SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
January 26, 2000
MDI ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 0-24919 73-1515699
- - - --------------- ---------------------- ---------------
(State or Other (Commission File (IRS Employer
Jurisdiction of Number) Identification No.)
Incorporation)
201 Ann Street
Hartford, Connecticut 06103
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (860) 527-5359
(Former Address, if changed since last report)
1
<PAGE>
This Form 8-K contains forward-looking statements. Such statements involve
various risks that may cause actual results to differ materially from those
expressed in such forward looking statements. These risks and uncertainties
include risks detailed from time to time in MDI Entertainment, Inc.'s filings
with the Securities and Exchange Commission including, but not limited to, those
described in the Registration Statement on Form SB-2, filed September 14, 1999.
Item 5: Other Events
- - - --------------------
MERGER
MDI Entertainment, Inc. ("MDI") has entered into an Agreement and Plan
of Merger (the "Merger Agreement") with The Lottery Channel, Inc. ("Lottery")
and MDI Acquisition, Inc., a wholly owned subsidiary of MDI ("Merger Sub"),
dated as of January 26, 2000, pursuant to which, among other things, (a) Lottery
will be merged into Merger Sub, (b) each outstanding share of Lottery common
stock at the effective time of the merger (other than shares held in Lottery's
treasury) will be converted into one share of our common stock and (c) each
option or right to acquire Lottery common stock will become an option or right
to acquire one share of our common stock.
THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the
Merger Agreement. A copy of the Merger Agreement is attached as Exhibit 99.1. We
urge you to read the Merger Agreement carefully and in its entirety. All
references to the Merger Agreement are qualified in their entirety by the Merger
Agreement.
Effective Time
The Merger Agreement contemplates the merger of Lottery into Merger Sub,
one of our subsidiaries. After the merger, Merger Sub will survive as one of our
wholly owned subsidiaries. The merger will become effective once we file a
certificate of merger with the Delaware Secretary of State, or at such later
time as specified in such document. This filing will occur as soon as practical
after the closing under the Merger Agreement. Unless the parties agree
otherwise, the closing will occur on the first business days following the
satisfaction or waiver of the conditions to closing set forth in the Merger
Agreement.
Conversion of Lottery Common Stock
Once we complete the merger, the following will occur:
o Each outstanding share of Lottery common stock will be converted
into one share of MDI common stock, with an aggregate of
13,000,000 shares of MDI common stock to be issued to current
2
<PAGE>
stockholders of Lottery or reserved for issuance to holders of
options or rights of Lottery.
o If there is a change in the number of outstanding shares of MDI
or Lottery common stock prior to the completion of the merger as
a result of stock splits or similar events, the exchange ratio
will be appropriately adjusted.
As of the date of this Form 8-K, the holders of Lottery common stock
would be entitled to receive in the aggregate 5,278,028 shares of MDI common
stock. An additional 7,415,618 shares would be reserved for issuance to holders
of options or rights of Lottery.
Stock Options and Stock Rights
Once we complete the merger, each option or right to purchase shares of
Lottery common stock then outstanding will be converted into an option or right
to acquire shares of MDI common stock. The number of shares of MDI common stock
to be subject to the option or right will be equal to the product of (a) the
number of shares of Lottery common stock subject to the original option or right
and (b) the exchange ratio (currently one-to-one), rounded to the nearest whole
share. The exercise price for each Lottery option or right will remain the same
unless the exchange ratio is changed. All other terms of the original option or
right will continue to apply. As of the date of this Form 8-K, the holders of
options or rights to purchase Lottery common stock would be entitled to receive
in the aggregate options or rights to purchase 7,415,618 shares of MDI common
stock.
Directors and Officers
Upon consummation of the merger, Steven M. Saferin, President, Chief
Executive Officer and a director of MDI, will become Chairman and remain
President of MDI, and Roger W. Ach, II, President, Chief Executive Officer and a
director of Lottery, will become Vice-Chairman and Chief Executive Officer of
MDI.
Upon consummation of the merger, the Board of Directors of MDI will be
expanded to nine members, five of whom will be current MDI directors. The other
four directors will be Roger W. Ach, II and three of his designees.
Covenants
The Merger Agreement contains reciprocal limitations on, among other
things, the ability of Lottery and MDI to take actions outside the ordinary
course of business, to change their respective capital structures and to
entertain alternative proposals.
Registration Rights
MDI agrees to file a registration statement, at its expense, covering
the resale of shares of MDI common stock issued in the merger on the earlier of
a date which is (a) six months after the closing of the public offering
3
<PAGE>
contemplated by the letter of intent referred to in the Merger Agreement, and
(b) if such public offering has not commenced within six months after the
closing or has commenced and terminated, six months after the date of the Merger
Agreement. MDI shall use its best efforts to cause such registration statement
to become effective as soon as practicable. Notwithstanding the foregoing, if
the Board of Directors of MDI in good faith determines that the filing of the
registration statement would materially adversely affect MDI by forcing
premature disclosure of a pending material event or otherwise, MDI may postpone
the filing of such registration statement by up to 90 days.
Conditions Precedent to Closing
MDI, MERGER SUB AND LOTTERY
The obligations of MDI, Merger Sub and Lottery to effect the merger are
subject to the fulfillment of a number of conditions including, among others,
receipt of fairness opinions and, if necessary, stockholder approvals, the
consummation of certain contemplated investments and receipt of third party
consents. Certain of such conditions are outside the control of the parties and
there is no assurance such conditions will be met or waived.
RELATED AGREEMENTS
Stockholders Agreements
All references to the Stockholders Agreements are qualified in their
entirety by the such agreements, which are attached hereto as Exhibits 99.2 and
99.3.
In connection with the Merger Agreement, three stockholders of Lottery
(two of whom are officers and/or directors of Lottery), who together hold
1,468,150 shares of Lottery's common stock and 1,000 shares of Lottery's Series
A preferred stock representing approximately eighty-five percent (85%) of the
voting power of Lottery, entered into a Stockholders Agreement with us and
Merger Sub (the "Lottery Stockholders Agreement"). These stockholders have
agreed, among other things, to vote for the merger and against alternative
proposals and to use their best efforts to cause the consummation of the
transactions contemplated by the Merger Agreement.
In addition, Steven M. Saferin, our principal stockholder (and our
President, Chief Executive Officer and a director) who holds 3,795,169 shares of
our common stock representing approximately thirty-eight percent (38%) of the
voting power of MDI, entered into a Stockholders Agreement with Lottery. Mr.
Saferin, in his capacity as a stockholder, agreed to perform reciprocal
obligations to those under the Lottery Stockholders Agreement.
Letter Agreements
All references to the Letter Agreements are qualified in their entirety
by the such agreements, which are attached hereto as Exhibits 99.4 and 99.5.
4
<PAGE>
Each of Steven M. Saferin and Roger W. Ach, II entered into a letter
agreement with MDI Mr. Saferin agreed that (i) MDI need not reserve 225,000
shares of MDI common stock underlying options that he currently owns and (ii) he
would not exercise such options unless and until the stockholders of MDI approve
an amendment to the Certificate of Incorporation authorizing additional shares
of MDI common stock. Mr. Ach agreed that (i) MDI need not reserve 2,064,500
shares of MDI common stock underlying options and rights that he will own upon
consummation of the transactions contemplated by the Merger Agreement and (ii)
he would not exercise such options and rights unless and until the stockholders
of MDI approve an amendment to the Certificate of Incorporation authorizing
additional shares of MDI common stock.
ADDITIONAL RISK FACTORS
THE MERGER AGREEMENT MAY NOT BE CONSUMATED
The Merger Agreement may be terminated by us or Lottery under certain
circumstances. See "Merger Agreement--Termination." In addition, certain
conditions must be satisfied prior to effecting the merger, a number of which
are not within our control. See "Merger Agreement-- Conditions." Although the
parties intend to consummate the merger, we cannot assure you that the merger
will be consummated.
THE EXPECTED BENEFITS OF COMBINING MDI AND LOTTERY MAY NOT BE REALIZED
MDI and Lottery entered into the Merger Agreement with the expectation
that the merger will result in benefits to the combined companies.
If we are not able to integrate effectively our technology, operations
and personnel in a timely and efficient manner, then the benefits of the merger
will not be realized and, as a result, our operating results and the market
price of our common stock may be adversely affected. In addition, the attention
and effort devoted to the integration of the two companies will significantly
divert management's attention from other important issues, and could
significantly harm the combined companies' business and operating results.
LOTTERY STOCKHOLDERS WILL RECEIVE ONE SHARE OF MDI COMMON STOCK AND/OR
OPTIONS AND RIGHTS TO ACQUIRE ONE SHARE OF MDI COMMON STOCK DESPITE CHANGES IN
THE MARKET VALUE OF LOTTERY COMMON STOCK OR MDI COMMON STOCK
Each outstanding share of Lottery common stock will be exchanged for one
share of our common stock and each option or right to acquire Lottery common
stock will become an option or right to acquire one share of our common stock
upon completion of the merger (with an aggregate of 13,000,000 shares of our
common stock being issued to stockholders of Lottery or reserved for issuance to
the holders of Lottery options and rights). This exchange ratio is a fixed
number and will not be adjusted for changes in the market price of either
Lottery common stock or our common stock. Neither party is permitted to
5
<PAGE>
terminate the merger agreement solely because of changes in the market price of
the other's common stock. Consequently, the specific dollar value of our common
stock to be received by Lottery shareholders will depend on our market value at
the time of completion of the merger. We cannot predict or give any assurances
as to the market price of Lottery before the merger or of our common stock at
any time before or after the merger. The prices of our common stock and
Lottery's common stock may vary because of factors such as:
o changes in the business, operating results or prospects of us or
Lottery;
o market assessments of the likelihood that the merger will be
completed;
o the timing of the completion of the merger;
o the prospects of post-merger operations;
o regulatory considerations; and
o general market and economic conditions.
THE LOTTERY CHANNEL, INC.
Lottery was incorporated in Delaware in 1996 as an entertainment company
providing cable television programming focusing on state-sponsored lotteries. It
has been operating from production studios at Century III at Universal Studios
in Orlando, Florida since April 1997. Headquartered in Cincinnati, Ohio, Lottery
operates two websites, www.lottery.com and www.gameland.com, headquartered in
Cincinnati, Ohio and Richmond, Virginia, respectively.
Lottery provides a communications package for the government-sponsored
lottery industry. The mission of Lottery is to serve as a visual communications
link among states offering lotteries to customers and their on-line retailer.
Lottery's goal is to make lottery games more fun so that they can compete with
other forms of gaming and entertainment for the consumer's discretionary dollar.
As a major function of this communications package, Lottery has
developed and continues to develop games suitable for play by state sponsored
lotteries whereby, upon approval by the appropriate lottery jurisdiction,
viewers can participate from their own home. Currently, no U.S. lottery
jurisdictions have approved an on-line lottery over the Internet. As a
complement to this new game development, Lottery has developed a web site
www.lottery.com which offers up-to-date lottery information, lottery-related
games and is designed to offer the opportunity for fulfillment of lottery
purchases requested by individual state lotteries. For the week ending January
15, 2000, third-party Internet auditor PC Data rated Lottery.com as the number
one "lottery" site and 808th overall site on the Internet. The recent
acquisition of www.gameland.com, a popular games for entertainment web site,
will allow Lottery to more rapidly expand its game offerings.
6
<PAGE>
In 1998, NBC purchased a significant minority interest in Lottery and
established a strategic alliance with Lottery providing Lottery with valuable
branding opportunities. Links now exist from the web sites of NBC affiliate
stations to Lottery's www.lottery.com web site.
7
<PAGE>
Item 7:Financial Statements, Pro Forma Financial information and Exhibits.
- - - --------------------------------------------------------------------------
(c) Exhibits
99.1 Agreement and Plan of Merger, dated as of January 26, 2000,
between MDI Entertainment, Inc., MDI Acquisition, Inc. and
The Lottery Channel, Inc.
99.2. Stockholders Agreement, dated as of January 26, 2000,
between MDI Entertainment, Inc., MDI Acquisition, Inc. and
certain parties listed therein.
99.3. Stockholders Agreement, dated as of January 26, 2000,
between The Lottery Channel, Inc. and certain parties
listed therein.
99.4 Letter Agreement, dated as of January 26, 2000, between
Steven M. Saferin and MDI Entertainment, Inc.
99.5 Letter Agreement, dated as of January 26, 2000,
between Roger W. Ach, II and MDI Entertainment, Inc.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 4, 2000
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
-------------------------
Steven M. Saferin
President and Chief Executive Officer
9
AGREEMENT AND PLAN OF MERGER
by and among
MDI ENTERTAINMENT, INC.,
MDI ACQUISITION, INC. AND
THE LOTTERY CHANNEL, INC.
DATED AS OF JANUARY 26, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
ARTICLE I
<S> <C>
THE MERGER........................................................................................................1
Section 1.1 The Merger..................................................................................1
----------
Section 1.2 Closing.....................................................................................1
-------
Section 1.3 Effective Time..............................................................................2
--------------
Section 1.4 Conversion of Securities....................................................................2
------------------------
Section 1.5 Adjustment of Exchange Ratio................................................................2
----------------------------
Section 1.6 Exchange of Securities......................................................................3
----------------------
Section 1.7 Stockholders' Approval......................................................................5
----------------------
Section 1.8 Definition of Subsidiary and Affiliate......................................................5
--------------------------------------
ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION AND PARENT..............................................................................6
Section 2.1 Certificate of Incorporation of the Surviving Corporation...................................6
---------------------------------------------------------
Section 2.2 By-laws of the Surviving Corporation........................................................6
------------------------------------
Section 2.3 Directors and Officers of the Surviving Corporation.........................................6
---------------------------------------------------
Section 2.4 Directors and Officers of Parent............................................................6
--------------------------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...........................................................6
Section 3.1 Existence, Good Standing, Corporate Authority...............................................6
---------------------------------------------
Section 3.2 Authorization, Validity and Effect of Agreements............................................7
------------------------------------------------
Section 3.3 Capitalization..............................................................................7
--------------
Section 3.4 Parent Reports and Financial Statements.....................................................7
---------------------------------------
Section 3.5 No Violation................................................................................8
------------
Section 3.6 Brokers or Finders..........................................................................8
------------------
Section 3.7 Parent Common Stock.........................................................................9
-------------------
Section 3.8 Interim Operations of Merger Sub............................................................9
--------------------------------
Section 3.9 Absence of Certain Changes..................................................................9
--------------------------
Section 3.10 Parent Proxy Statement......................................................................9
----------------------
Section 3.11 Financial Statements........................................................................9
--------------------
Section 3.12 Absence of Default..........................................................................9
------------------
Section 3.13 Distributions, Satisfactions, Obligations..................................................10
-----------------------------------------
Section 3.14 Compliance with Law........................................................................11
-------------------
Section 3.15 Environmental Laws.........................................................................11
------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 3.16 Securities Offerings.......................................................................13
--------------------
Section 3.17 Licenses...................................................................................13
--------
Section 3.18 License Agreements.........................................................................13
------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LOTTERY AND STOCKHOLDER........................................................13
Section 4.1 Existence, Good Standing, Corporate Authority..............................................13
---------------------------------------------
Section 4.2 Authorization, Validity and Effect of Agreements...........................................13
------------------------------------------------
Section 4.3 Capitalization.............................................................................14
--------------
Section 4.4 Options....................................................................................14
-------
Section 4.5 No Violation...............................................................................14
------------
Section 4.6 Subsidiaries and Affiliates................................................................15
---------------------------
Section 4.7 Financial Statements.......................................................................15
--------------------
Section 4.8 Absence of Undisclosed Liabilities.........................................................16
----------------------------------
Section 4.9 Tangible Personal Property; Sufficiency of Assets..........................................16
-------------------------------------------------
Section 4.10 Real Property..............................................................................17
-------------
Section 4.11 Machinery and Equipment....................................................................18
-----------------------
Section 4.12 Patents, Trademarks, Domain Names, Trade Names, Etc........................................18
---------------------------------------------------
Section 4.13 Contracts..................................................................................19
---------
Section 4.14 Absence of Default.........................................................................20
------------------
Section 4.15 Insurance..................................................................................21
---------
Section 4.16 Third Party Options........................................................................21
-------------------
Section 4.17 Distributions, Satisfactions, Obligations..................................................21
-----------------------------------------
Section 4.18 Capital Expenditures.......................................................................22
--------------------
Section 4.19 Litigation.................................................................................22
----------
Section 4.20 Compliance with Law........................................................................22
-------------------
Section 4.21 Transactions with Affiliates...............................................................23
----------------------------
Section 4.22 Prohibited Payments........................................................................23
-------------------
Section 4.23 Tax Matters................................................................................24
-----------
Section 4.24 Employee Benefit Plans.....................................................................26
----------------------
Section 4.25 Executive Employees........................................................................28
-------------------
Section 4.26 Employees..................................................................................28
---------
Section 4.27 Environmental Laws.........................................................................29
------------------
Section 4.28 Bank Accounts, Letters of Credit and Powers of Attorney....................................30
-------------------------------------------------------
Section 4.29 Minute Books; Records......................................................................30
---------------------
Section 4.30 Full Disclosure............................................................................30
---------------
Section 4.31 Securities Offerings.......................................................................30
--------------------
Section 4.32 Brokers or Finders.........................................................................31
------------------
Section 4.33 Licenses...................................................................................31
--------
Section 4.34 Lottery Proxy Statement....................................................................31
-----------------------
</TABLE>
ii
<PAGE>
<TABLE>
ARTICLE V
<S> <C>
COVENANTS........................................................................................................31
Section 5.1 Alternative Proposals......................................................................31
---------------------
Section 5.2 Interim Operations of Lottery and Parent...................................................32
----------------------------------------
Section 5.3 Filings; Other Action......................................................................34
---------------------
Section 5.4 Inspection of Records......................................................................35
---------------------
Section 5.5 Further Action.............................................................................35
--------------
Section 5.6 Break-Up Fees; Expenses....................................................................35
-----------------------
Section 5.7 Survival of Representations and Warranties.................................................35
------------------------------------------
Section 5.8 Governmental Approvals.....................................................................36
----------------------
Section 5.9 Public Announcements.......................................................................36
--------------------
Section 5.10 Lottery Stockholders Meeting...............................................................36
----------------------------
Section 5.11 Parent Stockholders Meeting................................................................36
---------------------------
Section 5.12 Proxy Statement............................................................................36
---------------
Section 5.13 Blue Sky...................................................................................37
--------
Section 5.14 Affiliates.................................................................................37
----------
Section 5.15 Registration Rights........................................................................37
-------------------
ARTICLE VI
CONDITIONS.......................................................................................................38
Section 6.1 Conditions to Obligation of Each Party to Effect the Merger................................38
-----------------------------------------------------------
Section 6.2 Conditions to Obligation of Lottery to Effect the Merger...................................38
--------------------------------------------------------
Section 6.3 Conditions to Obligation of Parent and Merger Sub to Effect
-----------------------------------------------------------
the Merger............................................................................39
----------
ARTICLE VII
TERMINATION......................................................................................................41
Section 7.1 Termination................................................................................41
-----------
Section 7.2 Effect of Termination......................................................................42
---------------------
ARTICLE VIII
GENERAL PROVISIONS...............................................................................................42
Section 8.1 Notices....................................................................................42
-------
Section 8.2 Assignment, Binding Effect.................................................................43
--------------------------
Section 8.3 Entire Agreement...........................................................................43
----------------
Section 8.4 Amendment..................................................................................43
---------
Section 8.5 Governing Law..............................................................................43
-------------
Section 8.6 Counterparts...............................................................................43
------------
Section 8.7 Headings...................................................................................43
--------
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 8.8 Interpretation.............................................................................43
--------------
Section 8.9 Waivers....................................................................................43
-------
Section 8.10 Incorporation of Schedules and Exhibits....................................................44
---------------------------------------
Section 8.11 Severability...............................................................................44
------------
Section 8.12 Enforcement of Agreement...................................................................44
------------------------
</TABLE>
EXHIBITS
Exhibit A Affiliate Agreement
Exhibit B Voting Agreement
Exhibit C Form of Opinion
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of January 26, 2000 (the
"Agreement") among MDI Entertainment, Inc, a Delaware corporation ("Parent"),
MDI Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of
Parent ("Merger Sub") and The Lottery Channel, Inc., a Delaware corporation
("Lottery").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties wish to provide for the terms and conditions upon
which Lottery, its wholly-owned subsidiaries and its interests in other
subsidiaries will be acquired by Parent by means of a merger of Lottery with and
into Merger Sub;
WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes, the merger provided for herein shall qualify as a
"reorganization" within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"); and
NOW THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.3 of this
Agreement), Lottery shall be merged with and into Merger Sub in accordance with
the laws of the State of Delaware and the terms of this Agreement (the
"Merger"), whereupon the separate corporate existence of Lottery shall cease,
and Merger Sub shall continue as the surviving corporation of the Merger (Merger
Sub, in such capacity hereinafter sometimes referred to as the "Surviving
Corporation"). The name of Merger Sub as the Surviving Corporation, shall be
changed, by virtue of the Merger, to a name mutually agreed upon by the parties.
