<PAGE>
As filed with the Securities and Exchange Commission on May 5, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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M2Direct, Inc.
(Exact Name of Registrant as Specified in its Charter)
Georgia 7389 58-2358460
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or --------------
Organization) 4830 West Kennedy Blvd., Suite 920
Tampa, FL 33609
(813) 289-5411
(813) 289-5336 (facsimile)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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John P. Kelly
Chief Executive Officer
M2Direct, Inc.
4830 West Kennedy Blvd., Suite 920
Tampa, FL 33609
(813) 289-5411
(813) 289-5336 (facsimile)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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Copies to:
Charles D. Vaughn, Esq. John F. Smith, Esq.
Robert D. Pannell, Esq. Jeffrey L. Schulte, Esq.
Jonathan R. Coe, Esq. Michael S. Wachholz, Esq.
William J. Ching, Esq. Morris, Manning & Martin, L.L.P.
Nelson Mullins Riley & Scarborough, 1600 Atlanta Financial Center
L.L.P. 3343 Peachtree Road, N.E.
First Union Plaza, Suite 1400 Atlanta, Georgia 30326
999 Peachtree Street, N.E. (404) 233-7000
Atlanta, Georgia 30309 (404) 365-9532 (facsimile)
(404) 817-6000
(404) 817-6050 (facsimile)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Title of each Class of Amount Maximum Maximum
Securities to be to be Offering Price Aggregate Amount of
Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common stock, no par
value................. $ $45,000,000 $12,510
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</TABLE>
(1) Includes shares which the underwriters have an option to purchase from
M2Direct, Inc. to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 5, 1999
PROSPECTUS
Shares
[LOGO]
Common Stock
This is an initial public offering of shares of our common stock. M2Direct
is offering shares and one of our shareholders is offering shares.
No public market currently exists for our shares. We have applied for
quotation of our common stock on the Nasdaq National Market under the symbol
"MTWO." We anticipate that the initial public offering price will be between
$ and $ per share.
See "Risk Factors" beginning on page 5 for a discussion of factors that you
should consider before you invest in our common stock.
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<TABLE>
<CAPTION>
Per share Total
--------- -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discount........................................... $ $
Proceeds to M2Direct............................................ $ $
Proceeds to the selling shareholder............................. $ $
</TABLE>
M2Direct has granted the underwriters an option to purchase up to
additional shares of common stock to cover over-allotments. The underwriters
expect to deliver the shares of common stock to purchasers on , 1999.
-----------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------
J.C.Bradford&Co. First Union Capital Markets Corp.
, 1999
<PAGE>
[INSERT ARTWORK]
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information regarding M2Direct and our common stock and the financial
information and accompanying notes that appear in other places in this
prospectus. Unless otherwise stated, all information in this prospectus assumes
that:
. all outstanding shares of our Series A preferred stock will be converted
into 593,214 shares of common stock;
. the shares of common stock will be sold for per share; and
. the underwriters will not exercise their over-allotment option.
M2Direct, Inc.
M2Direct offers a fully integrated, technology-driven marketing and sales
solution primarily to large financial institutions and Fortune 1000 companies.
We offer proprietary Internet and e-commerce products, data mining and
modeling, database management, creative services, teleservices, direct mail
production and fulfillment. By combining digital technology with traditional
marketing services like teleservices and direct mail, we create marketing
programs that enable our clients to develop interactive relationships with
their customers. Our end-to-end solution helps our clients identify their
target audiences, design and execute strategic marketing programs and enhance
ongoing customer relationships.
Our founders, with years of experience in information-based marketing,
formed M2Direct with the vision of using emerging technology to provide an
integrated marketing solution. From March 1998 through March 1999, we acquired
five providers of digital technology and direct marketing services to serve as
the foundation for our integrated marketing solution.
We believe that direct marketing will depend increasingly on the Internet
and other advanced technologies and that effective marketing campaigns will
require an integrated Internet component. According to International Data
Corporation, the number of Internet users worldwide will increase from
approximately 100 million in 1998 to over 320 million in 2002. Direct marketing
interactive media advertising expenditures grew from $11 million in 1994 to
$603 million in 1998, and have a projected compound annual growth rate of 54%
for 1998-2003, rising to an estimated total of $5 billion in 2003.
Our goal is to become the leading provider of fully integrated, technology-
driven marketing and sales programs. We are pursuing this objective by:
. developing new marketing and e-commerce capabilities;
. broadening our marketing solution;
. helping our existing clients expand their customer relationships; and
. acquiring other providers of marketing solutions.
M2Direct was incorporated in Georgia in September 1997 under the name
MegaMarketing Corporation. In February 1999, we changed our name to M2Direct,
Inc. We began our business operations when we acquired Control Group, Ltd. and
Genesis Direct, Inc. in March 1998. We acquired The Aberdeen Marketing Group in
June 1998, UST, Inc. in February 1999 and DeskGate Technologies, Inc. in March
1999. For more information about our acquisitions, see "Business--
Acquisitions."
3
<PAGE>
Summary Consolidated Pro Forma Financial Information
The quarterly pro forma results of operations data presented below assume
that we acquired Control Group, Ltd., Genesis Direct, Inc., The Aberdeen
Marketing Group and UST, Inc. on January 1, 1998. Because we accounted for our
acquisition of DeskGate as a pooling of interests, DeskGate's historical
financial results are combined with ours. We believe that the quarterly pro
forma results of operations data may be useful to you in evaluating our
financial performance on an ongoing basis. The pro forma quarterly results of
operations do not necessarily reflect the results of operations that we would
have achieved had the acquisitions actually occurred on January 1, 1998, and
you should not rely on the results as representative of future results of
operations. You should read these pro forma quarterly results of operations
with the unaudited pro forma consolidated statements of operations and our
historical audited financial statements and those of the companies that we have
acquired and related notes included in another place in this prospectus.
Net revenues do not include $2.3 million in deferred revenues for which
Control Group had performed services and incurred costs in 1997 and early 1998
under contracts with Provident Bank. Our pro forma 1998 results were affected
by our inability to recognize any of those revenues after we acquired Control
Group. In addition, as a result of the resolution of billing and compensation
issues in the three month period ended December 31, 1998 under other contracts
with Provident Bank, we (a) deferred approximately $2.1 million in revenues and
(b) recorded a loss of $660,000 under those contracts. For more information,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Provident Bank Contracts."
<TABLE>
<CAPTION>
Pro Forma 1998
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Three Months Ended Year Ended
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March 31 June 30 September 30 December 31 December 31
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<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 6,633,453 $ 8,429,898 $9,261,910 $10,514,269 $ 34,839,530
Costs of services....... 5,378,453 5,480,816 6,428,376 10,029,410 27,317,055
----------- ----------- ---------- ----------- ------------
Gross profit............ 1,255,000 2,949,082 2,833,534 484,859 7,522,475
Selling, general and
administrative
expenses............... 1,907,436 2,311,035 2,567,454 3,418,517 10,204,442
Depreciation and
amortization........... 636,737 647,150 651,682 644,861 2,580,430
Stock compensation
expense................ 2,680,184 1,030,982 95,588 0 3,806,754
Research and development
expense................ 94,151 145,334 84,942 0 324,427
----------- ----------- ---------- ----------- ------------
Operating loss.......... (4,063,508) (1,185,419) (566,132) (3,578,519) (9,393,578)
Interest expense, net... 318,138 333,919 342,010 367,392 1,361,459
Other (income) expense.. (37,741) (37,344) (3,359) 46,435 (32,009)
----------- ----------- ---------- ----------- ------------
Loss before income
taxes.................. (4,343,905) (1,481,994) (904,783) (3,992,346) (10,723,028)
Provision (benefit) for
income taxes........... 0 0 0 0 0
----------- ----------- ---------- ----------- ------------
Net loss................ $(4,343,905) $(1,481,994) $ (904,783) $(3,992,346) $(10,723,028)
=========== =========== ========== =========== ============
</TABLE>
4
<PAGE>
Summary Consolidated Pro Forma Financial Information
The quarterly pro forma results of operations data presented below assume
that we acquired Control Group, Ltd., Genesis Direct, Inc., The Aberdeen
Marketing Group and UST, Inc. on January 1, 1998. Because we accounted for our
acquisition of DeskGate as a pooling of interests, DeskGate's historical
financial results are combined with ours. We believe that the quarterly pro
forma results of operations data may be useful to you in evaluating our
financial performance on an ongoing basis. The pro forma quarterly results of
operations do not necessarily reflect the results of operations that we would
have achieved had the acquisitions actually occurred on January 1, 1998, and
you should not rely on the results as representative of future results of
operations. You should read these pro forma quarterly results of operations
with the unaudited pro forma consolidated statements of operations and our
historical audited financial statements and those of the companies that we have
acquired and related notes included in another place in this prospectus.
Net revenues do not include $2.3 million in deferred revenues for which
Control Group had performed services and incurred costs in 1997 and early 1998
under contracts with Provident Bank. Our pro forma 1998 results were affected
by our inability to recognize any of those revenues after we acquired Control
Group. In addition, as a result of the resolution of billing and compensation
issues in the three month period ended December 31, 1998 under other contracts
with Provident Bank, we (a) deferred approximately $2.1 million in revenues and
(b) recorded a loss of $660,000 under those contracts. For more information,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Provident Bank Contracts."
<TABLE>
<CAPTION>
Pro Forma 1998
----------------------------------------------------------------
Three Months Ended Year Ended
-------------------------------------------------- ------------
March 31 June 30 September 30 December 31 December 31
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 6,633,453 $ 8,429,898 $9,261,910 $10,514,269 $ 34,839,530
Costs of services....... 5,378,453 5,480,816 6,428,376 10,029,410 27,317,055
----------- ----------- ---------- ----------- ------------
Gross profit............ 1,255,000 2,949,082 2,833,534 484,859 7,522,475
Selling, general and
administrative
expenses............... 1,907,436 2,311,035 2,567,454 3,418,517 10,204,442
Depreciation and
amortization........... 636,737 647,150 651,682 644,861 2,580,430
Stock compensation
expense................ 2,680,184 1,030,982 95,588 0 3,806,754
Research and development
expense................ 94,151 145,334 84,942 0 324,427
----------- ----------- ---------- ----------- ------------
Operating loss.......... (4,063,508) (1,185,419) (566,132) (3,578,519) (9,393,578)
Interest expense, net... 318,138 333,919 342,010 367,392 1,361,459
Other (income) expense.. (37,741) (37,344) (3,359) 46,435 (32,009)
----------- ----------- ---------- ----------- ------------
Loss before income
taxes.................. (4,343,905) (1,481,994) (904,783) (3,992,346) (10,723,028)
Provision (benefit) for
income taxes........... 0 0 0 0 0
----------- ----------- ---------- ----------- ------------
Net loss................ $(4,343,905) $(1,481,994) $ (904,783) $(3,992,346) $(10,723,028)
=========== =========== ========== =========== ============
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risk factors described below before
purchasing our common stock. The risks described below are not the only risks
we face. If any of the following risks actually occur, our business, financial
condition and operating results could be adversely affected. If that happens,
the trading price of our common stock could decline, and you could lose part or
all of your investment.
Risks related to M2Direct
Our limited operating history creates financial risks and makes it difficult to
evaluate our business.
We were founded in 1997, had no operations until March 1998 and have made
two significant acquisitions recently. As a result, your evaluation of us and
our prospects is based on a limited operating history, and our business model
and strategy are continually evolving. You should consider the risks, expenses
and difficulties frequently encountered by companies like us that are in an
early stage of development. To address these risks, we must, among other
things:
. implement our technology-based business model and strategy and revise
them as necessary;
. integrate our two recent and our future acquisitions;
. continue to attract, retain and motivate qualified employees in a
rapidly changing business structure;
. implement our acquisition strategy;
. enhance and expand our marketing solution; and
. respond to our competition, which may seek to adopt some of our
strategies.
We cannot be certain that we will successfully address these risks. If we
cannot do so, our business operations and financial results will suffer.
The historical and pro forma financial information included in this
prospectus is based in part on the separate pre-acquisition financial reports
of the companies we have acquired. As a result, our historical results of
operations and pro forma financial information may not give you an accurate
indication of our future results of operation or prospects.
We have a history of losses and may continue to suffer losses.
We have incurred substantial losses since inception and may continue to
suffer substantial losses in the future. We may not be able to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis. If our
revenues grow more slowly than we anticipate, or if our operating expenses
exceed our expectations and cannot be adjusted accordingly, our business
operations and financial results will suffer.
Our financial results may fluctuate significantly and may not meet
expectations.
Our future operating results will depend on many factors, some of which are
beyond our control. These factors include:
. the timing of new marketing programs for our clients;
6
<PAGE>
. the timing and market acceptance of new products and services we offer
as part of our solution;
. reductions, cancellations, postponements or completions of major
marketing projects by our clients;
. seasonality in our business, which is typically weaker in the first
quarter;
. marketing budget decisions by our clients;
. our long sales cycle, which makes it difficult to predict the quarter in
which sales will occur;
. the loss of key employees, account managers and sales representatives
and the time required to train replacements;
. risks related to acquisitions as described below;
. the acceptance of the Internet in the direct marketing industry;
. the possible slowdown of direct marketing activities by financial
institutions and other clients in the second half of 1999 due to Year
2000 concerns; and
. general economic conditions that might cause our clients to decrease
what they spend on marketing.
In addition, we plan to increase our operating expenses to expand our sales
and marketing operations, develop new distribution channels, broaden our
product and service offerings and support and improve our operational and
financial systems. If our revenues do not increase along with these expenses,
our financial condition could be materially adversely affected.
Because our revenues are derived primarily from fees for services we perform
on an engagement-by-engagement basis, our revenues are not recurring from
period-to-period, which may result in unpredictability of our revenues in any
period.
Our future operating results are likely to be adversely affected by these
and other factors. You should not rely on the results of any one quarter or any
period-to-period comparison as an indication of our future performance. If our
financial results are below the expectations of securities analysts or our
investors in some future quarter, our stock price could decline, perhaps
significantly.
For more information, see "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We face challenges managing our rapid growth.
Our recent significant internal growth and our recent acquisitions have
placed great demands on our business, particularly our administrative,
technical and financial personnel and systems. We have grown from 74 employees
on March 6, 1998 to 276 employees on March 31, 1999. Of these employees, 93
joined us through our acquisitions of UST in February 1999 and DeskGate in
March 1999. Additional internal growth and acquisitions may further strain our
management, financial and other resources. We cannot guarantee that our
systems, procedures, controls and existing facilities will be adequate to
support expansion of our operations. Our future operating results will
substantially depend on the ability of our officers and key employees to manage
changing business conditions and to implement and improve our technical,
administrative, financial control and reporting systems. If we are unable to
respond to and manage changing business conditions as we expand, then the
quality of our products and services, our ability to retain key personnel and
our operating results could be materially adversely affected.
7
<PAGE>
We may be unable to integrate UST and DeskGate.
We acquired UST, a business-to-business teleservices company, on February 3,
1999, and DeskGate Technologies, an Internet and e-commerce applications
developer, on March 16, 1999. We must now integrate the technologies, service
offerings, operations, systems and personnel of these companies with our own
and attempt to grow the acquired businesses. The successful integration of
these acquisitions is critical to our future success, and if we are
unsuccessful in any of these tasks, our future financial performance could
suffer.
Integrating these two companies into our business is a complex process and
is placing significant demands on our management, technical, financial and
other resources. We cannot assure you that we will successfully complete the
integration of UST and DeskGate into our operations or how long it will take to
do so. We also cannot guarantee that UST and DeskGate will generate sufficient
sales or earnings to justify our investment in, or our expenses related to,
these acquisitions.
Potential challenges to the successful integration of UST and DeskGate
include:
. centralization and consolidation of financial, operational and
administrative functions;
. the technological integration of these companies' products and services,
particularly DeskGate's Internet tools, with ours;
. the integration of these companies' personnel with ours; and
. our ability to market and sell these companies' products and services.
We will face similar risks in integrating companies we acquire in the
future.
We face risks in acquiring other direct marketing and Internet companies.
A key element of our growth strategy is to acquire other companies we
believe will complement our business, particularly those with Internet-related
skills and technology.
Acquiring other businesses, whether technology-related or not, involves
numerous risks, including:
. difficulties in integrating the operations, services, products and
personnel of the acquired company into ours;
. diversion of our management's attention from other business concerns;
. inability to retain and motivate key personnel of the acquired business;
. entry into markets in which we have little or no direct prior
experience; and
. inability to maintain clients or goodwill of the acquired business.
In pursuing acquisitions, we may compete with competitors that are larger
than us and have greater financial and other resources than we have.
Competition for these acquisition targets could also result in increased prices
of acquisition targets.
We may take accounting charges related to acquisitions. The costs and
expenses actually incurred may exceed the estimates we use to take the
accounting charges.
Our operating results depend on our relationships with a limited number of
clients.
A substantial portion of our revenues comes from our relationships with a
small number of clients. If any of these key clients terminated its
relationship with us or materially reduced the
8
<PAGE>
amount of business it does with us, our future financial performance could
suffer. Provident Bank and Champion Mortgage together constituted approximately
47% of our pro forma 1998 revenues. Provident Bank alone contributed 31% of our
pro forma 1998 revenues. During 1998, our top ten clients accounted for 67% of
our total revenues on a pro forma basis. We cannot assure you that we will
maintain our historical rate of growth or our current level of revenues derived
from these clients.
We generally do not have long-term contracts with our clients and need to
establish relationships with new clients.
We do not have long-term contracts with most of our clients, and we provide
most of our solutions under purchase orders rather than contracts. We generally
do not have contracts that assure us a specific level of revenues over any
particular period nor do our clients generally designate us as their exclusive
marketing services provider. We cannot assure you that any client will continue
to hire us to provide our marketing solution. As a result, a client that
generates substantial revenue for us in one period may not do so in a later
period, and we must continually establish and develop relationships with new
clients.
We may lose money on fixed-fee contracts.
A majority of our 1998 pro forma revenues came from fixed-fee contracts,
rather than cost plus contracts. If we fail to meet client expectations
regarding the scope of services to be delivered under a fixed-fee engagement,
or to complete a fixed-price engagement within budget and on time, we could
lose money on the engagement and might have to pay penalties to the client.
Conflicts of interest with our clients may limit our ability to provide
services to others.
Conflicts of interest between existing clients and potential clients are
inherent in the direct marketing industry. We may be unable to take on new
clients who are direct competitors of our existing clients. In addition, we
risk harming relationships with existing clients when we agree to provide
solutions to their competitors. Prospective clients may choose not to retain us
because they believe we have conflicts, whether those conflicts actually exist
or not.
Because we rely heavily on technology, our inability to implement new
technology could create a competitive disadvantage.
We have significant investments in sophisticated telecommunications and
computer technology and have focused on applying this technology to provide a
customized solution to our clients. We may experience technical difficulties
that could delay or prevent the successful development, introduction or
marketing of improvements to our technology. We anticipate that we will need to
continue to invest in and develop new and enhanced technology on a timely basis
in the future to remain competitive. Our failure to do so could have a material
adverse effect on our business, financial condition and operating results.
We may acquire technology that we cannot use effectively.
We may acquire technology through acquisitions of companies or by purchasing
or licensing it. We face the risk of acquiring companies to obtain technology:
. that we cannot develop or adapt to profitable use on a widespread basis;
9
<PAGE>
. that we can neither integrate into our business effectively nor
profitably license to others; or
. that we later learn is not usable at all.
Dealing with unexpected technology problems may distract our management or
impair our ability to provide the marketing solution we have promised our
clients. Any of these problems could have a material adverse effect on our
business.
Our success will depend in part on our ability to protect and defend our
proprietary technology.
We believe our future success will depend in part on our ability to
integrate the proprietary Internet tools developed by DeskGate. Although we are
not currently involved in any intellectual property litigation regarding the
DeskGate technology, we may be a party to litigation in the future either:
. that we bring against others to protect our intellectual property; or
. that others bring against us alleging that we have infringed on their
intellectual property.
We might be forced to pay substantial costs to prosecute or defend any
litigation of that nature, which could divert the attention of our management
from other important matters.
To protect our technology, we rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions. These legal
protections may not adequately protect our technology or business if others
pirate it, particularly overseas, where enforcement of our rights may be
difficult or impossible.
In defending our technology against claims by others, we could be forced to
do one or more of the following:
. stop selling, incorporating or using products or services that
incorporate the challenged intellectual property;
. obtain a license to sell or use the relevant technology, which may not
be available on reasonable terms, if at all; and
. redesign our products or services that incorporate that technology.
In summary, if we lose the right to use our technology as we plan, our
business and operations could be materially adversely affected.
The loss of key personnel could adversely affect our business and operations.
Our management team has substantial experience in our industry and has
contributed significantly to our rapid growth. Our future success depends, in
significant part, upon the continued service of our senior management and other
key personnel. The loss of the services of John P. Kelly, our Chief Executive
Officer, or one or more of our other executive officers or key employees could
have a material adverse effect on our business. For more information, see
"Management--Executive Officers and Directors."
Our future success also depends on our ability to attract and retain highly
qualified technical, sales, customer service and managerial personnel.
Competition for qualified personnel is intense, and we cannot guarantee that we
will be able to attract or retain a sufficient number of highly qualified
employees in the future. If we are unable to hire and retain personnel in key
positions, our business, financial condition and operating results could be
materially adversely affected.
10
<PAGE>
We have adopted anti-takeover provisions.
Our articles of incorporation, our bylaws and Georgia law could make it more
difficult for another company to acquire us, even if a change in control would
benefit our shareholders. For more information, see "Description of Capital
Stock--Certain Provisions of Our Bylaws and Georgia Law."
Risks related to our industry
Our industry is very competitive and many of our competitors have greater
resources than we do.
The direct marketing industry is very competitive and highly fragmented. We
expect competition to persist and intensify in the future. We cannot guarantee
that we will be able to compete successfully with existing or new competitors.
We compete with other marketing services firms ranging from small firms
offering limited products and services, to large companies that have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical, marketing and other resources than
ours. Many of these companies can also engage in extensive research and
development and adopt aggressive pricing policies to gain market share. These
direct marketing firms may seek to offer online services or products.
We also compete with the internal marketing capabilities of our clients and
potential clients as well as with providers of other forms of advertising and
marketing media, such as radio and television. We also face competition from
Internet service providers, established online portals and traditional and Web-
based advertising agencies that decide to enter the direct marketing business.
In addition, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share, particularly with respect to
Internet-related marketing.
If we fail to compete successfully, our business, financial condition and
operating results will be materially adversely affected. For more information,
see "Business--Competition."
The market for digital marketing services is uncertain.
The market for digital marketing services is relatively new and is evolving
rapidly. Our future growth depends partly on our ability to provide a digital
marketing solution that appeals to our clients. Our ability to successfully
implement a digital marketing solution, including our VIAexpress TM electronic
envelope, depends on a number of factors. Those factors include the development
of technologies that facilitate interactive communication between companies and
target audiences and our ability to incorporate those technologies into our
solution on a timely basis.
Significant issues concerning the commercial use of digital technology
remain unresolved and may limit the growth of marketing activities that use
this technology. Those issues include security, privacy, reliability, cost,
ease of use and quality of service. In addition, widely accepted standards for
measuring the effectiveness of interactive marketing are not yet available, and
we cannot assure you that standards will develop sufficiently to support
interactive marketing as a significant marketing medium. We also cannot assure
you that the market for interactive marketing services will continue to grow or
that individual personal computer users in business or at home will continue to
use the
11
<PAGE>
Internet or other interactive media for commerce and communication. If the
market for digital marketing services develops more slowly than we expect, or
if our programs do not achieve market acceptance, our future operating
performance could be materially adversely affected.
