Stock pursuant to Sections 3, 4, 6 or
7(a) of the Certificate of Designation ("Stated Dividends") are not eligible for
the dividends received deduction provided under the Dividends Deduction Laws (as
defined in Section 5.5 below) (the "Dividends-Received Deduction"), (ii) any
Dividends Deduction Law or any similar or corresponding state or local law is
amended to reduce or eliminate or otherwise limit the Dividends-Received
Deduction available to Purchaser with respect to Stated Dividends or any other
dividend paid or accrued or deemed paid or accrued on the Convertible Preferred
Stock or (iii) any Stated Dividend with respect to the Convertible Preferred
Stock does not constitute, in whole or in part, a dividend for federal income
tax purposes or such dividend is subject to Section 1059 of the IRC (in either
case, an
38
"Excess Distribution"), Company shall pay to Purchaser with respect to each such
dividend payment, no later than the Payment Date (as defined below), an
additional payment (the "Gross-Up Payment") such that the net amount of such
Gross- Up Payment received and retained by Purchaser after payment by Purchaser
of any federal, state and local income tax payable with respect to such Gross-Up
Payment shall equal, in the case of (i) or (ii) above, the difference between
(x) the federal, state and local income tax payable by Purchaser with respect to
such dividend in its taxable year in which the dividend was paid or deemed paid
and (y) the federal, state and local income tax which would have been payable by
Purchaser in its taxable year in which the dividend was paid or deemed paid if
the events described in (i) or (ii) had not occurred and in the case of (iii)
above, an amount which, when taken together with the aggregate distributions
(whether treated as dividends or Excess Distributions for federal income tax
purposes) paid or deemed paid to Purchaser during any taxable year, would cause
Purchaser's net yield in dollars (after taking into effect the federal income
tax consequences of treating the Excess Distributions received by Purchaser as
capital gain received upon the taxable sale or exchange of Convertible Preferred
Stock) to be equal to the net yield in dollars which would have been received by
Purchaser had none of the distributions paid or deemed paid to Purchaser during
such taxable year constituted Excess Distributions, in all cases together with
any interest or penalties actually payable by Purchaser to the IRS or any other
applicable taxing authority by reason of such events.
(b) A "Final Determination" shall mean (i) a decision,
judgment, decree or other order by any court of competent jurisdiction, which
decision, judgment, decree or other order has become final or (ii) a closing
agreement entered into under Section 7121 (or any successor to such Section) of
the IRC or any corresponding provision of state or local law, or any other
settlement agreement entered into in connection with an administrative or
judicial proceeding and consented to by a Purchaser or any member of its
consolidated group. The "Payment Date" shall mean the date that is 90 days after
the end of the relevant taxable year.
(c) If Purchaser is notified formally or informally of any
audit, examination or proceeding by the IRS or any other taxing authority with
respect to the availability of the Dividends-Received Deduction, Purchaser
39
shall promptly notify Company of such audit, examination or proceeding;
provided, however, that Purchaser's failure to give such notice or to keep
Company fully informed concerning a Contest (as defined below) shall not affect
Company's obligation to make Gross-Up Payments in accordance with this Section.
Purchaser shall have exclusive control and responsibility to conduct any audit,
examination, proceeding or litigation (a "Contest") with respect to such issue.
(d) All subsequent holders of the Convertible Preferred Stock
shall be entitled to all of the benefits of this Section; provided that any such
subsequent holder qualifies for the Dividends-Received Deduction under the then
current Dividend Deductions Laws at the time of its acquisition of the
Convertible Preferred Stock.