Section 1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at the
offices of Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New
York, New York 10176 at 10:00 a.m. on the first business day after all the
conditions set forth in Article VI of this Agreement (other than those that are
waived by the party or parties for whose benefit such conditions exist) are
satisfied; or (b) at such other place, time, and/or date upon which the parties
hereto may otherwise agree. The date upon which the Closing shall occur is
referred to herein as the "Closing Date."
1
<PAGE>
Section 1.3 Effective Time. As soon as practical after all the
conditions to the Merger set forth in Article VI of this Agreement have been
fulfilled or waived and if this Agreement shall not have been terminated as
provided in Article VII hereof, the parties hereto shall cause a certificate of
merger to be properly executed and filed in accordance with the laws of the
State of Delaware and the terms of this Agreement. The parties hereto shall also
take such further actions as may be required under the laws of the State of
Delaware in connection with the consummation of the Merger. The Merger shall
become effective at such time as the certificate of merger is duly filed with
the Secretary of State of the State of Delaware or at such later time as is
specified in the certificate of merger (the "Effective Time"). From and after
the Effective Time, the Surviving Corporation shall be seized of and hold and
possess all the property, rights and interests and be subject to all the debts,
liabilities and obligations of Lottery and Merger Sub, all as provided under
applicable law.
Section 1.4 Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Parent, Merger Sub, Lottery
or the holder of any of the following securities:
(a) Capital Stock of Lottery. Subject to Section 1.6, each
common share, par value $.0001 per share, of Lottery (the "Lottery Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive one validly issued, fully paid and
non-assessable share of Common Stock, par value $.001 per share, of Parent (the
"Parent Common Stock") (such 1 to 1 ratio, as adjusted as contemplated pursuant
to Section 1.5, being referred to herein as the "Exchange Ratio"), it being
understood that an aggregate of 13,000,000 shares of Parent Common Stock will
either be issued to current stockholders of Lottery or reserved for issuance to
the holders of options or rights of Lottery. All such Lottery Stock shall no
longer be outstanding and shall automatically be canceled and shall cease to
exist, and each holder thereof shall cease to have any rights with respect
thereto, except the right to receive the shares of Parent Common Stock to be
issued pursuant to this Section 1.4 with respect thereto upon the surrender of
such interests in accordance with Section 1.6.
(b) Treasury Stock of Lottery. All shares of Lottery Stock
which immediately prior to the Effective Time are held directly by Lottery in
its treasury, if any, shall be canceled and shall cease to exist, and no capital
stock of Parent or other consideration shall be delivered with respect thereto.
(c) Merger Sub Common Stock. Each share of capital stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
remain outstanding and shall continue as one share of capital stock of the
Surviving Corporation and each certificate evidencing ownership of any such
shares shall continue to evidence ownership of the same number and kind of
shares of the Surviving Corporation.
Section 1.5 Adjustment of Exchange Ratio. In the event that,
subsequent to the date of this Agreement but prior to the Effective Time, the
outstanding shares of Parent Common Stock or Lottery Stock, respectively,
2
<PAGE>
shall have been changed into a different number of shares or interests or a
different class as a result of a stock split, reverse stock split, stock
dividend, subdivision, consolidation, reclassification, split, combination,
exchange, recapitalization or other similar transaction, the Exchange Ratio
shall be appropriately adjusted.
Section 1.6 Exchange of Securities.
(a) Promptly after the Effective Time, Parent shall, upon
surrender by any Lottery stockholder, in accordance with this Section 1.6, of
share certificates representing all of the issued and outstanding shares of the
Lottery Stock held by such stockholder or such certifications and indemnities as
are satisfactory to Parent with respect to lost or destroyed certificates,
deliver to such stockholder a certificate representing Parent Common Stock to
which such stockholder is entitled. The number of shares of Parent Common Stock
to which each Lottery stockholder is entitled shall be determined by multiplying
the number of shares of Lottery Stock held by such stockholder at the Effective
Time by the Exchange Ratio. The shares of Lottery Stock so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the unpaid
dividends and distributions, if any, payable to the holder of shares of Lottery
Stock.
(b) As soon as reasonably practicable after the Effective
Time, Parent shall cause Olde Monmouth Stock Transfer Co. (the "Exchange Agent")
to mail to each holder of record of Lottery Stock immediately prior to the
Effective Time whose shares were converted, pursuant to the Merger, into the
right to receive Parent Common Stock (i) a letter of transmittal (which shall
specify that delivery shall be effected, and the risk of loss and title to the
certificates which formerly represented Lottery Stock shall pass only upon
delivery of such certificates to the Exchange Agent and shall be in such form
and have such other customary provisions as Parent, in consultation with the
Surviving Corporation, may reasonably specify) and (ii) instructions for use in
effecting the surrender of certificates which represent Lottery Stock into
certificates representing Parent Common Stock which such holder has the right to
receive pursuant to the provisions of this Agreement. Upon surrender of a
certificate which represented Lottery Stock for cancellation to the Exchange
Agent, together with such letter of transmittal, duly executed, the holder of
such certificate shall be entitled to receive in exchange therefor certificates
representing that whole number of shares of Parent Common Stock equal to that
number of shares of Lottery Stock formerly held by such holder multiplied by the
Exchange Ratio then in effect. The Lottery Stock so surrendered shall forthwith
be canceled. No interest will be paid or accrued on the unpaid dividends and
distributions, if any, payable to the former holders of Lottery Stock.
(c) No certificate representing fractional Parent Common
Stock shall be issued upon surrender for exchange of certificates formerly
representing Lottery Stock or upon supplying to Parent certifications and
indemnities satisfactory to Parent with respect to lost or destroyed
certificates, and such fractional share interests shall not entitle the owner
thereof to any rights as a security holder of Parent. All holders entitled to
receive a fractional share of Parent Common Stock shall be entitled to receive,
in lieu thereof, an amount in cash (without interest) determined by multiplying
such fraction times the Market Price of Parent Common Stock on the tenth
3
<PAGE>
business day prior to the Effective Time. As used herein, "Market Price" per
share of Parent Common Stock on any date shall be deemed to be the average of
the daily closing prices for the twenty (20) consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the highest reported bid price for the Parent Common Stock as furnished by
the National Association of Securities Dealers, Inc.
(d) Notwithstanding anything in this Agreement to the
contrary, shares (the "Dissenting Shares") of Lottery Stock that are outstanding
immediately prior to the Effective Time and that are held by persons who are
entitled to demand, and properly demand, appraisal of the Dissenting Shares
pursuant to, and who comply in all respects with, Section 262 of the DGCL
("Section 262") shall not be converted into the Parent Common Stock as provided
in Section 1.4(a), but rather the holders of Dissenting Shares shall be entitled
to payment of the fair market value of such Dissenting Shares in accordance with
Section 262; provided, however, that if any holder of Dissenting Shares shall
fail to perfect or otherwise shall waive, withdraw or lose the right to
appraisal under Section 262, then the right of such holder to be paid the fair
value of such holder's Dissenting Shares shall cease and such Dissenting Shares
shall be treated as if they had been converted as of the Effective Time into the
Parent Common Stock as provided in Section 1.4(a). Lottery shall serve prompt
notice to Parent and Merger Sub of any demands received by Lottery for appraisal
of any shares of Lottery Stock, and Parent shall have the right to participate
in and direct all negotiations and proceedings with respect to such demands.
Lottery shall not, except with the prior written consent of Parent and Merger
Sub, make any payment with respect to, or settle or offer to settle, any such
demands, or agree to do any of the foregoing.
(e) From and after the Effective Time, the stock transfer
books of Lottery shall be closed and no transfer of shares of Lottery Stock
converted pursuant to the Merger shall thereafter be made. If after the
Effective Time, certificates representing such shares are presented to Parent,
they shall be canceled and exchanged for Parent Common Stock together with any
cash in lieu of fractional shares and any dividends or distributions with
respect thereto as provided herein.
(f) All shares of Parent Common Stock issued in accordance
with the terms hereof, together with any cash paid in accordance with subsection
(c) above, shall be deemed to have been issued and paid in full satisfaction of
all rights pertaining to such Lottery Stock.
(g) At the Effective Time, (i) each outstanding Lottery
stock option or right set forth on Schedule 1.6(g) shall be converted into an
option or right (an "Adjusted Option") to purchase the number of shares of
Parent Common Stock equal to the number of shares of Lottery Stock subject to
such Lottery stock option or right immediately prior to the Effective Time
multiplied by the Exchange Ratio (rounded to the nearest whole number of shares
of Parent Common Stock), at an exercise price per share equal to the exercise
price for each such share of Lottery Stock subject to such Lottery stock option
or right divided by the Exchange Ratio (rounded down to the nearest whole cent),
and all references in each such Lottery stock option or right to Lottery shall
be deemed to refer to Parent, where appropriate; provided, however, that the
adjustments provided in this clause (i) with respect to any options which are
4
<PAGE>
"incentive stock options" (as defined in Section 422 of the Code) or which are
described in Section 423 of the Code, shall be affected in a manner consistent
with the requirements of Section 423 of the Code, and (ii) Parent shall assume
the obligations of Lottery under the Lottery 1993 Stock Option Plan. The other
terms of each Adjusted Option, and the plans or agreements under which they were
issued, shall continue to apply in accordance with their terms. The date of
grant of each Adjusted Option shall be the date on which the corresponding
Lottery stock option was granted. Notwithstanding the foregoing, the exercise
price of the Lottery stock options granted to Chicago West Pullman, llc shall be
repriced to a price equal to the five-day average of the closing bid price of
Parent Common Stock as of the date hereof in consideration of the agreement to
convert the Series A Preferred Stock to Lottery Stock as contemplated by Section
6.3(n) of this Agreement.
Section 1.7 Stockholders' Approval. Each of Lottery and Parent, if
required by applicable law, shall take all action necessary, in accordance with
its Certificate of Incorporation and Bylaws, to convene a meeting of its
stockholders to consider and vote upon the approval and adoption of this
Agreement and the Merger and the transactions contemplated hereby, all in
accordance with the provisions of the Delaware General Corporation Law ("DGCL")
and, to the extent applicable, the Securities Act of 1933, as amended (the
"Securities Act") and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to be held as soon as practicable after the Lottery Proxy
Statement (as defined in Section 5.12 of this Agreement) shall, if required by
applicable law, have been cleared by the Securities and Exchange Commission (the
"SEC"). Parent, if required in order to consummate the Merger, shall also take
all action necessary, in accordance with its Certificate of Incorporation and
Bylaws, to convene a meeting of its stockholders to consider and vote upon the
approval of one or more of the following proposals: (i) proposal to change the
name of Parent to Lottery.Com, Inc.; (ii) proposal to increase the authorized
Parent Common Stock; (iii) a proposal to effect a reverse stock split of the
Parent Common Stock and (iv) proposal to add four directors to Parent's current
board of six directors, all in accordance with the provisions of the DGCL and,
to the extent applicable, the Securities Act and the Exchange Act, to be held as
soon as practicable after the Parent Proxy Statement (as defined in Section 5.12
of this Agreement) shall have been cleared by the SEC. After the name of Parent
is changed, Parent will apply for a Nasdaq symbol reflecting the name change.
Section 1.8 Definition of Subsidiary and Affiliate. As used in this
Agreement, (i) a "Subsidiary" of any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party or any
other Subsidiary of such party is a general partner or at least a majority of
the securities or other interests having by their terms ordinary voting power to
elect a majority of the Board of Directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party, by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries and (ii) an
"Affiliate" of any party means any individual, corporation or other
organization, whether incorporated or unincorporated, which directly or
indirectly controls, or is controlled by, or is under common control with, such
party. The term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of any
5
<PAGE>
corporation or other organization, whether incorporated or unincorporated,
whether through the ownership of voting securities, by contract or otherwise.
ARTICLE II
CERTAIN MATTERS RELATING TO
THE SURVIVING CORPORATION AND PARENT
Section 2.1 Certificate of Incorporation of the Surviving Corporation.
The Certificate of Incorporation of Merger Sub, as in effect at the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation
until thereafter amended as provided by law.
Section 2.2 By-laws of the Surviving Corporation. The By-laws of Merger
Sub, as in effect at the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter amended as provided by law.
Section 2.3 Directors and Officers of the Surviving Corporation. The
directors and officers of Merger Sub immediately prior to the Effective Time
shall be the persons identified on Schedule 2.3. The directors and officers will
hold office from the Effective Time until their respective successors are duly
elected or appointed and qualify in the manner provided in the Certificate of
Incorporation and By-laws of the Surviving Corporation, or as otherwise provided
by applicable law.
Section 2.4 Directors and Officers of Parent. The directors and
officers of Parent immediately prior to the Effective Time shall be the persons
identified on Schedule 2.4. The directors and officers will hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualify in the manner provided in the Certificate of Incorporation and
By-laws of the Surviving Corporation, or as otherwise provided by applicable
law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to Lottery as of the date
hereof and at the Effective Time as follows:
Section 3.1 Existence, Good Standing, Corporate Authority. Parent and
each of its Subsidiaries are corporations duly organized, validly existing and
in good standing under the laws of their respective jurisdiction of
incorporation. Each of Parent and each of its Subsidiaries is duly licensed or
qualified to do business as a foreign corporation or partnership and is in good
standing under the laws of any other state of the United States in which the
character of the properties owned or leased by it or in which the transaction of
its respective business makes such qualification necessary, except where the
failure to be so qualified or to be in good standing would not have a
6
<PAGE>
material adverse effect on the business, results of operations or financial
condition of Parent and its Subsidiaries taken as a whole (a "Parent Material
Adverse Effect"). Parent and each of its Subsidiaries have all requisite
corporate power and authority to own, operate and lease their respective
properties.
Section 3.2 Authorization, Validity and Effect of Agreements. Each of
Parent and Merger Sub has the requisite corporate power and authority to execute
and deliver this Agreement and all agreements and documents to be executed and
delivered in connection herewith (the "Ancillary Agreements"). The execution and
delivery of this Agreement (and the agreements contemplated hereby to be
executed by Parent or Merger Sub) and the consummation by Parent and Merger Sub
of the transactions contemplated hereby has been duly authorized by all
requisite corporate action. This Agreement constitutes, and all Ancillary
Agreements to be executed and delivered by Parent or Merger Sub in connection
herewith (when executed and delivered pursuant hereto for value received) will
constitute, the valid and legally binding obligations of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
Section 3.3 Capitalization. The authorized capital stock of Parent
consists of 25,000,000 shares of Parent Common Stock and 5,000,000 shares of
preferred stock, par value $.001 per share (the "Parent Preferred Stock") of
which 2,027 shares were designated Series A Preferred Stock. As of the date
hereof, there were 8,855,998 shares of Parent Common Stock and 1,015 shares of
Series A Preferred Stock (convertible into 1,015,000 shares of Parent Common
Stock), issued and outstanding. As of the date hereof, options, warrants and
debentures to acquire 1,105,833 shares, 1,625,000 shares and 375,000 shares,
respectively, of Parent Common Stock were outstanding. Except for those options,
warrants, debentures and shares of Parent Common Stock issuable upon conversion
of the Series A Preferred Stock, there are no options, warrants, calls or other
rights, agreements or commitments outstanding obligating Parent to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Parent to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. All issued and outstanding shares of Parent
Common Stock and Parent Preferred Stock are duly authorized, validly issued,
fully paid and nonassessable.
Section 3.4 Parent Reports and Financial Statements. Parent has
heretofore made available to Lottery true and complete copies of (i) the Annual
Report of Parent on Form 10-KSB for the fiscal year ended May 31, 1999, (ii) the
Quarterly Report of Parent on Form 10-QSB for the quarter ended August 31, 1999,
(iii) the Quarterly Report of Parent on Form 10-QSB for the quarter ended
November 30,1999 and (iv) the Registration Statement on Form SB-2 filed
September 14, 1999 (such reports, registration statements, and other documents,
together with any amendments thereto, are sometimes collectively referred to as
the "Parent Commission Filings"). As of their respective dates, each of the
Parent Commission Filings complied in all material respects with the applicable
requirements and, together with certain Current Reports on Form 8-K filed by
Parent, constituted all filings required during the relevant time periods under
7
<PAGE>
the Securities Act, the Exchange Act, and the rules and regulations under each
such Act, and none of the Parent Commission Filings and no representation or
warranty by Parent or Merger Sub in this Agreement contained as of such date 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. All financial
statements of Parent included in the Parent Commission Filings were prepared in
accordance with generally accepted accounting principles in the United States
("GAAP") applied on a consistent basis.