Our business may depend significantly on continued growth in Internet use and
improvements to it.
A key part of our business strategy is to integrate the communications
channels offered by the Internet into the traditional methods of direct
marketing. Our future success will depend significantly on the continued
expansion of the Internet and increasing reliance of consumers and businesses
on it. The Internet may not be able to support an increased number of users or
an increase in the volume of data transmitted over it. As a result, the
performance or reliability of the Internet may be adversely affected as use
increases. We cannot assure you that the infrastructure, products or services
necessary to maintain and expand the Internet will be developed, or that the
Internet will be a viable commercial medium for direct marketers.
Consumers' concerns about privacy on the Internet may adversely affect our
business.
An important feature of our digital marketing solution is the ability to
develop and maintain individual user profiles to measure the effectiveness of
the marketing programs and to determine the nature of the content to be
provided to particular customers. Profile information is often captured when
consumers visit a site on the Internet and volunteer information in response to
questions or other forms of solicitation concerning their backgrounds,
interests and preferences. Privacy concerns may cause consumers to resist
providing the personal data necessary to support this profiling capability.
Moreover, even the perception of privacy concerns, whether or not valid, may
inhibit market acceptance of the Internet as a means of commerce and marketing.
Privacy concerns would be heightened by legislative or regulatory requirements
that mandate notification to Internet users that the data captured on certain
Internet sites may be used by marketing entities to address product promotion
and advertising to that user.
The Federal Trade Commission recently conducted an online privacy survey of
150 randomly selected consumer websites based in the U.S. The survey examined
whether the sites gave notice of their data collection practices, whether users
could withhold data, what kind of access users have to stored personal data,
whether the websites employ adequate security to protect data and whether there
is a redress for privacy violations. The results of this survey may spur the
FTC or Congress to implement laws or regulations limiting the collection of
data from websites.
Whether or not these laws or regulations are adopted, our ability to enhance
our digital marketing solution and our future operating performance could be
materially and adversely affected if the privacy concerns of consumers are not
adequately addressed.
Potential Year 2000 problems may adversely affect our business.
Some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results. These problems are widely expected to increase in frequency
and severity as the year 2000 approaches and are commonly referred to as the
"Year 2000 problem."
12
<PAGE>
Our failure to correct any programs or hardware with a Year 2000 problem
could result in system failures or miscalculations causing disruptions of our
operations. We have determined that we will have to modify or replace parts of
our information and accounting systems so that those systems will properly use
dates beyond December 31, 1999. We intend to complete the necessary
modifications and replacements by September 30, 1999. If we do not make those
modifications and replacements or if we complete them later than we intend, the
Year 2000 problem could have a material adverse impact on our future operating
performance.
We do business with and communicate electronically with suppliers and
customers that also face the Year 2000 problem. We cannot guarantee that those
companies will not experience material disruptions in their businesses due to
the Year 2000 problem. The inability of our suppliers to address their Year
2000 problems could adversely affect our ability to provide products and
services to our clients. The inability of our clients to address their Year
2000 problems could cause them to reduce their expenditures on direct marketing
programs. Either event would have a material adverse effect on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance" for a more detailed explanation of what we are doing to address
this problem.
Our teleservices and e-commerce businesses are subject to government regulation
and legal uncertainties.
Teleservices. Approximately 90% of our in-house teleservices are business-
to-business teleservices, with the remaining 10% business-to-consumer
teleservices. Various federal and state laws and regulations apply to our
teleservices. Federal Communications Commission rules limit the hours during
which telemarketers may call consumers and prohibit the use of automated
telephone dialing equipment to call specified telephone numbers. In addition,
the FTC regulations require telemarketers to make prescribed disclosures when
soliciting sales or other information. Additional federal or state legislation,
or changes in regulatory implementation, could limit our activities or our
clients' activities or significantly increase the costs of regulatory
compliance.
E-commerce. Laws and regulations may be adopted that govern online or e-mail
content, user privacy, the use of personal information and pricing and quality
of products and services. Pending legislation in Congress seeks, among other
things, to:
. prohibit unsolicited e-mail and unsolicited e-mail in bulk, sometimes
called spamming;
. require unsolicited commercial e-mail to have the word "advertisement"
in the e-mail subject box;
. establish do-not-e-mail lists; and
. create a method of security for personal or business information over
the Internet and through e-mail.
We can give you no assurances regarding the scope or effect of any future
legislation or rules that might apply to our teleservices and e-commerce
businesses. Those statutes and regulations could:
. have a material adverse effect on our plans to develop and implement our
Internet and e-commerce strategies;
. affect the way in which we are allowed to conduct our business,
especially those aspects that involve the collection or use of personal
information; and
. have a material adverse effect on our business, financial condition and
operating results.
In addition, we could incur additional expenses if state governmental bodies
choose to investigate our privacy practices.
13
<PAGE>
Risks related to the offering
Our stock has no prior public market and its price may be volatile.
Before this offering, no public market has existed for our common stock. The
initial public offering price for the shares will be determined by negotiation
among us, the representatives of the underwriters and the selling shareholder
based upon several factors, and it may not indicate future market prices.
Because this is our initial public offering, our share float will be relatively
small, and we cannot predict how liquid the market for our shares will be. For
those reasons and because our business is to a significant degree technology-
related, the trading price of our common stock could fluctuate significantly.
Volatility in our stock price could also result from the following factors,
among others:
. quarterly variations in operating results;
. announcements of technological innovations or new services or products
by us or our competitors;
. changes in financial estimates by securities analysts;
. the operating and stock price performance of other companies in our
industry; and
. general stock market or economic conditions.
In particular, the market prices of equity securities of companies within
particular industry groups, such as technology companies, have been
particularly volatile. If the market price of equity securities of companies in
our industry group become volatile, the trading price of our common stock could
fluctuate widely. We cannot guarantee that investors will be able to sell their
shares at or above the initial public offering price. In the past, following
periods of volatility in the market price for a company's securities,
shareholders have often instituted securities class action litigation.
Litigation of that type could result in substantial costs and the diversion of
management's attention and resources, which could have a material adverse
effect on our business, financial condition and operating results.
Our existing shareholders will be able to control shareholder actions after
this offering.
When this offering is completed, our present directors, executive officers
and current holders of more than 5% of the common stock will beneficially own
enough shares to control the outcome of any shareholder vote if they vote as a
group. Specifically, these persons will own approximately % of the
outstanding common stock. They could use this power to delay or prevent a
change in control, even if a majority of the other shareholders desired a
change. "Principal and Selling Shareholders" and "Description of Capital
Stock."
Our management has broad discretion over the use of the proceeds from this
offering.
Our board of directors and management will have significant flexibility in
applying the net proceeds of this offering, and they may use the proceeds for
purposes you may think are unwise. Management's failure to apply those funds
effectively could have a material adverse effect on our business, financial
condition and operating results. For more information, see "Use of Proceeds."
You will experience immediate and substantial dilution in net tangible book
value per share.
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately after
the offering. Accordingly, you will incur immediate dilution of approximately
$ in the book value per share of the common stock from the price you pay for
the common stock. This calculation assumes that you purchased the common stock
for $ per share. The exercise of outstanding options and warrants may result
in further dilution. For more information, see "Dilution."
14
<PAGE>
Substantial sales of our common stock after the offering could cause the market
price of our common stock to decline.
Current shareholders hold a substantial number of shares that they will be
able to sell in the public market in the near future. If our shareholders sell
large amounts of our common stock in the public market after this offering, the
market price of our common stock could fall. Those sales also could make it
harder for us to sell stock or stock-related securities in the future at a time
or price that we believe is fair. In addition, within approximately 180 days
after the date of this prospectus, we expect to register under the Securities
Act a total of shares of common stock issuable on exercise of outstanding
stock options. See "Shares Eligible for Future Sale."
15
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of shares of common stock in
this offering are estimated to be $ , assuming an initial public offering
price of $ per share and after deducting the underwriting discount and
estimated offering expenses. If the underwriters exercise their over-allotment
option, we will receive $ in additional net proceeds.
The principal purposes of this offering are to:
. repay debt;
. increase our working capital;
. increase our equity capital;
. enhance our ability to use our common stock as consideration for
acquisitions;
. facilitate our future access to public equity markets;
. increase our visibility in the marketplace; and
. give us a means of attracting and retaining key employees.
We will use approximately $11.5 million of the net proceeds from this
offering to pay the following debt:
<TABLE>
<CAPTION>
Principal Maturity
Lender Amount Date Interest Rate
------ ---------- --------- -------------
<S> <C> <C> <C>
Sirrom Investments, Inc................. $5,000,000 3/5/2003 14%
Citizens Bank, Vienna, Georgia.......... $2,500,000 2/1/2000 Prime plus 1/4%
First Union National Bank............... $3,000,000 6/30/2000 Prime + 1%
Provident Bank.......................... $1,000,000 4/16/2004 15%
</TABLE>
We used $3,000,000 of the Sirrom loan to pay part of the purchase prices of
Control Group and Genesis Direct in March 1998. We used the remaining
$2,000,000 of the Sirrom loan and the Citizens Bank loan to buy UST in February
1999. We borrowed $3,000,000 from First Union in March 1999 under a revolving
line of credit to repay a total of approximately $2,570,000 in bank debt owed
by our various subsidiaries. Our subsidiaries had obtained these loans for
working capital, equipment and other general corporate purposes. We used the
balance of the $3,000,000 First Union loan for working capital. First Union
National Bank is an affiliate of First Union Capital Markets Corp. We issued a
$1,000,000 zero coupon promissory note with an imputed interest rate of 15% to
Provident Bank in April 1999 as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Provident Bank
Contracts."
We expect to use the remainder of the net proceeds for working capital and
other general corporate purposes including acquisitions. Except for the
repayment of indebtedness, we have not identified specific uses for the net
proceeds, and management will have significant discretion over their use and
investment. Pending use of the proceeds for the above purposes, we intend to
invest those funds in short-term, investment-grade, interest-bearing
instruments. We will deposit at least one-half of the net proceeds with
Provident Bank. See "Risk Factors--Risks Related to the Offering--Our
management has broad discretion over the use of the proceeds from this
offering" and "Business--Business Objective and Strategies--Acquiring Other
Providers of Marketing Solutions."
16
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 31, 1999: (1)
on an actual basis and (2) on a pro forma as adjusted basis to reflect the
conversion of all of our outstanding shares of Series A preferred stock into
common stock on the closing of the offering and the receipt of the estimated
net proceeds from the sale of the shares of common stock offered by M2Direct.
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of March 31, 1999 and does not
include the following:
. shares issuable under the underwriters' over-allotment option;
. 2,766,249 shares issuable under options and warrants outstanding as of
March 31, 1999 at a weighted average exercise price of $2.20 per share;
and
. 100,000 shares issuable under a warrant granted to Provident Bank in
April 1999.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Shares Eligible for Future
Sale," our consolidated financial statements and the related notes to them and
the other financial information in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Actual as Adjusted
------ -----------
<S> <C> <C>
Long-term debt, including current maturities, net of
original issue discount................................ $ $
Warrants with redemption feature........................
Shareholders' equity:
Preferred stock, no par value; 500,000 shares
authorized:
Series A convertible preferred stock, non-voting;
250,000 shares authorized; 141,120 shares issued and
outstanding, actual; no shares issued or outstanding,
pro forma as adjusted................................
Common stock, no par value; 100,000,000 shares
authorized:
8,883,297 shares issued and outstanding, actual;
shares issued and outstanding, pro forma as
adjusted.............................................
Retained earnings......................................
---- ----
Total shareholders' equity..........................
---- ----
Total capitalization.............................. $ $
==== ====
</TABLE>
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to fund the development and growth of
our business. Our loan agreements prohibit us from paying dividends. Payment of
future dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $ , or
$ per share of common stock. The formula for calculating pro forma net
tangible book value per share is total tangible assets less total liabilities,
divided by the total pro forma number of shares of common stock outstanding,
after giving effect to the conversion of our Series A preferred stock into
common stock. After giving effect to the sale of shares of common stock in
this offering, our adjusted pro forma net tangible book value as of March 31,
1999 would have been $ , or $ per share. This amount represents an
immediate increase in pro forma net tangible book value of $ per share to
existing shareholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of March 31,
1999............................................................ $
Increase in net tangible book value per share attributable to new
investors.......................................................
----
Adjusted pro forma net tangible book value after the offering....
----
Dilution per share to new investors..............................
====
</TABLE>
The following table summarizes the number of shares of common stock
purchased from M2Direct, the total consideration and the average price per
share paid by existing shareholders and to be paid by new investors in this
offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- --------------------- Price
Number Percent Amount Percent Per Share
------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... % $ % $
New investors...............
------- -------- --------- ---------
Total..................... 100.0% $ 100.0%
======= ======== ========= =========
</TABLE>
The sale of shares by the selling shareholder will reduce the number of
shares held by existing shareholders to , or %, and will increase the
number of shares held by new investors to , or %, of the total number of
shares of common stock to be outstanding after this offering. If the
underwriters exercise their over-allotment option, the number of shares held by
existing shareholders will decrease to , or %, and the number of shares
held by new investors will increase to , or %, of the total shares
outstanding.
The above computations exclude 2,766,249 shares of common stock issuable
upon the exercise of options or warrants outstanding as of March 31, 1999 at a
weighted average exercise price of $2.20 per share. If and as any of those
options and warrants are exercised, new investors will incur further dilution.
18
<PAGE>
1998 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
We acquired Control Group and Genesis Direct on March 6, 1998; Aberdeen
Marketing on June 19, 1998; and UST on February 3, 1999. We accounted for all
four of these acquisitions as purchase transactions. Accordingly, our
historical consolidated statement of operations includes the results of
operations of Control Group and Genesis Direct beginning on March 1, 1998 and
those of Aberdeen Marketing beginning on July 1, 1998. Because we accounted for
our March 1999 acquisition of DeskGate as a pooling of interests, its
historical financial results are combined with ours.
The following unaudited pro forma condensed consolidated statement of
operations is based on the following:
. our consolidated results of operations for the year ended December 31,
1998;
. the historical results of operations of Control Group and Genesis Direct
for the two months ended February 28, 1998;
. Aberdeen Marketing's combined historical results of operations for the
six months ended June 30, 1998; and
. UST's historical results of operations for the year ended December 31,
1998.
The unaudited pro forma condensed consolidated statement of operations gives
effect to the acquisitions of Control Group, Genesis Direct, Aberdeen Marketing
and UST as if they had occurred on January 1, 1998. The related pro forma
adjustments are described in the accompanying notes on the next page. The pro
forma adjustments are based upon available information and assumptions we
believe are reasonable. Because we accounted for these acquisitions as
purchases, we have allocated the total purchase prices for the acquisitions to
the tangible and identifiable intangible assets and liabilities of the acquired
businesses based on our preliminary estimates of their fair value, with the
remainder allocated to goodwill. We may revise the allocation of purchase
prices for our acquisitions when we obtain additional information about the
value of their assets and liabilities.
Net revenues do not include $2.3 million in deferred revenues for which
Control Group had performed services and incurred costs in 1997 and early 1998
under contracts with Provident Bank. Our 1998 pro forma results were affected
by our inability to recognize any of those revenues after we acquired Control
Group. In addition, as a result of the resolution of billing and compensation
issues under other contracts with Provident Bank in the three month period
ended December 31, 1998, we (a) deferred approximately $2.1 million in revenues
and (b) recorded a loss of $660,000 under those contracts. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Provident Bank Contracts."
The pro forma condensed consolidated statement of operations does not
purport to represent what our results of operations or financial condition
would actually have been had the acquisitions occurred on January 1, 1998. You
should not rely on the pro forma statement of operations as being
representative of our future results of operations. Please read this pro forma
financial statement along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with our historical
financial statements and those of Control Group, Genesis Direct, Aberdeen
Marketing and UST included elsewhere in this prospectus.
19
<PAGE>
1998 Unaudited Pro Forma Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
Two Months Two Months Six Months
Year Ended Ended Ended Ended
December 31 February 28 February 28 June 30 Year Ended December 31
------------ ----------- ----------- ---------- --------------------------------------
Control Genesis Aberdeen Acquisition
M2Direct Group Direct Marketing UST Adjustments Pro Forma
------------ ----------- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 25,925,793 $ 1,325,138 $575,156 $1,306,049 $5,707,394 $ 0 $ 34,839,530
Costs of services....... 21,076,437 2,433,288 330,255 1,235,840 2,241,235 0 27,317,055
------------ ----------- -------- ---------- ---------- ----------- ------------
Gross profit............ 4,849,356 (1,108,150) 244,901 70,209 3,466,159 0 7,522,475
Selling, general and
administrative
expenses............... 6,056,706 478,089 230,341 398,189 3,041,117 0 10,204,442
Depreciation and
amortization........... 1,794,663 12,948 12,069 112,390 119,426 528,934(a) 2,580,430
Stock compensation
expense................ 3,806,754 0 0 0 0 0 3,806,754
Research and development
expense................ 324,427 0 0 0 0 0 324,427
------------ ----------- -------- ---------- ---------- ----------- ------------
Operating income
(loss)................. (7,133,194) (1,599,187) 2,491 (440,370) 305,616 (528,934) (9,393,578)
Interest expense, net... 659,580 3,457 3,976 24,969 29,977 639,500(b) 1,361,459
Other income............ (31,494) (112) (42) (361) 0 0 (32,009)
------------ ----------- -------- ---------- ---------- ----------- ------------
Income (loss) before
income taxes........... (7,761,280) (1,602,532) (1,443) (464,978) 275,639 (1,168,434) (10,723,028)
Provision (benefit) for
income taxes........... 0 (643,341) 0 0 0 643,341(c) 0
------------ ----------- -------- ---------- ---------- ----------- ------------
Net income (loss)....... $ (7,761,280) $ (959,191) $ (1,443) $ (464,978) $ 275,639 $(1,811,775) $(10,723,028)
============ =========== ======== ========== ========== =========== ============
</TABLE>
Discussion of acquisition adjustments:
(a) This adjustment to depreciation and amortization includes the following:
<TABLE>
<S> <C>
(1) two months of additional goodwill amortization, based on $4.2
million of goodwill amortized over an estimated useful life of 20
years, related to our purchase of Genesis Direct.................. $ 35,397
(2) two months of additional goodwill amortization, based on $5.9
million of goodwill amortized over a useful life of 20 years, and
two months of intangibles amortization, based on $1.2 million of
intangibles amortized over an estimated useful life of one year,
related to our purchase of Control Group.......................... 260,427
(3) six months of additional goodwill amortization, based on $1.5
million of goodwill amortized over an estimated useful life of 20
years, related to our purchase of Aberdeen Marketing.............. 37,863
(4) twelve months of additional goodwill amortization, based on $3.9
million of goodwill amortized over an estimated useful life of 20
years, related to our acquisition of UST.......................... 195,247
--------
$528,934
========
(b) This adjustment to interest expense, net includes the following:
(1) two months of additional interest expense associated with $3.0
million we borrowed from Sirrom at an interest rate of 14% to
purchase Control Group and Genesis Direct......................... $ 70,000
(2) interest associated with $4.5 million we borrowed to purchase
UST, as follows:
. interest expense associated with $2.0 million we borrowed from
Sirrom at an interest rate of 14%................................. 280,000
. interest expense associated with $2.5 million we borrowed from
Citizens Bank at an interest rate of prime plus 0.25%............. 200,000
(3) additional debt discount amortization associated with the Sirrom
loans and the Citizens Bank loan.................................. 89,500
--------
$639,500
========
</TABLE>
(c) This adjustment to provision (benefit) for income taxes reflects a
valuation allowance related to the historical tax benefit recorded by
Control Group for the two month period ended February 28, 1998.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
11 Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, December 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------------------------------
Control Control Genesis Control Genesis
Group Group Direct Group Direct M2Direct
<CAPTION> ------------ ------------ ------------ ----------- ----------- ----------
Year Ended Two Months Year Ended
December 31, Ended December 31,
1997 February 28, 1998 1998
-------------------------------------- ------------------------- -------------
Control Genesis Control Genesis
Group Direct M2Direct Group Direct M2Direct
------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Net revenues.... $ 11,407,033 $ 11,564,210 $ 825,331 $ 9,997,154 $ 1,765,317 $ 1,376
Costs of
services........ 10,396,605 10,513,478 570,325 7,521,451 1,073,630 0
------------ ------------ --------- ----------- ----------- ----------
Gross profit.... 1,010,428 1,050,732 255,006 2,475,703 691,687 1,376
Selling, general
and
administrative
expenses........ 740,766 893,105 225,260 2,370,835 699,095 87,832
Depreciation and
amortization.... 35,002 47,566 3,118 75,452 19,136 2,939
Stock
compensation
expenses........ 0 0 0 0 0 154,000
Research and
development
expense......... 0 0 0 0 0 79,427
------------ ------------ --------- ----------- ----------- ----------
Operating income
(loss).......... 234,660 110,061 26,628 29,416 (26,544) (322,822)
Interest expense
(income), net... 29,807 71,611 (5,692) 71,491 17,029 0
Other (income)
expense......... 0 (21,692) 0 0 1,660 0
------------ ------------ --------- ----------- ----------- ----------
Income (loss)
before income
taxes........... 204,853 60,142 32,320 (42,075) (45,233) (322,822)
Provision
(benefit) for
income taxes.... 0 0 0 15,575 0 0
------------ ------------ --------- ----------- ----------- ----------
Net income
(loss).......... 204,853 60,142 32,320 (57,650) (45,233) (322,822)
Accretion of
warrant with
redemption
feature......... 0 0 0 0 0 0
Preferred stock
dividend........ 0 0 0 0 0 0
Net income
(loss)
attributable to
common
shareholders.... $ 204,853 $ 60,142 $ 32,320 $ (57,650) $ (45,233) $ (322,822)
============ ============ ========= =========== =========== ==========
Net income
(loss) per
common share.... $ (3.06)
==========
Weighted average
common shares
outstanding..... 105,524
==========
Statements of
Operations Data:
Net revenues.... $ 7,182,166 $ 3,346,843 $ 2,500 $ 1,325,138 $ 575,156 $ 25,925,793
Costs of
services........ 7,221,523 1,711,362 0 2,433,288 330,255 21,076,437
------------- ------------ ----------- ------------- ----------- -------------
Gross profit.... (39,357) 1,635,481 2,500 (1,108,150) 244,901 4,849,356
Selling, general