5.5. Status of Dividends. Company will not (i) in any income
-------------------
tax return or claim for refund of income tax or other submission to the IRS or
other taxing authority claim a deduction in respect of amounts paid or payable
under the Convertible Preferred Stock, whether as interest or pursuant to any
other statutory provisions or regulation now in effect or hereafter enacted or
adopted, except to the extent that any such deduction shall not, in the opinion
of counsel satisfactory to the Required Holders, operate to jeopardize the
availability to Purchaser of the dividends received deduction provided by
Section 243(a)(1) of the IRC, or any successor provision or any similar or
corresponding provision under state or local law (collectively, the "Dividends
Deduction Laws"), (ii) in any report to stockholders, or to any governmental
body having jurisdiction over Company or otherwise treat the Convertible
Preferred Stock other than as equity capital or the dividends paid thereon other
than as dividends paid on equity capital unless required to do so by a
governmental body having jurisdiction over the accounts of Company or by a
change in GAAP required as a result of action by an authoritative accounting
standards-setting body, and (iii) except to the extent permitted in clause (i)
above and other than as expressly permitted by this Agreement or Company's
Certificate of Incorporation take any action which would result in the dividends
paid by Company on the Convertible Preferred Stock out of Company's current or
accumulated earnings and profits being ineligible for the dividends received
deduction provided by any Dividends Deduction Laws.
40
VI. CONDITIONS PRECEDENT
--------------------
6.1. Conditions Precedent. The obligation of Purchaser to
--------------------
purchase the Convertible Preferred Stock and Warrants pursuant to Section 2.2
hereof, is subject to the condition that Purchaser shall have received, on the
Closing Date, the following, each dated the Closing Date unless otherwise
indicated, in form and substance satisfactory to the Required Holders:
(a) Favorable opinions of Camhy ▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇, LLP,
counsel to Company and ▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, Nevada counsel to Company,
substantially in the form attached hereto as Exhibit E, it being understood that
to the extent that such opinion of counsel to Company shall rely upon any other
opinion of counsel, each such other opinion shall be in form and substance
reasonably satisfactory to Purchaser and shall provide that Purchaser may rely
thereon.
(b) Resolutions of the board of directors of Company,
certified by the Secretary or Assistant Secretary of Company, as of the Closing
Date, to be duly adopted and in full force and effect on such date, authorizing
(i) the consummation of each of the transactions contemplated by this Agreement
and (ii) specific officers to execute and deliver this Agreement and each other
Transaction Document to which it is a party.
(c) Governmental certificates, dated the most recent
practicable date prior to the Closing Date, with telegram updates where
available, showing that Company is organized and in good standing in the
jurisdiction of its organization and is qualified as a foreign corporation and
in good standing in all other jurisdictions in which it is qualified to transact
business.
(d) True and correct copies, certified by the Secretary or
Assistant Secretary of Company, of the document evidencing the terms of the
Convertible Preferred Stock, which shall contain the terms set forth in Exhibit
A attached hereto and evidence of the filing of the Certificate of Designation
with the Secretary of State of the State of Nevada, it being understood that as
soon as practicable after the Closing Date, Company shall file an amendment to
the previously filed Certificate of Designation so as to conform it to the terms
set forth in Exhibit A hereto.
41
(e) A copy of the organizational charter and all amendments
thereto of Company, certified as of a recent date by the Secretary of State of
the State of Nevada, and copies of Company's by-laws, certified by the Secretary
or Assistant Secretary of Company as true and correct as of the Closing Date.
(f) The letter from Company to its accountants referred to in
Section 5.1(c).
(g) The Registration Rights Agreement and the Stockholders
Agreement duly executed by the parties thereto.
(h) Certificates of the Secretary or an Assistant Secretary of
Company, dated the Closing Date, as to the incumbency and signatures of the
officers of Company executing this Agreement, the Convertible Preferred Stock,
the Warrants, each other Transaction Document to which it is a party and any
other certificate or other document to be delivered pursuant hereto or thereto,
together with evidence of the incumbency of such Secretary or Assistant
Secretary.
(i) Certificate of the President of Company, dated the Closing
Date, stating that all of the representations and warranties of Company
contained herein or in the other Transaction Documents are true and correct on
and as of the Closing Date as if made on such date and that no breach of any
covenant contained in Article V has occurred or would result from the Closing
hereunder.