Section 3.5 No Violation. Except as set forth on Schedule 3.5, neither
the execution and delivery by Parent and Merger Sub of this Agreement, nor the
consummation by Parent and Merger Sub of the transactions contemplated hereby in
accordance with the terms hereof, will (a) conflict with or result in a breach
of any provisions of the Certificate of Incorporation, as amended, or the Bylaws
of Parent or any of its Subsidiaries; (b) result in a breach or violation of, a
default under, or the triggering of any payment or other material obligations
pursuant to, or accelerate vesting under, the 1998 Parent Stock Option and Award
Plan, or any grant or award made under the foregoing; (c) violate, conflict
with, result in a breach of any provision of, constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
result in the termination, or in a right of termination or cancellation of,
accelerate the performance required by, result in the triggering of any payment
or other material obligations pursuant to, result in the creation of any lien,
security interest, charge or encumbrance upon any of the material properties of
Parent or its Subsidiaries under, or result in being declared void, voidable, or
without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument, commitment or
obligation to which Parent or any of its Subsidiaries is a party, or by which
Parent or any of its Subsidiaries or any of their respective properties is bound
or affected, except for any of the foregoing matters which would not have a
Parent Material Adverse Effect; (d) contravene or conflict with or constitute a
violation of any provision of any law, regulation, judgement, injunction, order
or decree binding upon or applicable to Parent or any of its Subsidiaries which
would have a Parent Material Adverse Effect; or (e) other than the filings
provided for in Section 1.3, filings under applicable federal, state and local
regulatory laws, filings required under the Exchange Act, the Securities Act, or
applicable state securities and "Blue Sky" laws or filings in connection with
the maintenance of qualification to do business in other jurisdictions
(collectively, the "Regulatory Filings"), require any consent, approval or
authorization of, or declaration, of or filing or registration with, any
domestic governmental or regulatory authority, which the failure to obtain or
make would have a Parent Material Adverse Effect.
Section 3.6 Brokers or Finders. Other than Venture Partners Capital,
LLC and its affiliates ("VPC"), Parent has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of Parent or Merger Sub to pay any finder's fee, brokerage or agent's
commissions or other like payment in connection with the negotiations leading to
this Agreement or the consummation of the transactions contemplated hereby,
provided that Parent shall (pursuant to an agreement between Parent and VPC) pay
all fees owed to VPC in connection with the transactions.
8
<PAGE>
Section 3.7 Parent Common Stock. The issuance and delivery by Parent of
shares of Parent Common Stock in connection with the Merger and this Agreement
have been duly and validly authorized by all necessary corporate action on the
part of Parent. The shares of Parent Common Stock to be issued in connection
with the Merger and this Agreement, when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable and not
subject to preemptive rights of any sort.
Section 3.8 Interim Operations of Merger Sub. Merger Sub has been
formed solely for the purpose of engaging in the transactions contemplated
hereby, and immediately prior to the Effective Time will have engaged in no
other business activities, will have no Subsidiaries, and will have conducted
its operations only as contemplated hereby.
Section 3.9 Absence of Certain Changes. Except as otherwise disclosed
in the Parent Commission Filings, since May 31, 1999 there has not been any
Parent Material Adverse Effect.
Section 3.10 Parent Proxy Statement. The information supplied or to be
supplied by Parent and any Subsidiary thereof for inclusion in either the Parent
Proxy Statement or the Lottery Proxy Statement, as the case may be, including
any amendments and supplements thereto, will not either at the date mailed to
stockholders or at the time of such stockholder meeting, contain any untrue
statement of a material fact or omit to state any 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.
Section 3.11 Financial Statements.
(a) As of the date hereof, all the accounts, books, ledgers
and financial and other records of whatever kind of each such entity have been
properly and accurately kept and are correct and complete in all respects and
there are no inaccuracies or discrepancies contained or reflected therein. The
financial statements of Parent included in the Parent Commission Filings fairly
present the consolidated financial position of Parent as of the dates thereof
and the consolidated results of operations and changes in financial position of
Parent for each of the periods then ended.
Section 3.12 Absence of Default. Except as set forth in Schedule 3.12
hereto, each of Parent and its Subsidiaries has complied with and performed all
of its respective obligations required to be performed under all material
contracts, agreements and leases to which it is a party (whether as an original
party or as an assignee or successor) as of the date hereof, and is not in
default in any material respect under any contract, agreement, lease, loan,
undertaking, commitment or other obligation; and no event has occurred which,
with or without the giving of notice, lapse of time or both, would constitute a
default thereunder in any material respect. Parent, after due inquiry of each
Subsidiary, has no knowledge that any party has failed to comply with or perform
all of its obligations required to be performed under any material contract,
agreement or lease to which Parent or its Subsidiaries is a party (whether as an
original party or as an assignee or successor) as of the date hereof, or that
any event has occurred which, with or without the giving of notice, lapse of
9
<PAGE>
time or both, would constitute a default by such party thereunder. In addition,
except as disclosed in Schedule 3.12, Parent, after due inquiry of each
Subsidiary, has no knowledge of any facts or circumstances which make a default
by any party to any material contract or obligation likely to occur subsequent
to the date hereof. Parent intends to enter into a definitive agreement with
respect to each Letter of Intent (as defined in Section 4.13(xiii)) and has not
received any notice that a party to any Letter of Intent intends not to enter
into such a definitive agreement.
Section 3.13 Distributions, Satisfactions, Obligations. Except as
disclosed in Schedule 3.13 hereto, since the unaudited consolidated balance
sheet of Parent as of November 30, 1999, none of Parent nor its Subsidiaries
has:
(i) issued any stock, bonds, partnership or membership
interests or other securities or equity interests;
(ii) incurred any obligations or liabilities for money
borrowed;
(iii) incurred any material obligations or liabilities,
absolute or contingent;
(iv) discharged or satisfied any lien, encumbrance or
obligation, or paid any material liabilities, absolute or contingent, other than
in the ordinary course of the operation of the business;
(v) declared or made any dividend payment or distribution
to any stockholder, partner or member of any of Parent or its Subsidiaries;
(vi) purchased or redeemed any shares of the capital stock
or other equity interests of Parent or its Subsidiaries ;
(vii) mortgaged or pledged or subjected to lien, charge or
other encumbrance, any of its material assets, tangible or intangible;
(viii) sold, transferred or disposed of any of its assets
except assets used or consumed in the ordinary course of business and obsolete
equipment and equipment which has been replaced in the ordinary course of
business;
(ix) suffered any material adverse change, material damage,
disruption of business or losses, whether covered by insurance or not, or waived
any rights of substantial value;
(x) increased compensation payable to or to become payable
by such entity to any of its employees whose salary (inclusive of bonus) is
expected to exceed $50,000 in 1999, except for increases in the ordinary course
of business to an employee on the anniversary date of such employee's
10
<PAGE>
employment, or upon such employee's annual award date, which do not exceed 10%
of the base salary of such employee; or
(xi) operated its business in any way other than in the
ordinary course.
Section 3.14 Compliance with Law.
(a) Each of Parent and its Subsidiaries:
(i) has complied with each, and is not in violation
of any, law, ordinance or governmental rule or regulation to which it or its
business is subject, and
(ii) has not failed to obtain any license, permit,
certificate or other governmental authorization or inspection necessary to the
ownership or use of its assets and properties or to the conduct of its business,
which, in the event of any noncompliance, violation or failure to obtain, as the
case may be, would have a material adverse effect on the business, operations,
prospects, properties, assets or condition (financial or otherwise) of such
entity.
(b) Except as set forth in Schedule 3.14 hereto, none of
Parent nor its Subsidiaries has since (i) in the case of Parent, its date of
incorporation, and (ii) in the case of any Subsidiary, the date of its
acquisition or formation by Parent, received any claim or notice of any
violation, within the past three years, of any building, zoning, fire, health or
employment laws, ordinances, rules or regulations relating to the properties,
premises, business or employees of such entity, which in the event of any
non-compliance or violation would have a material adverse effect on the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of such entity.
(c) None of Parent nor its Subsidiaries has, nor has any
director, officer, agent or employee of any such entity: (i) made or agreed to
make any contributions, payments or gifts of its funds or property to any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift was or is illegal under the laws of the
United States, any state or province thereof or any other jurisdiction (foreign
or domestic); (ii) established or maintained any unrecorded fund or asset for
any purpose, or made any false or artificial entries on any of its books or
records for any reason; (iii) made or agreed to make any contribution, or
reimbursed any political gift or contribution made by any other person or
entity, to candidates for public office whether federal, state, local or
foreign, where such contributions were or would be violative of applicable law;
or (iv) violated the U.S. Federal Corrupt Practices Act of 1977, as amended.
Section 3.15 Environmental Laws.
(a)Each of Parent and its Subsidiaries has obtained and
holds all permits, licenses and other authorizations which are required with
respect to the operation of its business under Federal, state, provincial, local
and foreign laws relating to pollution or protection of the environment,
11
<PAGE>
including laws relating to emissions, discharges, releases or threatened
releases or pollutants, contaminants, chemicals, or industrial, toxic or
hazardous substances or wastes ("Hazardous Substances") into the environment
(including, without limitation, ambient air, surface water, ground water, land
surface or subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals or industrial toxic or hazardous
substances or wastes (the "Environmental Laws"), except any permits, licenses
and other authorizations the absence of which would not, individually or in the
aggregate, materially adversely affect any of Parent or its Subsidiaries, and
all such permits, licenses and other authorizations are in good standing and
Parent and its Subsidiaries are not in default thereunder.
(b) Each of Parent and its Subsidiaries is in full
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
the Environmental Laws or contained in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
(c) There is no civil, criminal or administrative action,
suit, demand, claim, hearing notice or demand letter pending or threatened
against any of Parent or its Subsidiaries relating in any way to the
Environmental Laws or any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder.
(d) No events, conditions, activities, practices,
incidents, actions or plans of action taken or to be taken by any of Parent or
its Subsidiaries are reasonably likely to (i) interfere with or prevent
compliance or continued compliance with the Environmental Laws or with any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, in any manner which
could have a Parent Material Adverse Effect, (ii) give rise to any common law or
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorizations Act of 1986, or any
other applicable Environmental Laws or similar state, provincial or local laws,
or (iii) form the basis of any claim, action, demand, suit, proceeding, hearing
or notice of violation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, toxin or hazardous substance or
waste.
(e) There are no environmental audits or assessments,
analyses of soil, groundwater, indoor and outdoor air, sediment, surface water
and asbestos-containing materials relating in whole or in part to Parent and its
Subsidiaries, any owned property or any leased real estate undertaken by or on
behalf of Parent or any of its Subsidiaries, and there have been no written
communications received by Parent relating in whole or in part to the existence
of Hazardous Substances at any owned property or lease real estate or any real
property previously owned or operated by Parent or its Subsidiaries
12
<PAGE>
or the compliance of Parent and its Subsidiaries with respect to any
Environmental Law.
Section 3.16 Securities Offerings. None of Parent nor its
Subsidiaries has offered, or is offering, for sale any of its securities by
means of offering memoranda or circulars, subscription agreements, or other
documentation which contains any untrue statement of a material fact or omits to
state any material fact necessary to make any statement therein, in the light of
the circumstances under which it was made, not misleading.
Section 3.17 Licenses. Each of Parent and its Subsidiaries
holds all licenses, franchises, registrations, ordinances, authorizations,
permits, certificates, variances, qualifications, exemptions, orders, approvals
and waivers of any governmental entity (Federal, state and local) (collectively,
"Licenses") which are required for the conduct of its business operations as
currently conducted. All of the Licenses are in full force and effect, and no
Action is pending or threatened, seeking the revocation or limitation of any of
the Licenses. Schedule 3.17 lists all Licenses that are material to the business
of each of Parent and its Subsidiaries. Except as indicated on Schedule 3.17, no
License will terminate as a result of this Agreement or the transactions
contemplated hereby.
Section 3.18 License Agreements. Any license agreement with
an entertainment property to which Parent or its Subsidiaries has any liability
or obligation or is receiving or will become entitled to receive any benefits is
listed on Schedule 3.18.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LOTTERY AND STOCKHOLDER
Lottery represents and warrants to Parent and Merger Sub as of the date
hereof and at the Effective Time as follows:
Section 4.1 Existence, Good Standing, Corporate Authority. Lottery and
each of its Subsidiaries are corporations duly organized, validly existing and
in good standing under the laws of their respective jurisdictions of
incorporation. Lottery and each of its Subsidiaries is duly licensed or
qualified to do business as a foreign corporation and is in good standing under
the laws of any other state of the United States in which the character of the
properties owned or leased by it or in which the transaction of its respective
business makes such qualification necessary, except where the failure to be so
qualified or to be in good standing would not have a material adverse effect on
the business, results of operations or financial condition of Parent and its
Subsidiaries taken as a whole (a "Lottery Material Adverse Effect"). Lottery and
each of its Subsidiaries have all requisite corporate power and authority to
own, operate and lease their respective properties.
Section 4.2 Authorization, Validity and Effect of Agreements. Lottery
has the requisite corporate power and authority to execute and deliver this
Agreement and all the Ancillary Agreements. The execution and delivery of
13
<PAGE>
this Agreement (and the agreements contemplated hereby to be executed by
Lottery) and the consummation by Lottery of the transactions contemplated hereby
has been duly authorized by all requisite corporate action. This Agreement
constitutes, and all Ancillary Agreements to be executed and delivered in
connection herewith (when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of Lottery,
enforceable against Lottery in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
Section 4.3 Capitalization. The authorized capital stock of Lottery
consists of 20,000,000 shares of Lottery Common Stock and 10,000,000 shares of
"blank check" Preferred Stock, of which 5,278,028 shares of Lottery Common Stock
are issued and outstanding and 1,000 shares of Series A Preferred Stock are
issued and outstanding. Except as set forth on Schedule 4.3, Lottery has no
outstanding bonds, debentures, notes or other obligations the holders of which
have the right to vote (or which are convertible into or exercisable or
exchangeable for securities having the right to vote) with the stockholders of
Lottery on any matter. All issued and outstanding shares of Lottery Stock are
duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights.
Section 4.4 Options. Except as set forth on Schedule 4.4 hereto, there
are no existing agreements, subscriptions, options, warrants, calls,
commitments, trusts (voting or otherwise), or rights of any kind whatsoever
granting to any person or entity any interest in or the right to purchase or
otherwise acquire from Lottery, or any of its Subsidiaries, at any time, or upon
the happening of any stated event, any capital stock, securities, partnership
interests, membership interests or other equity interests of such entity,
whether or not presently issued or outstanding, nor are there any outstanding
securities, partnership interests, membership interests or other equity
interests of any such entity, or any other entity which are convertible into or
exercisable or exchangeable for capital stock, or other securities, partnership
interests, membership interests or other equity interests of Lottery, or any of
its Subsidiaries, nor are there any agreements, subscriptions, options,
warrants, calls, commitments or rights of any kind whatsoever granting to any
person or entity any interest in or the right to purchase or otherwise acquire
from Lottery, or any of its Subsidiaries, or any other entity any securities so
convertible or exercisable or exchangeable, nor are there any proxies,
agreements or understandings with respect to the voting of or with respect to
such interests.
Section 4.5 No Violation. Except as set forth on Schedule 4.5, neither
the execution and delivery by Lottery of this Agreement, nor the consummation by
Lottery of the transactions contemplated hereby in accordance with the terms
hereof, will (a) conflict with or result in a breach of any provisions of the
Certificate of Incorporation, Bylaws or similar organizational documents of
Lottery or any of its Subsidiaries; (b) violate, conflict with, result in a
breach of any provision of, constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, result in the
termination, or in a right of termination or cancellation of, accelerate the
performance required by, result in the triggering of any payment or other
material obligations pursuant to, result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties of Lottery
or its Subsidiaries under, or result in being declared void, voidable,
14
<PAGE>
or without further binding effect, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any material license,
franchise, permit, lease, contract, agreement or other instrument, commitment or
obligation to which Lottery or any of its Subsidiaries is a party, or by which
Lottery or any of its Subsidiaries or any of their respective properties is
bound or affected, except for any of the foregoing matters which would not have
a Lottery Material Adverse Effect; (c) contravene or conflict with or constitute
a violation of any provision of any law, regulation, judgement, injunction,
order or decree binding upon or applicable to Lottery or any of its Subsidiaries
which would have a Lottery Material Adverse Effect; or (d) other than the
filings provided for in Section 1.3, and applicable Regulatory Filings, require
any consent, approval or authorization of, or declaration, of or filing or
registration with, any domestic governmental or regulatory authority, the
failure to obtain or make would have a Lottery Material Adverse Effect.
Section 4.6 Subsidiaries and Affiliates. Except as set forth on
Schedule 4.6 hereto, neither Lottery, nor any of its Subsidiaries owns, directly
or indirectly any interest in any other entity. Each of the Subsidiaries of
Lottery is listed on Schedule 4.6 and each of such Subsidiaries is wholly-owned
by Lottery.
Section 4.7 Financial Statements.
(a) Parent and Merger Sub have previously been furnished
with true and complete copies of the following financial statements of Lottery
and each of its Subsidiaries:
(i) audited consolidated balance sheets as of
December 31, 1998, 1997 and 1996, each certified by Grant Thornton LLP,
independent certified public accountants, and an unaudited consolidated balance
sheet of Lottery as of September 30, 1999 (the "Balance Sheet Date"), prepared
by management (the unaudited balance sheet as of the Balance Sheet Date, the
"Company Balance Sheet") in accordance with GAAP; and
(ii) audited consolidated statements of income,
retained earnings, cash flows and changes in shareholders equity for the fiscal
years ended 1998, 1997 and 1996, each certified by Grant Thornton LLP,
independent certified public accountants, and unaudited statements of income,
retained earnings, cash flows and changes in shareholders equity for the periods
ended September 30, 1999 and 1998, prepared by management in accordance with
GAAP.
(b) The foregoing financial statements were prepared in
accordance with GAAP applied on a basis consistent with that of preceding
audited accounting periods (except as may be indicated therein or in the notes
thereto). Such financial statements are correct and complete in all respects and
are in accordance with the books and records of the applicable entity. As of the
date hereof, all the accounts, books, ledgers and financial and other records of
whatever kind of each such entity have been properly and accurately kept and are
correct and complete in all respects and there are no inaccuracies or
discrepancies contained or reflected therein. The financial statements fairly
15
<PAGE>
present the consolidated financial position of Lottery as of the dates thereof
and the consolidated results of operations and changes in financial position of
Lottery for each of the periods then ended.