and
administrative
expenses........ 2,478,797 1,420,321 134,684 478,089 230,341 6,056,706
Depreciation and
amortization.... 75,883 60,744 4,042 12,948 12,069 1,794,663
Stock
compensation
expenses........ 0 0 251,520 0 0 3,806,754
Research and
development
expense......... 0 0 196,258 0 0 324,427
------------- ------------ ----------- ------------- ----------- -------------
Operating income
(loss).......... (2,594,037) 154,416 (584,004) (1,599,187) 2,491 (7,133,194)
Interest expense
(income), net... 79,824 40,995 39,612 3,457 3,976 659,580
Other (income)
expense......... 6,159 (77) 0 (112) (42) (31,494)
------------- ------------ ----------- ------------- ----------- -------------
Income (loss)
before income
taxes........... (2,680,020) 113,498 (623,616) (1,602,532) (1,443) (7,761,280)
Provision
(benefit) for
income taxes.... (1,083,672) 0 0 (643,341) 0 0
------------- ------------ ----------- ------------- ----------- -------------
Net income
(loss).......... (1,596,348) 113,498 (623,616) (959,191) (1,443) (7,761,280)
Accretion of
warrant with
redemption
feature......... 0 0 0 0 0 (605,000)
Preferred stock
dividend........ 0 0 0 0 0 (1,447,440)
Net income
(loss)
attributable to
common
shareholders.... $ (1,596,348) $ 113,498 $ (623,616) $ (959,191) $ (1,443) $ (9,813,720)
============= ============ =========== ============= =========== =============
Net income
(loss) per
common share.... $ (0.58) $ (1.36)
=========== =============
Weighted average
common shares
outstanding..... 1,073,492 7,189,863
=========== =============
<CAPTION>
As of As of As of
December 31, December 31, December 31,
1994 1995 1996
------------ -------------------------- ------------------------------------
<CAPTION>
As of As of As of
December 31, February 28, December 31,
1997 1998 1998
-------------------------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Working
capital......... $ 232,570 $ (12,459) $ (1,977) $ (114,966) $ (137,900) $ (259,580)
Total assets.... 2,440,528 2,192,795 136,781 2,474,350 503,543 12,607
Long-term debt,
net of
discounts....... 27,500 32,800 56,084 10,095 194,015 0
Shareholders'
equity
(deficit)....... 285,516 345,658 (380) 288,008 (101,487) (247,822)
Balance Sheet
Data:
Working
capital......... $ (2,330,435) $ (125,184) $ (23,709) $ (3,908,782) $ (175,431) $ (2,392,512)
Total assets.... 3,770,737 791,975 54,186 3,526,336 866,314 20,568,190
Long-term debt,
net of
discounts....... 0 226,926 274,438 0 160,918 3,701,494
Shareholders'
equity
(deficit)....... (1,718,935) (66,394) (260,461) (2,678,126) (67,837) 5,069,880
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
11 Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, December 31,
1994 1995 1995 1996
------------ ------------ ------------ ------------------------------------
Control Control Genesis Control Genesis
Group Group Direct Group Direct M2Direct
<CAPTION> ------------ ------------ ------------ ----------- ----------- ----------
Year Ended Two Months Year Ended
December 31, Ended December 31,
1997 February 28, 1998 1998
-------------------------------------- ------------------------- -------------
Control Genesis Control Genesis
Group Direct M2Direct Group Direct M2Direct
------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Net revenues.... $ 11,407,033 $ 11,564,210 $ 825,331 $ 9,997,154 $ 1,765,317 $ 1,376
Costs of
services........ 10,396,605 10,513,478 570,325 7,521,451 1,073,630 0
------------ ------------ --------- ----------- ----------- ----------
Gross profit.... 1,010,428 1,050,732 255,006 2,475,703 691,687 1,376
Selling, general
and
administrative
expenses........ 740,766 893,105 225,260 2,370,835 699,095 87,832
Depreciation and
amortization.... 35,002 47,566 3,118 75,452 19,136 2,939
Stock
compensation
expenses........ 0 0 0 0 0 154,000
Research and
development
expense......... 0 0 0 0 0 79,427
------------ ------------ --------- ----------- ----------- ----------
Operating income
(loss).......... 234,660 110,061 26,628 29,416 (26,544) (322,822)
Interest expense
(income), net... 29,807 71,611 (5,692) 71,491 17,029 0
Other (income)
expense......... 0 (21,692) 0 0 1,660 0
------------ ------------ --------- ----------- ----------- ----------
Income (loss)
before income
taxes........... 204,853 60,142 32,320 (42,075) (45,233) (322,822)
Provision
(benefit) for
income taxes.... 0 0 0 15,575 0 0
------------ ------------ --------- ----------- ----------- ----------
Net income
(loss).......... 204,853 60,142 32,320 (57,650) (45,233) (322,822)
Accretion of
warrant with
redemption
feature......... 0 0 0 0 0 0
Preferred stock
dividend........ 0 0 0 0 0 0
Net income
(loss)
attributable to
common
shareholders.... $ 204,853 $ 60,142 $ 32,320 $ (57,650) $ (45,233) $ (322,822)
============ ============ ========= =========== =========== ==========
Net income
(loss) per
common share.... $ (3.06)
==========
Weighted average
common shares
outstanding..... 105,524
<S> <C> <C> <C> <C> <C> <C>==========
Statements of
Operations Data:
Net revenues.... $ 7,182,166 $ 3,346,843 $ 2,500 $ 1,325,138 $ 575,156 $ 25,925,793
Costs of
services........ 7,221,523 1,711,362 0 2,433,288 330,255 21,076,437
------------- ------------ ----------- ------------- ----------- -------------
Gross profit.... (39,357) 1,635,481 2,500 (1,108,150) 244,901 4,849,356
Selling, general
and
administrative
expenses........ 2,478,797 1,420,321 134,684 478,089 230,341 6,056,706
Depreciation and
amortization.... 75,883 60,744 4,042 12,948 12,069 1,794,663
Stock
compensation
expenses........ 0 0 251,520 0 0 3,806,754
Research and
development
expense......... 0 0 196,258 0 0 324,427
------------- ------------ ----------- ------------- ----------- -------------
Operating income
(loss).......... (2,594,037) 154,416 (584,004) (1,599,187) 2,491 (7,133,194)
Interest expense
(income), net... 79,824 40,995 39,612 3,457 3,976 659,580
Other (income)
expense......... 6,159 (77) 0 (112) (42) (31,494)
------------- ------------ ----------- ------------- ----------- -------------
Income (loss)
before income
taxes........... (2,680,020) 113,498 (623,616) (1,602,532) (1,443) (7,761,280)
Provision
(benefit) for
income taxes.... (1,083,672) 0 0 (643,341) 0 0
------------- ------------ ----------- ------------- ----------- -------------
Net income
(loss).......... (1,596,348) 113,498 (623,616) (959,191) (1,443) (7,761,280)
Accretion of
warrant with
redemption
feature......... 0 0 0 0 0 (605,000)
Preferred stock
dividend........ 0 0 0 0 0 (1,447,440)
Net income
(loss)
attributable to
common
shareholders.... $ (1,596,348) $ 113,498 $ (623,616) $ (959,191) $ (1,443) $ (9,813,720)
============= ============ =========== ============= =========== =============
Net income
(loss) per
common share.... $ (0.58) $ (1.36)
=========== =============
Weighted average
common shares
outstanding..... 1,073,492 7,189,863
=========== =============
<CAPTION>
As of As of As of
December 31, December 31, December 31,
1994 1995 1996
------------ -------------------------- ------------------------------------
<CAPTION>
As of As of As of
December 31, February 28, December 31,
1997 1998 1998
-------------------------------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Working
capital......... $ 232,570 $ (12,459) $ (1,977) $ (114,966) $ (137,900) $ (259,580)
Total assets.... 2,440,528 2,192,795 136,781 2,474,350 503,543 12,607
Long-term debt,
net of
discounts....... 27,500 32,800 56,084 10,095 194,015 0
Shareholders'
equity
(deficit)....... 285,516 345,658 (380) 288,008 (101,487) (247,822)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Working
capital......... $ (2,330,435) $ (125,184) $ (23,709) $ (3,908,782) $ (175,431) $ (2,392,512)
Total assets.... 3,770,737 791,975 54,186 3,526,336 866,314 20,568,190
Long-term debt,
net of
discounts....... 0 226,926 274,438 0 160,918 3,701,494
Shareholders'
equity
(deficit)....... (1,718,935) (66,394) (260,461) (2,678,126) (67,837) 5,069,880
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our founders, with years of experience in information-based marketing,
formed M2Direct with the vision of incorporating emerging technologies into
marketing programs to provide an integrated marketing solution. From our
incorporation in September 1997 through March 1998, our activities primarily
consisted of raising capital, recruiting personnel and analyzing acquisition
candidates. From March 1998 through March 1999, we acquired five providers of
digital technology and direct marketing services to serve as the foundation for
our integrated marketing solution. On March 6, 1998, we acquired Control Group
and Genesis Direct, and since then we have acquired three additional companies:
Aberdeen Marketing in June 1998, UST in February 1999 and DeskGate Technologies
in March 1999. We accounted for all of our acquisitions as purchases, except
DeskGate, which we accounted for as a pooling of interests. The financial
results of all of the companies we have acquired except DeskGate are included
in our financial statements from their date of acquisition. In a pooling of
interests, the companies are treated as if they were combined for their entire
existence. Thus, DeskGate's financial results are included in our financial
statements from March 1, 1996, its date of incorporation.
We derive our revenues from fees for marketing programs delivered primarily
to large financial institutions and Fortune 1000 companies. We offer data
mining and modeling, database management, creative services, teleservices,
direct mail production, proprietary Internet and e-commerce products and
fulfillment. A majority of our revenues are recognized on an ongoing basis as
services are provided.
The fees for our programs vary significantly, depending on the solution
provided to each client. In pricing our solution, we consider the costs
incurred for each individual service included in a program, then apply
appropriate markups to this cost structure to determine final pricing.
Generally, contracts for our large direct mail or fulfillment campaigns are
quoted and billed on a per-piece or per-item basis. For programs that include
an Internet component, we may charge a license fee for the particular
technology employed or a transactional fee based on the volume of transactions
processed. Our Internet operations are in the early stages and our Internet
revenues to date have not been material.
The solution that we provide to each client is generally aimed at a
particular business objective, and each client usually retains us on a project-
by-project basis. We strive to maintain long-term relationships with our
clients, and our top ten clients based on 1998 pro forma revenues have been
clients for an average of 5 years. We cannot assure you that once we complete a
marketing campaign for a client, the client will hire us for a future campaign.
As a result, a client that generates substantial revenue for us in any one
period may not be a substantial source of revenue in a later period. Although
we have not historically required our clients to enter into long-term
contracts, in the future we will attempt to sign fixed-term agreements with
those clients for which our work is generally ongoing. We have recently entered
into a three year agreement with Provident Bank, our largest client.
Costs of services include both direct and indirect costs. Direct costs are
incurred in the production of our products and services and include salaries
and wages, benefits, temporary labor, raw materials and outsourced services
like printing, shipping and business-to-consumer teleservices. Indirect costs
are incurred as part of the costs of products and services but are not directly
allocable
23
<PAGE>
to the production of products and services. Indirect costs include salaries and
wages, benefits, production supplies and related overhead expenses associated
with generating revenues.
Selling, general and administrative expenses include salaries and
commissions of management and salespersons, travel expenses, marketing and
advertising, personnel costs for our executive, administrative, finance and
human resources personnel, costs of support services and professional service
fees.
Depreciation and amortization includes depreciation of property and
equipment and amortization of intangible assets, including goodwill, customer
contracts and capitalized software development costs.
Stock compensation expense includes a charge for (a) common stock issued at
fair value in consideration for services, and (b) stock and options issued at
what we initially believed to be fair value but which we determined to be below
fair market value on further review as we prepared our financial statements.
Provident Bank Contracts
Provident Bank, our largest client, was a client of Control Group when we
acquired it in March 1998. Under a master services agreement with Provident
Bank, we enter into a separate contract with them for each new marketing
campaign we undertake for them.
Under contracts entered into in 1997, Provident Bank was obligated to pay
Control Group a percentage of the value of the balances of the accounts it
obtained through the efforts of Control Group. Before the ultimate percentage
was known, however, Control Group was entitled to bill Provident Bank in
advance for account solicitation costs for a fixed period. Twelve months after
the beginning of the account solicitation period, Provident Bank was to measure
the account balances, apply the appropriate percentage fee payable to Control
Group and compare that with amounts billed and paid in advance. Under the
contracts, Control Group agreed to reimburse Provident Bank for any amounts
billed by and paid to Control Group which exceeded the percentage fee to which
it was ultimately entitled. Because of its potential obligation to reimburse
Provident Bank for excess fees already billed and paid, Control Group's 1997
and January-February 1998 revenues do not include any of the $2.3 million in
deferred revenues for which it had performed services and incurred costs in
1997 and in early 1998.
Control Group had treated as deferred revenue the $2.3 million in payments
it had received from Provident Bank. Under generally accepted accounting
principles, however, we were unable to recognize the $2.3 million as deferred
revenues as of the date we acquired Control Group or as revenues after the
acquisition date because it had already performed the services related to those
revenues before we acquired it. Accordingly, neither M2Direct nor Control Group
ever recognized the $2.3 million in revenues related to these contracts, even
though the costs related to those revenues are included in Control Group's 1997
and 1998 results of operations and, to the extent costs were incurred in
January-February 1998, in our pro forma 1998 results of operations.
In 1998 we entered into agreements with Provident Bank to provide direct
marketing services beginning in September 1998 and continuing into 1999. In
April 1999, we resolved several billing and compensation issues with Provident
Bank related to those agreements. As part of this resolution,
24
<PAGE>
we agreed to discontinue services under those agreements and deferred
approximately $2.1 million in revenues in the three month period ended December
31, 1998. As consideration for discontinuing services under these agreements,
we issued to Provident Bank a warrant to purchase 100,000 shares of common
stock at an exercise price of $0.01 per share. We recorded the warrant in April
1999 at $525,000 in our financial statements based on the estimated fair market
value of our common stock at the warrant grant date. In addition, we issued to
Provident Bank a $1.0 million zero coupon promissory note payable in 2004,
which we recorded in April 1999 at its present value of approximately $500,000.
In accordance with our policy of recording contract losses in the earliest
applicable reporting period, we recorded a loss of approximately $660,000 in
the statement of operations for the year ended December 31, 1998 related to the
Provident Bank agreements.
In April 1999, we also entered into a separate agreement with Provident
Bank, under which any future programs for Provident Bank will include pricing
structures that guarantee that we will be paid for all costs incurred under the
budget for the program, plus an agreed-upon margin. See "Business--Clients."
Unaudited Quarterly Pro Forma Results of Operations
The unaudited quarterly pro forma results of operations data presented below
assume that we acquired Control Group, Genesis Direct, Aberdeen Marketing and
UST on January 1, 1998. Because we accounted for our acquisition of DeskGate as
a pooling of interests, DeskGate's financial results are combined with ours. We
believe that the quarterly pro forma results of operations data may be useful
to you in evaluating our financial performance on an ongoing basis. The pro
forma quarterly results of operations do not necessarily reflect the results of
operations that we would have achieved had the acquisitions occurred on January
1, 1998, and you should not rely on the results as representative of future
results of operations. These pro forma amounts include the same adjustments
that are reflected in the pro forma statements of operations. You should read
these pro forma quarterly results of operations with the unaudited pro forma
consolidated financial statements and our historical audited financial
statements and those of the companies that we have acquired and related notes
included in another place in this prospectus.
<TABLE>
<CAPTION>
Pro Forma 1998
----------------------------------------------------------------
Three Months Ended Year Ended
-------------------------------------------------- ------------
March 31 June 30 September 30 December 31 December 31
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 6,633,453 $ 8,429,898 $9,261,910 $10,514,269 $ 34,839,530
Costs of services....... 5,378,453 5,480,816 6,428,376 10,029,410 27,317,055
----------- ----------- ---------- ----------- ------------
Gross profit............ 1,255,000 2,949,082 2,833,534 484,859 7,522,475
Selling, general and
administrative
expenses............... 1,907,436 2,311,035 2,567,454 3,418,517 10,204,442
Depreciation and
amortization........... 636,737 647,150 651,682 644,861 2,580,430
Stock compensation
expense................ 2,680,184 1,030,982 95,588 0 3,806,754
Research and development
expense................ 94,151 145,334 84,942 0 324,427
----------- ----------- ---------- ----------- ------------
Operating loss.......... (4,063,508) (1,185,419) (566,132) (3,578,519) (9,393,578)
Interest expense, net... 318,138 333,919 342,010 367,392 1,361,459
Other (income) expense.. (37,741) (37,344) (3,359) 46,435 (32,009)
----------- ----------- ---------- ----------- ------------
Loss before income
taxes.................. (4,343,905) (1,481,994) (904,783) (3,992,346) (10,723,028)
Provision (benefit) for
income taxes........... 0 0 0 0 0
----------- ----------- ---------- ----------- ------------
Net loss................ $(4,343,905) $(1,481,994) $ (904,783) $(3,992,346) $(10,723,028)
=========== =========== ========== =========== ============
</TABLE>
25
<PAGE>
Historical Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
M2Direct
The following discussion relates to M2Direct's actual operating results for
1998 and 1997. The 1998 operating results include the operations of the
companies acquired by M2Direct from their date of acquisition in 1998, but are
not reflected in M2Direct's 1997 results of operations. The results of
operations in 1998 include the following: (a) twelve months of operations of
DeskGate, (b) ten months of operations of Control Group and Genesis Direct, and
(c) six months of operations of Aberdeen Marketing. As a result, we believe the
operating results for the year ended December 31, 1998 are not comparable to
the operating results for the year ended December 31, 1997.
Net revenues. Net revenues were $25.9 million in 1998 and $2,500 in 1997.
Revenues in 1997 included only the operations of DeskGate, whose efforts were
directed primarily to building infrastructure and on research and development.
Control Group. For 1998, revenues during the two month period ended
February 28 were $1.3 million, and revenues attributable to the former Control
Group operations following its March 1, 1998 acquisition by M2Direct were $21.4
million. Control Group's revenues in 1997 were $7.2 million. The increase in
revenues was due primarily to an expansion of business with an existing client,
Provident Bank, and business from a new client, Champion Mortgage.
Genesis Direct. For 1998, revenues during the two month period ended
February 28 were $575,000, and revenues attributable to the former Genesis
Direct operations following its March 1, 1998 acquisition by M2Direct were $3.0
million. Revenues of Genesis Direct were $3.3 million in 1997. The increase in
revenues in 1998 was due to increased business with new and existing clients.
Costs of services. Costs of services were $21.1 million in 1998 and $0 in
1997. DeskGate's operations during 1997 incurred no costs because it was
focused primarily on building infrastructure and on research and development.
Control Group. For 1998, costs of services during the two month period
ended February 28 were $2.4 million, and costs of services attributable to the
former Control Group operations following its acquisition by M2Direct were
$19.1 million. Control Group's costs of services in 1997 were $7.2 million. The
increase in costs of services was due primarily to increased business with new
and existing clients.
Genesis Direct. For 1998, costs of services during the two month period
ended February 28 were $330,000, and costs of services attributable to the
former Genesis Direct operations following its acquisition by M2Direct were
approximately $1.9 million. Costs of services following the acquisition by
M2Direct have been adjusted to eliminate intercompany costs of services billed
to Control Group. Costs of services of Genesis Direct were $1.7 million in
1997. The increase in costs of services was due primarily to increased business
with new and existing clients.
Selling, general and administrative expenses. These expenses were $6.1
million in 1998 and $135,000 in 1997. The amounts stated for 1998 include the
expenses of the companies acquired in 1998.
26
<PAGE>
Control Group. For 1998, selling, general and administrative expenses
during the two month period ended February 28 were $478,000, and expenses
attributable to the former Control Group operations following its acquisition
by M2Direct were $2.4 million. Control Group's selling, general and
administrative expenses in 1997 were $2.5 million. These expenses increased as
a result of additional costs necessary to support the growth of the business.
Genesis Direct. For 1998, selling, general and administrative expenses
during the two month period ended February 28, 1998 were $230,000, and expenses
attributable to the former Genesis Direct operations following its acquisition
by M2Direct were $1.6 million. Genesis Direct's general and administrative
expenses in 1997 were $1.4 million. The increased dollar amount was primarily
the result of additional costs necessary to support the growth of the business.
Depreciation and amortization. Depreciation and amortization was $1.8
million in 1998 and $4,000 in 1997. The increase was due primarily to the
amortization of goodwill from the acquisitions of Control Group, Genesis Direct
and Aberdeen Marketing.
Control Group. For 1998, depreciation and amortization during the two
month period ended February 28 was $13,000, and depreciation and amortization
attributable to the former Control Group operations following its acquisition
by M2Direct was $1.4 million. Control Group's depreciation and amortization in
1997 was $76,000. The increase was due primarily to the amortization of
goodwill and intangibles related to the purchase of Control Group.
Genesis Direct. For 1998, depreciation and amortization during the two
month period ended February 28, 1998 was $12,000, and depreciation and
amortization attributable to the former Genesis Direct operations following its
acquisition by M2Direct was $229,000. Depreciation and amortization for Genesis
Direct in 1997 was $61,000. The increase was due primarily to the amortization
of goodwill related to the purchase of Genesis Direct.
Stock compensation expense. Stock compensation expense increased to $3.8
million in 1998 from $252,000 in 1997. In 1997 and 1998 DeskGate issued common
stock at fair value in consideration for services provided by members of
management and outside service providers. During 1998, M2Direct sold shares of
common stock and issued options to acquire common stock at what we believed to
be the fair market value of the stock at that time. When we reviewed the value
of the common stock and options in preparing our financial statements, we
determined that a higher valuation was appropriate, and we recorded a one-time
non-cash charge for the difference in valuation.
Research and development expenses. These expenses increased to $324,000 in
1998 from $196,000 in 1997 due to increased efforts to develop our e-commerce
products.
Interest expense (income), net. Interest expense increased to $660,000 in
1998 from $40,000 in 1997 due primarily to increased borrowings for our
acquisitions of Control Group, Genesis Direct and Aberdeen Marketing.
Income taxes. As of December 31, 1998, we had net operating loss
carryforwards of approximately $4.9 million for federal tax purposes, which if
not utilized will expire beginning in 2016 and continuing through 2018. We have
not recognized any benefit from the future use of those net operating losses
because our assumptions of future profitable operations contain risks that do
not provide sufficient assurance to currently recognize those tax benefits.
27
<PAGE>
additional personnel and facilities to support the increased revenues. The
increase as a percentage of revenues was due to a larger support staff hired to
accommodate anticipated growth.
Interest expense (income), net. Interest expense increased to $41,000 in
1997 from $17,000 in 1996 primarily as a result of increased borrowing under a
line of credit and expense incurred on additional capital leases.
M2Direct
M2Direct's operations in 1996 and 1997, which consisted solely of DeskGate's
operations, were minimal. A majority of its efforts were spent on building
infrastructure and on research and development.
Factors Affecting Operating Results
We have historically experienced, and expect to continue to experience,
significant seasonal fluctuations in the demand for our solution. Many clients
make significant marketing expenditures in the fourth quarter, which has
historically caused an increase in the demand for our services during that
quarter. In addition, because our clients tend to set marketing budgets and
develop marketing campaigns during the early part of the year, we expect our
first quarter revenues to be lower than in other quarters of a given year.
Our future operating results will depend on many factors, some of which are
beyond our control. These factors include those described in "Risk Factors--Our
financial results may fluctuate significantly and may not meet expectations."
Some of those factors are:
. timing of new direct marketing projects;
. timing and market acceptance of products and services;
. reductions, cancellations, postponements or completions of major
marketing projects by our clients;
. loss of key employees, account managers and sales representatives and
the time required to train replacements; and
. our ability to integrate recent and future acquisitions.
Liquidity and Capital Resources
We have financed our operations primarily from funds generated from
operations, borrowings under various credit facilities with commercial banks
and private placements of our common and Series A preferred stock. In 1998 we
received net proceeds of:
. $1.0 million from the sale of common stock;
. $1.2 million from the sale of Series A preferred stock; and
. $600,000 from the sale of a convertible debenture with a common stock
warrant.
28
<PAGE>
additional personnel and facilities to support the increased revenues. The
increase as a percentage of revenues was due to a larger support staff hired to
accommodate anticipated growth.
Interest expense (income), net. Interest expense increased to $41,000 in
1997 from $17,000 in 1996 primarily as a result of increased borrowing under a
line of credit and expense incurred on additional capital leases.