6.2. Additional Conditions to Closing. The obligation of
--------------------------------
Purchaser to purchase the Convertible Preferred Stock and the Warrants to be
purchased on the Closing Date pursuant to Section 2.2 is subject to the
additional conditions precedent that:
(a) Purchaser shall have received evidence that the insurance
policies provided for in Section 4.24 are in full force and effect, certified by
the insurer thereof.
(b) Except as disclosed pursuant to Article IV, there shall
not have occurred any event or condition since June 30, 1997 which could have a
Material Adverse Effect.
(c) All of the representations and warranties of Company
contained herein or in the other Transaction Documents shall be true and correct
in all material respects on and as of the Closing Date as if made on such date
and no
42
breach of any covenant contained in Article V shall have occurred or would
result from the Closing hereunder.
(d) The Closing shall have occurred no later than December 31,
1997.
(e) Purchaser shall have completed its business, financial and
legal due diligence investigation and review of Company with results
satisfactory to it in its sole discretion.
VII. SECURITIES LAW MATTERS
----------------------
7.1. Legends. Each certificate representing the
-------
Convertible Preferred Stock shall bear a legend
substantially in the following form:
"THE SERIES D CONVERTIBLE PREFERRED STOCK REPRESENTED BY THIS
CERTIFICATE HAS BEEN ACQUIRED BY THE HOLDER FOR ITS OWN
ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE
DISTRIBUTION OF SUCH CONVERTIBLE PREFERRED STOCK. THE SHARES
OF SERIES D CONVERTIBLE PREFERRED STOCK HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") AND
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
THEREFROM."
VIII. INDEMNIFICATION
---------------
Company agrees to indemnify and hold harmless Purchaser and
its Affiliates and their respective officers, directors and employees from and
against any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of
any kind ("Losses") which may be imposed upon, incurred by or asserted against
Purchaser or such other indemnified Persons in any manner relating to or arising
out of any untrue representation, breach of warranty or failure to perform any
covenants or agreement by Company contained herein or in any certificate or
document delivered pursuant hereto or arising out of any Environmental Law
applicable to Company or its Subsidiaries or otherwise relating to or arising
out of the transactions contemplated hereby, other than those Losses that arise
as a result of
43
Purchaser's or such other indemnified Persons' gross negligence or willful
misconduct.
IX. EXPENSES
--------
Company shall pay all reasonable out-of-pocket expenses of
Purchaser in connection with the preparation of the Transaction Documents and
the transactions contemplated thereby including all legal expenses. In addition,
Company shall pay all reasonable out-of-pocket expenses of Purchaser in
connection with (A) any amendment, modification or waiver, or consent with
respect to, any of the Transaction Documents, and (B) any attempt to enforce any
rights of Purchaser against Company, any Subsidiary of Company or any other
Person, that may be obligated to Purchaser by virtue of any of the Transaction
Documents (including the reasonable fees and expenses of all of its counsel and
consultants retained in connection with the Transaction Documents and the
transactions contemplated thereby).
X. MISCELLANEOUS
-------------
10.1. Notices. Whenever it is provided herein that any notice,
demand, request, consent, approval, declaration or other communication shall or
may be given to or served upon any of the parties by another, or whenever any of
the parties desires to give or serve upon another any such communication with
respect to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and either shall be
delivered in person with receipt acknowledged or by registered or certified
mail, return receipt requested, postage prepaid, or by telecopy and confirmed by
telecopy answerback addressed as follows:
If to Company:
Marketing Services Group, Inc.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Telecopy Number: (▇▇▇) ▇▇▇-▇▇▇▇
44
with a copy (which shall not constitute notice)
to:
Camhy Karlinsky & ▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇ ▇. Annex, Esq.
Telecopy Number: (▇▇▇) ▇▇▇-▇▇▇▇
If to Purchaser:
General Electric Capital Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: Equity Capital Group-Consumer Products
Telecopy Number: (▇▇▇) ▇▇▇-▇▇▇▇
with copies to:
General Electric Capital Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: Equity Capital Group Legal Counsel
Telecopy Number: (▇▇▇) ▇▇▇-▇▇▇▇
and
Weil, Gotshal & ▇▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Telecopy Number: (▇▇▇) ▇▇▇-▇▇▇▇
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback, or
three (3) Business Days after the same shall have been deposited with the United
States mail.