(c) The prepaid insurance, expenses and taxes as set forth
on the Company Balance Sheet, or arising since the date thereof, represent
amounts of a benefit to future periods.
(d) The Company Balance Sheet and the notes thereto,
correctly and completely set forth all consolidated liabilities of Lottery as of
the date thereof (i) pursuant to all Plans, as that term is defined below,
including all unfunded past service costs, (ii) pursuant to all bonus,
incentive, compensation, insurance, deferred compensation, severance and other
fringe benefit plans, contracts, agreements, arrangements and programs of any
type coverage or form, including, without limitation, where applicable, any
employee welfare benefit program as defined in Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and (iii) for
vacation pay and compensatory time.
Section 4.8 Absence of Undisclosed Liabilities. Except as set forth on
Schedule 4.8 hereto, there are no liabilities or obligations (whether absolute,
accrued, contingent or otherwise) with respect to either Lottery or any of its
Subsidiaries, except (i) liabilities, obligations or contingencies which are
accrued or reserved against in the Company Balance Sheet, and (ii) normally
recurring liabilities incurred after the Balance Sheet Date in the ordinary
course of operations of the business and consistent with past practice.
Section 4.9 Tangible Personal Property; Sufficiency of Assets.
(a) Except as disclosed on Schedule 4.9 hereto, each of
Lottery and each of its Subsidiaries has good and valid title to all tangible
personal property which it owns or uses in the operations of its business,
including all such tangible personal property reflected in the Company Balance
Sheet as owned by Lottery, except (x) for personal property leased (exclusive of
capitalized leases) pursuant to a written agreement identified on Schedule 4.9
and (y) for such tangible personal property disposed of to third parties since
the date of the Balance Sheet Date in the ordinary course of business and
consistent with past practice, in each case free and clear of all liens,
charges, security interests, assessments, claims or encumbrances of any kind
whatsoever ("Liens"), except (i) mechanics', materialmen's, carriers',
workmen's, warehousemen's, repairmen's, landlord's or other like Liens securing
obligations that are not delinquent, (ii) Liens for taxes and other governmental
charges which are not due and payable or which may be paid without penalty,
(iii) purchase money liens securing the purchase price of the related personal
property listed as purchase money liens on Schedule 4.9; and (iv) other Liens,
if any, set forth in Schedule 4.9. Except as set forth in Schedule 4.9, all of
the tangible personal property owned or used in the operation of the business of
Lottery and the Subsidiaries is in good working order, reasonable wear and tear
excepted, and are suitable for the use for which they are intended in all
material respects.
(b) All of the inventory of each of Lottery and its
Subsidiaries consists of a quality and quantity reasonably usable and saleable
in the ordinary course of business consistent with past practices, subject
16
<PAGE>
to normal and customary allowances for spoilage, damage and outdated items
reflected on their books and records. All items included in the inventory of
each of Lottery and its Subsidiaries are the property of such entity, free and
clear of all Liens, are not held by such entity on consignment from others and
conform in all material respects to all standards applicable to such inventory
or its use or sale imposed by law.
(c) Except as set forth on Schedule 4.9, the tangible
personal property of each of Lottery and its Subsidiaries which is currently
owned or leased by it is, in the aggregate, all of the tangible personal
property used to conduct such business in the manner in which such business was
conducted during the nine month period ended September 30, 1999 and since such
time, except for additions thereto and deletions therefrom in the ordinary
course of business and consistent with past practice which could not reasonably
be expected to have a Lottery Material Adverse Effect.
Section 4.10 Real Property.
(a) Neither Lottery nor its Subsidiaries owns any real
property.
(b) Schedule 4.10 lists all real property (including all
land and buildings) which is leased by Lottery or a Subsidiary as lessee or
sublessee (the "Leased Real Estate"). Lottery has delivered or caused to be
delivered to Parent complete and accurate copies of the written leases and
subleases which are listed in Schedule 4.10. None of Lottery nor its
Subsidiaries has received written notice of condemnation or eminent domain
proceedings pending or threatened against any Leased Real Estate. Neither
Lottery nor any of its Subsidiaries has received any notice from any city,
village or other governmental entity of any zoning, ordinance, building, fire or
health code or other legal violations in respect of any Leased Real Estate,
other than violations which have been corrected. There are no material
structural defects relating to any Leased Real Estate. Except as set forth in
Schedule 4.10:
(i) each of the leases or subleases relating to the
Leased Real Estate (each, a "Lease" and collectively, the "Leases") is in full
force and effect and valid and binding on the lessor or sublessor and
enforceable in accordance with its terms (except insofar as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies), and all consents required
under any Lease in connection with this Agreement and the consummation of the
transactions contemplated hereby have been obtained;
(ii) no amount payable under any Lease is past due;
(iii) each of Lottery and its Subsidiaries is in
compliance in all material respects with all commitments and obligations on its
part to be performed or observed under any Lease and is not aware of the failure
by any other party to such Lease to comply in all material respects with all of
its commitments and obligations;
17
<PAGE>
(iv) none of Lottery nor its Subsidiaries has
received any notice (A) of a default (which has not been cured), offset or
counterclaim under any Lease, or any other communication calling upon such
entity to comply with any provision of any Lease or asserting noncompliance, or
asserting such entity has waived or altered its rights thereunder, and no event
or condition has happened or presently exists which constitutes a default or,
after notice or lapse of time or both, would constitute a default under any
Lease on the part of such entity or any other party thereto, or (B) of any
action, complaint, claim, prosecution, indictment, suit, arbitration,
investigation or proceeding (an "Action") by or before any governmental entity
against any party under any Lease which if adversely determined could result in
such Lease being terminated or modified in a manner adverse to such entity;
(v) none of Lottery nor its Subsidiaries has
assigned, mortgaged, pledged or otherwise encumbered its interest, if any, under
any Lease; and
(vi) none of Lottery nor its Subsidiaries has
exercised, or failed to exercise within the time prescribed in each Lease, any
option provided therein to extend or renew the term thereof.
(c) The Leased Real Estate constitute, in the aggregate,
all of the real property used to conduct the business of Lottery and its
Subsidiaries in the manner in which such business was conducted during the nine
month period ended September 30,1999 and since such time. Except as set forth on
Schedule 4.10, no consent is required of any party to any of the Leases by
virtue of this Agreement, and the consummation of any of the transactions
contemplated hereby will not result in the termination of any Lease or a
material alteration of the terms of any Lease. Except as set forth on Schedule
4.10, none of the Leased Real Estate is owned, in whole or in part, by any
director, officer, stockholder, partner or member of Lottery or any of its
Subsidiaries, by any affiliate of any affiliate of Lottery or any of its
Subsidiaries, or by any entity created for the benefit of any family member(s)
of any of the foregoing persons.
Section 4.11 Machinery and Equipment. Neither Lottery nor its
Subsidiaries owns any machinery or equipment.
Section 4.12 Patents, Trademarks, Domain Names, Trade Names, Etc.
Schedule 4.12 sets forth, as of the date hereof, a correct and complete list of
(a) all patents and patent applications, and all trademarks, service marks,
domain names, trade names and registered copyrights, owned by Lottery or its
Subsidiaries or in which Lottery or its Subsidiaries has rights, through license
or otherwise, and all licenses and other agreements relating thereto; and (b)
all agreements relating to third party technology, know-how and processes which
Lottery or its Subsidiaries is licensed or authorized to use (collectively, the
"Intellectual Property"). Lottery and its Subsidiaries hold free from
contractual restrictions and any other restriction, except those restrictions
imposed by law or governmental regulation, or any license or other agreement
relating thereto, all Intellectual Property. As of the date hereof, there are no
unresolved claims made and there has not been communicated to Lottery or its
Subsidiaries the threat of any claim that the holder of such Intellectual
18
<PAGE>
Property is in violation of or infringing any service mark, patent, trademark,
trade name, trademark or trade name registration, domain name, copyright or
copyright registration of any third party. Lottery or its Subsidiaries is the
owner of, or has a valid license to use, the patents, patent licenses, trade
names, trademarks, service marks, brand marks, brand names, copyrights,
know-how, formula and other proprietary and trade rights necessary for the
conduct of Lottery or its Subsidiaries' business as now conducted, without any
known conflict with the rights of others, and Lottery or its Subsidiaries has
not knowingly forfeited or otherwise relinquished any such patent, patent
license, trade name, trademark, service mark, brand mark, brand name, copyright,
know-how, formula or other proprietary right necessary for the conduct of
Lottery or its Subsidiaries' business as conducted on the date hereof. To the
knowledge of Lottery or its Subsidiaries, no person is infringing any of the
Intellectual Property. Lottery has previously delivered to Parent and Merger Sub
true, correct and complete copies of all such documents.
Section 4.13 Contracts. Schedule 4.13 lists each and every:
(i) contract or commitment to which any of Lottery
and its Subsidiaries is a party not made in the ordinary course of business or
continuing over a period of more than six months from the date hereof or under
which payments are to be made or received;
(ii) contract with or commitment to employees,
advisors, consultants or their Affiliates;
(iii) debt instrument, including, without limitation,
any loan agreements, promissory notes, security agreements or other evidences of
indebtedness, where any of Lottery or its Subsidiaries is a lender or borrower;
(iv) contract, commitment or arrangement restricting
any of Lottery or its Subsidiaries , or any of their respective employees from
engaging in business or from competing in any line of business with any other
parties;
(v) contract, agreement or arrangement to which
Lottery or its Subsidiaries is a party (whether as an original party or an
assignee or successor) for a line of credit or guarantee, pledge or undertaking
of the indebtedness of any other person or entity;
(vi) contract or commitment to which Lottery or its
Subsidiaries is a party (whether as an original party or an assignee or
successor) for any charitable or political contribution;
(vii) loan agreement, security agreement, note,
debenture, or other contract or commitment (except for this Agreement) limiting
or restraining Lottery or its Subsidiaries from declaring, setting aside,
authorizing or making payment of any dividend or any distribution, whether in
cash or property;
19
<PAGE>
(viii) joint venture or partnership agreement to
which Lottery or its Subsidiaries is, directly or indirectly, a party (whether
as an original party or as an assignee or successor);
(ix) agreement or agreements to which Lottery or its
Subsidiaries is a party (whether as an original party or as an assignee or
successor) with respect to any assignment, discounting or reduction of any
receivables, other than normal trade discounts, of Lottery or its Subsidiaries ;
(x) distributorship, sales agency, sales
representative or marketing agreement;
(xi) any license pursuant to which Lottery or its
Subsidiaries has any liability or obligation or is receiving or will become
entitled to receive any benefits, and any permit pursuant to which such entity
currently operates its business;
(xii) existing agreements, options, commitments or
rights with, to or in any third party to acquire any assets or properties, real,
personal or mixed, or any interest therein, of Lottery or its Subsidiaries,
except for those contracts for the sale of inventory entered into in the
ordinary course of business; and
(xiii) existing agreements, options, commitments or
rights ("Acquisition Contracts") to acquire any assets or properties, real,
personal or mixed, or any interest therein, except for those relating to the
acquisition of inventory in the ordinary course of business, and letters of
intent, agreements-in-principal and heads of agreement ("Letters of Intent")
with respect to any of the foregoing.
Lottery has heretofore delivered to Parent and Merger Sub true, correct
and complete copies of all documents described in Schedule 4.13.
Section 4.14 Absence of Default. Except as set forth in Schedule 4.14
hereto, each of Lottery and its Subsidiaries has complied with and performed all
of its respective obligations required to be performed under all material
contracts, agreements and leases to which it is a party (whether as an original
party or as an assignee or successor) as of the date hereof, and is not in
default in any material respect under any contract, agreement, lease, loan,
undertaking, commitment or other obligation; and no event has occurred which,
with or without the giving of notice, lapse of time or both, would constitute a
default thereunder in any material respect. Lottery, after due inquiry of each
Subsidiary, has no knowledge that any party has failed to comply with or perform
all of its obligations required to be performed under any material contract,
agreement or lease to which Lottery or its Subsidiaries is a party (whether as
an original party or as an assignee or successor) as of the date hereof, or that
any event has occurred which, with or without the giving of notice, lapse of
time or both, would constitute a default by such party thereunder. In addition,
except as disclosed in Schedule 4.14, Lottery, after due inquiry of each
Subsidiary, has no knowledge of any facts or circumstances which make
20
<PAGE>
a default by any party to any material contract or obligation likely to occur
subsequent to the date hereof. Lottery intends to enter into a definitive
agreement with respect to each Letter of Intent and has not received any notice
that a party to any Letter of Intent intends not to enter into such a definitive
agreement.
Section 4.15 Insurance. Each of Lottery and its Subsidiaries maintains
insurance coverages on its structures, facilities, fixtures, machinery,
equipment, motor vehicles, inventory and other properties and assets and with
respect to its employees and operations, covering risks which are prudently
insured against by similar businesses. Lottery has previously furnished to
Parent and Merger Sub a correct and complete description of all such policies or
binders of insurance held by or on behalf of Lottery and its Subsidiaries or any
of its or their properties or assets (specifying the insurer, the amount of the
coverage, the type of insurance, the risks insured, the expiration date, the
policy number, the premium and any agent or broker). Except as may otherwise
have been disclosed to Parent and Merger Sub in writing (i) no notice of
cancellation or nonrenewal with respect to, or disallowance of any claim under,
any such policy or binder has been received by either Lottery or its
Subsidiaries from January 1, 1999 to the date hereof, and (ii) Lottery, after
due inquiry of each Subsidiary has no knowledge of any state of facts or the
occurrence of any event which reasonably might form the basis of any claim
against or relating to its or their businesses or operations or any of their
assets or properties which are covered by any of such policies or binders which
might substantially increase the insurance premiums payable under any such
policy or binder. Lottery has previously furnished to Parent and Merger Sub a
correct and complete description of all outstanding performance bonds which have
been delivered to any person in connection with the business and operations of
each of Lottery and its Subsidiaries.
Section 4.16 Third Party Options. Except as set forth pursuant to
Section 4.13(xiii) hereof, there are no existing agreements, options,
commitments or rights with, to or in any third party to acquire any assets or
properties, real, personal or mixed, or any interest therein, of Lottery or its
Subsidiaries, except for those contracts entered into by any of them in the
ordinary course of business.
Section 4.17 Distributions, Satisfactions, Obligations. Except as
disclosed in Schedule 4.17 hereto, since the Balance Sheet Date, none of Lottery
nor its Subsidiaries has:
(i) issued any stock, bonds, partnership or
membership interests or other securities or equity interests;
(ii) incurred any obligations or liabilities for
money borrowed;
(iii) incurred any material obligations or
liabilities, absolute or contingent;
(iv) discharged or satisfied any lien, encumbrance or
obligation, or paid any material liabilities, absolute or contingent, other than
in the ordinary course of the operation of the business;
21
<PAGE>
(v) declared or made any dividend payment or
distribution to any stockholder, partner or member of any of Lottery or its
Subsidiaries;
(vi) purchased or redeemed any shares of the capital
stock or other equity interests of Lottery or its Subsidiaries;
(vii) mortgaged or pledged or subjected to lien,
charge or other encumbrance, any of its material assets, tangible or intangible;
(viii) sold, transferred or disposed of any of its
assets except assets used or consumed in the ordinary course of business and
obsolete equipment and equipment which has been replaced in the ordinary course
of business;
(ix) suffered any material adverse change, material
damage, disruption of business or losses, whether covered by insurance or not,
or waived any rights of substantial value;
(x) increased compensation payable to or to become
payable by such entity to any of its employees whose salary (inclusive of bonus)
is expected to exceed $50,000 in 1999, except for increases in the ordinary
course of business to an employee on the anniversary date of such employee's
employment, or upon such employee's annual award date, which do not exceed 10%
of the base salary of such employee; or
(xi) operated its business in any way other than in
the ordinary course.
Section 4.18 Capital Expenditures. Except as set forth in Schedule 4.18
hereto, none of Lottery nor its Subsidiaries has made or budgeted for any
capital expenditures or commitments, whether or not contracted for, in an
aggregate amount exceeding $50,000.
Section 4.19 Litigation. Except as set forth in Schedule 4.19 hereto,
as of the date hereof, there are no actions, suits, material labor disputes or
arbitrations, legal or administrative proceedings or investigations pending
against Lottery or its Subsidiaries and no actions, suits, material labor
disputes or arbitrations, legal or administrative proceedings or investigations
are contemplated or threatened against Lottery or its Subsidiaries or any of its
or their assets, properties or businesses, nor is any basis known by Lottery,
after due inquiry of each Subsidiary, to exist for any such action or for any
governmental investigation relating to any of Lottery or its Subsidiaries or its
or their properties or businesses. Neither Lottery nor its Subsidiaries nor
their assets, properties or business, are subject to any judgment, order, writ,
injunction or decree of any court, governmental agency or arbitration tribunal.
Section 4.20 Compliance with Law.
(a) Each of Lottery and its Subsidiaries:
22
<PAGE>
(i) has complied with each, and is not in violation
of any, law, ordinance or governmental rule or regulation to which it or its
business is subject, and
(ii) has not failed to obtain any license, permit,
certificate or other governmental authorization or inspection necessary to the
ownership or use of its assets and properties or to the conduct of its business,
which, in the event of any noncompliance, violation or failure to obtain, as the
case may be, would have a material adverse effect on the business, operations,
prospects, properties, assets or condition (financial or otherwise) of such
entity.
(b) Except as set forth in Schedule 4.20 hereto, none of
Lottery nor its Subsidiaries has since (i) in the case of Lottery, its date of
incorporation, and (ii) in the case of any Subsidiary, the date of its
acquisition or formation by Lottery, received any claim or notice of any
violation, within the past three years, of any building, zoning, fire, health or
employment laws, ordinances, rules or regulations relating to the properties,
premises, business or employees of such entity, which in the event of any
non-compliance or violation would have a material adverse effect on the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of such entity.
(c) None of Lottery nor its Subsidiaries has, nor has any
director, officer, agent or employee of any such entity: (i) made or agreed to
make any contributions, payments or gifts of its funds or property to any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift was or is illegal under the laws of the
United States, any state or province thereof or any other jurisdiction (foreign
or domestic); (ii) established or maintained any unrecorded fund or asset for
any purpose, or made any false or artificial entries on any of its books or
records for any reason; (iii) made or agreed to make any contribution, or
reimbursed any political gift or contribution made by any other person or
entity, to candidates for public office whether federal, state, local or
foreign, where such contributions were or would be violative of applicable law;
or (iv) violated the U.S. Federal Corrupt Practices Act of 1977, as amended.