M2Direct
M2Direct's operations in 1996 and 1997, which consisted solely of DeskGate's
operations, were minimal. A majority of its efforts were spent on building
infrastructure and on research and development.
Factors Affecting Operating Results
We have historically experienced, and expect to continue to experience,
significant seasonal fluctuations in the demand for our solution. Many clients
make significant marketing expenditures in the fourth quarter, which has
historically caused an increase in the demand for our services during that
quarter. In addition, because our clients tend to set marketing budgets and
develop marketing campaigns during the early part of the year, we expect our
first quarter revenues to be lower than in other quarters of a given year.
Our future operating results will depend on many factors, some of which are
beyond our control. These factors include those described in "Risk Factors--Our
financial results may fluctuate significantly and may not meet expectations."
Some of those factors are:
.timing of new direct marketing projects;
.timing and market acceptance of products and services;
. reductions, cancellations, postponements or completions of major
marketing projects by our clients;
. loss of key employees, account managers and sales representatives and
the time required to train replacements; and
.our ability to integrate recent and future acquisitions.
Liquidity and Capital Resources
We have financed our operations primarily from funds generated from
operations, borrowings under various credit facilities with commercial banks
and private placements of our common and Series A preferred stock. In 1998 we
received net proceeds of:
.$1.0 million from the sale of common stock;
.$1.2 million from the sale of Series A preferred stock; and
. $600,000 from the sale of a convertible debenture with a common stock
warrant.
29
<PAGE>
At December 31, 1998 we were negotiating a forbearance agreement with First
Union National Bank as successor to CoreStates Bank, to which Control Group
owed a total of $1.2 million that had matured. In addition, Aberdeen owed
$210,000 to another commercial bank under a loan agreement that matured on
December 31, 1998. In late January 1999 we signed the forbearance agreement
with First Union to extend the forbearance period for the $1.2 million debt to
April 15, 1999. In February 1999 we borrowed a $350,000 short-term bridge loan
from First Union to repay the matured $210,000 loan and provide working
capital. In late March 1999 we borrowed $3.0 million from First Union under a
revolving credit facility to refinance the $1.2 million debt, the $350,000
short-term bridge loan, and $988,000 in other loans owed to commercial banks,
as well as provide working capital.
At April 23, 1999, we had the following debt outstanding:
<TABLE>
<CAPTION>
Principal Maturity
Lender Amount Date Interest Rate
------ ---------- --------- -------------
<S> <C> <C> <C>
Sirrom Investments......................... $5,000,000 3/5/2003 14%
Citizens Bank.............................. $2,500,000 2/1/2000 Prime plus 1/4%
First Union National Bank.................. $3,000,000 6/30/2000 Prime plus 1%
Provident Bank............................. $1,000,000 4/16/2004 15%
</TABLE>
We intend to repay these loans with some of the proceeds from this offering,
although we will keep the First Union revolving credit facility in place to
provide working capital as needed in the future. The First Union loan is
secured by a blanket lien on essentially all of our assets and a pledge of 100%
of the stock of our subsidiaries. We currently comply with all covenants of our
loan agreements and promissory notes related to the above debt.
Net cash used in operating activities was $2.7 million for 1998. Net cash
used in operating activities represents a $7.8 million net loss, of which $5.8
million were non-cash expenses; a $3.9 million increase in accounts receivable;
a $781,000 increase in prepaid expenses and other current assets; and a
decrease in accrued liabilities of $216,000. These items were partially offset
by an increase of $1.4 million in accounts payable, an increase of $2.1 million
in deferred revenue and an increase in customer deposits of $626,000. We plan
to increase our operating expenses to expand our sales and marketing
operations, develop new distribution channels, broaden our product and service
offerings and support and improve our operational and financial systems. If our
revenues do not increase along with these expenses, our financial condition
could be materially adversely affected.
Net cash used in investing activities was $2.9 million for 1998. Investing
activities reflect $2.2 million of cash paid for acquisitions and $626,000 in
expenditures for computer software, computer hardware, furniture and office
equipment. At December 31, 1998, we had no material commitments for capital
expenditures, but we expect to spend approximately $500,000 for computer
hardware, furniture and office equipment for a new fulfillment and production
facility in the Tampa area in the second and third quarters of 1999.
At December 31, 1998, we had cash and cash equivalents of $619,000. Net cash
provided by financing activities was $6.2 million for 1998. This consisted
primarily of $2.2 million in proceeds from private placements of securities and
$4.0 million of net proceeds from long term borrowings.
We believe that the net proceeds from this offering, which are estimated to
be $ million, together with funds available from operations and the First
Union revolving credit facility, will be
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sufficient to meet our capital needs for at least the next 12 months. After
that period we may need to raise additional funds. If we raise additional funds
by issuing equity securities, our existing shareholders may experience
significant dilution. Additional financing may not be available when needed or,
if available, it may not be on terms favorable to us or our shareholders. If
additional financing is not available when we need it or is not available on
acceptable terms, we may be unable to develop or enhance our products or
services. Further, we may be unable to take advantage of business opportunities
or respond to competitive pressures. Any of these events could have a material
adverse effect on our business, financial condition or results of operations.
We intend to grow, in part, through strategic acquisitions. We anticipate
making additional expenditures to negotiate and consummate acquisitions and
integrate the acquired companies. Although we can make no assurances, we
believe that the proceeds of this offering and funds from the First Union
credit facility, together with the issuance of common stock and other
securities, will be sufficient to fund our acquisition needs for the next 12
months. We cannot assure you that we will complete any acquisitions on
favorable terms or at all, or that additional sources of financing will not be
required during these time periods or thereafter. Our estimates are forward
looking statements that involve risks and uncertainties. Actual results and
working capital needs could differ materially from those estimated due to a
number of factors, included those discussed in "Risk Factors."
Year 2000 Compliance
Some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if, for example, "00" is interpreted to mean 1900, rather than
2000. These problems are widely expected to increase in frequency and severity
as the year 2000 approaches and are commonly referred to as the "Year 2000
problem."
Assessment. The Year 2000 problem could affect computers, software and other
equipment that we use. Accordingly, we are reviewing our internal computer
programs and systems to determine if they will be Year 2000 compliant. We
believe that our computer systems will be Year 2000 compliant in a timely
manner. Although we do not expect the cost of these efforts to be material to
our financial position or any year's operating results, we cannot assure you of
that result.
Internal Infrastructure. We believe that we have identified substantially
all of the major computers, software applications and related equipment used
with our internal operations that must be modified, upgraded or replaced to
minimize the possibility of a material disruption to our business. We have
begun modifying, upgrading and replacing systems that we have identified as
potentially being adversely affected and expect to complete this process before
the end of the third quarter of 1999. We do not expect the costs related to
these efforts to be material to our business, financial condition or operating
results.
Systems Other Than Information Technology Systems. In addition to computers
and related systems, the operation of our office and facilities equipment, such
as fax machines, photocopiers, telephone switches, security systems, elevators
and other common devices may be affected by the Year 2000 problem. We are
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on this equipment. We estimate that our total cost of completing
any required modifications, upgrades or replacements of these internal systems
will not have a material adverse effect on our business, financial condition or
operating results.
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Suppliers. We have been gathering information from and have initiated
communications with our significant suppliers to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. Based on written
certifications or oral representations from these suppliers, we do not believe
our business will be materially affected due to the failure of any of these
suppliers to be Year 2000 compliant. We have limited or no control, however,
over the actions of our suppliers. Thus, while we expect that we will be able
to resolve any significant Year 2000 problems with our systems, we cannot
guarantee that our suppliers will resolve any or all Year 2000 problems with
their systems before our business is materially disrupted. Any failure of our
suppliers to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on our business, financial condition or
operating results.
Customers. Most of our customers, particularly financial institutions, rely
heavily on technology. We cannot assure you that our customers will
successfully address their own Year 2000 problems. Their failure to do so could
cause them to terminate or postpone the marketing programs we implement for
them, which could have a material adverse effect on our business, financial
condition or operating results.
Most Likely Consequences of Year 2000 Problems. We expect to identify and
resolve all internal Year 2000 problems that could materially adversely affect
our business, financial condition or operating results. We believe that it is
not possible, however, to determine with complete certainty that we have
identified or corrected all Year 2000 problems affecting us. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, we cannot accurately predict how many
failures related to the Year 2000 problem will occur or the severity, duration
or financial consequences of those failures. As a result, we could possibly
suffer the following consequences:
. a significant number of operational inconveniences and inefficiencies
for us, our suppliers and our customers may divert our time and
attention and financial and human resources from our ordinary business
activities; and
. a lesser number of serious system failures may require significant
efforts by us, our suppliers and our customers to prevent or alleviate
material business disruptions.
Contingency Plans. We are currently developing contingency plans to be
implemented as part of our efforts to identify and correct Year 2000 problems
affecting our internal systems. We expect to complete our contingency plans by
the end of the third quarter of 1999. Depending on the systems affected, these
plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software;
. increased work hours for our personnel or use of contract personnel to
correct on an accelerated schedule any Year 2000 problems which arise or
to provide manual workarounds for information systems; and
. other similar approaches.
If we are required to implement any of these contingency plans, those plans
could have a material adverse effect on our business, financial condition or
operating results.
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New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and presentation of comprehensive income
and its components in a full set of general purpose financial statements. This
statement is effective for periods beginning after December 15, 1997. The
adoption of SFAS No. 130 did not have a material impact on our financial
statements, as comprehensive loss did not differ from the reported net loss.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, which establishes
standards for disclosures about operating segments, products and services,
geographic areas and major customers is effective for financial statements for
periods beginning after December 15, 1997. We adopted the provisions of
SFAS 131 effective January 1, 1998. See note 13 in the notes to our
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. We are required to implement the statement in the
first quarter of fiscal year 2000. We have not used derivative instruments and
believe the adoption of this statement will not have significant effect on our
financial statements.
Quantitative and Qualitative Disclosures about Market Risk
Our financial instruments consist of cash that is invested in institutional
money market accounts. At March 31, 1999, the carrying value of our financial
instruments approximated their fair values based on current market prices and
rates. We do not use derivative financial instruments in our operations or
investments and do not have significant operations subject to fluctuations in
foreign currency exchange rates. Our $3.0 million credit facility has an
interest rate which is based on First Union's prime rate. As of April 23, 1999,
the total amount outstanding under this credit facility was $3.0 million.
Changes in interest rates which dramatically increase First Union's prime rate
would make it more costly to borrow proceeds under that facility.
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BUSINESS
Overview
We offer a fully integrated, technology-driven marketing and sales solution
primarily to large financial institutions and Fortune 1000 companies. We offer
proprietary Internet and e-commerce products, data mining and modeling,
database management, creative services, teleservices, direct mail production
and fulfillment. By combining digital technology with traditional marketing
services like teleservices and direct mail, we create marketing programs that
enable our clients to develop interactive relationships with their customers.
Our end-to-end solution helps our clients identify their target audiences,
design and execute strategic marketing programs and enhance ongoing customer
relationships.
We believe that the emergence of the Internet and other advanced
technologies will drive the next generation of direct marketing. Our founders,
with years of experience in information-based marketing, formed M2Direct with
the vision of using technology to provide an integrated marketing solution. We
have acquired five providers of digital technology and direct marketing
services to serve as the foundation for our integrated marketing solution,
including:
<TABLE>
<CAPTION>
Company Primary Capabilities
------- --------------------
<S> <C>
DeskGate Technologies, Inc. . proprietary Internet and e-commerce products
UST, Inc. . advanced business-to-business teleservices
. database services
The Aberdeen Marketing Group . creative services
. database management
. fulfillment
Genesis Direct, Inc. . direct mail production
Control Group, Ltd. . statistical data modeling
. data mining
. database management
. creative services like copywriting and graphic design
</TABLE>
For more information about our primary capabilities, please turn to page 38.
The skills and products gained through our acquisitions enable us to offer
an integrated solution that combines the primary marketing communication and
distribution channels--the Internet, the telephone and mail. The acquisition of
DeskGate strengthened our Internet capabilities and our ability to offer
marketing programs that include more interactive media. We intend to continue
to develop technology and to acquire other businesses with Internet-related
technologies that will expand our integrated marketing solution and enhance our
clients' abilities to communicate one-on-one with their customers.
Industry
Direct marketing is any direct communication designed to generate a response
from the recipient of the message. A response could come in the form of a
direct order, a request for further information or a visit to a store or
website to purchase the advertised product or service. According
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to the Direct Marketing Association, direct marketing advertising expenditures
represent approximately 57% of total U.S. advertising expenditures, which were
estimated to be $285 billion in 1998.
We believe it has become increasingly difficult for businesses to reach
their target audiences, build customer relationships and differentiate
themselves from their competitors. The increasing number of media and
communications choices, including the Internet, is driving the need for more
sophisticated targeted marketing to reach consumers. To be effective, direct
marketing programs need to become more personalized, focusing on the individual
consumer.
The recent unprecedented growth of the Internet has increased its importance
as a communications and distribution channel. According to International Data
Corporation, the number of Internet users worldwide will increase from
approximately 100 million in 1998 to over 320 million in 2002. Direct marketing
interactive media advertising expenditures grew from $11 million in 1994 to
$603 million in 1998, and have a projected compound annual growth rate of 54%
for 1998-2003, rising to an estimated total of $5 billion in 2003.
We believe that direct marketing will depend increasingly on the Internet
and other advanced technologies and that successful direct marketing campaigns
will require an integrated Internet component. The Internet enables companies
to develop and deliver targeted marketing programs that incorporate interactive
features like e-mail to distribute information quickly and inexpensively.
Marketing programs delivered through the Internet are easily developed and
customized, are adaptable to large and small audiences and are quickly and
easily modified to respond to market changes and customer feedback. The
Internet also allows advertisers and direct marketers to track the demographic
characteristics of Internet users in real time. The interactive nature of the
Internet enables marketers to better understand potential customers, implement
cost-effective programs and quickly change marketing campaigns in response to
customer interests and behavior.
The direct marketing industry is highly fragmented--no single company
accounts for more than 1% of total industry revenues. Most marketing services
businesses are small companies that focus primarily on a particular skill or
single marketing medium. Although many companies offer single medium services
like teleservices or direct mail, we believe few offer marketing programs that
combine media like the Internet with teleservices and direct mail. To implement
a complete marketing program, a business often must hire multiple companies
which provides the business with no single source of accountability for its
program.
We believe companies will increasingly demand an integrated marketing
solution that couples digital interactive services with traditional direct
marketing. This demand will benefit integrated providers who can fulfill direct
marketing needs from end-to-end. We believe the most effective marketing
solution will:
. incorporate an Internet strategy;
. reach customers through multiple channels;
. personalize the message to the customer; and
. take advantage of marketing opportunities with each customer
interaction.
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The M2Direct Solution
Through both internal growth and acquisitions, we have built and continue
to expand our end-to-end, integrated marketing solution. We believe that our
ability to deliver this solution gives us a competitive advantage over other
marketing firms which lack integrated capabilities. Because we can handle all
aspects of a marketing program, from an initial needs analysis to identifying
and developing a target audience to executing a program and measuring its
results, we provide a single source of accountability for our clients'
marketing needs.
[graphic appears here]
[Graphic entitled "The M2Direct Solution." This graphic shows the words "Needs
Assessment," "Database Analysis," "Modeling," "Strategy," "Creative,"
"Execution" and "Program Analysis" arranged in a circle around the following
words: "Direct Mail," "Teleservices," "e-commerce" and "Fulfillment."]
Our mission is to help our clients meet their goals and realize a greater
return on their marketing investments. As we form long-term relationships with
our clients and complete multiple programs for them, we gain valuable insight
into their business and a better understanding of their goals and objectives.
With each additional marketing program we implement for a client, we acquire
more knowledge about its customers and the most effective distribution
channels, which in turn improves the results of future programs. We believe
clients that use our integrated solution realize better returns on their
investment, because the results of the programs improve as our involvement
increases.
We offer a comprehensive marketing solution that enables our clients to
take advantage of the benefits of the Internet and digital technology. Our
acquisition of DeskGate and its innovative Internet products has significantly
enhanced our digital marketing capabilities. Our proprietary products
accelerate the distribution and sale of goods and services through the
Internet via e-mail. These products enable our clients to use e-mail to
deliver printed materials and digital media like music and video to their
customers. We believe that our new technology will open new marketing channels
with lower production, distribution and management costs than those incurred
in traditional marketing campaigns.
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Business Objective and Strategies
Our goal is to become the leading provider of fully integrated, technology-
based marketing and sales programs. We will pursue this objective by:
Developing New Marketing and E-Commerce Capabilities. We intend to enhance
and expand our digital marketing tools to strengthen our marketing and sales
programs. We believe that the Internet's importance as a communications medium
and distribution channel will continue to increase and that successful direct
marketing campaigns will require an integrated Internet component. Using our
proprietary technology, we plan to develop new e-commerce capabilities and
increase our use of sophisticated marketing techniques, like electronic
envelopes and interactive websites. By integrating the Internet into our
clients' marketing programs, we can complement our traditional direct marketing
products and services and optimize the solution for our clients.
Broadening Our Marketing Solution. By increasing the range and depth of our
marketing programs, we can better maximize the value of our client
relationships. Although some clients retain us for only a portion of their
marketing programs, we believe that a broader solution will improve our ability
to attract new clients and handle a larger part of their marketing programs. We
intend to hire additional salespeople and promote our ability to provide more
sophisticated marketing campaigns that require higher value-added services,
like database management, strategic consulting, predictive modeling and
creative design. When used in a broad marketing program, these value-added
services can improve the results of the campaign, increasing the client's
return on investment.
Helping Our Existing Clients Expand Their Customer Relationships. As
customers become more difficult and more expensive to obtain, we believe
companies will focus on improving their relationships with their existing
customers. By helping clients develop marketing programs and incentive
marketing campaigns to improve and expand their customer relationships, we help
them increase the lifetime value of their customers. We encourage our clients
to implement new methods of interacting with their customers, since any client
communication with a customer creates a marketing opportunity we can address.
Acquiring Other Providers of Marketing Solutions. We intend to acquire other
businesses that we believe will improve our technological capabilities and
enhance our end-to-end marketing solution. The direct marketing industry is
highly fragmented, with no single company representing more than 1% of the
market. This presents us with an opportunity to acquire other businesses,
broaden the relationships with their existing customers and expand our
geographic scope. We believe that geographic expansion is particularly
important to our fulfillment capabilities, because it lowers our costs and
speeds distribution for our clients. We have acquired a total of five
businesses since our inception, and we will continue to pursue acquisitions
that will allow us to accomplish one or more of the following:
. strengthen our technology;
. add a complementary service or product;
. expand our geographic market;
. add to our existing client base in industries we already serve; or
. add clients in industries we have not served.
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M2Direct Marketing Programs
Overview
Companies may undertake marketing programs for any number of reasons,
including:
. to improve market awareness of the company;
. to sell a product or service;
. to increase customer loyalty and maximize existing customer
relationships; or
. to gather information about current and potential customers.
We create highly targeted marketing programs to help our clients meet their
business objectives. The range of services we provide to a client depends on
the client's particular needs. Our value-added services and digital marketing
tools together support all stages of a broad-based direct marketing campaign.
We use a team approach to provide our solution, ensuring a consistent,
focused message for each program. After our sales force generates a lead, we
organize a team of experts from each discipline to visit the client, perform a
needs analysis and describe our resources. Once we have entered into an
agreement with a client, we determine a solution and assign an experienced
account manager to coordinate all aspects of the client's marketing program.
The account manager organizes and manages a multidisciplined team of
professionals, which may include Internet specialists, database specialists,
strategic consultants, creative designers, teleservices and production
coordinators and fulfillment personnel.
Database Analysis and Modeling
We use sophisticated analytical techniques to help clients understand and
make better use of their data to achieve their business objectives. We collect
data from various sources, study market and media trends and screen databases
for the desired customer characteristics. We then use advanced modeling
techniques to define a target audience and identify potential customers for the
client.
We believe that our extensive experience in knowledge discovery gives us a
competitive advantage over many traditional direct marketing firms. Knowledge
discovery is the term we use to describe methods of interpreting demographic
data, public record information or lifestyle data to learn more about a
particular customer group. Predictive modeling is a method of knowledge
discovery we frequently use. This statistical tool will analyze data and
predict an outcome such as a response, usage level, spending level or
likelihood of renewal. We also use another method of knowledge discovery known
as clustering or profiling. With this method, we analyze potential customer
data to create a profile of a typical customer. Using this profile, we are able
to determine the characteristics of an ideal customer for a campaign. We
believe that data mining and modeling techniques will become more important as
marketing campaigns target hard-to-reach consumers.
Strategy and Creative Services
When our database analysts have identified a target audience, our marketing
strategists work with the client to develop the marketing campaign. Our
programs might encompass a new or improved website, banner ads, direct mail
and/or a teleservices program. Our creative personnel can customize the
artwork, photography, layout, design and text of the materials to target groups
of
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customers and even specific individuals. Our digital marketing materials take
advantage of the multimedia aspects of the Internet, including text, graphics,
sound and video.
Execution
Direct mail. If a marketing program designed by our creative staff includes
a direct mail component, the creative team electronically transmits the artwork
for the materials to our production staff for printing and distribution from
one or more of our production facilities in Florida, New Jersey and Georgia.
Our production staff manages the entire direct mail project. We use a targeted
customer and prospect list, provided by our modeling and strategy experts or by
the client, to transform the printed piece into personalized correspondence
from our client to its current and potential customers. Once we develop a
customer list, we process the data to eliminate duplicates and correct errors,
and then personalize pre-printed materials using our laser printers. We then
fold, collate, insert and meter the materials by automated equipment, sort the
mail by zip code to optimize delivery times and reduce the client's out-of-
pocket costs, and then distribute the materials to the target audience. Our
goal is to provide targeted, personalized direct mail that enables our clients
to send the fewest possible pieces and realize the highest possible return on
their marketing investment.
Teleservices. We manage and conduct telephone-based business-to-business
marketing and customer service programs for our clients. Approximately 60% of
our teleservices programs are business-to-business. Most of our teleservices
associates have technical educational backgrounds or prior work experience with
technology companies, which enhances their ability to effectively communicate
our message.
Our teleservices staff processes a variety of marketing activities from
order processing to full service customer support, acting as an extension of
our clients' marketing departments. Inbound teleservices, which constitute
approximately 30% of our teleservices business, typically involve the receipt
of a call from a client's customer through a toll-free number. These calls may
be initiated by marketing materials we provide or from a telephone number
placed on a website. Customers may place inbound calls to request product or
service information, place an order for a product or service or obtain
assistance regarding a previous order or purchase. More sophisticated programs
assist clients in responding to customer inquiries, offering technical and
product support services and assessing overall customer satisfaction.
Our teleservices centers are equipped with computer-integrated telephony.
Upon receipt of a call, our digital switch identifies the call and routes it to
the appropriate telephone marketing associate. Our computers store database
information about each prospective customer, as well as information about our
client's product or service. This information, along with a script for the
call, is displayed to our telephone marketing associate on a computer screen
during a call.
Approximately 40% of our teleservices business is business-to-consumer, but
we generally outsource about 90% of this business. We do not engage in any form
of outbound communication that uses computerized voice presentations or
requires unsolicited financial requests, nor are we engaged in the "900" number
business.
E-commerce.