10.2. Binding Effect; Benefits. Except as otherwise provided
------------------------
herein, this Agreement shall be binding upon and inure to the benefit of the
parties to this Agreement and their respective successors and permitted
45
assigns. Nothing in this Agreement, express or implied, is intended or shall be
construed to give any person other than the parties to this Agreement or their
respective successors or assigns any legal or equitable right, remedy or claim
under or in respect of any agreement or any provision contained herein.
10.3. Amendment. No amendment or waiver of any provision of
---------
this Agreement or any other Transaction Document nor consent to any departure by
Company therefrom, shall in any event be effective unless the same shall be in
writing and signed by Company and the Required Holders, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given. No action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action, of compliance
with any representations, warranties, covenants or agreements contained herein.
The waiver by any party hereto of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any preceding or succeeding
breach and no failure by either party to exercise any right or privilege
hereunder shall be deemed a waiver of such party's rights or privileges
hereunder or shall be deemed a waiver of such party's rights to exercise the
same at any subsequent time or times hereunder.
10.4. Successors and Assigns; Assignability. Neither this
-------------------------------------
Agreement nor any right, remedy, obligation or liability arising hereunder or by
reason hereof shall be assignable by Company without the prior written consent
of the Required Holders. Any right, remedy, obligation or liability arising
hereunder or by reason hereof shall be assignable by Purchaser without the prior
written consent of Company, except the obligation of Purchaser to purchase the
Convertible Preferred Stock and Warrants at the Closing. All covenants contained
herein shall bind and inure to the benefit of the parties hereto and their
respective successors and assigns.
10.5. Remedies. Purchaser, in addition to being entitled to
--------
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Agreement. Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Agreement and
hereby agrees to
46
waive the defense in any action for specific performance that a remedy at law
would be adequate. In any action or proceeding brought to enforce any provision
of this Agreement or where any provision hereof is validly asserted as a
defense, the successful party shall be entitled to recover reasonable attorneys'
fees in addition to any other available remedy.
10.6. Section and Other Headings. The section and other
--------------------------
headings contained in this Agreement are for reference purposes only and shall
not affect the meaning or interpretation of this Agreement.
10.7. Severability. In the event that any one or more of the
------------
provisions contained in this Agreement shall be determined to be invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of any such provision or provisions in every other respect
and the remaining provisions of this Agreement shall not be in any way impaired.
10.8. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
10.9. Publicity. Neither Purchaser nor Company shall issue any
---------
press release or make any public disclosure regarding the transactions
contemplated hereby unless such press release or public disclosure is approved
by the other party in advance. Notwithstanding the foregoing, each of the
parties hereto may, in documents required to be filed by it with the SEC or
other regulatory bodies, make such statements with respect to the transactions
contemplated hereby as each may be advised by counsel is legally necessary or
advisable, and may make such disclosure as it is advised by its counsel is
required by law.
10.10. Governing Law. This Agreement shall be governed by,
-------------
construed and enforced in accordance with, the laws of the State of New York
without regard to the principles thereof relating to conflict of laws. Each of
the parties hereby submits to personal jurisdiction and waives any objection as
to venue in the County of New York, State of New York. Service of process on the
parties in any action arising out of or relating to this Agreement shall be
effective if mailed to the parties in accordance with Section 10.1 hereof. The
parties hereto waive all right to
47
trial by jury in any action or proceeding to enforce or defend any rights under
this Agreement.
48
IN WITNESS WHEREOF, Company and Purchaser has executed this
Agreement as of the day and year first above written.
MARKETING SERVICES GROUP, INC.
By: __________________________________
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Chief Executive Officer
GENERAL ELECTRIC CAPITAL CORPORATION
By: ________________________________
Name:
Title:
49
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