Section 4.21 Transactions with Affiliates. None of Lottery nor its
Subsidiaries nor any current director or officer thereof controls or during the
last three years has controlled, directly or indirectly, any business, corporate
or otherwise, which is or was a party to any agreement, business arrangement or
course of dealing with any of Lottery or its Subsidiaries or any property or
asset which was the subject of any agreement, business arrangement or course of
dealing with any of Lottery or its Subsidiaries.
Section 4.22 Prohibited Payments. Neither Lottery nor its Subsidiaries,
nor any of their respective officers, directors, employees, agents or affiliates
has offered, paid, or agreed to pay to any person or entity, including any
governmental official, or solicited, received or agreed to receive from any such
person or entity, directly or indirectly, any money or anything of value for the
purpose or with the intent of obtaining or maintaining business for any such
entity or otherwise affecting the business, operations, prospects, properties,
or condition (financial or otherwise) of any such entity and which is or
23
<PAGE>
was in violation of any ordinance, regulation or law, or not properly and
correctly recorded or disclosed on the books and records of such entity. None of
Lottery nor its Subsidiaries has engaged in any transaction, maintained any bank
account or used any other funds except for transactions, bank accounts and funds
which have been and are properly and correctly reflected in the normally
maintained books and records of such entity.
Section 4.23 Tax Matters.
(a) "Tax(es)" shall mean all taxes, assessments and other
charges, including any interest, penalties, additions to tax or additional
amounts that may become payable in respect thereof, imposed by any foreign,
federal, state, local or other government or taxing authority, which taxes shall
include, without limitation, all income taxes, payroll and employee withholding
taxes, unemployment insurance, social security, sales and use taxes, excise
taxes, franchise taxes, gross receipts taxes, occupation taxes, real and
personal property taxes, stamp taxes, transfer taxes, workers' compensation and
other obligations of the same or of a similar nature, including, without
limitation, Taxes imposed by reason of transferee or successor liability.
(b) Each of Lottery and its Subsidiaries has timely filed
with the appropriate taxing authorities all returns, declarations and reports
(including, without limitation, information returns and other statements or
information) in respect of Taxes (collectively, "Tax Returns") required to be
filed through the date hereof and will timely file any such Tax Returns required
to be filed on or prior to the Closing Date. The Tax Returns filed are complete
and accurate in all material respects. Lottery and its Subsidiaries have not
requested any extension of time within which to file any Tax Returns. Lottery
and its Subsidiaries have delivered to the Parent complete and accurate copies
of their respective federal, state and local Tax Returns for the last three (3)
fiscal years. No amended Tax Returns or refund claims have been or are scheduled
to be filed by or on behalf of Lottery or its Subsidiaries.
(c) All Taxes for which Lottery or its Subsidiaries is or
may be liable, whether or not shown as due on any Tax Return, in respect of
periods beginning before the Closing Date, have been timely paid, and Lottery
and its Subsidiaries do not have any liability for Taxes in excess of the
amounts so paid. There are no Taxes for which Lottery or its Subsidiaries is or
may become liable that will apply in a period or a portion thereof beginning on
or after the Closing Date and that are attributable to income earned or
activities of Lottery or its Subsidiaries occurring before the Closing Date. All
required Tax estimates, deposits, prepayments and similar reports or payments
for current periods have been properly made.
(d) No deficiencies for Taxes, have been claimed, proposed
or assessed by any taxing or other governmental authority against Lottery or its
Subsidiaries. There are no pending or threatened audits, investigations or
claims for or relating to any liability in respect of Taxes, and there are no
matters under discussion with any taxing or governmental authorities with
respect to Taxes that in the reasonable judgement of Lottery or its
Subsidiaries, or its counsel, are likely to result in additional liability for
Taxes. No notice or claim has ever been made by any governmental
24
<PAGE>
authority in a jurisdiction where Lottery or its Subsidiaries do not file Tax
Returns that it is or may be subject to Taxes in that jurisdiction. There have
been no audits of federal, state and local returns for Taxes by any taxing or
governmental authorities and Lottery or its Subsidiaries have not been notified
that any taxing or governmental authority intends to audit a return for any
period. No extension of a statute of limitations relating to Taxes is in effect
with respect to Lottery or its Subsidiaries. No power of attorney has been
executed by Lottery or its Subsidiaries with respect to any matters relating to
Tax which is currently in force.
(e) There are no liens for Taxes (other than for current
Taxes not yet due and payable) on Lottery or its Subsidiaries' assets and no
basis exists for the imposition of any such liens.
(f) None of Lottery or its Subsidiaries' assets is property
that is required to be treated as being owned by any other person pursuant to
the so-called safe harbor lease provisions of former Section 168(f)(8) of the
Code.
(g) None of Lottery or its Subsidiaries' assets directly or
indirectly secures any debt the interest on which is tax-exempt under Section
103(a) of the Code.
(h) None of Lottery or its Subsidiaries' assets is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(i) The transaction contemplated herein is not subject to
the tax withholding provisions of Section 3406 of the Code, or of Subchapter A
of Chapter 3 of the Code or of any other provision of law.
(j) All elections with respect to Taxes affecting Lottery
or its Subsidiaries as of the date hereof are set forth on Schedule 4.23.
Lottery or its Subsidiaries have not consented at any time under Section
341(f)(1) of the Code, to have the provisions of Section 341(f)(2) of the Code
apply to any disposition of Lottery or its Subsidiaries' assets. Lottery and its
Subsidiaries have not agreed to make, nor is required to make, any adjustments
under Section 481(a) of the Code by reason of a change in the accounting method
or otherwise.
(k) There are no tax sharing agreements or similar
arrangements with respect to or involving Lottery or its Subsidiaries. Lottery
and its Subsidiaries are not parties to any contractual obligation requiring the
indemnification of any person with respect to the payment of Taxes.
(l) Lottery and its Subsidiaries are not parties to any
joint venture, partnership or other arrangement or contract which is treated as
a partnership for federal income tax purposes.
(m) As of the Closing Date, Lottery and its Subsidiaries
are not parties to any agreement, contract, arrangement or plan that has
resulted or would result, separately or in the aggregate, in the payment
25
<PAGE>
of any "excess parachute payments" within the meaning of Section 280G of the
Code.
Section 4.24 Employee Benefit Plans
(a) Schedule 4.24 sets forth a list of all of employee
benefit plans, funds or programs (within the meaning of ERISA), funds or
programs whether or not they are or are intended to be (i) covered or qualified
under the Code or ERISA or any other applicable law, (ii) written or oral, (iii)
formal or informal, (iv) funded or unfunded, or (v) generally available to all
employees of each of Lottery and its Subsidiaries, which were or are established
or maintained by such entity and all other compensation practices, policies,
terms or conditions, wether written or unwritten (individually, a "Plan", and
collectively, the "Plans"). For purposes of this Section 4.24, the term
"Company" shall mean and include Lottery and its Subsidiaries and any
corporation which is a member of a controlled group of corporations (as defined
in Section 414(b) of the Code) which includes any of Lottery or its
Subsidiaries; any trade or business (whether or not incorporated) which is under
common control (as defined in Section 414(c) of the Code) with any Company; any
organization (whether or not incorporated) which is a member of an affiliated
service group (as defined in Section 414(m) of the Code) which includes any
Company; and any other entity required to be aggregated with any Company
pursuant to regulations under Section 414(o) of the Code.
(b) Lottery has not contributed or been obligated to make
any contributions for the six-year period ending on the Closing Date, to any
multi-employer plans (within the meaning of Section 3(37) of ERISA).
(c) Lottery has previously furnished to Parent and Merger
Sub (i) true and complete copies of all Plan documents and other instruments
relating thereto, (ii) accurate and complete detailed summaries of all oral
Plans, (iii) true and complete copies of the most recent financial statements
with respect to the Plans, (iv) true and complete copies of all annual reports
prepared within the past five years, and (v) true and complete copies of all
filings submitted to and any correspondence received from any government agency
within the past five years.
(d) No Plan is intended to be or required to be qualified
under Section 401(a) and exempt from tax under Section 501(a) of the Code.
(e) The Plans and provisions thereof, the trusts created
thereby, and the operation of the Plans are in compliance with and conform to
applicable provisions of all applicable laws, including, but not limited to, the
Code, ERISA, other statutes, and governmental rules and regulations and there
have been and there exist no prohibited transactions (as defined in Section 406
of ERISA or Section 4975 of the Code) with respect to any Plan.
(f) Each Company has made, or will make, all contributions
to the applicable Plans for all periods up to the Closing Date as required by
the terms of the Plans, the Code and ERISA and has accrued under financial
statements all contributions that will have to be made with respect to the Plans
26
<PAGE>
as of the Closing Date. Each most recent Plan audit report and annual report,
certified by the Plan's auditors, fairly presents the financial condition of the
Plan as at the date thereof and the results of operations of the Plan for the
plan year reflected therein and, there has been no material adverse change in
the condition of the Plan since the date of the most recent Form 5500 or audited
annual financial statement.
(g) With respect to any Plan that is an employee welfare
benefit plan within the meaning of Section 3(1) of ERISA (a "Welfare Plan"), (i)
each such Welfare Plan the contributions to which are claimed as a deduction
under any provision of the Code is in compliance with all applicable
requirements pertaining to such deduction, (ii) with respect to any welfare
benefit fund within the meaning of Section 419 of the Code that comprises part
of a Welfare Plan, there is no disqualified benefit within the meaning of
Section 4976(b) of the Code that would subject the Company to a tax under
Section 4976(a) of the Code, and (iii) any such Plan that is a group health plan
within the meaning of Section 5000(b)(1) of the Code meets all of the
requirements of Section 4980B of the Code. Lottery has previously furnished to
Parent and Merger Sub a list of all Welfare Plan benefits being provided or that
will be provided to all former employees (or other participants and
beneficiaries) and the accrued liabilities of same.
(h) The consummation of the transaction contemplated hereby
will not accelerate any liability under the Plans because of an acceleration of
any rights or benefits to which any participant or beneficiary (as such terms
are defined in Section 3 of ERISA) may be entitled thereunder.
(i) No Plan is in the process of being (i) amended in any
manner that would directly or indirectly increase the benefit accrued or which
may be accrued by any participant thereunder, or (ii) amended in any manner that
would materially increase the cost of maintaining such Plan.
(j) Each Plan that is required or intended to be qualified
under applicable law or registered or approved by a governmental agency or
authority, has been so qualified, registered or approved by the appropriate
governmental agency or authority, and nothing has occurred since the date of the
last qualification, registration or approval to adversely affect, or cause the
appropriate governmental agency or authority to revoke, such qualification
registration or approval.
(k) All contributions (including premiums) required by law
or contract to have been made or approved by Lottery or its Subsidiaries under
or with respect to the Plans have been paid or accrued by Lottery. Without
limiting the foregoing, there are no unfunded liabilities under any Plan.
(l) There are no pending or threatened matters, actions,
audits, suits, claims, investigations, litigation or other enforcement actions
against Lottery or its Subsidiaries with respect to any of the Plans.
27
<PAGE>
(m) There are no actions, suits or claims pending or, to
the best knowledge of Lottery, threatened by former or present employees of
Lottery or its Subsidiaries (or their beneficiaries) or any union representing
employees of the Company with respect to the Plans or the assets or fiduciaries
thereof (other than routine claims for benefits).
(n) No conditions or event has occurred with respect to the
Plans which has or could reasonably be expected to result in a liability to
Lottery or its Subsidiaries.
Section 4.25 Executive Employees.
(a) Annexed hereto as Schedule 4.25 is a correct and
complete list of the names, titles and current annual salary rates of and
bonuses paid or payable (including the value of any stock-based compensation) to
all present non-union officers, employees and consultants of each of Lottery and
its Subsidiaries whose 1999 annual salary or compensation (including bonuses
paid or payable in 1998 or thereafter) is expected to exceed $50,000 ("Executive
Employees").
(b) Neither Lottery nor any of its Subsidiaries has any
employment agreement with, and does not maintain any Plan with respect to, any
Executive Employees or other employees, except as disclosed on Schedule 4.25.
(c) All information and other relevant documentation
relating the financial condition of Lottery and its Subsidiaries provided to
Parent or Merger Sub by Lottery accurately reflect all outstanding liability
relating to compensation for length of service, overtime (including, without
limitation, banked overtime), vacation or holiday pay, salary, bonuses, stock
options or any other compensation owed or owing to any and all employees and
consultants of each of Lottery and its Subsidiaries.
Section 4.26 Employees. Annexed hereto as Schedule 4.26 is a correct
and complete list of all labor and collective bargaining agreements (whether
written or oral) to which each of Lottery or its Subsidiaries is a party or by
which any of them is bound, and all employment, profit sharing, deferred
compensation, bonus, stock option, stock purchase, pension, retainer,
consultant, retirement, severance, welfare or incentive agreements, plans or
contracts (other than those identified herein) to which any of them is a party.
Lottery has delivered copies of all such agreements, contracts and plans to
Parent and Merger Sub. None of Lottery nor any of its Subsidiaries is in default
with regard to any of such agreements, plans or contracts. Each of Lottery and
its Subsidiaries is in compliance in all material respects with all applicable
laws relating to the employment of labor. There are no controversies (other than
routine grievances) pending or threatened, between any of Lottery or its
Subsidiaries, and any of its employees, consultants or labor unions or other
collective bargaining units representing any of its employees. No unfair labor
practice complaints have been filed against any of Lottery or its Subsidiaries
with the National Labor Relations Board or other appropriate authority, and none
of Lottery nor its Subsidiaries has received any notice or communication
reflecting an intention or a threat to file any such complaint.
28
<PAGE>
Section 4.27 Environmental Laws.
(a) Each of Lottery and its Subsidiaries has obtained and
holds all permits, licenses and other authorizations which are required with
respect to the operation of its business under Federal, state, provincial, local
and foreign laws relating to pollution or protection of the environment,
including laws relating to Hazardous Substances into the environment (including,
without limitation, ambient air, surface water, ground water, land surface or
subsurface strata) or otherwise relating to the Environmental Laws, except any
permits, licenses and other authorizations the absence of which would not,
individually or in the aggregate, materially adversely affect any of Lottery or
its Subsidiaries, and all such permits, licenses and other authorizations are in
good standing and Lottery and its Subsidiaries are not in default thereunder.
(b) Each of Lottery and its Subsidiaries is in full
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
the Environmental Laws or contained in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
(c) There is no civil, criminal or administrative action,
suit, demand, claim, hearing notice or demand letter pending or threatened
against any of Lottery or its Subsidiaries relating in any way to the
Environmental Laws or any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder.
(d) No events, conditions, activities, practices,
incidents, actions or plans of action taken or to be taken by any of Lottery or
its Subsidiaries are reasonably likely to (i) interfere with or prevent
compliance or continued compliance with the Environmental Laws or with any
regulation, code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, in any manner which
could have a Lottery Material Adverse Effect, (ii) give rise to any common law
or legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorizations Act of 1986, or any
other applicable Environmental Laws or similar state, provincial or local laws,
or (iii) form the basis of any claim, action, demand, suit, proceeding, hearing
or notice of violation based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, toxin or hazardous substance or
waste.
(e) Lottery has made available to Parent and Merger Sub
true and correct copies of, all environmental audits or assessments, analyses of
soil, groundwater, indoor and outdoor air, sediment, surface water and
asbestos-containing materials relating in whole or in part to Lottery and its
Subsidiaries, any owned property or any Leased Real Estate undertaken by or on
behalf of Lottery or any of its Subsidiaries, and any written communications
received by Lottery relating in whole or in part to the existence of Hazardous
Substances at any owned property or Leased Real Estate or any real
29
<PAGE>
property previously owned or operated by Lottery or its Subsidiaries or
the compliance of Lottery and its Subsidiaries with respect to any Environmental
Law.
Section 4.28 Bank Accounts, Letters of Credit and Powers of Attorney.
Schedule 4.28 sets forth a true and correct list of (a) all bank accounts, lock
boxes and safe deposit boxes relating to the business and operations of each of
Lottery and its Subsidiaries, (b) all outstanding letters of credit issued by
financial institutions for the account of each of Lottery and its Subsidiaries
(setting forth, in each case, the financial institution issuing such letter of
credit, the maximum amount available under such letter, the terms (including the
expiration date) of such letter of credit and the party or parties in whose
favor such letter of credit was issued), and (c) the name and address of each
person who has a power of attorney to act on behalf of each of Lottery and its
Subsidiaries. Lottery has heretofore delivered to Parent and Merger Sub true,
correct and complete copies of each such letter of credit and each such power of
attorney.
Section 4.29 Minute Books; Records. The minute books and/or other
official records, as applicable, of each of Lottery and its Subsidiaries as
previously made available to Parent and Merger Sub for inspection, contain
complete and accurate records of all meetings and accurately reflect all other
action of the stockholders, boards of directors, management committees or other
governing bodies, as applicable, of each of Lottery and its Subsidiaries. The
stock certificate books, stock transfer ledgers and/or capital account records,
as applicable, of each of Lottery and its Subsidiaries as previously made
available to Parent and Merger Sub for inspection, are true and complete. All
stock and/or other applicable transfer taxes levied or payable with respect to
all transfers of shares and/or other equity interests, as applicable, of each of
Lottery and its Subsidiaries prior to the date hereof have been paid and
appropriate transfer tax stamps affixed.
Section 4.30 Full Disclosure. No representation or warranty by Lottery
in this Agreement, any Schedule hereto or in any list, certificate, document or
written statement delivered by Lottery to Parent or Merger Sub pursuant hereto,
contains any untrue statement of a material fact or omits to state any material
fact necessary to make any statement herein or therein, in the light of the
circumstances under which it was made, not misleading. Except as described in
the Schedules hereto or in any list, certificate, document or written statement
delivered or to be delivered, all documents and agreements are valid and
effective in accordance with their respective terms, and there is not under any
of such documents or agreements, or any obligation, covenant or condition
contained therein, any existing default by any of Lottery or its Subsidiaries or
any other party, or event which with notice, lapse of time, or both, would
constitute a default which would have a Lottery Material Adverse Effect. There
is no fact known to Lottery, which Lottery has not disclosed or will not
disclose to Parent and Merger Sub which adversely affects or, so far as Lottery,
can now reasonably foresee, which may adversely affect, the continued operation
of any Lottery or its Subsidiaries.
Section 4.31 Securities Offerings. None of Lottery nor its Subsidiaries
has offered, or is offering, for sale any of its securities by means of offering
memoranda or circulars, subscription agreements, or other documentation which
contains any untrue statement of a material fact or omits to state
30
<PAGE>
any material fact necessary to make any statement therein, in the light of the
circumstances under which it was made, not misleading.