VIAexpress(TM). We have developed the VIAexpress envelope--an
"electronic envelope" that compresses, encrypts and delivers documents and
files as a single attachment to an e-mail. We intend to use the electronic
envelope primarily to send to consumers and businesses information they
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have requested or elected to receive. The VIAexpress envelope virtually
eliminates information delivery costs, provides several levels of security and
provides multimedia file compression of documents. Users simply "drag-and-drop"
the documents and files into the envelope. Because e-mail messages are
compressed up to 1/20 of their original size, larger documents, files and
websites can be attached with reduced effects on network bandwidth and faster
retrieval by the end user.
Upon arrival of an e-mail at its destination, the recipient receives a
customized envelope with secure, organized contents. After providing the
necessary notification information, such as name and e-mail address, the
recipient can open the envelope with any e-mail package that is based on a
Windows(R) NT or Windows(R) 95 (or later) platform, without any additional
software. Each envelope opens itself when clicked on and reveals its contents
to the user. The envelope may be transmitted to other users or computers via e-
mail or other mechanisms, including physical transfer of a floppy disk storing
the envelope. Like the initial recipient, later recipients may be required to
provide demographic information before they are allowed to view the contents.
The electronic envelope solves three basic issues that marketers must
address to effectively use the Internet as a distribution channel for media.
First, the envelope's tracking feature notifies senders when the envelope is
received and opened, eliminating clients' uncertainty of whether marketing
materials are reviewed. Second, the envelope maintains the security of its
contents because unauthorized users cannot access the materials. Finally, once
an envelope has been opened, users may generally access its contents at any
time, even if they are off-line, which we believe will improve the chances that
the materials will be reviewed by a potential customer.
The VIAexpress envelope provides for promotion, advertising and package
delivery in one technology. It gives our clients a personalized method of
getting information to their target audiences. We can customize envelopes for
any vendor and enhance them with full color graphics, logos, banner advertising
and links to related websites. Vendors can promote themselves and their website
with each e-mail delivery. The envelope also offers an improved way to collect
information from customers. Customers may be required to provide demographic
information before they are allowed to view the contents. The collected
information can provide valuable marketing data that may track the number and
demographic attributes of users accessing the envelope. Because the envelope
may be sent to any target audience, either to individuals or in broadcast e-
mails, it enables us to enhance our customer management solution.
VIApublisher(TM)--The Internet's Traveling Salesman(TM). VIApublisher,
our portable e-commerce tool, is an electronic folder distributed by e-mail
that works like a traveling salesman on the Internet. All files and programs
needed to conduct an e-commerce transaction are contained within the
VIApublisher or otherwise contain a mechanism to retrieve necessary files via
the Internet. Each VIApublisher stores the price and terms of its contents and
protects them from unauthorized tampering and copyright infringement. When a
customer decides to make a purchase, the VIApublisher collects the payment and
information directly from the purchaser and delivers it by using a real-time
authorization process. If the transaction does not require a payment,
VIApublisher can simply collect the consumer's personal information before
authorizing use of the contents. The purchaser retains the right to access the
contents for repeated use on his personal computer. A VIApublisher can contain
intellectual property like movies, books, magazines, newspapers, music and
catalogs and may contain promotional information, serving as a roving billboard
as it moves from person to person. If a purchaser forwards the e-mail to
another person, the VIApublisher moves with the e-mail to the next transaction.
Like the first purchaser, the recipient cannot open the e-mail and view its
contents, except to review an authorized sample, until he pays or provides the
data required by our client.
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VIApublisher allows our clients to take advantage of the friend-to-friend,
co-worker to co-worker network. VIApublisher facilitates e-commerce by
decentralizing the sales process, while crediting the originating seller
throughout the process. Purchasers do not need special software to receive and
handle the e-mail, although some products may require special software usually
available free from the vendor's website. Purchasers can order goods
prepackaged for delivery over standard e-mail or by immediate download and be
assured of delivery before initiating a payment or authorization process.
Banner advertisements. Our No ClickSM banner ad technology enables an
interested consumer to receive information by typing his or her e-mail address
into a banner ad. The e-mail address is then forwarded to a remote server,
which responds via e-mail with additional information about the advertised
product or service. Our No Click banner ads offer advantages over regular
banner ads. First, the consumer avoids the annoyance of being diverted to a
different web site to get additional information, and avoids waiting on-line
for a linked site's web page to load. In contrast, with typical banner ads the
consumer "clicks through" to the website of the company whose product is
featured in the banner ad, leaving the web page where the banner ad is located.
We believe the feature will be attractive to web page publishers because their
traffic will not be directed from their websites. In addition, because the
marketing materials are automatically delivered by a server, the turnaround
time from the consumer's request to actual receipt of the materials is
improved. Moreover, because the marketing materials are sent to the consumer's
e-mail address, the materials can be viewed off-line at the consumer's leisure,
which we believe increases the probability that the consumer will spend more
time viewing them. Because the consumer has chosen to "opt-in" to e-mail
delivery of marketing materials, the client may send additional materials to
the consumer and add additional demographic information to its customer
database.
For a discussion of potential legislation that may impact our e-commerce
activities, see "--Government Regulation."
Fulfillment. We also provide fulfillment services, which involve filling
orders received through customer websites, outbound and inbound customer
service calls and direct mail solicitation. Our fulfillment services include:
. receipt of merchandise;
. warehousing;
. small batch printing;
. detailed program management;
. control and reporting of inventory;
. order retrieval;
. supply of packaging materials, as needed; and
. pick/pack/ship operations.
We monitor all incoming and outgoing merchandise with our inventory system.
To increase response rates, many of our direct marketing campaigns use premium
items that must be individually packaged. Our fulfillment personnel order these
items or arrange for their shipment from the client, organize the materials to
be included and then assemble the package. We maintain warehouse space for
storage of client products and literature, which are sorted for inventory
control.
Program Analysis. Throughout a marketing campaign, we continuously gather,
manage and analyze the data that is generated from the campaign. By analyzing
performance-related information and sales transactions, we measure the success
of each marketing program. We then meet with the
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client to discuss consumer behavior and transaction patterns and develop any
changes to the program warranted by the data. We recommend future marketing
programs to the client and explain how it can increase customer acquisition and
retention, enhance its customer relationships and gain additional sales and
marketing opportunities.
Case studies
Web page response management
Viasoft, Inc. engaged us to develop and implement a campaign integrating
direct mail, the Internet, teleservices, fulfillment and field sales contacts.
We designed this integrated campaign to develop a market for Viasoft's suite of
Year 2000 software products. We implemented an extensive direct mail program to
drive recipients to Viasoft's website where they could obtain information about
its Year 2000 solution. We helped create the website appearance and content to
give prospects an indication of the capabilities of the software applications.
We performed daily sweeps of the website to gather information from customers
who had visited the site and requested additional information. We segmented the
customers into sets of qualified and non-qualified prospects based on their
readiness for a Year 2000 solution. We used our teleservices center to call the
qualified prospects to better evaluate their potential for purchasing Viasoft's
Year 2000 solution. Stronger leads were then re-qualified and sent to Viasoft's
field sales organization. We generated a second mailing to the remaining
prospects who were not qualified for short-term direct action. We sent more in-
depth information on Viasoft's product offerings via direct mail to some of
these remaining prospects. The success of this program, as well as the
integrated marketing methods and close cooperation with Viasoft's field sales
personnel, garnered a 1998 Award for Call Center Excellence from
TeleProfessional Magazine.
Integrated campaign
A large insurance and annuity provider hired us to develop a program to
generate and deliver qualified leads for its team of life insurance and annuity
agents. The client's goal was to improve response and lead turnaround time, as
well as more effectively track and measure the success of its programs and the
volume and quality of the leads generated.
We created an integrated marketing campaign that addressed each of these
problems and are currently implementing the program. Our creative team has
designed several packages of direct mail materials, as well as mass media
advertising, that focus on obtaining a response from consumers. Consumers will
be asked to return coupons with their telephone numbers and an indication of
their interest level in a particular product or to call a toll free number and
provide the information to one of our telephone marketing associates. The
direct mail materials also will drive consumers to the client's web site, where
they can obtain and request more information. We will collect the information
from each of these channels daily and transmit it electronically to our
database. Our initial mailings included materials to the client's existing
customers and to individuals on prospect lists provided by the client. We will
analyze the results of these initial mailings and, with a prospect list
acquired from a third party vendor, create additional mailings. Our consulting
team will analyze these mailings to improve future mailings. Then, with the
addition of lists purchased from outside vendors, our modeling team will
predict the best customers to target for additional products and services and
the best prospects to target for new sales.
Once the lead information is compiled and sorted, we transmit it via e-mail
to the client's agents. Because the leads must remain secure, we are using a
VIAexpress electronic envelope to send the data to the agents. We have reduced
the turnaround time from receipt of the lead information to transmission of
that lead to an agent from several weeks to 24-48 hours. Once an agent receives
a
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lead, he may decide to send additional marketing materials to that individual.
Our production and fulfillment team fulfills agent requests for personalized
marketing materials printed at one of our production centers. The agents are
responsible for forwarding additional information to the consumer.
Clients
Our clients consist principally of large financial institutions and Fortune
1000 companies who need targeted marketing solutions to sell their products and
services. Our business depends substantially on a limited number of large
clients. Based on our pro forma 1998 revenues, two clients each accounted for
more than 10% of our revenues: Provident Bank, with $10.9 million, or 31%, of
our pro forma revenues; and Champion Mortgage Co., with $5.5 million, or 16%,
of our pro forma revenues. Our 1998 pro forma revenues from our top ten clients
were $23.3 million, or 67%, of our total pro forma revenues.
Our clients ordinarily hire us on a program basis rather than on a retainer
basis, so we generally do not have long-term contracts with our clients. As a
result, our clients generally may terminate their contracts with us without
significant penalty and on relatively short or no notice. While we are not
aware of plans by any of our significant clients to terminate their
relationship with us, the termination or significant curtailment of our
business relationship with any of our significant clients, particularly
Provident Bank or Champion Mortgage, could have a material adverse effect on
our business, financial condition and operating results.
In April 1999 we entered into a long-term relationship with Provident Bank.
We will serve as Provident Bank's principal direct marketing firm of record for
its credit card and home equity product lines for a three-year period. In the
future, we will bill Provident Bank in a manner that takes into account the
number of accounts actually obtained by Provident Bank as a result of our
marketing efforts. Provident Bank agreed to create pricing structures that
guarantee that we will be paid for all costs incurred up to the mutually agreed
upon budget for each Provident Bank marketing program, plus an agreed-upon
margin.
We also resolved several billing and compensation issues related to direct
marketing programs we performed for Provident Bank in 1998 and early 1999.
Provident Bank paid us $828,033 upon signing the agreement. As an inducement
for the agreement, we issued to Provident Bank a stock purchase warrant for the
purchase of 100,000 shares of common stock at an exercise price of $0.01 per
share. We also issued to Provident Bank a zero coupon promissory note payable
in one payment of $1,000,000 in five years. We must prepay the note in full,
without any discount, on the closing of this offering. We agreed to deposit
with Provident Bank at least one half of the net proceeds of this offering and
will receive interest on those funds at a commercially reasonable rate until
they are used as described in "Use of Proceeds." In addition, we licensed to
Provident Bank the algorithms/ models we have created specifically for use in
its programs.
Seasonality
We have historically experienced, and expect to continue to experience,
significant seasonal fluctuations in the demand for our solutions. Many clients
make significant marketing expenditures in the fourth quarter, which has
historically caused an increase in the demand for our services during that
quarter. In addition, because our clients tend to set marketing budgets and
develop marketing campaigns during the early part of the year, we expect our
first quarter revenues to be lower than in other quarters of a given year.
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Sales and Marketing
Our overall sales focus is to position our company as a single-source
solution for a client's targeted marketing needs. Our sales force emphasizes
the range of direct marketing products and services we provide and is supported
by teams of associates in each of our service disciplines. We acquire new
clients and market our solution by using our own direct marketing capabilities,
attending trade shows, advertising in industry publications, responding to
requests for proposals, pursuing client referrals and cross-selling to existing
clients. The sales cycle of a typical direct marketing campaign for a new
client--from initial contact by a sales executive to commencement of the
campaign--generally takes approximately six to nine months.
Our national sales force is managed by our Executive Vice President of Sales
and Marketing and includes 11 individuals located in our offices in Atlanta,
Georgia, Tampa, Florida and Washington, D.C. We have experienced sales managers
that focus on various disciplines. We have three managers focused on integrated
programs, two focused on e-commerce business, five focused on business-to-
business teleservices and one focused on direct mail. Each sales team is made
up of specialists in certain functional areas, and depending on the needs of a
particular client, any or all of these persons may be a member of the sales
team that sells our solution.
Acquisitions
From March 1998 through March 1999, we acquired several providers of direct
marketing services and digital technology to serve as the foundation for our
integrated marketing solution, including:
Control Group, Ltd. Control Group was a direct response agency that provided
predictive modeling, direct mail design and fulfillment and strategic
development primarily to financial institutions for their credit card and home
equity programs. On March 6, 1998, we acquired all of the outstanding capital
stock of Control Group in exchange for $250,000 in cash, 2,076,720 shares of
our common stock and the assumption of $376,466 in debt owed by Control Group's
shareholders. Subject to some adjustments, an additional $250,000 may be paid
to the former shareholders of Control Group in 1999.
Genesis Direct, Inc. Genesis Direct was a full service direct mail
production facility providing laser imaging, lettershop and data processing. On
March 6, 1998, we acquired all of the outstanding capital stock of Genesis
Direct in exchange for $1,950,000 in cash and 946,080 shares of our common
stock.
The Aberdeen Marketing Group. Aberdeen Marketing was a direct response
agency that provided teleservices, database marketing and creative services for
customer acquisition, retention and growth programs. On March 6, 1998, we
acquired the assets of Aberdeen Marketing in exchange for 719,425 shares of our
common stock and the assumption of essentially all of the liabilities of
Aberdeen Marketing. Because Aberdeen Marketing did not meet various financial
targets following the acquisition, only 239,808 shares will be retained by the
former owners of Aberdeen Marketing Group.
UST, Inc. UST was a provider of business-to-business sales and marketing
consulting services and teleservices for technology companies throughout the
United States. Its services included consulting, training, program development
and maintenance, database development and maintenance, inbound and outbound
teleservices and web page response management. On February 3, 1999, we
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acquired all of the outstanding shares of UST in exchange for $3,875,000 in
cash and 149,880 shares of our common stock.
DeskGate Technologies, Inc. DeskGate was an e-commerce company specializing
in the packaging, delivery, protection and selling of documents, publications,
music and other copyrighted material over the Internet. On March 16, 1999, we
acquired all of the outstanding capital stock of DeskGate in exchange for
2,493,609 shares of our common stock. We also assumed outstanding warrants of
DeskGate that are exercisable for a total of 673,781 shares of our common stock
at a purchase price of $2.28 per share.
We accounted for all of the transactions using the purchase method of
accounting, with the exception of DeskGate, which we accounted for as a
pooling-of-interests.
Competition
We compete with other direct marketing firms in a very competitive and
highly fragmented industry. Many of the other firms offer a limited number of
services within a limited geographic area, but we have several competitors
whose businesses tend to be national or international and offer a broad array
of marketing services. Our competitors range in size from very small firms
offering specialized applications or short-term projects, to large independent
firms. We believe that some of these competitors have capabilities and
resources greater than ours. We also compete with the internal marketing and
customer service departments of our clients and potential clients as well as
with providers of other forms of advertising and marketing media, such as radio
and television. We believe that we compete primarily on the basis of:
. our ability to offer an integrated end-to-end solution;
. our technological, creative and consulting expertise;
. our demonstrated ability to attract and acquire customers;
. our reputation for quality;
. our competitive prices; and
. our geographic presence with regard to fulfillment operations.
Research and Development
DeskGate was incorporated in 1996. Before we acquired DeskGate in March
1999, its operations had focused primarily on research and development. The
VIAexpress electronic envelope, VIApublisher and the No Click banner ad
technology are Internet products produced from DeskGate's research and
development activities. DeskGate developed these products entirely in-house by
a team of programmers headed by Pat Patterson, our Chief Technology Officer. We
have filed several patent applications to protect some of the technology
developed by this team. In the future, our research and development efforts
will focus on enhancing our existing technology, and developing and integrating
technology that we may acquire. See "--Intellectual Property."
Government Regulation
Teleservices. We provide both inbound and outbound business-to-business
teleservices that are governed by various federal and state laws and
regulations. Because most of our in-house teleservices are business-to-
business, most governmental regulations that govern teleservices do not apply
to us. An increasing amount of federal and state regulation has been
promulgated to govern portions of our industry in the recent past, however, and
to the extent that we provide business-to-consumer teleservices, government
regulations apply to us.
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Rules implemented by the Federal Communications Commission under the Federal
Telephone Consumer Protection Act of 1991 limit the hours during which
telemarketers may call consumers and prohibit the use of automated telephone
dialing equipment to call certain telephone numbers. Additionally, the
Telephone Consumer Protection Act requires telemarketing firms to develop a
written policy implementing a "do not call" list, including the training of its
telemarketing personnel to comply with these restrictions. We train our service
representatives to comply with the regulations of the Telephone Consumer
Protection Act.
The Federal Trade Commission regulates both general sales practices and
telemarketing specifically. Under the Federal Trade Commission Act, the FTC has
broad authority to prohibit a variety of advertising or marketing practices
that may constitute "unfair or deceptive acts and practices." The FTC also
administers the Federal Telemarketing and Consumer Fraud and Abuse Prevention
Act of 1994, which broadly authorizes the FTC to issue regulations prohibiting
misrepresentation in telephone sales. In August 1995, the FTC issued
regulations under the Prevention Act which, among other things, require
telemarketers to make prescribed disclosures when soliciting sales or other
information. We believe our operating procedures comply with the telephone
solicitation rules of the FCC and FTC. Additional federal or state legislation,
or changes in regulatory implementation, could limit our activities or our
clients' activities in the future or significantly increase the cost of
regulatory compliance.
Several states have enacted or are considering enacting legislation to
regulate telephone solicitations. For example, until a written contract is
delivered to and signed by a buyer, telephone sales in some states are not
final and even then may be canceled within three business days. At least one
state also prohibits telemarketers from requiring credit card payment, and
several other states require some telemarketers to obtain licenses, post bonds
or submit sales scripts to the state's attorney general. Additionally, current
and proposed federal and state legislation may prohibit or restrict us from:
. calling individuals who have placed their names on a statewide do-not-
call list;
. blocking display of our number from caller ID devices;
. collecting, using or disclosing information obtained from an individual
without his consent; and
. disclosing names, addresses or telephone numbers for commercial use
without the consent of the individuals.
E-commerce. Currently, few laws or regulations specifically regulate
communications or commerce on the Internet or via e-mail. Laws and regulations
may be adopted in the future that address issues such as online or e-mail
content, user privacy and pricing and quality of products and services. Pending
legislation in Congress seeks to, among other things:
. prohibit unsolicited e-mail and unsolicited e-mail in bulk, frequently
called spamming;
. require unsolicited commercial e-mail to have the word "advertisement"
in the e-mail subject box;
. establish do-not-e-mail lists; and
. create a method of security for personal or business information over
the Internet and through e-mail.
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At least four states have adopted laws prohibiting spamming.
We can give no assurances regarding any legislation that might be enacted.
Any statutes or regulations could have a material adverse effect on our plans
to develop our Internet strategy. Government regulation could affect the way in
which we are allowed to conduct our business, especially those aspects that
involve the collection or use of personal information, and could have a
material adverse effect on our business, financial condition and operating
results.
Government regulations apply to several industries in which our clients
operate, particularly the financial services industry. Generally, our clients
are responsible for compliance with these regulations. We could be subject,
however, to a variety of enforcement or private actions for our failure or our
clients' failure to comply with these regulations. Enforcement or private
actions might include injunctions against particular operations, monetary
penalties or disgorgement of profits and could have a material adverse effect
on our business, financial condition and operating results.
In addition, the FTC and state governmental bodies have been investigating
some Internet companies' use of personal information. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if the FTC or state governmental bodies choose to investigate our
privacy practices. Moreover, it may take years to determine the extent to which
existing laws governing issues such as property ownership, libel, negligence
and personal privacy are applicable to the Internet or e-mail solicitations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret
laws and contractual provisions to establish and protect our proprietary
rights. We have applied to register in the United States service marks and
trademarks that we use. Additionally, we have filed three patent applications
with the United States Patent and Trademark Office to protect aspects of our
digital technology. We cannot assure you that our trademark registrations or
patent applications will be approved or granted and, if they are granted, that
they will not be successfully challenged by others or invalidated through
administrative process or litigation. If our trademark registrations and patent
applications are not approved or granted due to the prior use or issuance of
trademarks or patents by or to others or for other reasons, we may not able to
agree with those other parties on commercially reasonable terms to allow us to
continue to use that intellectual property. We cannot assure you that the steps
we have taken to protect our proprietary rights will be adequate, that we will
be able to secure trademark or service mark registrations for all of our marks
in the United States or that others will not infringe upon or misappropriate
our copyrights, trademarks, service marks and similar proprietary rights.
In addition, effective copyright, trademark and patent protection may be
unavailable or limited in some foreign countries, and the global nature of the
Internet makes it impossible to control the ultimate destination of our digital
products and services. Our competitors may adopt product or service names
similar to ours, which could impede our ability to build brand identity and
possibly confuse our clients. Our inability to protect our marks adequately
could have a material adverse effect on the acceptance of the M2Direct brand
and on our business, financial condition and operating results.
We also rely on a variety of software and technology that we license from
others, including database and telephony software and software for scripting
and contact management of our teleservices. We cannot assure you that these
third party technology licenses will continue to be available to us on
commercially reasonable terms. Our loss of or inability to maintain or obtain
upgrades to any of these software and technology licenses could materially
adversely affect our business, financial condition and operating results.
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Facilities
Our principal executive offices are located in 1,700 square feet of leased
space in Tampa, Florida, where our chief executive officer and other executive
officers reside. The following table lists the metropolitan locations where we
lease additional space and the principal use of each location:
<TABLE>
<C> <S>
Wilmington, Delaware Consulting, strategy and data modeling
Washington, D.C. Internet and e-commerce development
Melbourne, Florida Call center
Tampa, Florida Corporate offices, direct mail production and
database services
Atlanta, Georgia Corporate offices, creative services, call center
and fulfillment center
Parsippany, New Jersey Fulfillment center
Allentown, Pennsylvania Creative services and account management
</TABLE>
We have internal teleservices capacity to handle over 1,700 billable hours
of calls per day. As of April 23, 1999, we had approximately 100 active call
stations with capacity to increase the number of our call stations to 140.
Employees
As of April 23, 1999, we had 276 full-time and 9 part-time employees. None
of our employees is a member of a labor union and none is represented by a
collective bargaining agreement. We have never experienced any type of work
stoppage and believe our relationship with our employees is satisfactory.
Legal Proceedings
We may be involved from time to time in ordinary routine legal proceedings
that arise in the normal course of business. We currently are not a party in
any pending material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table gives the name, age and positions of our executive
officers and directors as of April 23, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John P. Kelly........... 56 Chairman of the Board, Chief Executive Officer and President
Glenn W. Sturm.......... 45 Vice Chairman of the Board and Secretary
Patrick E. Patterson.... 52 Chief Technology Officer
Michael T. Kane......... 58 Chief Financial Officer
Paul B. Byrum, III...... 41 Executive Vice President--Sales
Edward J. Rutkowski..... 56 Executive Vice President--Corporate Development
Theresa L. Swanda....... 46 Executive Vice President--Operations
Jeffrey T. Arnold....... 29 Director
John W. Collins......... 51 Director
Jill F. Dorsey.......... 35 Director
Stephen R. Gross........ 51 Director
Thomas P. Maletta....... 57 Director
Richard M. Stolbach..... 46 Director
</TABLE>
John P. Kelly, one of our co-founders, has served as our Chairman of the
Board, Chief Executive Officer and President since January 1998. Mr. Kelly has
more than 30 years of experience in the data and information-based marketing
industry. In 1987, Mr. Kelly founded OKRA Marketing Corporation, a database
marketing systems provider, and served as its Chairman and President before
selling it to John H. Harland Company in 1996. From May 1996 to December 1997,
Mr. Kelly was the Senior Vice President--International with John H. Harland, a
checkprinter and database marketing systems provider. At Harland, Mr. Kelly was
responsible for managing and developing database marketing business in the
United Kingdom and Europe. Before co-founding OKRA, Mr. Kelly was a founder and
president of CDP Marketing, a developer and marketer of database marketing
systems to the financial services industry.
Glenn W. Sturm, one of our co-founders, has served as a director and as our
Secretary since September 1997 and as the Vice Chairman of the Board since
December 1998. Mr. Sturm has been a partner in the law firm of Nelson Mullins
Riley & Scarborough, L.L.P. since 1992, and he presently serves as its
Corporate Chairman and as a member of its Executive Committee. He is a director
of Phoenix International Ltd., Inc., The InterCept Group, Inc., Towne Services,
Inc. and WebMD, Inc. Mr. Sturm is a principal in Centaurus Ventures, a venture
organization which invests in and advises e-commerce and computer telephony
companies, and Capital Appreciation Partners, a venture capital fund.
Patrick E. Patterson has served as our Chief Technology Officer since March
1999 and has over 22 years of software design experience. From 1993 until its
merger with M2Direct, Mr. Patterson served as Chairman of the Board, Chief
Executive Officer and President of DeskGate Technologies. Before founding
DeskGate, Mr. Patterson had experience with several successful startups,
including Excalibur Technologies, Inc. and Infocel, Inc. At Excalibur, Mr.
Patterson managed software development teams and developed prototype software
applications. Mr. Patterson began his career in the information technology
industry as a computer programmer for the United States Army.
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Michael T. Kane has served as our Chief Financial Officer since July 1998.
From March 1998 to July 1998, Mr. Kane was associated with US Intellicom, Inc.,
a software development company, as the Vice President of Finance and Chief
Financial Officer responsible for all aspects of financial management and
reporting. From June 1997 to March 1998, Mr. Kane was the Director of Finance
and Administration for ACT Manufacturing Corp., a public company in the
business of contract manufacturing of electronic circuit board assemblies,
where he was responsible for financial reporting activities and administration.
From September 1994 to June 1997, Mr. Kane was the Vice President of Finance
and Chief Financial Officer of Electronic Systems International Acquisition
Corp., a manufacturer of electronic circuit board assemblies and injection
plaster molding products. From October 1984 to September 1994, Mr. Kane was the
Vice President of Finance and Chief Financial Officer for Allied Data
Communications Group, Inc. in Norcross, Georgia.
Paul B. Byrum, III has served as our Executive Vice President of Sales and
Marketing since March 1998. Mr. Byrum also served as a director of M2Direct
from March 1998 to December 1998. From May 1995 to March 1998, Mr. Byrum was a
Vice President at John H. Harland where he was responsible for business
development, strategic planning and customer profitability and retention. From
March 1988 to May 1995, Mr. Byrum was a senior vice president at OKRA Marketing
responsible for business development and sales in the U.S. and South America.
The balance of his career was spent with Virginia National Bank, where he was
responsible for market research.
Edward J. Rutkowski, one of our co-founders, has served as our Executive
Vice President of Corporate Development since our formation in September 1997.
Mr. Rutkowski also served as a director of M2Direct from September 1997 to
December 1998. From January 1993 to May 1996, Mr. Rutkowski was an Executive
Vice President at OKRA where he was responsible for all sales and marketing
functions. From May 1996 to September 1997, Mr. Rutkowski was employed at John
H. Harland as a Vice President of Strategic Development where he was
responsible for providing initial support to the entire International Markets
Division, including structuring and negotiating global agreements and
solutions. Before OKRA, Mr. Rutkowski was Vice Chairman of Southern Financial
Holdings, an investment banking firm. The balance of his career was spent with
Bank of America and Citicorp, where he was responsible for the delivery of
financial services to a broad range of corporate and high net worth
individuals.
Theresa L. Swanda has served as our Executive Vice President of Operations
since March 1998. She has over 15 years experience in database direct
marketing. Ms. Swanda served as a director of M2Direct from June 1998 until
December 1998. Before joining M2Direct, Ms. Swanda had been Director of
Database Marketing Services since 1997 at Bisys Corporation, a financial
services provider. At Bisys she was responsible for database development, data
analysis and planning, and executing and tracking strategic marketing programs
using targeted segmentation. Before then, Ms. Swanda was a Senior Vice
President of OKRA Marketing since its inception in 1987. In her nine years at
OKRA, Ms. Swanda was responsible for many areas of development in the company,
including technical sales support, client services, quality assurance
practices, optimizing operational processes and staff and account management.
Before OKRA, Ms. Swanda was Vice President, Client Services, at CDP Marketing
for three years.
Jeffrey T. Arnold has served as a director since December 1998. Mr. Arnold
is the founder of WebMD, a provider of Web-based information and communication
services for healthcare providers and consumers, and has served as WebMD's
Chairman of the Board and Chief Executive Officer since its inception in
October 1996. Mr. Arnold also served as WebMD's President from its inception
until September 1997. From April 1994 until its merger with WebMD in March
1997, Mr. Arnold
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Committees of the Board of Directors
<TABLE>
<CAPTION>
Committees and members Function of committees
---------------------- ----------------------
<C> <S>
Executive committee . exercises the power of the board of directors between
board meetings, with certain limitations
John W. Collins
Stephen R. Gross
John P. Kelly
Thomas P. Maletta
Glenn W. Sturm
Audit committee . reviews our audit functions, including our accounting
and financial reporting practices
Stephen R. Gross . reviews the adequacy of our system of internal
Thomas P. Maletta accounting controls and the quality and integrity of
Richard M. Stolbach our financial statements
. maintains relations with our independent auditors
Compensation committee . establishes the compensation of our executive
officers, including salaries, bonuses, commissions,
John W. Collins and benefit plans
Jill F. Dorsey . administers our option and incentive plans
</TABLE>
Compensation Committee Interlocks and Insider Participation
On February 2, 1999, we borrowed $2.5 million from Citizens Bank, Vienna,
Georgia, to pay part of the purchase price for UST. The Citizens Bank loan has
a term of one year, may be extended if prescribed conditions are met, and bears
interest at a per annum rate of prime plus 0.25%. Directors Collins (a member
of our compensation committee), Gross, Kelly and Sturm, as well as another
shareholder who is not a director, personally guaranteed the Citizens Bank
loan. Although each guarantor is liable to Citizens Bank for up to the full
amount of the loan, the guarantors have agreed to reimburse each other as
needed so that they share the liability equally. Mr. Kelly, Mr. Sturm and the
other shareholder pledged securities valued at $1.9 million to Citizens Bank to
secure their guaranties, which will be released when the loan is repaid out of
the net proceeds of this offering.
On February 3, 1999, we borrowed $2.0 million from Sirrom to pay part of the
purchase price for UST. The Sirrom loan bears interest at the rate of 14% per
annum and matures on March 5, 2003. The guarantors identified above also
guaranteed the $2,000,000 Sirrom loan, but the guaranties will become effective
only if we repay the Citizens Bank loan without also repaying the Sirrom loan
at the same time. The guaranties will be released when the loan is repaid out
of the net proceeds of this offering.
Directors Collins and Sturm are also directors of The InterCept Group, Inc.
We have performed direct marketing services for InterCept, which has paid us
$21,126, and we may perform direct marketing services for InterCept in the
future. Mr. Collins is the Chairman and Chief Executive Officer of InterCept
and is a member of the compensation committee of our board of directors.
Mr. Sturm is our Vice Chairman and Secretary.
51
<PAGE>
Committees of the Board of Directors
<TABLE>
<CAPTION>
Committees and members Function of committees
---------------------- ----------------------
<C> <S>
Executive committee . exercises the power of the board of directors between
board meetings, with certain limitations
John W. Collins
Stephen R. Gross
John P. Kelly
Thomas P. Maletta
Glenn W. Sturm
Audit committee . reviews our audit functions, including our accounting
and financial reporting practices
Stephen R. Gross . reviews the adequacy of our system of internal
Thomas P. Maletta accounting controls and the quality and integrity of
our financial statements
Richard M. Stolbach . maintains relations with our independent auditors
Compensation committee . establishes the compensation of our executive
officers, including salaries, bonuses, commissions,
and benefit plans
John W. Collins
Jill F. Dorsey . administers our option and incentive plans
</TABLE>
Compensation Committee Interlocks and Insider Participation
On February 2, 1999, we borrowed $2.5 million from Citizens Bank, Vienna,
Georgia, to pay part of the purchase price for UST. The Citizens Bank loan has
a term of one year, may be extended if prescribed conditions are met, and bears
interest at a per annum rate of prime plus 0.25%. Directors Collins (a member
of our compensation committee), Gross, Kelly and Sturm, as well as another
shareholder who is not a director, personally guaranteed the Citizens Bank
loan. Although each guarantor is liable to Citizens Bank for up to the full
amount of the loan, the guarantors have agreed to reimburse each other as
needed so that they share the liability equally. Mr. Kelly, Mr. Sturm and the
other shareholder pledged securities valued at $1.9 million to Citizens Bank to
secure their guaranties, which will be released when the loan is repaid out of
the net proceeds of this offering.
On February 3, 1999, we borrowed $2.0 million from Sirrom to pay part of the
purchase price for UST. The Sirrom loan bears interest at the rate of 14% per
annum and matures on March 5, 2003. The guarantors identified above also
guaranteed the $2,000,000 Sirrom loan, but the guaranties will become effective
only if we repay the Citizens Bank loan without also repaying the Sirrom loan
at the same time. The guaranties will be released when the loan is repaid out
of the net proceeds of this offering.
Directors Collins and Sturm are also directors of The InterCept Group, Inc.
We have performed direct marketing services for InterCept, which has paid us
$21,126, and we may perform direct marketing services for InterCept in the
future. Mr. Collins is the Chairman and Chief Executive Officer of InterCept
and is a member of the compensation committee of our board of directors.
Mr. Sturm is our Vice Chairman and Secretary.
52
<PAGE>
Director Compensation
Our policy is to award options to purchase common stock to non-employee
directors for their service on the board of directors. We granted each of our
outside directors options to acquire 40,000 shares of common stock when they
joined our board at an exercise price equal to the fair market value of the
common stock on the date of grant. We expect to follow that policy in the
future as outside directors are elected to our board of directors. We reimburse
our directors for out-of-pocket expenses they incur in serving as directors. We
currently do not intend to pay cash fees to our directors for attendance at
meetings.
One of our directors, Thomas P. Maletta, owns Dolphin Consulting LLC, which
performed financial due diligence services for us related to our acquisition of
UST, Inc. We paid Dolphin $9,996 for those services.
Executive Compensation
The following table provides all compensation awarded to, earned by or paid
for services rendered to us in all capacities during the fiscal year ended
December 31, 1998 by our Chief Executive Officer, John P. Kelly. Mr. Kelly was
the only officer whose annual salary and bonus exceeded $100,000 in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Position Salary Bonus Compensation Options(#) Compensation
- ------------------ --------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
John P. Kelly Chairman,
President and Chief
Executive Officer..... $ 106,570 -- -- -- $ 1,800
</TABLE>
Employment Agreements
On March 6, 1998, each of Messrs. Kelly, Rutkowski, Byrum and Ms. Swanda
signed an employment agreement with us. Under their agreements, these officers
receive the following annual base salary:
<TABLE>
<S> <C>
John P. Kelly $125,000
Edward J. Rutkowski $100,000
Paul B. Byrum $100,000
Theresa L. Swanda $100,000
</TABLE>
Each agreement is for a term of three years and continues after the three-
year term for additional one-year terms until either the employee or we elect
not to renew it. Upon an initial public offering, each agreement can be amended
at the reasonable request of the managing underwriters and on the consent of
these officers, each of whom cannot withhold his or her consent unreasonably.
Mr. Rutkowski, Mr. Byrum and Ms. Swanda each agreed not to compete with us
for a period of one year following termination of employment. If any of these
officers' employment is terminated for any reason after a change in control or
they resign for good reason, that non-competition covenant is void. All of
these officers agreed not to solicit any of our employees or customers for one
year following termination of employment.
If any of these employment agreements are terminated (a) by us without cause
or (b) by an employee following a change in control or our breach of the
agreement, we will pay that employee
53
<PAGE>
severance of one year's salary in 12 monthly payments. The agreement defines
the terms "cause" and "change in control." If an employee resigns for any
reason or his employment is terminated for his failing to meet reasonable
performance expectations, we will pay that employee severance of six months'
salary in six monthly payments. If an employee's employment is terminated for
cause (other than failing to meet reasonable performance expectations), we are
not obligated to pay that employee severance.
We entered into employment agreements with Mr. Kane, our Chief Financial
Officer, in July 1998 and Mr. Patterson, our Chief Technology Officer, in March
1999. These employment agreements provide for a base annual salary of $100,000
for Mr. Kane and $150,000 for Mr. Patterson, and each may participate in our
bonus program for senior executives. Both employees participate in insurance
and other benefit plans available to similarly situated employees. When he
became our employee, Mr. Kane received options to purchase 150,000 shares of
our common stock at an exercise price of $1.00 per share. Of these options,
100,000 are vested and 50,000 vest upon the effective date of this offering. We
granted Mr. Patterson options to purchase 100,000 shares of common stock when
he became our employee on the DeskGate merger at an exercise price of $5.25 per
share. One-third of these options vested on March 16, 1999, with another one-
third vesting on each of March 16, 2000 and 2001.
Mr. Kane's employment agreement is for a term of three years. Mr.
Patterson's employment agreement is for a term of one year, with an automatic
renewal for a two-year term unless either party gives the other party written
notice of its intent to terminate before the end of a term. We can terminate
the employment of Mr. Kane and Mr. Patterson with or without cause by
delivering them a notice of termination. If we terminate either employee
without cause, we must pay him severance payments equal to his then current
annual salary in twelve monthly installments. Under their employment
agreements, Mr. Kane and Mr. Patterson agree to maintain the confidentiality of
our trade secrets and confidential business information. Both employees also
agree that we own all work product that they create during their employment.
Director and Officer Liability and Indemnification
Our articles of incorporation provide that no director shall be personally
liable to us or any of our shareholders for any breach of the duties of office,
except that the elimination of liability does not apply to:
. appropriations of business opportunities in violation of the director's
duties;
. knowing or intentional misconduct or violation of law;
. liability for assenting to distributions which are illegal or improper
under the Georgia Business Corporation Code or our articles; and
. liability for any transaction in which an improper personal benefit is
derived.
In addition, our articles state that if the Georgia Code is ever amended to
allow for greater exculpation of directors than presently permitted, the
directors will be relieved from liabilities to the fullest extent provided by
the Georgia Code, as so amended. No further action by the board of directors or
our shareholders is required, unless the Georgia Code provides otherwise. No
modification or repeal of this provision will adversely affect the elimination
or reduction in liability provided by it with respect to any alleged act
occurring before the effective date of that modification or repeal.
We have entered into indemnification agreements with each of our directors
and executive officers that give these individuals similar rights to
indemnification and contribution.
54
<PAGE>
CERTAIN TRANSACTIONS
Acquisitions
Since our formation in 1997, we have acquired five companies that now
operate as our wholly-owned subsidiaries. In two of these acquisitions, persons
who were previously shareholders of acquired companies are now executive
officers, directors or holders of at least 5% of our outstanding common stock.
The following table summarizes the consideration we paid to those persons in
those acquisitions:
<TABLE>
<CAPTION>
Name of Acquired Number
Name Company and Date of Shares Cash
---- --------------------- --------- --------
<S> <C> <C> <C>
Michael J. Chomik (1)................. Control Group
(March 1998) 969,120 $200,000
William J. DeGrosky (1)............... Control Group
(March 1998) 1,107,600 $ 50,000
Patrick E. Patterson.................. DeskGate Technologies
(March 1999) 1,167,948 $ 0
</TABLE>
- --------
(1) Subject to certain adjustments, an additional $200,000 may be paid to Mr.
Chomik and an additional $50,000 may be paid to Mr. DeGrosky in 1999.
When we acquired Control Group, each of Mr. Chomik and Mr. DeGrosky signed
an employment agreement specifying an annual base salary of $200,000. Each
agreement is for a term of three years and continues after the three-year term
for additional one-year terms until either the employee or we elect not to
renew it. Upon an initial public offering, each agreement can be amended at the
reasonable request of the managing underwriters with the employee's consent.
The employee cannot withhold his consent unreasonably. If the employee's
employment is terminated either (a) by us without cause, or (b) by the employee
following a change in control or our breach of the agreement, we will pay him
severance of one year's salary in 12 monthly payments. The agreement defines
the terms "cause" and "change in control." If the employee resigns for any
other reason or his employment is terminated for his failing to meet reasonable
performance expectations, we will pay him severance of six months' salary in
six monthly payments. If the employee's employment is terminated for cause
(other than failing to meet reasonable performance expectations), we are not
obligated to pay him severance. Each employee agreed not to compete with us for
a period of one year, except that if his employment is terminated for any
reason after a change in control or he resigns for good reason, that non-
competition covenant is void. Each employee also agreed not to solicit any of
our employees or customers for one year following termination of employment.
Before we acquired Control Group, Mr. Chomik and Mr. DeGrosky owned all of
its outstanding stock. Control Group had borrowed or guaranteed three loans
from CoreStates Bank. Control Group had borrowed $1,000,000 from CoreStates
Bank under a line of credit arrangement. The line of credit bore interest at an
annual rate of prime plus 1% and had a balance of $982,000 when repaid.
Mr. Chomik and Mr. DeGrosky guaranteed the line of credit when Control Group
originally obtained it. Mr. Chomik and Mr. DeGrosky also guaranteed a term loan
from CoreStates Bank to Control Group that bore interest at an annual rate of
prime plus 1% and had a balance of approximately $250,000 when repaid. In
addition, Mr. Chomik and Mr. DeGrosky formed a partnership to borrow funds from
CoreStates Bank to finance the construction of Control Group's offices in
Wilmington, Delaware. Control Group guaranteed the loan to the partnership. The
loan bore interest at an annual rate of 9.8% and had an outstanding balance of
approximately $119,000 when Mr. Chomik and
55
<PAGE>
Mr. DeGrosky repaid it in March 1999. We lease the Wilmington offices from the
Chomik/DeGrosky partnership for $2,585 per month under a lease that runs until
March 5, 2003.
In 1998, First Union acquired CoreStates Bank. In January 1999 M2Direct
guaranteed all three CoreStates Bank loans in consideration of First Union's
agreement to extend their maturity dates to April 15. We repaid the line of
credit and the term loan in full in March 1999 with some of the proceeds of the
$3,000,000 line of credit from First Union. As noted in the previous paragraph,
Mr. Chomik and Mr. DeGrosky had already repaid the loan to the partnership, so
we did not use any of the proceeds of the $3,000,000 loan for that purpose.
In the Control Group merger we also assumed the obligations of Mr. Chomik
and Mr. DeGrosky to Control Group under a promissory note, dated July 15, 1997,
in the original principal balance of $376,000. Mr. Chomik and Mr. DeGrosky
transferred to us the right to the benefits and payments under a contract. We
have received payments totaling approximately $150,000 and expect to receive
payments totaling approximately $225,000 under this contract. The Control Group
merger agreement gives each of Mr. Chomik and Mr. DeGrosky the right, beginning
on December 31, 1999, to sell his shares to us for cash if we have not filed a
registration statement with the SEC covering an offering of shares providing at
least $15 million in gross proceeds to us. This right expires on March 31,
2000. The price we must pay for their shares will be the lesser of $2.17 per
share or fair market value as defined.
When we acquired DeskGate, we entered into an employment agreement with Mr.
Patterson and granted him options to purchase 100,000 shares of common stock.
See "Management--Employment Agreements."
Sales of Common Stock to Executive Officers, Directors and 5% Shareholders
In January 1998, we raised the initial capital for our business by selling
common stock to the following shareholders for $0.06 per share:
<TABLE>
<CAPTION>
Shares of Aggregate
Name Common Stock Consideration
---- ------------ -------------
<S> <C> <C>
Paul B. Byrum, III............................... 268,435 $16,000
John W. Collins.................................. 67,109 4,000
Stephen R. Gross................................. 201,327 12,000
John P. Kelly.................................... 402,652 24,000
Edward J. Rutkowski.............................. 268,435 16,000
Glenn W. Sturm................................... 134,218 8,000
</TABLE>
In March 1998, we raised additional capital for our business by selling
common stock to the following shareholders for $0.56 per share:
<TABLE>
<CAPTION>
Shares of Aggregate
Name Common Stock Consideration
---- ------------ -------------
<S> <C> <C>
Paul B. Byrum, III............................... 327,005 $184,000
John W. Collins.................................. 81,751 46,000
Stephen R. Gross................................. 199,934 112,500
John P. Kelly.................................... 490,508 276,000
Edward J. Rutkowski.............................. 15,995 9,000
Glenn W. Sturm................................... 163,502 92,000
Theresa L. Swanda................................ 293,238 165,000
</TABLE>
56
<PAGE>
We sold all the capital stock listed above at a price per share equal to the
fair market value of the stock on the date of sale as determined by our board
of directors.
From June 1998 through December 1998 we raised additional capital to finance
our operations by selling investment units at $8.68 per unit. Each unit
consisted of one share of Series A convertible preferred stock and a warrant to
purchase four shares of common stock at an exercise price of $4.17 per share.
Purchasers of the units included the following persons, among others:
<TABLE>
<CAPTION>
Aggregate
Name Units Consideration
---- ------ -------------
<S> <C> <C>
Paul B. Byrum, III..................................... 5,775 $ 50,127
John W. Collins........................................ 5,185 45,006
William J. DeGrosky.................................... 5,760 49,997
Stephen R. Gross....................................... 5,185 45,006
Michael T. Kane........................................ 8,640 74,995
John P. Kelly.......................................... 25,000 217,000
Edward J. Rutkowski.................................... 1,000 8,680
Glenn W. Sturm......................................... 5,185 45,006
Theresa L. Swanda...................................... 5,000 43,400
</TABLE>
We sold units to the above persons on the same terms as sales to
unaffiliated persons.
Other Transactions and Relationships
On March 6, 1998, we borrowed $3,000,000 from, and issued a stock purchase
warrant to, Sirrom. In the Sirrom warrant, John P. Kelly, Edward J. Rutkowski
and Paul B. Byrum, III generally agreed not to sell any of their shares of
common stock without first offering Sirrom the right to sell stock on the same
terms. These co-sale rights will terminate on completion of this offering.
We also borrowed an additional $2,000,000 from Sirrom on February 3, 1999,
and we issued another stock purchase warrant to Sirrom in that transaction. Mr.
Kelly, Mr. Rutkowski and Mr. Byrum again generally agreed not to sell any of
their shares of common stock without first offering Sirrom the right to sell
stock on the same terms. The co-sale rights terminate on completion of this
offering.