Section 4.32 Brokers or Finders. Lottery and its Subsidiaries have not
entered into any contract, arrangement or understanding with any person or firm
which may result in the obligation of Lottery or its Subsidiaries to pay any
finder's fee, brokerage or agent's commissions or other like payment in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
Section 4.33 Licenses. Each of Lottery and its Subsidiaries holds all
Licenses which are required for the conduct of its business operations as
currently conducted. All of the Licenses are in full force and effect, and no
Action is pending or threatened, seeking the revocation or limitation of any of
the Licenses. Schedule 4.33 lists all Licenses that are material to the business
of each of Lottery and its Subsidiaries. Except as indicated on Schedule 4.33,
no License will terminate as a result of this Agreement or the transactions
contemplated hereby.
Section 4.34 Lottery Proxy Statement. The information supplied or to be
supplied by Lottery and any Subsidiary thereof for inclusion in either the
Parent Proxy Statement or the Lottery Proxy Statement, as the case may be,
including any amendments and supplements thereto, will not either at the date
mailed to stockholders or at the time of such stockholder meeting, contain any
untrue statement of a material fact or omit to state any 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.
ARTICLE V
COVENANTS
Section 5.1 Alternative Proposals. From the date hereof until the
Closing Date or the termination of this Agreement pursuant to Article VII, each
party agrees that (a) neither it nor any of its Subsidiaries shall, nor shall
it, nor any of its Subsidiaries permit their respective officers, directors,
employees, agents, representatives or Affiliates (including, without limitation,
any investment banker, attorney or accountant retained by them) to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation any
proposal or offer to its or their stockholders) which constitutes or is
reasonably likely to lead to any Alternative Proposal, as hereinafter defined,
or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, or otherwise cooperate in
any way with, any corporation, partnership, person or other entity or group
(each a "Third Party") relating to an Alternative Proposal, or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal;
(b) it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing, and will take the necessary steps to
inform the individuals or entities referred to above of the obligations
undertaken in this Section 5.1; provided that, with respect to
31
<PAGE>
clauses (a) and (b) of this Section 5.1, the Board of Directors of the party
receiving an unsolicited Alternative Proposal may, in the event of an
unsolicited Alternative Proposal, engage in negotiations or discussions with, or
provide information or data to, any Third party relating to an Alternative
Proposal if (i) the Alternative Proposal is a bona fide fully-financed written
offer submitted to such party's Board of Directors and such Board of Directors,
after consulting with a nationally recognized investment bank, determines that
such Alternative Proposal is a Superior Proposal (as hereinafter defined) and
(ii) such party's Board of Directors determines, after having received the
written opinion of outside legal counsel to such party that the failure to
engage in such negotiations or discussions or provide such information would
result in a breach of the fiduciary duties of such party's Board of directors
under applicable law. Then in such event, such party's Board of Directors may
withdraw or modify its approval or recommendation of this Agreement or the
Merger, approve or recommend the Superior Proposal or terminate this Agreement
pursuant to Section 7.1(e) or (f), hereof as the case may be. The other party
shall have the right to match any such Superior Proposal, and have such matching
proposal immediately accepted by the party receiving the unsolicited Alternative
Proposal for five business days after such party is informed of the necessary
determination in clauses (i) and (ii) of the preceding sentence with respect to
such Superior Proposal; and (c) it will notify the other party immediately if
any discussions or negotiations are sought to be initiated, any inquiry or
proposal is made, or any information is requested by any Third Party with
respect to an Alternative Proposal or which could lead to an Alternative
Proposal and immediately notify the other party of all material terms of any
proposal which it may receive in respect of any such Alternative Proposal,
including the identity of the Third Party making the Alternative Proposal or the
request for information, if known, and thereafter shall inform Parent on a
timely, ongoing basis of the status and content of any discussions or
negotiations with such Third Party, including immediately reporting any material
changes to the terms and conditions thereof. As used herein, "Alternative
Proposal" means any inquiry, proposal or offer from any Third Party relating to
a direct or indirect acquisition or purchase of 15% or more of any class of
equity securities or Lottery or any of its Subsidiaries, any tender offer or
exchange offer that if consummated would result in any Third party beneficially
owning 15% or more of any class of equity securities of Lottery of any of its
Subsidiaries, any merger consolidation, business combination, sale of all or
substantially all of the assets, recapitalization, liquidation, dissolution or
similar transaction involving Lottery or any of its Subsidiaries, other than the
transactions contemplated by this Agreement, or any other transaction the
consummation of which could reasonably be expected to impede, interfere with,
prevent or materially delay the Merger or which would reasonably be expected to
dilute materially the benefits to Parent of the transactions contemplated
hereby.
Section 5.2 Interim Operations of Lottery and Parent. Prior to the
Effective Time, unless a party has consented in writing thereto, the other party
and each of its Subsidiaries:
(a) shall conduct its operations according to its usual,
regular and ordinary course in substantially the same manner as heretofore
conducted;
32
<PAGE>
(b) shall use its reasonable efforts to preserve intact its
business organizations and goodwill, keep available the services of officers and
employees and maintain satisfactory relationships with those persons having
business relationships with it;
(c) shall not amend its Certificate of Incorporation or its
Bylaws or comparable governing instruments;
(d) shall promptly notify the other party of any material
emergency or other material change in its condition (financial or otherwise),
business, properties, assets, liabilities, prospects or the normal course of its
business or of its properties, any material litigation or material governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the breach of any representation or warranty
contained herein;
(e) shall not (A), issue or redeem any capital stock or
otherwise change its capitalization as it existed on the date hereof other than
as contemplated by Section 3.3 or Section 4.3; (B) grant, confer or award any
option, warrant, conversion right or other right not existing on the date hereof
to acquire any capital stock; (C) increase any compensation or enter into or
amend any employment or consultant agreement with any of its present or future
officers, directors or employees; (D) grant, pay or admit liability to pay any
severance or termination package to any employee or consultant; or (E) adopt any
new employee benefit plan (including any stock option, benefit or purchase plan)
or amend any existing employee benefit plan in any respect;
(f) shall not declare, set aside or pay any dividend or
make any other distribution or payment with respect to any shares of its capital
stock;
(g) shall not enter into any material transaction, or agree
to enter into any material transaction, outside the ordinary course of business,
including, without limitation, any transaction involving a merger,
consolidation, joint venture, partial or complete liquidation or dissolution,
reorganization, recapitalization, restructuring or a purchase, sale, lease or
other disposition of a substantial portion of assets or capital stock;
(h) shall not incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or warrants
or rights to acquire any debt securities of others;
(i) shall not make any loans, advances or capital
contributions to, or investments in, any other person;
(j) shall not make or commit to make any capital
expenditures except as set forth in Schedule 5.2-A in the case of Lottery or
Schedule 5.2-B in the case of Parent;
33
<PAGE>
(k) shall not apply any of its assets to the direct or
indirect payment, discharge, satisfaction or reduction of any amount payable
directly or indirectly to or for the benefit of any Affiliate or enter into any
transaction with any Affiliate;
(l) shall not alter the manner of keeping its books,
accounts or records, or change in any manner the accounting practices therein
reflected;
(m) shall not grant or make any mortgage or pledge or
subject itself or any of its properties or assets to any lien, charge or
encumbrance of any kind;
(n) shall maintain insurance on its tangible assets and its
businesses in such amounts and against such risks and losses as are currently in
effect; and
Section 5.3 Filings; Other Action.
(a) Subject to the terms and conditions herein provided,
Lottery and Parent shall use all reasonable efforts to take, or cause to be
taken, all action and do, or cause to be done, all things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Effective Time, any further reasonable
action is necessary or desirable to carry out the purpose of this Agreement, the
proper officers and directors of Parent and Lottery shall take all such
necessary action.
(b) (i) Lottery and Parent shall give any notices to
third parties, and use all reasonable efforts to obtain any third party
consents, necessary, proper or advisable to consummate the transactions
contemplated in this Agreement, including, without limitation, the consents of
any lenders, landlords or parties to agreements under which a breach, with
notice or lapse of time or both, would result in the termination or cancellation
thereof, accelerate the performance required thereby, result in the triggering
of any payment or other material obligation pursuant thereto, result in the
creation of any lien, security interest, charge or encumbrance upon any material
properties of Lottery or any of its Subsidiaries thereunder, or result in such
agreements being declared void, voidable or without further binding effect.
(ii) In the event that either party shall fail to
obtain any third party consent described in subsection (b) (i) above, such party
shall use all reasonable efforts, and shall take any such actions reasonably
requested by the other party hereto, to minimize any adverse effect upon Lottery
and Parent, their Subsidiaries, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
(c) From and after the date of this Agreement until the
Effective Time, each party hereto shall promptly notify the others of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause any condition to the obligations of any party
to effect the Merger and the other transactions contemplated by this Agreement
not to be satisfied, or (ii) the failure of Lottery or Parent, as the case may
be, to comply with or satisfy any covenant, condition or agreement
34
<PAGE>
to be complied with or satisfied by it pursuant to this Agreement which would be
likely to result in any condition to the obligations of any party to effect the
Merger and the other transactions contemplated by this Agreement not to be
satisfied; provided, however, that the delivery of any notice pursuant hereto
shall not cure any breach of any representation or warranty requiring disclosure
of such matter prior to the date of this Agreement or otherwise limit or affect
the remedies available hereunder to the party receiving such notice.
Section 5.4 Inspection of Records. From the date hereof to the
Effective Time, each party shall (a) allow all designated officers, attorneys,
accountants and other representatives of the other reasonable access at all
reasonable times to its offices, records and files, correspondence, audits and
properties, as well as to all information relating to its commitments,
contracts, titles and financial position, or otherwise pertaining to its
business and affairs; (b) furnish to each party and its representatives such
financial and operating data and other information as such persons may
reasonably request; and (c) instruct its employees, counsel and financial
advisors to cooperate with the other party and its representatives in their
investigation of its business.
Section 5.5 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the conditions of
performance set forth herein or the waiver thereof, perform such further acts
and execute such documents as may be reasonably required to effect the Merger.
Section 5.6 Break-Up Fees; Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall, except as otherwise provided
herein, be split equally between Lottery and Parent; provided, however, that in
the event that this Agreement is terminated pursuant to Sections 7.1(c), 7.1(d),
7.1(e) or 7.1(f), the party whose breach, or in the case of 7.1(e) and 7.1(f)
the decision to terminate, has led to such termination shall bear all of the
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby, including all such costs and expenses incurred
by the non-breaching party. Such costs and expenses (including, without
limitation, fees and expenses payable to all governmental authorities, banks,
investment banking firms and other financial institutions, and their respective
agents and counsel, and all fees and expenses of counsel, accountants, financial
printers, proxy solicitors, exchange agents, experts and consultants), shall be
reimbursed whether incurred prior to, on or after the date hereof, in connection
with the Merger and the consummation of the transactions contemplated hereby.
Section 5.7 Survival of Representations and Warranties. Notwithstanding
any right of party to investigate the affairs of the other and notwithstanding
any knowledge of facts determined or determinable by such party pursuant to such
investigation or right of investigation, such party has the right to rely fully
upon the representations, warranties, covenants and agreements of the other
party contained in this Agreement. All such representations, warranties,
covenants and agreements shall survive the execution and delivery hereof and the
consummation of the transactions contemplated hereby for a period of two years
following the Effective Time.
35
<PAGE>
Section 5.8 Governmental Approvals. As promptly as practicable after
the execution of this Agreement, Parent, Merger Sub and Lottery shall make any
filings or applications for consent required from any governmental authority in
connection with this Agreement and the transactions contemplated hereby, and
shall use their commercially reasonable efforts to obtain any such consents.
Section 5.9 Public Announcements. Each party to this Agreement and
their respective Subsidiaries shall consult with each other before issuing any
press release or otherwise making any public statements with respect to this
Agreement or any transaction contemplated hereby and shall not issue any such
press release (unless required by applicable law) or make any such public
statement without the prior consent of the other parties hereto, which consent
shall not be unreasonably withheld.
Section 5.10 Lottery Stockholders Meeting. Lottery shall call a meeting
of its stockholders (the "Lottery Stockholder Meeting") to be held as promptly
as practicable for the purpose of considering and voting upon this Agreement and
the Merger. The Board of Directors of Lottery shall recommend that the
stockholders of Lottery approve this Agreement and the Merger (the "Lottery
Stockholder Approval").
Section 5.11 Parent Stockholders Meeting. If required by applicable law
for the consummation of the Merger, Parent shall call a meeting of its
stockholders (the "Parent Stockholder Meeting") to be held as promptly as
practicable for the purpose of considering and voting upon the Merger and, if
such a meeting is required in order to consummate the Merger, the other the
proposals listed in Section 1.7 hereof. If such a meeting is required, the Board
of Directors of Parent shall recommend that the stockholders of Parent approve
such proposals (the "Parent Stockholder Approval").
Section 5.12 Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, (i) Lottery and Parent shall comply with applicable corporate and
securities laws and, if required by applicable law, prepare and file with the
SEC, a proxy statement relating to the Lottery Stockholder Meeting and Parent
Stockholder Meeting, as the case may be, to be held in connection with the
Merger (together with any amendments thereof or supplements thereto, the
"Lottery Proxy Statement" and "Parent Proxy Statement," respectively). Each of
Parent and Lottery shall cause the Proxy Statement, if required, to comply as to
form in all material respects with the applicable provisions of the Exchange
Act. Lottery and Parent shall furnish to the other all information concerning
Lottery and Parent as the other may reasonably request in connection with the
preparation of the documents referred to herein.
(b) The information supplied by each of Parent and Lottery
for inclusion in each of the Lottery Proxy Statement or Parent Proxy Statement,
as the case may be, shall not, at (i) the time the Lottery Proxy Statement or
Parent Proxy Statement is first mailed to the stockholders of Lottery or
36
<PAGE>
Parent, respectively, (ii) the time of the Lottery Stockholders Meeting or
Parent Stockholders Meeting or (iii) the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time, any event or
circumstance relating to Lottery, Parent or any of their respective Subsidiaries
or officers or directors, should be discovered by such party which should be set
forth in an amendment or a supplement to either the Lottery Proxy Statement or
Parent Proxy Statement, such party shall promptly inform the other thereof and
take appropriate action in respect thereof.
Section 5.13 Blue Sky. Parent shall use its commercially reasonable
efforts to obtain prior to the Effective Time all approvals or permits required
to carry out the transactions contemplated hereby under applicable securities
laws and regulations ("Blue Sky Laws") in connection with the issuance of the
Parent Common Stock in the Merger; provided, however, that with respect to such
qualifications Parent shall not be required to register or qualify as a foreign
corporation or take any action which would subject it to general service of
process or taxation in any jurisdiction where it is not now subject. Lottery
shall cooperate with Parent in the making of all required filings under the Blue
Sky Laws in connection with the issuance of Parent Common Stock in the Merger.
Section 5.14 Affiliates. If applicable, at least ten (10) days prior to
the mailing of the Lottery Proxy Statement (a) Lottery shall deliver to Parent a
letter identifying all persons who may be deemed to be affiliates of under Rule
145 of the Securities Act as of the record date of the Lottery Stockholders
Meeting, including, without limitation, all of its directors and executive
officers (the "Rule 145 Affiliates") and (b) Lottery shall advise the persons
identified in such letter of the resale restrictions imposed by applicable
securities laws and shall use commercially reasonable efforts to obtain from
each person identified in such letter a written agreement substantially in the
form of Exhibit A hereto.
Section 5.15 Registration Rights. Parent agrees to file a registration
statement, at its expense, covering the resale of shares of Parent Common Stock
issued in the Merger on the earlier of a date which is (a) six months after the
closing of the public offering contemplated by the letter of intent referred to
in Section 6.3(g), and (b) if such public offering has not commenced within six
months after the Effective Date or has commenced and terminated, six months
after the date of this Agreement. Parent shall use its best efforts to cause
such registration statement to become effective as soon as practicable.
Notwithstanding the foregoing, if the Board of Directors of Parent in good faith
determines that the filing of the registration statement would materially
adversely affect Parent by forcing premature disclosure of a pending material
event or otherwise, Parent may postpone the filing of such registration
statement by up to 90 days. Holders of a majority of the shares of Parent Common
Stock received in the Merger shall entitled to waive or amend any provision of
this Section 5.15, provided such waiver is in writing.
37
<PAGE>
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to Obligation of Each Party to Effect the
Merger. The obligation of each party hereto to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Lottery shall have received the Lottery Stockholder
Approval.
(b) Parent shall, if required by applicable law, have
received the Parent Stockholder Approval.
(c) All necessary regulatory and governmental approvals and
consents shall have been obtained.
(d) If either party has satisfied the conditions set forth
in this Section (Section 6.2 for Parent and Section 6.3 for Lottery) and the
other party has not satisfied such conditions within 60 days after the date
hereof, the party satisfying such conditions may terminate this Agreement.
Section 6.2 Conditions to Obligation of Lottery to Effect the Merger.
The obligation of Lottery to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Parent shall have performed, in all material respects,
all of its agreements contained herein that are required to be performed by
Parent on or prior to the Closing Date, and Lottery shall have received a
certificate of the President or Vice President of Parent dated the Closing Date,
certifying to such effect.
(b) The representations and warranties of Parent and Merger
Sub contained in this Agreement and in any document delivered in connection
herewith shall be true and correct in all material respects as of the Closing,
and Lottery shall have received a certificate of the President or Vice President
of Parent, dated the Closing Date, certifying to such effect.
(c) The Board of Directors of Lottery shall have received
from an investment banking firm a written opinion to the effect that, as of the
date of this Agreement, the Exchange Ratio is fair to the stockholders of
Lottery from a financial point of view, provided, that if Lottery shall not have
determined by written notice to Parent given within 15 business days of the date
of this Agreement to obtain such a fairness opinion, this subsection (c) shall
no longer be a condition to Lottery's obligation to effect the Merger.
(d) All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental thereto, and all other
related legal matters, shall be subject to the reasonable approval of
38
<PAGE>
Dinsmore & Shohl LLP, counsel to Lottery, and Parent shall have furnished such
counsel all documents as such counsel may have reasonably requested for the
purpose of enabling them to pass upon such matters.
(e) Lottery shall have been furnished with an opinion of
Squadron, Ellenoff, Plesent & Sheinfeld, LLP, counsel to Parent and Merger Sub,
substantially in the form of Exhibit C hereto.
Section 6.3 Conditions to Obligation of Parent and Merger Sub to Effect
the Merger. The obligations of Parent and Merger Sub to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Lottery shall have performed, in all material respects,
all of its agreements contained herein that are required to be performed by
Lottery on or prior to the Closing Date, including obtaining the consents to the
agreements listed on Schedule 6.3(a), and Parent and Merger Sub shall have
received a certificate of the President or a Vice President of Lottery, dated
the Closing Date, certifying to such effect.