Our director Jeffrey T. Arnold is the Chairman of the Board of Directors and
Chief Executive Officer of WebMD, Inc. We performed telemarketing-based
research and sales support for WebMD, which paid us $122,000. We have a pending
proposal to perform additional services for WebMD. Our director Glenn W. Sturm
is a director of WebMD. We have also performed direct marketing services for
Towne Services, Inc., which paid us approximately $16,000. Two of our
directors, Mr. Sturm and Mr. Collins, are directors of Towne Services.
Our Vice Chairman, Secretary and director Glenn W. Sturm is a partner in the
law firm of Nelson Mullins Riley & Scarborough, L.L.P., where he serves as
Corporate Chairman and a member of the executive committee. Nelson Mullins has
been our law firm since our inception.
Our director Stephen R. Gross is a shareholder of HLB Gross Collins, P.C., a
full service CPA firm. HLB Gross Collins performed accounting, tax and
financial due diligence services for us from March 1998 to October 1998. We
paid HLB Gross Collins $212,000 for those services.
57
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
As of April 23, 1999, there were 38 holders of our common stock. The
following table provides information about the beneficial ownership of our
outstanding common stock as of April 23, 1999 (assuming conversion of the
Series A preferred stock into common stock), and as adjusted to reflect the
sale of the common stock offered by this prospectus, by:
. each person or entity known by us to be the beneficial owner of more than
5% of the outstanding shares of common stock;
. each director and each of our named executive officers; and
. our directors and executive officers as a group.
Other than Sirrom, each shareholder's address is in care of M2Direct at 2030
Powers Ferry Road, Suite 120, Atlanta, Georgia 30339. Sirrom's address is 500
Church Street, Suite 200, Nashville, Tennessee 37219. The right to acquire
column in the table reflects all shares of common stock that each individual
has the right to acquire through the exercise of options or warrants within 60
days of April 23, 1999. Under SEC rules, options or warrants in the Right to
Acquire column are deemed to be outstanding and to be beneficially owned by the
person or group holding those options or warrants when computing the percentage
ownership of that person or group, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or group.
Sirrom will sell shares of common stock in this offering and will have
the right to acquire shares following the offering. No shareholder other
than Sirrom will sell any common stock in this offering.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
--------------------
Number of Before the After the
Name of Beneficial Owner Shares Owned Right to Acquire Offering Offering
- ------------------------ ------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
John P. Kelly.............. 998,494 -- 10.5% %
Glenn W. Sturm............. 289,536 20,000 3.3
Patrick E. Patterson....... 1,167,948 33,333 12.6
Michael T. Kane............ 36,250 150,000 1.9
Paul B. Byrum, III......... 619,772 -- 6.5
Edward J. Rutkowski........ 288,634 10,385 3.2
Theresa L. Swanda.......... 314,305 -- 3.3
Jeffrey T. Arnold.......... 30,000 20,000 *
John W. Collins............ 170,676 20,000 2.0
Jill F. Dorsey............. -- 20,000 *
Stephen R. Gross........... 423,077 20,000 4.7
Thomas P. Maletta.......... -- 20,000 *
Richard M. Stolbach........ -- 20,000 *
William J. DeGrosky........ 1,130,640 -- 11.9
Michael J. Chomik.......... 969,120 -- 10.2
Sirrom Investments, Inc. .. -- 739,142 7.2
All directors and executive
officers as a group
(12 persons).............. 4,338,692 333,718 47.6% %
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock
and 500,000 shares of preferred stock. Our board of directors has designated
250,000 shares of preferred stock as Series A convertible preferred stock. As
of April 23, 1999, 8,883,297 shares of common stock were outstanding, held of
record by approximately 38 shareholders, and 141,120 shares of Series A
preferred stock were outstanding, held of record by approximately 26
shareholders.
Common Stock
The holders of common stock are entitled to one vote for each share they
hold of record for matters on which they are entitled to vote. There are no
sinking fund provisions or any cumulative voting, preemptive, redemption or
conversion rights applicable to the common stock. The holders of common stock
may take shareholder action without a meeting if a written consent describing
the action to be taken is signed by shareholders holding (a) the minimum number
of votes that would be necessary to authorize or take action at a meeting at
which all shares entitled to vote were present and voted, or (b) two-thirds of
the number of votes which could be cast with respect to the action at a meeting
at which all shares entitled to vote were present and voted. The rights,
preferences and privileges of holders of common stock are subject to, and may
be adversely affected by, the rights of holders of any shares of the Series A
preferred stock and of any other series of preferred stock that our board of
directors may designate from time to time in the future. Subject to the
preference rights of the holders of any outstanding shares of preferred stock,
holders of common stock are entitled to receive ratably the dividends and other
distributions, if any, as the board of directors may declare out of funds
legally available for that purpose. On the liquidation, dissolution or winding
up of M2Direct, holders of common stock are entitled to share ratably in all
assets of M2Direct after the payment of its debts and other liabilities, and,
if applicable, dividends on its preferred stock. The outstanding shares of
common stock are fully paid and non-assessable.
Preferred Stock
General. Our board of directors has the authority under our articles of
incorporation, without the approval of or any action by the shareholders, to
issue up to 500,000 shares of preferred stock in the series and with the
preferences, powers, limitations and relative rights as the board of directors
may determine from time to time. The terms of the voting, conversion, dividend,
liquidation, preemptive and redemption rights and preferences, and other
qualifications, powers and privileges conferred upon the holders of any
preferred stock, may be more favorable than those granted to holders of common
stock. The designation of any preferred stock with greater rights, privileges
and preferences than those applicable to the common stock may adversely affect
the voting power, market price and other rights and privileges of the common
stock, and may hinder or delay the removal of directors, attempted tender
offers, proxy contests or takeovers, or other attempts to change control of
M2Direct, some or all of which the holders of common stock may desire.
Series A Convertible Preferred Stock and Warrants. In August 1998, we filed
amended and restated articles of incorporation to designate 250,000 shares of
Series A convertible preferred stock. From June to December 1998, we offered
and sold 141,120 investment units at $8.68 per unit. Each unit consisted of one
share of Series A preferred stock and a warrant to purchase four shares of
common stock at an exercise price of $4.17 per share.
59
<PAGE>
Each share of Series A preferred stock may be converted at any time into a
number of shares of common stock determined by dividing $8.68 plus all accrued
and unpaid dividends, by $2.17. If not converted before this offering, each
share of Series A preferred stock automatically converts into shares of common
stock on the closing of this offering. Until converted, the Series A preferred
stock:
. accrues dividends at the annual rate of 8% per share per annum, which are
payable when and as declared by the board of directors out of funds
legally available for that purpose or in common stock;
. is non-voting;
. is entitled to an antidilution adjustment only upon a stock split,
reclassification or similar event;
. is entitled to a liquidation preference over the common stock;
. is convertible into common stock at the option of the holder at any time
and automatically upon the closing of a public offering registered under
the Securities Act that yields gross proceeds to M2Direct of at least
$7,500,000; and
. may be redeemed by us at our option between July 31, 2001 and July 31,
2003 at $8.68 per redeemed share.
The warrants are entitled to an antidilution adjustment only upon a stock
split, recapitalization or similar event, are exercisable beginning two years
after the date of issuance and remain exercisable at the holder's option until
the tenth anniversary of their issuance.
Certain Provisions of our Bylaws and Georgia Law
Number, Term and Removal of Directors. Our bylaws provide that the number of
directors is set by resolution of the board of directors. Currently, we have
eight directors. Upon a vacancy created in the board of directors, a successor
or new director may be appointed by the affirmative vote of a majority of the
directors then in office.
Special Shareholder Meetings. Our bylaws provide that special meetings of
shareholders or a class or series of shareholders may be called at any time by
the board of directors, the chairman of the board or our chief executive
officer. Those kinds of meetings must be called upon the written request of the
holders of shares representing at least 25% of the votes entitled to be cast on
each issue presented at the meeting.
Georgia Anti-Takeover Statutes. Some provisions of the Georgia Business
Corporation Code may be considered to have anti-takeover effects and may
hinder, delay, deter or prevent a tender offer, proxy contest or other
attempted takeover that a shareholder may deem to be in his best interest.
Those provisions might allow the board of directors to defend against an
attempted transaction that might otherwise result in payment of a premium over
the market price for shares the shareholder holds.
Registration Rights
The holders of approximately 5,214,106 shares of common stock and common
stock equivalents have rights to have their shares registered with the SEC
under the Securities Act.
We have granted piggyback registration rights to:
. Sirrom Investments;
. the holders of Series A preferred stock; and
60
<PAGE>
. some of our shareholders in merger or acquisition agreements.
Under its stock purchase warrants, Sirrom may include its common stock in a
registration statement that we use to sell any of our common stock in a public
offering. Sirrom is selling shares of common stock in this offering.
Under an investor rights agreement, the holders of Series A preferred stock
may include common stock issued upon the conversion of the Series A preferred,
or upon the exercise of warrants granted to Series A holders, in a registration
statement we prepare for our own account or for the account of others. Those
registration rights do not apply to this offering.
When we acquired DeskGate, we granted to the shareholders and warrantholders
of DeskGate the right to include their common stock in our registration
statement if we propose to sell common stock for our own account. Those
registration rights do not apply to this offering.
In each of these instances, we must notify these holders of our intent to
register common stock under the Securities Act and allow them an opportunity to
include their shares of common stock in our registration. These registration
rights are subject to certain limitations and restrictions, including the right
of the underwriters to limit the number of shares offered in a registration if
an underwriter determines that the number of shares requested to be registered
cannot be underwritten. We are generally required to bear all of the expenses
of all registrations under these agreements, except underwriting discounts and
commissions. We are also obligated to indemnify the holders whose shares are
included in any of our registrations against losses and liabilities we cause,
including liabilities under the Securities Act and state securities laws.
Under two of our merger agreements, we have also agreed to provide four
shareholders with the same rights to participate as selling shareholders in
public offerings of our common stock as members of our senior management team
have. Other than the rights granted to the holders of Series A preferred and
the rights granted in those merger agreements, we have not granted registration
rights of any kind to members of our senior management team. We have no
arrangement or understanding with any member of our senior management team
regarding participation as a selling shareholder in any public offering of our
common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at times and on terms favorable
to us. Of the shares to be outstanding after the offering, assuming the
underwriters do not exercise their over-allotment option, the shares of
common stock offered by this prospectus and an additional shares of common
stock will be freely tradeable without restriction in the public market unless
those shares are held by "affiliates," as that term is defined in Rule 144(a)
under the Securities Act of 1933. For purposes of Rule 144, an "affiliate" of
an issuer is a person that, directly or indirectly through one or more
intermediaries, controls, or is controlled by or is under common control with,
the issuer.
The remaining shares of common stock to be outstanding after the offering
are "restricted securities" under the Securities Act and may be sold in the
public market upon the expiration of specified holding periods under Rule 144,
assuming the volume, manner of sale and other limitations of Rule 144 are met.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," as
that term is defined in the Securities Act, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of our common stock
(approximately shares immediately following the offering), or
. the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale.
Sales under Rule 144 must also comply with the manner of sale provisions and
notice requirements of the rule, and current public information about us must
be available. A shareholder who is deemed not to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned
restricted shares for at least two years, would be entitled to sell shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions or public information requirements.
As of April 23, 1999, we had outstanding warrants and options to purchase
2,866,249 shares of common stock, of which 2,041,384 were fully vested and
exercisable.
We cannot estimate the number of shares that will be sold under Rule 144,
because this will depend on the market price of our common stock, the personal
circumstances of the sellers and other factors. Before the offering, no public
market for the common stock existed, and we cannot assure you that a
significant public market for the common stock will develop or be sustained
after the offering. Any future sale of substantial amounts of the common stock
in the open market may adversely affect the market price of the common stock.
Our directors, executive officers and five percent beneficial owners have
contractually agreed that they will not sell any common stock without the prior
written consent of J.C. Bradford & Co. for a period of 180 days from the date
of this prospectus. As of April 23, 1999, the holders of options and warrants
to purchase approximately shares of common stock will be eligible to sell
their shares upon the expiration of the 180-day lockup period, assuming in some
cases the vesting of options.
Any employee or consultant of M2Direct who purchased his or her shares under
a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits
62
<PAGE>
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and which permits affiliates to sell their Rule 701 shares without
having to comply with the Rule 144 holding period restrictions. In either case,
sales may be made under Rule 701 beginning 90 days after the date of this
prospectus.
In addition, some shareholders have registration rights with respect to
their shares of common stock and common stock equivalents. See "Description of
Capital Stock--Registration Rights" and "Risk Factors--Substantial sales of our
common stock after the offering could cause the market price of our common
stock to decline."
63
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives, J.C.
Bradford & Co. and First Union Capital Markets Corp., which we refer to as the
"Representatives," have severally agreed with us and Sirrom, the selling
shareholder, to purchase the number of shares of common stock listed opposite
their names below. The underwriters are committed to purchase and pay for all
the shares, if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
J.C. Bradford & Co..............................................
First Union Capital Markets Corp................................
---
Total.........................................................
===
</TABLE>
The Representatives have advised us that they propose to offer the shares of
common stock to the public at the offering price given on the cover page of
this prospectus and to certain dealers at that price less a concession of not
more than $ per share, of which $ may be reallowed to other dealers.
After the completion of the offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. Any reduction
will not affect the amount of proceeds received by us and Sirrom.
We have granted the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to additional
shares of common stock at the initial public offering price. To the extent that
the underwriters exercise their option, each of them will have a firm
commitment to purchase approximately the same percentage of the additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the shares offered by this
prospectus. If purchased, the underwriters will sell those additional shares on
the same terms as those on which the other shares are being sold.
The underwriting agreement contains indemnity covenants among the
underwriters, M2Direct and Sirrom against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Each of our executive officers and directors and some of our security
holders have agreed with the Representatives not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of common stock, any options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or later
acquired directly or indirectly by holders for a period of 180 days following
the date of this prospectus, without J.C. Bradford & Co.'s prior written
consent. J.C. Bradford & Co., in its sole discretion at any time or from time
to time, without notice, may release all or any portion of the securities
covered by the lock-up agreements. Approximately of those shares will be
eligible for immediate public sale following expiration of the lock-up period,
assuming compliance with Rule 144. See "Shares Eligible For Future Sale."
The Representatives have advised us that, under SEC rules, some of the
persons participating in the offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the common stock at a level above that which might otherwise prevail in the
open market. A
64
<PAGE>
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the purchase
of the common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters related to the offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member related to the
offering if the common stock originally sold by the underwriter or syndicate
member is repurchased by the Representatives in syndicate covering
transactions, in stabilizing transactions or otherwise. The Representatives
have advised us that those transactions may be effected on the Nasdaq National
Market or otherwise and, if begun, may be discontinued at any time.
The Representatives have informed us that the underwriters do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of common stock offered by this
prospectus.
Before this offering, no public market for our securities existed. The
initial public offering price of the common stock will be determined by
negotiation among us and the Representatives. Among the factors to be
considered in those negotiations will be prevailing market conditions, the
results of our operations in recent periods, market valuations of publicly
traded companies that we and the Representatives believe to be comparable to
us, estimates of our business potential, the present state of our development,
the current state of the industry and the economy as a whole, and other factors
deemed relevant.
We borrowed $3,000,000 from First Union National Bank in March 1999 under a
revolving line of credit to repay a total of approximately $2,570,000 in bank
debt owed by our various subsidiaries and for working capital. This revolving
line of credit matures on June 30, 2000. First Union National Bank is an
affiliate of First Union Capital Markets Corp. We will use approximately
$3,000,000 of the net proceeds from this offering to repay the indebtedness
owed to First Union National Bank.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for M2Direct by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta,
Georgia. Glenn W. Sturm, a partner of Nelson Mullins, is the Secretary of
M2Direct and the Vice Chairman of M2Direct's board of directors. At April 23,
1999, members of Nelson Mullins beneficially owned an aggregate of 367,640
shares of common stock and common stock equivalents. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Morris, Manning & Martin, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
65
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
M2Direct has filed with the SEC through the Electronic Data Gathering and
Retrieval, or EDGAR system, a registration statement on Form S-1 under the
Securities Act for the securities offered by this prospectus. This prospectus
does not contain all of the information provided in the registration statement,
because we have omitted parts of the registration statement under the
applicable SEC rules. Statements in this prospectus about any contract or other
document referred to are not necessarily complete, and in each instance we
refer you to the copy of that contract or other document filed as an exhibit to
the registration statement. For further information, you may read and copy any
materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC through the EDGAR system. Reports and
other information concerning M2Direct also may be inspected at the offices of
the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
We are not presently a reporting company and do not file reports or other
information with the SEC. On the effective date of the registration statement,
however, we will become a reporting company, and we will register our
securities under the Securities Exchange Act of 1934. Accordingly, the
additional reporting requirements of the Exchange Act will apply to us, and we
will file reports, proxy statements and other information with the SEC. In
addition, after the completion of this offering, we intend to furnish our
shareholders with annual reports containing audited financial statements and
with quarterly reports containing unaudited summary financial information for
each of the first three quarters of each fiscal year.
66
<PAGE>
M2DIRECT, INC.
Index to Financial Statements
<TABLE>
<S> <C>
M2Direct, Inc. and Subsidiaries
- -------------------------------
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets--December 31, 1997 and 1998................... F-3
Consolidated Statements of Operations for the period from inception (March
1, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998..... F-4
Consolidated Statements of Shareholders' (Deficit) Equity for the period
from inception
(March 1, 1996) to December 31, 1996 and for the years ended December 31,
1997 and 1998............................................................ F-5
Consolidated Statements of Cash Flows for the period from inception (March
1, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998..... F-6
Notes to Consolidated Financial Statements................................ F-7
Control Group, Ltd.
- -------------------
Report of Independent Public Accountants.................................. F-23
Balance Sheets--December 31, 1997 and February 28, 1998................... F-24
Statements of Operations for the years ended December 31, 1996 and 1997
and for the
two-month period ended February 28, 1998................................. F-25
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1996 and 1997
and for the two-month period ended February 28, 1998..................... F-26
Statements of Cash Flows for the years ended December 31, 1996 and 1997
and for the
two-month period ended February 28, 1998................................. F-27
Notes to Financial Statements............................................. F-28
Genesis Direct, Inc.
- --------------------
Report of Independent Public Accountants.................................. F-34
Balance Sheets--December 31, 1997 and February 28, 1998................... F-35
Statements of Operations for the years ended December 31, 1996 and 1997
and for the
two-month period ended February 28, 1998................................. F-36
Statements of Shareholders' Deficit for the years ended December 31, 1996
and 1997 and for the
two-month period ended February 28, 1998................................. F-37
Statements of Cash Flows for the years ended December 31, 1996 and 1997
and for the
two-month period ended February 28, 1998................................. F-38
Notes to Financial Statements............................................. F-39
The Aberdeen Marketing Group
- ----------------------------
Report of Independent Public Accountants.................................. F-43
Combined Balance Sheet--December 31, 1997................................. F-44
Combined Statement of Operations for the year ended December 31, 1997..... F-45
Combined Statement of Shareholders' Deficit for the year ended December
31, 1997................................................................. F-46
Combined Statement of Cash Flows for the year ended December 31, 1997..... F-47
Notes to Combined Financial Statements.................................... F-48
UST, Inc.