(b) The representations and warranties of Lottery contained
in this Agreement and in any document delivered in connection herewith shall be
true and correct in all material respects as of the Closing, and Parent and
Merger Sub shall have received a certificate of the President or Vice President
of Lottery, dated the Closing Date, certifying to such effect.
(c) The holders of not more than 5% of the outstanding
Lottery Stock shall have given notice of an intent to exercise rights of dissent
pursuant to Section 1.6(d) hereof.
(d) The Board of Directors of Parent shall have received
from an investment banking firm a written opinion to the effect that, as of the
date of this Agreement, the Exchange Ratio is fair to the stockholders of Parent
from a financial point of view.
(e) No action shall have been taken, and no statute, rule,
regulation, executive order, judgment, decree or injunction (other than a
temporary restraining order) shall have been enacted, entered, promulgated or
enforced (and not repealed, superseded, lifted or otherwise made inapplicable)
by any court of competent jurisdiction or governmental authority with restrains,
enjoins or otherwise prohibits the consummation or the transactions contemplated
hereby.
(f) All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental thereto, and all other
related legal matters, shall be subject to the reasonable approval of Squadron,
Ellenoff, Plesent & Sheinfeld, LLP, counsel to the Parent and Merger Sub, and
Lottery shall have furnished such counsel all documents as such counsel may have
reasonably requested for the purpose of enabling them to pass upon such matters.
(g) Parent shall have received a non-binding letter of
intent executed by an investment banking firm which contemplates
39
<PAGE>
that such firm will act as an underwriter for a public offering of Parent Common
Stock of at least $30,000,000 in gross proceeds.
(h) National Broadcasting Company ("NBC") shall have
purchased $10,000,000 of Parent Common Stock at a minimum price of $8.00 per
share.
(i) Parent shall have received at least $5,000,000
(exclusive of amounts received from NBC) of gross proceeds from the private
placement of equity securities of Parent.
(j) The Stock Purchase Agreement, dated September 21, 1998,
between Lottery and NBC Multimedia, Inc. and the NBC In-Content Provider
Agreement, dated September 21, 1998, between Lottery and NBC MultiMedia, Inc.
shall have been amended or modified on terms acceptable to Parent in its sole
discretion.
(k) The URL's (domain names) owned by or registered to
Chicago West Pullman, llc, and listed on Schedule 6.3(k), shall have been
transferred for no consideration to Lottery or such other entity designated by
Parent.
(l) The Asset Purchase Agreement, dated July 9, 1999,
between iXL-Richmond, Inc. and Lottery, and any and all of the agreements
contemplated by the Asset Purchase Agreement, shall have been amended in form
and substance satisfactory to Parent.
(m) The Agreement, dated November 3, 1998, between Lottery,
Bingo, Inc. and Strauss & Troy shall have been amended in form and substance
satisfactory to Parent.
(n) Lottery's Series A Preferred Stock shall have been
converted into Lottery Stock immediately prior to the Merger.
(o) The Voting Agreement, attached hereto as Exhibit B,
shall have been executed by the parties listed therein.
(p) Parent and Merger Sub shall have been furnished with an
opinion of Dinsmore & Shohl LLP, counsel to Lottery, substantially in the form
of Exhibit C hereto.
(q) The employment agreement between The Lottery Channel,
Inc. and Roger W. Ach, II shall have been amended in form and substance similar
to the employment agreement between Media Drop-In Productions, Inc. and Steven
M. Saferin.
(r) The Operating Agreement of NetGain Technologies, Inc.
shall have been amended in form and substance satisfactory to Parent.
40
<PAGE>
(s) Roger W. Ach, II shall agree to indemnify Parent in
shares of Parent Common Stock for any amounts over $100,000 payable by Parent if
the disclosure on Schedule 4.19(2) results in a litigation resulting in amounts
payable by Lottery or Parent over $100,000.
ARTICLE VII
TERMINATION
Section 7.1 Termination. This Agreement may be terminated and the
Merger contemplated hereby may be abandoned, by written notice promptly given to
the other parties hereto, at any time prior to the Effective Time, whether prior
to or after approval by their respective stockholders:
(a) by mutual written consent of Parent and Lottery;
(b) by either Parent or Lottery, if a court of competent
jurisdiction or a governmental entity shall have issued an order, decree or
ruling or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become final
and nonappealable;
(c) by Parent, if Lottery fails to perform in all material
respects its obligations under this Agreement, or there has been a material
violation or breach by Lottery of any representation, warranty or agreement
contained herein;
(d) by Lottery, if Parent fails to perform in all material
respects its obligations under this Agreement, or there has been a material
violation or breach by Parent or Merger Sub of any representation, warranty or
agreement contained herein;
(e) by Parent, if, prior to the Effective Time, any Third
Party has made a bona fide fully financed written offer relating to an
Alternative Proposal, or has commenced a tender or exchange offer for Parent
Common Stock, and Parent's Board of Directors determines in good faith (i) after
consultation with its financial advisors, and that such transaction constitutes
a Superior Proposal and (ii) after having received the written opinion of
outside legal counsel to Parent, that the failure to engage in such negotiations
or discussions or provide such information would result in a breach of the
fiduciary duties of the Board of Directors of Parent under applicable law. As
used herein, "Superior Proposal" means any bona fide fully-financed written
offer made by a Third Party to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, more than 50% of a party's
Common Stock then outstanding or all or substantially all of the assets of such
party and otherwise on terms which the Board of Directors of such party
determines (after consultation with a nationally recognized investment bank) to
be economically superior to the transaction contemplated by this Agreement.
41
<PAGE>
(f) by Lottery, if, prior to the Effective Time, any Third
Party has made a bona fide fully financed written offer relating to an
Alternative Proposal, or has commenced a tender or exchange offer for Lottery
Stock, and Lottery's Board of Directors determines in good faith (i) after
consultation with its financial advisors, and that such transaction constitutes
a Superior Proposal and (ii) after having received the written opinion of
outside legal counsel to Lottery, that the failure to engage in such
negotiations or discussions or provide such information would result in a breach
of the fiduciary duties of the Board of Directors of Lottery under applicable
law.
Section 7.2 Effect of Termination. In the event of the termination of
this Agreement and abandonment of the Merger as provided in Section 7.1 hereof,
this Agreement shall forthwith become void and there shall be no liability on
the part of Parent or Lottery, except as set forth in this Section 7.2 and
Section 5.6 hereof, and except to the extent that such termination results from
the willful breach of a party hereto of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Notices. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission or by courier
service (with proof of service), hand delivery or certified or registered mail
(return receipt requested and first-class postage prepaid), addressed as
follows:
If to Parent or Merger Sub: If to Lottery:
MDI Entertainment, Inc. The Lottery Channel, Inc.
201 Ann Street 425 Walnut Street, Suite 2300
Hartford, CT 06103 Cincinnati, OH 45202
Fax: (860) 527-5920 Fax: (513) 712-6035
Attn: Steven M. Saferin, Attn: Roger Ach, II
Chief Executive Officer
With copies to: With copies to:
Squadron, Ellenoff, Plesent & Dinsmore & Shohl LLP
Sheinfeld, LLP 255 East Fifth Street
551 Fifth Avenue Cincinnati, OH 45202
New York, New York 10176 Fax: (513) 977-8141
Fax: (212) 697-6686 Attn: Charles F. Hertlein, Jr.
Attn: Kenneth R. Koch
42
<PAGE>
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered or mailed.
Section 8.2 Assignment, Binding Effect. Neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that Merger Sub may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to any direct or indirect Subsidiary of Parent. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective permitted successors and assigns.
Section 8.3 Entire Agreement. This Agreement and any documents
delivered by the parties in connection herewith constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
Section 8.4 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 8.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
its rules of conflict of laws.
Section 8.6 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
Section 8.7 Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
Section 8.8 Interpretation. In this Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
Section 8.9 Waivers. Except as provided in this Agreement, 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 in this Agreement. The waiver by
any party hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any other
provision hereunder.
43
<PAGE>
Section 8.10 Incorporation of Schedules and Exhibits. The Schedules and
Exhibits attached hereto and referred to herein are hereby incorporated herein
and made a part hereof for all purposes as if fully set forth herein.
Section 8.11 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
Section 8.12 Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to seek an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which they are entitled at law or in equity.
44
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
----------------------------
Steven M. Saferin
President and Chief Executive Officer
MDI ACQUISITION, INC.
By: /s/ Steven M. Saferin
----------------------------
Steven M. Saferin
President and Chief Executive Officer
THE LOTTERY CHANNEL, INC.
By: /s/ Roger W. Ach II
----------------------------
Roger W. Ach, II
President and Chief Executive Officer
45
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT, dated as of January 26, 2000 (the
"Agreement"), is made and entered into by MDI ENTERTAINMENT, INC., a Delaware
corporation ("Parent"), MDI ACQUISITION, INC., a Delaware corporation and a
wholly-owned subsidiary of the Parent ("Merger Sub"), and the parties listed on
Schedule A (each party on Schedule A shall be referred to individually as a
"Stockholder" and collectively as the "Stockholders").
WITNESSETH:
WHEREAS, on the date hereof, Parent, Merger Sub and The Lottery Channel,
Inc., a Delaware corporation ("Lottery"), entered into an Agreement and Plan of
Merger (as such agreement may hereafter be amended, restated or otherwise
modified from time to time, the ("Merger Agreement"), pursuant to which each
outstanding share of Lottery Stock will be converted into and represent the
right to receive one share of Parent Common Stock, and Lottery will be merged
with and into Merger Sub;
WHEREAS, set forth opposite each Stockholder's name on Schedule A is the
number of shares of Lottery Stock or Series A Preferred Stock owned by such
Stockholder; and
WHEREAS, the Stockholders are executing this Agreement as an inducement
to Parent and Merger Sub to facilitate the Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS. Capitalized terms used and not defined herein shall have
the respective meanings ascribed to them in the Merger Agreement. For purposes
of this Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to
any securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), including pursuant to any agreement, arrangement
or understanding, whether or not in writing but excluding any shares deemed to
be beneficially owned by a Person as a result of the participation of such
Person in a "group" within the meanings of Section 13(d)(3) of the Exchange Act.
(b) "Merger" shall mean the merger contemplated by the Merger
Agreement.
1
<PAGE>
(c) "Person" shall mean an individual, corporation, partnership,
joint venture, association, trust, unincorporated organization or other entity.
(d) "Termination Event " shall mean the termination of the Merger
Agreement in accordance with its terms.
2. STOCKHOLDER APPROVAL.
(a) Provided that a Termination Event has not occurred, each of
the Stockholders hereby, severally and not jointly and severally, agrees:
(i) as soon as practical following the date hereof, to use
such influence as he may have by reason of his Beneficial Ownership of shares of
Lottery Stock ("Shares") to call a meeting of the Stockholders of Lottery or
arrange for the execution of a consent by the holders of the requisite majority
of Shares (a "Stockholder Vote") in order to approve and adopt the Merger
Agreement and the Merger;
(ii) to exercise any vote he may have as a Beneficial
Owner of Shares in a Stockholder Vote to approve the Merger Agreement and the
Merger;
(iii) to vote against any Alternative Proposal, including
a Lottery Superior Proposal; and
(iv) to use best efforts to cause the consummation of the
transactions contemplated by the Merger Agreement.
3. TERMINATION. All obligations of the Stockholders under this Agreement
shall terminate upon a Termination Event; provided that the foregoing shall not
affect the rights of Parent or Merger Sub arising out of any breach prior to
such Termination Event.
4. COVENANTS, REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER. Each
Stockholder hereby, severally and not jointly and severally, represents and
warrants to Parent and Merger Sub as follows:
(a) OWNERSHIP BY SHARES. Such Stockholder is (i) the record and
Beneficial Owner of, or (ii) the Beneficial Owner but not the record holder of,
the number of Shares in each such category set forth opposite the Stockholder's
name on Schedule A. As of the date hereof, the Shares set forth opposite such
Stockholder's name on Schedule A constitute all of the Shares owned of record or
Beneficially Owned by such Stockholder. Such Stockholder has sole power to issue
instructions with respect to the matters set forth in Section 2 hereof, sole
power of disposition, sole power of conversion, sole power to elect to dissent
to the Merger and sole power to agree to all of the matters set forth in this
Agreement, in each case with respect to all of the Shares set forth opposite
such Stockholder's name on Schedule A, as the case may be, with no material
2
<PAGE>
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement.
(b) POWER; BINDING AGREEMENT. Such Stockholder has the legal
capacity, power and authority to enter into and perform all of such
Stockholder's obligations under this Agreement. The execution, delivery and
performance of this Agreement by such Stockholder will not violate any other
agreement to which such Stockholder is a party, including, without limitation,
any voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by such Stockholder and
constitutes a valid and binding agreement of such Stockholder, enforceable
against such Stockholder in accordance with its terms. There is no beneficiary
or holder of a voting trust certificate or other interest of any trust of which
such Stockholder is trustee whose consent is required for the execution and
delivery of this Agreement or the consummation by such Stockholder of the
transactions contemplated hereby. If such Stockholder is married and such
Stockholder's Shares constitute community property, this Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and binding
agreement of, such Stockholder's spouse with the same effect and to the same
extent as is applicable with respect to such Stockholder, enforceable against
such person in accordance with its terms.
(c) NO CONFLICTS. Except for filings under the Exchange Act (i)
no filing with, and no permit, authorization, consent or approval of, any state
or federal public body or authority is necessary for the execution of this
Agreement by the Stockholder and the consummation by such Stockholder of the
transactions contemplated hereby, except where the failure to obtain such
consent, permit, authorization, approval or filing would not interfere with such
Stockholder's ability to perform its obligations hereunder, and (ii) none of the
execution and delivery of this Agreement by such Stockholder, the consummation
by such Stockholder of the transactions contemplated hereby or compliance by
such Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of any applicable organizational documents applicable to
such Stockholder, (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any third
party right of termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which such Stockholder is a
party or by which such Stockholder or any of such Stockholder's properties or
assets may be bound, or (C) violate any order, writ, injunction, decree,
judgment, order, statute, rule or regulation applicable to such Stockholder or
any of such Stockholder's properties or assets, in each such case except to the
extent that any conflict, breach, default or violation would not interfere with
the ability of such Stockholder to perform its obligations hereunder.
(d) NO ENCUMBRANCES. Except as required or permitted by Sections
2 and 4, the Shares of such Stockholder and the certificates representing such
Shares are now, and at all times during the term hereof will be, held by such
Stockholder, or by a nominee or custodian for the benefit of such Stockholder,
free and clear of all liens, claims, security interests, proxies, voting trusts
or agreements, understandings or arrangements or any other encumbrances
whatsoever.
3
<PAGE>
(e) NO FINDER'S FEES. No broker, investment banker, financial
adviser or other person is entitled to any broker's, finder's, financial
adviser's or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of such
Stockholder.
(f) RESTRICTION ON TRANSFER, PROXIES AND NON-INTERFERENCE. Prior
to the occurrence of a Termination Event, except as required by this Agreement,
the Stockholder shall not directly or indirectly without the consent of Parent:
(i) offer for sale, sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of, any or all of such
Stockholder's Shares, or any interest therein, unless such Stockholder first
obtains from the assignee a proxy giving the Stockholder the right to vote such
Shares in favor of the Merger (ii) grant any proxies or powers of attorney,
deposit any shares into a voting trust or enter into a voting agreement with
respect to any Shares, or (iii) take any action that could have the effect of
preventing or disabling such Stockholder from performing such Stockholder's
obligations under this Agreement. Each of the Stockholders and Lottery agree
that any purported transfer of such Stockholder's Shares or any interest therein
in violation of the Agreement shall be void ab initio and shall not be effected
on the books and records of Lottery and that, in the event of any inquiry by
Parent, Merger Sub or Lottery, or any related proceeding, the Stockholder shall
have the burden of proving that any action described in this Section 4(f) is in
compliance with this Agreement.
(g) WAIVER OF APPRAISAL RIGHTS. The Stockholder hereby waives any
rights of appraisal or rights to dissent from the Merger that the Stockholder
may have under the Delaware General Corporation Law or otherwise.
(h) STOCKHOLDER INTENTION TO RETAIN SHARES. Following his receipt
of Parent Common Stock in accordance with the Merger Agreement, the Stockholder
has no present plan to sell, exchange or otherwise dispose of such number of
Parent Common Stock as would cause the Merger to fail to qualify as a
reorganization under Section 368(a) of the Code.
5. STOP TRANSFER. Each Stockholder agrees with, and covenants to, Parent
that prior to a Termination Event such Stockholder shall not request that
Lottery register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Stockholder's Shares, unless
such transfer is made in compliance with this Agreement.
6. ADJUSTMENT OF EXCHANGE RATIO. In the event that, subsequent to the
date of this Agreement, but prior to the Effective Time, the Shares shall have
been changed into a different number or a different class of shares as a result
of a stock split, reverse stock split, stock dividend, subdivision,
reclassification split, combination exchange, recapitalization or other similar
transaction, the Exchange Ratio shall be appropriately adjusted and the term
"Shares" shall be deemed to refer and include the Shares and any shares into
which or for which any or all of the Shares may be changed.
4
<PAGE>
7. STOCKHOLDER CAPACITY. Except as the Agreement expressly provides
otherwise, no person executing this Agreement who is or becomes during the term
hereof a director or officer of Lottery makes any agreement or understanding
herein in his or her capacity as such director or officer and nothing herein
shall limit or affect any action taken by such person in his or her capacity as
a director or officer. Each Stockholder signs solely in his or her capacity as
the record and beneficial owner of, or the trustee of a trust whose
beneficiaries are the beneficial owners of, such Stockholder's Shares.
8. STOCKHOLDERS' OBLIGATIONS. All obligations and liabilities of each
Stockholder under this Agreement shall be several and not joint and no
Stockholder shall have any liability for any obligations or liabilities under
this Agreement of any other Stockholder.
9. FURTHER ASSURANCES. From time to time, at the other parties'
reasonable request and without further consideration, each Stockholder and
Merger Sub and Parent shall execute and deliver such additional documents and
take such other action as may be reasonably necessary or desirable to consummate
and make effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
10. MISCELLANEOUS.
(a) NOTICES. Any notice or other communication required or which
may be given hereunder shall be in writing and shall be delivered personally, by
facsimile transmission, telegraphed or telexed, or sent by certified,
registered, or express mail, postage prepaid, and shall be deemed given when so
delivered personally, successfully faxed, telegraphed or telexed, or if mailed,
two days after the date of mailing, as follows:
(i)if to Parent or Merger Sub, to:
MDI Entertainment, Inc.
201 Ann Street
Hartford, CT 06103
Facsimile: (860) 527-5920
Attention: Steven M. Saferin
with a copy to:
Squadron, Ellenoff, Plesent
& Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Facsimile: (212) 697-6686
Attention: Kenneth R. Koch, Esq.
5
<PAGE>
(ii) if to Lottery or to any of the Stockholders, to:
The Lottery Channel, Inc.
425 Walnut Street, Suite 2300
Cincinnati, OH 45202
Facsimile: (513) 712-6035
Attention: Roger Ach, II
with a copy to:
Dinsmore & Shohl LLP
255 East Fifth Street
Cincinnati, OH 45202
Facsimile: (513) 977-8141
Attention: Charles F. Hertlein, Jr., Esq.
(b) ENTIRE AGREEMENT. This Agreement (including the Schedules
hereto) contains the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior agreements, written or oral, with
respect thereto.
(c) WAIVER; AMENDMENTS; SEPARABILITY. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity. If any provision of this Agreement is held to be invalid or
unenforceable, the balance of this Agreement shall remain in effect.
(d) SURVIVAL. None of the representations and warranties of the
Stockholders contained in this Agreement shall survive the Closing. Except as
specifically set forth in this Agreement and the agreements and documents
specifically referred to herein, there are no representations or warranties,
express or implied, made by any party in connection with the transactions
contemplated by this Agreement.
(e) GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State.
6
<PAGE>
(f) NO ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective permitted successors and assigns.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(h) SCHEDULE. Schedule A to this Agreement is a part of this
Agreement as if set forth in full herein.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first written above.
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
---------------------------
Name: Steven M. Saferin
Title: President and Chief Executive
Officer
MDI ACQUISITION, INC.
By: /s/ Steven M. Saferin
-----------------------------
Name: Steven M. Saferin
Title: President
CHICAGO WEST PULLMAN
By: /s/ Roger W. Ach, II
----------------------------
Roger W. Ach, II
Title: Member
/s/ Roger W. Ach, II
--------------------
Roger W. Ach, II
/s/ Carol A. Meinhardt
----------------------
Carol A. Meinhardt
The undersigned hereby
acknowledges and agrees
to be bound by the provisions
of Section 4(f) of the foregoing
Agreement, as of the date
written above:
THE LOTTERY CHANNEL, INC.
By: /s/ Roger W. Ach, II
- - - -------------------------
Name: Roger W. Ach, II
Title: President and Chief Executive Officer
8
<PAGE>
SCHEDULE A
STOCKHOLDER NO. OF SHARES
Chicago West Pullman 1,000 Series A Preferred (3,042,000 votes)
Roger W. Ach 1,393,150 Common Stock
Carol A. Meinhardt 75,000 Common Stock
9
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT, dated as of January 26, 2000 (the
"Agreement"), is made and entered into by THE LOTTERY CHANNEL, INC., a Delaware
corporation ("Lottery") and the parties listed on Schedule A (each party on
Schedule A shall be referred to individually as a "Stockholder" and collectively
as the "Stockholders").
WITNESSETH:
WHEREAS, on the date hereof, MDI Entertainment, Inc., a Delaware
corporation ("Parent"), MDI Acquisition, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Parent ("Merger Sub"), and Lottery, entered into
an Agreement and Plan of Merger (as such agreement may hereafter be amended,
restated or otherwise modified from time to time, the ("Merger Agreement"),
pursuant to which each outstanding share of Lottery Stock will be converted into
and represent the right to receive one share of Parent Common Stock, and Lottery
will be merged with and into Merger Sub;
WHEREAS, set forth opposite each Stockholder's name on Schedule A is the
number of shares of Parent Common Stock owned by such Stockholder; and
WHEREAS, the Stockholders are executing this Agreement as an inducement
to Lottery to facilitate the Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. DEFINITIONS. Capitalized terms used and not defined herein shall have
the respective meanings ascribed to them in the Merger Agreement. For purposes
of this Agreement:
(a) "Beneficially Own" or "Beneficial Ownership" with respect to
any securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), including pursuant to any agreement, arrangement
or understanding, whether or not in writing but excluding any shares deemed to
be beneficially owned by a Person as a result of the participation of such
Person in a "group" within the meanings of Section 13(d)(3) of the Exchange Act.
(b) "Merger" shall mean the merger contemplated by the Merger
Agreement.
1
<PAGE>
(c) "Person" shall mean an individual, corporation, partnership,
joint venture, association, trust, unincorporated organization or other entity.
(d) "Termination Event " shall mean the termination of the Merger
Agreement in accordance with its terms.
2. STOCKHOLDER APPROVAL.
(a) Provided that a Termination Event has not occurred, each of
the Stockholders hereby, severally and not jointly and severally, agrees:
(i) as soon as practical following the date hereof, to use
such influence as he may have by reason of his Beneficial Ownership of shares of
Parent Common Stock ("Shares") to call a meeting of the Stockholders of Parent
or arrange for the execution of a consent by the holders of the requisite
majority of Shares (a "Stockholder Vote") in order to approve and adopt the
Merger Agreement and the Merger, if required by applicable law;
(ii) to exercise any vote he may have as a Beneficial
Owner of Shares in a Stockholder Vote to approve the Merger Agreement and the
Merger;
(iii) to vote against any Alternative Proposal, including
a Parent Superior Proposal; and
(iv) to use best efforts to cause the consummation of the
transactions contemplated by the Merger Agreement.
3. TERMINATION. All obligations of the Stockholders under this Agreement
shall terminate upon a Termination Event; provided that the foregoing shall not
affect the rights of Lottery arising out of any breach prior to such Termination
Event.
4. COVENANTS, REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER. Each
Stockholder hereby, severally and not jointly and severally, represents and
warrants to Lottery as follows:
(a) OWNERSHIP BY SHARES. Such Stockholder is (i) the record and
Beneficial Owner of, or (ii) the Beneficial Owner but not the record holder of,
the number of Shares in each such category set forth opposite the Stockholder's
name on Schedule A. As of the date hereof, the Shares set forth opposite such
Stockholder's name on Schedule A constitute all of the Shares owned of record or
Beneficially Owned by such Stockholder. Such Stockholder has sole power to issue
instructions with respect to the matters set forth in Section 2 hereof, sole
power of disposition, sole power of conversion, sole power to elect to dissent
to the Merger and sole power to agree to all of the matters set forth in this
Agreement, in each case with respect to all of the Shares set forth opposite
such Stockholder's name on Schedule A, as the case may be, with no material
2
<PAGE>
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement.
(b) POWER; BINDING AGREEMENT. Such Stockholder has the legal
capacity, power and authority to enter into and perform all of such
Stockholder's obligations under this Agreement. The execution, delivery and
performance of this Agreement by such Stockholder will not violate any other
agreement to which such Stockholder is a party, including, without limitation,
any voting agreement, stockholder's agreement or voting trust. This Agreement
has been duly and validly executed and delivered by such Stockholder and
constitutes a valid and binding agreement of such Stockholder, enforceable
against such Stockholder in accordance with its terms. There is no beneficiary
or holder of a voting trust certificate or other interest of any trust of which
such Stockholder is trustee whose consent is required for the execution and
delivery of this Agreement or the consummation by such Stockholder of the
transactions contemplated hereby. If such Stockholder is married and such
Stockholder's Shares constitute community property, this Agreement has been duly
authorized, executed and delivered by, and constitutes a valid and binding
agreement of, such Stockholder's spouse with the same effect and to the same
extent as is applicable with respect to such Stockholder, enforceable against
such person in accordance with its terms.
(c) NO CONFLICTS. Except for filings under the Exchange Act (i)
no filing with, and no permit, authorization, consent or approval of, any state
or federal public body or authority is necessary for the execution of this
Agreement by the Stockholder and the consummation by such Stockholder of the
transactions contemplated hereby, except where the failure to obtain such
consent, permit, authorization, approval or filing would not interfere with such
Stockholder's ability to perform its obligations hereunder, and (ii) none of the
execution and delivery of this Agreement by such Stockholder, the consummation
by such Stockholder of the transactions contemplated hereby or compliance by
such Stockholder with any of the provisions hereof shall (A) conflict with or
result in any breach of any applicable organizational documents applicable to
such Stockholder, (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any third
party right of termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding, agreement
or other instrument or obligation of any kind to which such Stockholder is a
party or by which such Stockholder or any of such Stockholder's properties or
assets may be bound, or (C) violate any order, writ, injunction, decree,
judgment, order, statute, rule or regulation applicable to such Stockholder or
any of such Stockholder's properties or assets, in each such case except to the
extent that any conflict, breach, default or violation would not interfere with
the ability of such Stockholder to perform its obligations hereunder.
(d) NO ENCUMBRANCES. Except as required or permitted by Sections
2 and 4, the Shares of such Stockholder and the certificates representing such
Shares are now, and at all times during the term hereof will be, held by such
Stockholder, or by a nominee or custodian for the benefit of such Stockholder,
free and clear of all liens, claims, security interests, proxies, voting trusts
or agreements, understandings or arrangements or any other encumbrances
whatsoever.
3
<PAGE>
(e) NO FINDER'S FEES. No broker, investment banker, financial
adviser or other person is entitled to any broker's, finder's, financial
adviser's or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of such
Stockholder.
(f) RESTRICTION ON TRANSFER, PROXIES AND NON-INTERFERENCE. Prior
to the occurrence of a Termination Event, except as required by this Agreement,
the Stockholder shall not directly or indirectly without the consent of Lottery:
(i) offer for sale, sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of, any or all of such
Stockholder's Shares, or any interest therein, unless such Stockholder first
obtains from the assignee a proxy giving the Stockholder the right to vote such
Shares in favor of the Merger (ii) grant any proxies or powers of attorney,
deposit any shares into a voting trust or enter into a voting agreement with
respect to any Shares, or (iii) take any action that could have the effect of
preventing or disabling such Stockholder from performing such Stockholder's
obligations under this Agreement. Each of the Stockholders and Lottery agree
that any purported transfer of such Stockholder's Shares or any interest therein
in violation of the Agreement shall be void ab initio and shall not be effected
on the books and records of Parent and that, in the event of any inquiry by
Parent, Merger Sub or Lottery, or any related proceeding, the Stockholder shall
have the burden of proving that any action described in this Section 4(f) is in
compliance with this Agreement.
(g) WAIVER OF APPRAISAL RIGHTS. The Stockholder hereby waives any
rights of appraisal or rights to dissent from the Merger that the Stockholder
may have under the Delaware General Corporation Law or otherwise.
(h) STOCKHOLDER INTENTION TO RETAIN SHARES. The Stockholder has
no present plan to sell, exchange or otherwise dispose of such number of Parent
Common Stock as would cause the Merger to fail to qualify as a reorganization
under Section 368(a) of the Code.
5. STOP TRANSFER. Each Stockholder agrees with, and covenants to,
Lottery that prior to a Termination Event such Stockholder shall not request
that Parent register the transfer (book-entry or otherwise) of any certificate
or uncertificated interest representing any of such Stockholder's Shares, unless
such transfer is made in compliance with this Agreement.
6. ADJUSTMENT OF EXCHANGE RATIO. In the event that, subsequent to the
date of this Agreement, but prior to the Effective Time, the Shares shall have
been changed into a different number or a different class of shares as a result
of a stock split, reverse stock split, stock dividend, subdivision,
reclassification split, combination exchange, recapitalization or other similar
transaction, the Exchange Ratio shall be appropriately adjusted and the term
"Shares" shall be deemed to refer and include the Shares and any shares into
which or for which any or all of the Shares may be changed.
4
<PAGE>
7. STOCKHOLDER CAPACITY. Except as the Agreement expressly provides
otherwise, no person executing this Agreement who is or becomes during the term
hereof a director or officer of Parent makes any agreement or understanding
herein in his or her capacity as such director or officer and nothing herein
shall limit or affect any action taken by such person in his or her capacity as
a director or officer. Each Stockholder signs solely in his or her capacity as
the record and beneficial owner of, or the trustee of a trust whose
beneficiaries are the beneficial owners of, such Stockholder's Shares.
8. STOCKHOLDERS' OBLIGATIONS. All obligations and liabilities of each
Stockholder under this Agreement shall be several and not joint and no
Stockholder shall have any liability for any obligations or liabilities under
this Agreement of any other Stockholder.
9. FURTHER ASSURANCES. From time to time, at the other parties'
reasonable request and without further consideration, each of Stockholder and
Lottery shall execute and deliver such additional documents and take such other
action as may be reasonably necessary or desirable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement.
10 MISCELLANEOUS.
(a) NOTICES. Any notice or other communication required or which
may be given hereunder shall be in writing and shall be delivered personally, by
facsimile transmission, telegraphed or telexed, or sent by certified,
registered, or express mail, postage prepaid, and shall be deemed given when so
delivered personally, successfully faxed, telegraphed or telexed, or if mailed,
two days after the date of mailing, as follows:
(i)if to Parent or Merger Sub, to:
MDI Entertainment, Inc.
201 Ann Street
Hartford, CT 06103
Facsimile: (860) 527-5920
Attention: Steven M. Saferin
with a copy to:
Squadron, Ellenoff, Plesent
& Sheinfeld, LLP
551 Fifth Avenue
New York, NY 10176
Facsimile: (212) 697-6686
Attention: Kenneth R. Koch, Esq.
5
<PAGE>
(ii) if to Lottery or to any of the Stockholders, to:
The Lottery Channel, Inc.
425 Walnut Street, Suite 2300
Cincinnati, OH 45202
Facsimile: (513) 712-6035
Attention: Roger Ach, II
with a copy to:
Dinsmore & Shohl LLP
255 East Fifth Street
Cincinnati, OH 45202
Facsimile: (513) 977-8141
Attention: Charles F. Hertlein, Jr., Esq.
(b) ENTIRE AGREEMENT. This Agreement (including the Schedules
hereto) contains the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior agreements, written or oral, with
respect thereto.
(c) WAIVER; AMENDMENTS; SEPARABILITY. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity. If any provision of this Agreement is held to be invalid or
unenforceable, the balance of this Agreement shall remain in effect.
(d) SURVIVAL. None of the representations and warranties of the
Stockholders contained in this Agreement shall survive the Closing. Except as
specifically set forth in this Agreement and the agreements and documents
specifically referred to herein, there are no representations or warranties,
express or implied, made by any party in connection with the transactions
contemplated by this Agreement.
(e) GOVERNING LAW. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State.
6
<PAGE>
(f) NO ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective permitted successors and assigns.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(h) SCHEDULE. Schedule A to this Agreement is a part of this
Agreement as if set forth in full herein.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first written above.
THE LOTTERY CHANNEL, INC.
By: /s/ Roger W. Ach II
----------------------------
Name: Roger W. Ach, II
Title: President and Chief Executive Officer
/s/ Steven M. Saferin
---------------------
Steven M. Saferin
The undersigned hereby
acknowledges and agrees
to be bound by the provisions
of Section 4(f) of the foregoing
Agreement, as of the date
written above:
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
- - - --------------------------
Name: Steven. M. Saferin
Title: President and Chief Executive Officer
8
<PAGE>
SCHEDULE A
STOCKHOLDER NO. OF SHARES
Steven M. Saferin 3,795,169
9
MDI Entertainment, Inc.
January 26, 2000
Page 1
Steven M. Saferin
c/o MDI Entertainment, Inc.
201 Ann Street
Hartford, Connecticut 06103
January 26, 2000
MDI Entertainment, Inc.
201 Ann Street
Hartford, Connecticut 06103
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated as of
January 26, 2000, by and among MDI Entertainment, Inc., a Delaware corporation
("MDI"), MDI Acquisition, Inc., a Delaware corporation, and the Lottery Channel,
Inc., a Delaware corporation (the "Merger Agreement").
1. As a further inducement for the parties to the Merger Agreement to
consummate the transactions contemplated by the Merger Agreement, I hereby agree
that:
(i) MDI need not reserve 225,000 shares of MDI common stock, par
value $.001 per share ("Common Stock"), underlying options (the "Options") that
I currently own; and
(ii) I will not exercise the Options unless and until the
stockholders of MDI have approved an amendment to MDI's Certificate of
Incorporation authorizing additional shares of MDI Common Stock.
2. Miscellaneous.
(i) Entire Agreement. This Agreement contains the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto.
(ii) Waiver; Amendments; Separability. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
<PAGE>
MDI Entertainment, Inc.
January 26, 2000
Page 2
hereunder. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity. If any provision of this Agreement is held to be invalid or
unenforceable, the balance of this Agreement shall remain in effect.
(iii) Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State.
(iv) No Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective permitted successors and assigns.
(v) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
If the foregoing accurately reflects our agreement with respect to the
foregoing matters, please sign a copy of this letter in the space provided below
and return it to the undersigned.
Very truly yours,
/s/ Steven M. Saferin
---------------------
Steven M. Saferin
Accepted and agreed to as of the date first above written:
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
- - - ----------------------------
Steven M. Saferin
President and Chief Executive Officer
MDI Entertainment, Inc.
January 26, 2000
Page 1
Roger W. Ach, II
c/o The Lottery Channel, Inc.
425 Walnut Street, Suite 2300
Cincinnati, OH 45202
January 26, 2000
MDI Entertainment, Inc.
201 Ann Street
Hartford, Connecticut 06103
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated as of
January 26, 2000, by and among MDI Entertainment, Inc., a Delaware corporation
("MDI"), MDI Acquisition, Inc., a Delaware corporation, and the Lottery Channel,
Inc., a Delaware corporation (the "Merger Agreement").
1. As a further inducement for the parties to the Merger Agreement to
consummate the transactions contemplated by the Merger Agreement, I hereby agree
that:
(i) MDI need not reserve 2,064,500 shares of MDI common stock,
par value $.001 per share ("Common Stock"), underlying options and rights (the
"Options") that I will own upon consummation of the transactions contemplated by
the Merger Agreement; and
(ii) I will not exercise the Options unless and until the
stockholders of MDI have approved an amendment to MDI's Certificate of
Incorporation authorizing additional shares of MDI Common Stock.
2. Miscellaneous.
(i) Entire Agreement. This Agreement contains the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral, with respect thereto.
(ii) Waiver; Amendments; Separability. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder, preclude any other or further
<PAGE>
MDI Entertainment, Inc.
January 26, 2000
Page 2
exercise thereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which any party may otherwise have at law or
in equity. If any provision of this Agreement is held to be invalid or
unenforceable, the balance of this Agreement shall remain in effect.
(iii) Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State.
(iv) No Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective permitted successors and assigns.
(v) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
If the foregoing accurately reflects our agreement with respect to the
foregoing matters, please sign a copy of this letter in the space provided below
and return it to the undersigned.
Very truly yours,
/s/ Roger W. Ach II
-------------------
Roger W. Ach, II
Accepted and agreed to as of the date first above written:
MDI ENTERTAINMENT, INC.
By: /s/ Steven M. Saferin
- - - ----------------------------
Steven M. Saferin
President and Chief Executive Officer