- ---------
Report of Independent Public Accountants.................................. F-53
Balance Sheets--December 31, 1997 and 1998................................ F-54
Statements of Operations for the years ended December 31, 1997 and 1998... F-55
Statements of Shareholders' Equity for the years ended December 31, 1997
and 1998................................................................. F-56
Statements of Cash Flows for the years ended December 31, 1997 and 1998... F-57
Notes to Financial Statements............................................. F-58
Pro Forma Financial Information
- -------------------------------
Unaudited Pro Forma Financial Information................................. F-61
Unaudited Pro Forma Condensed Consolidated Balance Sheet.................. F-62
Unaudited Pro Forma Consolidated Statement of Operations.................. F-64
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To M2Direct, Inc.:
We have audited the accompanying consolidated balance sheets of M2DIRECT,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998
and the related consolidated statements of operations, shareholders' equity,
and cash flows for the period from inception (March 1, 1996) to December 31,
1996 and for each of the two years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of M2Direct, Inc. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for the period from inception to December 31,
1996 and for each of the two years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
April 16, 1999
F-2
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<S> <C> <C>
ASSETS 1997 1998
------ --------- ------------
CURRENT ASSETS:
Cash and cash equivalents............................... $ 16,500 $ 619,009
Accounts receivable, net of allowance for doubtful
accounts of $32,627 at December 31, 1998............... 0 5,860,419
Deferred tax assets..................................... 0 16,991
Prepaid expenses and other current assets............... 0 949,980
--------- ------------
Total current assets.................................. 16,500 7,446,399
--------- ------------
PROPERTY AND EQUIPMENT:
Property and equipment.................................. 39,567 1,513,369
Less accumulated depreciation........................... (6,981) (217,754)
--------- ------------
Property and equipment, net........................... 32,586 1,295,615
--------- ------------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$1,521,231 in 1998..................................... 0 11,450,024
Other noncurrent assets................................. 5,100 376,152
--------- ------------
Total other assets.................................... 5,100 11,826,176
--------- ------------
Total assets.......................................... $ 54,186 $ 20,568,190
========= ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt....................... $ 0 $ 942,212
Accounts payable........................................ 40,209 4,201,661
Accrued liabilities..................................... 0 1,505,078
Customer deposits....................................... 0 756,446
Deferred revenue........................................ 0 2,433,514
--------- ------------
Total current liabilities............................. 40,209 9,838,911
--------- ------------
LONG-TERM DEBT, less current portion and discount......... 274,438 3,235,948
--------- ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
WARRANT WITH REDEMPTION FEATURE........................... 0 2,423,451
--------- ------------
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $0 par value; 500,000 shares
authorized, Series A convertible preferred stock,
nonvoting; 250,000 shares authorized, 0 and 141,120
shares issued and outstanding in 1997 and 1998,
respectively........................................... 0 2,353,899
Common stock, $0 par value; 100,000,000 shares
authorized, 1,848,275 and 8,228,177 shares issued and
outstanding in 1997 and 1998, respectively............. 534,120 12,890,874
Warrants outstanding.................................... 68,037 501,445
Accumulated deficit..................................... (862,618) (10,676,338)
--------- ------------
Total shareholders' (deficit) equity.................. (260,461) 5,069,880
--------- ------------
Total liabilities and shareholders' equity............ $ 54,186 $ 20,568,190
========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period From Inception (March 1, 1996) to December 31, 1996
and for the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ------------
<S> <C> <C> <C>
NET REVENUES.............................. $ 1,376 $ 2,500 $ 25,925,793
COSTS OF SERVICES......................... 0 0 21,076,437
--------- --------- ------------
Gross profit........................... 1,376 2,500 4,849,356
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 87,832 134,684 6,056,706
DEPRECIATION AND AMORTIZATION............. 2,939 4,042 1,794,663
STOCK COMPENSATION EXPENSE................ 154,000 251,520 3,806,754
RESEARCH AND DEVELOPMENT EXPENSE.......... 79,427 196,258 324,427
--------- --------- ------------
OPERATING LOSS............................ (322,822) (584,004) (7,133,194)
--------- --------- ------------
OTHER (EXPENSE) INCOME:
Interest expense........................ 0 (39,612) (659,580)
Other income, net....................... 0 0 31,494
--------- --------- ------------
Total other expense, net.............. 0 0 (628,086)
--------- --------- ------------
LOSS BEFORE BENEFIT FOR INCOME TAXES...... (322,822) (623,616) (7,761,280)
BENEFIT FOR INCOME TAXES.................. 0 0 0
--------- --------- ------------
NET LOSS.................................. $(322,822) $(623,616) $ (7,761,280)
ACCRETION OF WARRANT WITH REDEMPTION
FEATURE.................................. 0 0 (605,000)
PREFERRED STOCK DIVIDEND.................. 0 0 (1,447,440)
--------- --------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS............................. $(322,822) $(623,616) $ (9,813,720)
========= ========= ============
NET LOSS PER COMMON SHARE:
Basic................................... $ (3.06) $ (.58) $ (1.36)
========= ========= ============
Diluted................................. $ (3.06) $ (.58) $ (1.36)
========= ========= ============
WEIGHTED AVERAGE SHARES OUTSTANDING....... 105,524 1,073,492 7,189,863
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
For the Period From Inception (March 1, 1996) to December 31, 1996
and for the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ---------------------
Warrants Accumulated
Shares Amount Shares Amount Outstanding Deficit Total
------- ---------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, inception
(March 1, 1996)........ 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of common
stock................. 0 0 125,870 75,000 0 0 75,000
Net loss............... 0 0 0 0 0 (322,822) (322,822)
------- ---------- --------- ----------- -------- ------------ -----------
BALANCE, December 31,
1996................... 0 0 125,870 75,000 0 (322,822) (247,822)
Issuance of warrants... 0 0 0 0 68,037 0 68,037
Issuance of common
stock................. 0 0 1,145,417 53,600 0 0 53,600
Compensation expense
for stock issuance.... 0 0 576,988 405,520 0 0 405,520
Net loss............... 0 0 0 0 0 (623,616) (623,616)
Less: net loss of
DeskGate for the two
months ended February
28, 1998 (Note 1)..... 0 0 0 0 0 83,820 83,820
------- ---------- --------- ----------- -------- ------------ -----------
BALANCE, December 31,
1997................... 0 0 1,848,275 534,120 68,037 (862,618) (260,461)
Issuance of warrants... 0 0 0 0 114,928 0 114,928
Issuance of Series A
Stock and warrants.... 141,120 906,459 0 0 318,480 0 1,224,939
Preferred stock
dividend.............. 0 1,447,440 0 0 0 (1,447,440) 0
Issuance of common
stock to founders of
M2Direct.............. 0 0 2,977,200 3,632,390 0 0 3,632,390
Issuance of common
stock for acquisition
of Control Group...... 0 0 2,076,720 4,500,000 0 0 4,500,000
Issuance of common
stock for acquisition
of Genesis............ 0 0 946,080 2,050,000 0 0 2,050,000
Issuance of common
stock for acquisition
of Aberdeen........... 0 0 239,808 1,000,000 0 0 1,000,000
Compensation expense
for stock issuance.... 0 0 140,093 286,764 0 0 286,764
Compensation expense
for stock option
issuance.............. 0 0 0 887,600 0 0 887,600
Accretion of warrants
with redemption
feature............... 0 0 0 0 0 (605,000) (605,000)
Net loss............... 0 0 0 0 0 (7,761,280) (7,761,280)
------- ---------- --------- ----------- -------- ------------ -----------
BALANCE, December 31,
1998................... 141,120 $2,353,899 8,228,176 $12,890,874 $501,445 $(10,676,338) $ 5,069,880
======= ========== ========= =========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
M2DIRECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period From Inception (March 1, 1996) to December 31, 1996
and for the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................. $(322,822) $(623,616) $(7,761,280)
Net loss of DeskGate for the two months
ended February 28, 1998 (Note 1)......... 0 83,820 0
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 2,939 4,042 1,794,663
Amortization of debt discount........... 0 14,175 154,146
Stock compensation expense.............. 154,000 251,520 3,806,754
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable................... 0 0 (3,876,980)
Prepaid expenses and other current
assets............................... 0 (5,100) (781,278)
Accounts payable...................... 52,529 (12,320) 1,412,456
Customer deposits..................... 0 0 626,460
Deferred revenue...................... 0 0 2,088,514
Accrued liabilities................... 0 0 (216,361)
--------- --------- -----------
Net cash used in operating
activities......................... (113,354) (287,479) (2,752,906)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (14,697) (24,870) (626,093)
Additions of capitalized software costs... 0 0 (52,000)
Cash paid for acquisitions, net of cash
acquired................................. 0 0 (2,195,147)
--------- --------- -----------
Net cash used in investing
activities......................... (14,697) (24,870) (2,873,240)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.... 75,000 0 1,000,000
Proceeds from issuance of preferred
stock.................................... 0 0 1,224,939
Proceeds from long-term borrowings........ 53,900 353,058 5,188,296
Principal payments on long-term
borrowings............................... 0 (25,058) (1,184,580)
--------- --------- -----------
Net cash provided by financing
activities......................... 128,900 328,000 6,228,655
--------- --------- -----------
NET INCREASE IN CASH........................ 849 15,651 602,509
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD..................................... 0 849 16,500
--------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.. $ 849 $ 16,500 $ 619,009
========= ========= ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................... $ 0 $ 649 $ 573,505
========= ========= ===========
SUPPLEMENTAL DISCLOSURES ON NONCASH
FINANCING ACTIVITIES:
Issuance of Common Stock for acquisition
of Control Group......................... $ 0 $ 0 $ 4,500,000
========= ========= ===========
Issuance of Common Stock for acquisition
of Genesis............................... $ 0 $ 0 $ 2,050,000
========= ========= ===========
Issuance of Common Stock for acquisition
of Aberdeen.............................. $ 0 $ 0 $ 1,000,000
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
M2Direct, Inc. (the "Company") is a Georgia corporation headquartered in
Tampa, Florida. The Company was formed on September 11, 1997; however, the
operations of the Company did not start until March 6, 1998, when it purchased
all of the outstanding stock of Control Group, Ltd. ("Control Group") and
Genesis Direct, Inc. ("Genesis"). Control Group is a provider of direct
marketing and advertising services primarily to regional banks throughout the
United States, and Genesis is a single-source, direct mail bureau that provides
data processing, creative printing, laser imaging, and mail processing services
to clients in the insurance, health care, publishing, retail, banking, and not-
for-profit industries.
In June 1998, the Company acquired substantially all of the assets of The
Aberdeen Marketing Group ("Aberdeen") (Note 3). Aberdeen is a direct response
agency that provides teleservices, database marketing and creative services for
customer acquisition, retention and growth programs.
In March 1999, the Company acquired the outstanding stock of DeskGate
Technologies, Inc. ("DeskGate") for 2,493,609 shares of common stock. This
transaction was accounted for as a pooling of interests under the provisions of
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations."
DeskGate is an Internet and e-commerce software developer and marketer. All
prior period amounts have been restated to include the historical results of
DeskGate for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Presentation
DeskGate was formed on March 1, 1996 and has historically reported its
financial results using a February 28 fiscal year-end. Accordingly, the results
of operations for the years ended December 31, 1996 and 1997 include the
operations of DeskGate for the years ended February 28, 1997 and February 28,
1998, respectively. The results of operations of the Company for the year ended
December 31, 1998 include the operations of DeskGate for the calendar year. Due
to the different historical fiscal year-ends, DeskGate's results of operations
for the two-month period ended February 28, 1998 are included in the restated
consolidated statements of operations for both 1997 and 1998. For the two-month
period ended February 28, 1998, DeskGate had revenues of $0 and a net loss of
$83,820. DeskGate's net loss for the two-month period ended February 28, 1998
is recorded as an offset to accumulated deficit in the accompanying statements
of shareholders' (deficit) equity for the period ended December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Property and equipment acquired
as part of a business combination accounted for as a purchase are stated at
fair value as of the date of the business combination. When assets are retired
or otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income. Expenditures for repairs and maintenance not considered to improve or
substantially lengthen the lives of respective assets are expensed as incurred.
For financial reporting purposes, the Company utilizes the straight-line
method of depreciation over the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Furniture and fixtures................................. Five to seven years
Machinery and equipment................................ Five to seven years
Vehicles............................................... Five to ten years
Computer equipment and software........................ Three to five years
</TABLE>
Leasehold improvements are depreciated over the shorter of the useful lives
of the assets or the lease term.
Intangible Assets
Intangible assets include goodwill, customer contracts, and capitalized
software development costs.
Goodwill
Goodwill represents the excess of the purchase price over the net tangible
and identifiable intangible assets of acquired businesses. Goodwill is
amortized on a straight-line basis over 20 years.
Customer Contracts
In connection with the Company's acquisition of Control Group, the Company
allocated a portion of the purchase price to customer contracts acquired based
upon a discounted cash flow analysis of the applicable contracts. The estimated
fair values attributed to the contracts are being amortized over 12 months,
which represents the estimated average remaining life of the contracts.
Software Development Costs
The Company capitalizes software development costs incurred from the time
that technological feasibility of the software is established until the
software is saleable. These costs are amortized on a straight-line basis over
three years, the estimated economic life of the software. Prior to reaching
technological feasibility, research and development costs and maintenance costs
related to software development are expensed as incurred.
F-8
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company is a C corporation for U.S. federal income tax reporting
purposes and accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires the use of an asset and liability method of accounting for
deferred income taxes. Under SFAS No. 109, deferred tax assets or liabilities
at the end of each period are determined using the tax rate expected to apply
to taxable income in the period in which the deferred tax asset or liability is
expected to be settled or realized.
Long-Lived Assets
The Company continually reevaluates the propriety of the carrying amounts of
long-lived assets as well as the related depreciation or amortization periods
to determine whether current events and circumstances warrant adjustments to
the carrying values and/or revised estimates of useful lives. This evaluation
is based on the Company's projection of the undiscounted cash flows over the
useful remaining lives of the related long-lived assets. To the extent such
projections indicate that the undiscounted cash flows are not expected to be
adequate to recover the carrying amounts of long-lived assets, such carrying
amounts are written down by charges to expense in amounts equal to the excess
of the carrying amount of long-lived assets over the related fair value of the
assets. Management believes that no significant impairment of long-lived assets
has occurred and that no reduction of the estimated useful lives is warranted.
Customer Deposits
Customer deposits consist of payments made in advance by customers for
postage associated with production orders. The liability is relieved as orders
are completed and postage is used.
Revenue Recognition and Deferred Revenue
Revenues represent direct marketing fees paid by customers for various
services. Revenues are primarily recognized as services are performed or upon
completion of the production process and the shipment of mailers. Revenues
subject to customer contracts are recognized as earned under the provisions of
the contract. The Company recognizes losses on contracts as soon as they become
evident.
Amounts billed in advance of services being completed are recorded as
deferred revenue and are recognized as revenue when the related services are
completed.
Loss Contracts
The Company entered into two contract agreements (the "Contract Agreements")
with its largest customer to provide direct marketing services beginning in
September 1998 and continuing through 1999. In April 1999, the Company and the
customer agreed that the Company would discontinue services under the Contract
Agreements. In consideration for discontinuing services under the Contract
Agreements, the Company issued a warrant to purchase 100,000 shares of M2Direct
common stock at an exercise price of $.01 per share. The warrant was valued at
$525,000 based on the fair market value of the Company's common stock at the
warrant grant date. In addition, the Company agreed to issue a $1,000,000 zero
coupon promissory note payable in April
F-9
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2004 and recorded this promissory note at its present value in April 1999. The
Company has recorded a loss of approximately $660,000 in the statement of
operations for the year ended December 31, 1998 in connection with the Contract
Agreements.
Accounts Receivable
The Company's accounts receivable consist of billed and unbilled accounts
receivable from customers. Unbilled receivables result from services that have
been completed before the customer has been billed. The Company's accounts
receivable include $0 and $641,153 of unbilled receivables as of December 31,
1997 and 1998, respectively.
A summary of changes in the allowance for doubtful accounts for period from
inception March 1, 1996 to December 31, 1996 and for the years ended December
31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- -------
<S> <C> <C> <C>
Balance, beginning of year................................ $0 $0 $ 0
Acquired balance from Control Group...................... 0 0 15,000
Acquired balance from Genesis............................ 0 0 5,000
Acquired balance from Aberdeen........................... 0 0 12,627
Provision................................................ 0 0 3,800
Write-offs, net of recoveries............................ 0 0 (3,800)
--- --- -------
Balance, end of year...................................... $0 $0 $32,627
=== === =======
</TABLE>
Financial Instruments
The Company's carrying value of financial instruments (cash, accounts
receivable, accounts payable, and other financial instruments) approximates
fair value principally because of the short-term maturities of these
instruments. The fair value of the Company's debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
Under this method, the Company's fair value of debt was not significantly
different than the stated value at December 31, 1997 and 1998.
Concentration of Risk
During 1998, the Company's two largest customers accounted for 42% and 21%,
respectively, of total revenues. The loss of any one of these customers may
have a material adverse effect on the Company's financial position or results
of operations.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share," effective for fiscal years ending after December 15,
1997. The Company adopted the new guidelines for the calculation and
presentation of earnings per share, and all prior periods have been restated.
Basic loss per share is based on the weighted average number of shares
outstanding. Diluted loss per share is based on the weighted average number of
shares outstanding and the dilutive effect of common stock equivalent shares
issuable upon the exercise of stock options
F-10
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and warrants (using the treasury stock method). Due to the Company's net loss
position, the basic net loss per common share did not differ from diluted net
loss per common share. A reconciliation of net loss attributable to common
shareholders for the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Net loss as reported......................................... $(7,761,280)
Dividends on convertible preferred shares.................... (1,447,440)
Accretion of warrant with redemption feature................. (605,000)
-----------
Net loss attributable to common shareholders................. $(9,813,720)
===========
</TABLE>
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. This statement is effective for periods beginning after
December 15, 1997. The adoption of SFAS No. 130 did not have a material impact
on the Company's financial statements, as comprehensive loss did not differ
from the reported net loss.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
adopted SFAS No. 131 in 1998 (Note 13).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized in earnings in the
current period unless specific hedge accounting criteria are met. The Company
plans to adopt SFAS No. 133 in the first quarter of fiscal year 2000.
Management is still assessing the impact of the adoption of this statement on
the financial statements. Currently, management does not believe the adoption
of this statement will have a material impact on the Company's financial
statements.
3. ACQUISITIONS
On March 6, 1998, the Company acquired the outstanding stock of Control
Group for $500,000 cash and 2,076,720 shares of the Company's common stock at
an estimated fair market value of $2.17 per share. The Company recorded
$1,268,111 to an intangible asset for Control Group's existing contracts which
will be amortized over 1 year, the life of the contracts. The remaining excess
of the cost over the fair value of assets acquired of $5,889,010 has been
recorded as goodwill and is being amortized over 20 years using the straight-
line method.
On March 6, 1998, the Company acquired the outstanding stock of Genesis for
$1,950,000 cash and 946,080 shares of the Company's common stock at an
estimated fair market value of $2.17 per share. The excess of the cost over the
fair value of assets acquired of $4,226,612 has been recorded as goodwill and
is being amortized over 20 years using the straight-line method.
F-11
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 19, 1998, the Company acquired substantially all of the assets of
Aberdeen for a maximum of 719,425 shares of the Company's common stock at an
estimated fair market value of $4.17 per share. Per the terms of the purchase
agreement, the ultimate number of shares may be reduced based upon Aberdeen's
adjusted EBITDA, as defined. In determining the purchase price, the Company has
assumed 239,808 shares will be distributed as the targeted results were not
achieved. The excess of the cost over the fair value of assets acquired of
$1,514,527 has been recorded as goodwill and is being amortized over 20 years
using the straight-line method.
The following table represents the values of assets acquired (liabilities
assumed) of Control Group, Genesis, and Aberdeen (in thousands):
<TABLE>
<CAPTION>
Control
Group Genesis Aberdeen
------- ------- --------
<S> <C> <C> <C>
Cash............................................. $ 135 $ 37 $ 82
Accounts Receivable.............................. 1,146 429 409
Other current assets............................. 105 131 31
Property plant and equipment..................... 96 263 495
Intangibles...................................... 7,157 4,227 1,515
Other assets..................................... 331 5 10
Accounts payable................................. (1,596) (368) (786)
Accrued expenses and other current liabilities... (1,374) (373) (332)
Long-term debt................................... (1,000) (351) (424)
------- ------ ------
Purchase Price................................. $ 5,000 $4,000 $1,000
======= ====== ======
</TABLE>
The following summary prepared on an unaudited basis presents the results of
the operations of the Company combined with Control Group, Genesis, and
Aberdeen as if the acquisitions had occurred at the beginning the year (in
thousands):
<TABLE>
<S> <C>
Revenues.......................................................... $29,132
Net loss.......................................................... (9,625)
Loss per share.................................................... (1.62)
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had occurred as of the beginning of the year.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
------- ----------
<S> <C> <C>
Furniture and fixtures.................................. $ 0 $ 140,820
Machinery and equipment................................. 0 434,976
Vehicles................................................ 0 55,113
Computer equipment and software......................... 39,567 783,134
Leasehold improvements.................................. 0 99,326
------- ----------
39,567 1,513,369
Less accumulated depreciation........................... (6,981) (217,754)
------- ----------
$32,586 $1,295,615
======= ==========
</TABLE>
F-12
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INTANGIBLES
Intangibles at December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---- -----------
<S> <C> <C>
Goodwill................................................... $0 $11,651,144
Customer contracts......................................... 0 1,268,111
Software development costs................................. 0 52,000
--- -----------
0 12,971,255
Less accumulated amortization.............................. 0 (1,521,231)
--- -----------
$0 $11,450,024
=== ===========
</TABLE>
6. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Note payable to an investment company ("Investment
Note"), interest at 14%, payable monthly, principal due
March 2003, secured by substantially all of the assets
of the Company......................................... $ 0 $3,000,000
Convertible note payable ("Convertible Note One"),
interest at 7%, payable at maturity, due in August
1999, net of unamortized discount of $19,842........... 171,138 205,158
Note payable to a bank ("Note Payable One"), interest
at prime plus 1%, payable April 15, 1999, secured by
certain assets of the Company.......................... 0 249,240
Convertible note payable ("Convertible Note Two"),
interest at 7%, payable at maturity, due in October
1999, net of unamortized discount of $86,197........... 0 513,803
Promissory note payable (the "Promissory Note"),
interest at 7%, payable monthly, due on February 28,
1999................................................... 100,000 200,000
Capital lease payable to a leasing corporation,
interest at 7%, principal and interest payable monthly,
due in May 2000........................................ 0 129,157
Notes payable to a bank ("Note Payable Two"), interest
at 8.9% and 9.08%, payable monthly, maturing September
1999 and April 2000.................................... 0 104,281
Note payable to a bank ("Note Payable Three"), interest
at 9.39%, payable on May 20, 2001, secured by certain
assets of the Company.................................. 0 83,687
Notes payable to a bank ("Note Payable Four"), interest
at 8.75% and 9.25%, payable monthly through December
15, 2001 and July 24, 2003, secured by certain assets
of the Company......................................... 0 52,467
Lines of Credit........................................ 0 1,281,498
Other.................................................. 3,300 85,925
-------- ----------
274,438 5,905,216
Less current portion................................... 0 (942,212)
-------- ----------
274,438 4,963,004
Less original issue discount........................... 0 (1,727,056)
-------- ----------
$274,438 $3,235,948
======== ==========
</TABLE>
F-13
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 942,212
2000............................................................ 1,878,546
2001............................................................ 68,073
2002............................................................ 14,670
2003............................................................ 3,001,715
----------
$5,905,216
==========
</TABLE>
As of December 31, 1998 the Company was not in compliance with certain
financial covenants for the Investment Note and Note Payable One (Note 14). In
addition, Note Payable One, Note Payable Two, Note Payable Three, and Note
Payable Four were refinanced subsequent to year-end with long-term debt;
therefore, all amounts are included in long-term debt in the accompanying
balance sheet as of December 31, 1998 (Note 14).
The Investment Note was issued in March 1998 for $3,000,000 to provide a
portion of the funds used to acquire Control Group and Genesis. In connection
with the issuance of the Investment Note, the Company issued a redeemable
warrant (Note 8) to purchase 260,192 shares of common stock at a price of $.01
per share. The warrant provides that the number of shares subject to the
warrant will increase to specified amounts if the Investment Note remains
outstanding on the third, fourth and fifth anniversaries of its issuance. The
value of the warrant was determined to be approximately $480,000 based on the
relative fair value of the warrant to the Investment Note. A corresponding
amount of the loan proceeds has been allocated to the warrant and has been
accounted for as debt discount and warrant with redemption features on the
accompanying balance sheets.
Pursuant to the warrant agreement, if fiscal year 1998 EBITDA targets as
defined are not met, the shares subject to the warrant increase. In May 1999,
the investment company and the Company agreed to an application of the original
formula whereby the shares subject to the warrant increased to 581,935 shares
in light of the Company's 1998 EBITDA, and the investment company waived,
through December 31, 1999, the Company's failure to comply with the financial
covenant. The $1,338,451 value of these 321,743 additional shares has been
allocated to the warrant with an offset to debt discount at December 31, 1998.
As a result of this agreement, the warrant provides that if the Investment Note
remains outstanding on March 6, 2001, the shares subject to the warrant
increase to 703,911; if the Investment Note remains outstanding on March 6,
2002, the shares subject to the warrant increase to 857,143; and if the
Investment Note remains outstanding on March 6, 2003, the shares subject to the
warrant increase to 1,017,544, all at an exercise price of $.01 per share.
In August 1997, the Company issued Convertible Note One to outside investors
for $225,000 in cash. Convertible Note One is convertible into common stock at
a defined conversion price. In connection with Convertible Note One, the
Company issued a warrant to purchase 145,379 shares of the Company's common
stock at an exercise price of $2.28 per share. The value of the warrant was
determined to be $68,037 based on the relative fair value of the warrant to
Convertible Note One. A corresponding amount of the loan proceeds has been
accounted for as a debt discount on Convertible Note One to be amortized using
the effective interest method. At December 31, 1998, Convertible Note One was
convertible into 83,198 shares of the Company's common stock.
F-14
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1998, the Company issued Convertible Note Two to outside
investors for $600,000 in cash. Convertible Note Two is convertible into common
stock at a defined conversion price. In connection with Convertible Note Two,
the Company issued a warrant to purchase 528,402 shares of the Company's common
stock at an exercise price of $2.28 per share. The value of the warrant was
determined to be $114,928 based on the relative fair value of the warrant to
Convertible Note Two. A corresponding amount of the loan proceeds has been
accounted for as a debt discount on Convertible Note Two to be amortized using
the effective interest method. At December 31, 1998, Convertible Note Two was
convertible into 238,526 shares of the Company's common stock.
Lines of Credit
The Company has a line of credit agreement with a bank, which allows the
Company to borrow up to $1,000,000. This line of credit bears interest at prime
plus 1% (8.75% at December 31, 1998) and is secured by certain of the Company's
assets. Interest is payable monthly and the line of credit matures in April
1999. At December 31, 1998, $982,138 was outstanding under this line of credit.
The Company has a line of credit agreement with a bank, which allows the
Company to borrow up to $87,000. This line of credit bears interest at prime
plus 1.75% (9.5% at December 31, 1998) and is secured by certain of the
Company's assets. Interest is payable monthly and the line of credit matures in
March 1999. At December 31, 1998, $87,000 was outstanding under this line of
credit.
The Company has a revolving credit facility agreement with a bank, which
allows the Company to borrow up to $350,000. Outstanding borrowings under the
line of credit bear interest at 8.75% and are limited to 75% of Aberdeen's
prior month's outstanding qualified accounts receivable (as defined) and are
secured by Aberdeen's accounts receivable and equipment. Interest is payable
monthly and the line of credit matures in February 1999. At December 31, 1998,
$212,360 was outstanding and $137,640 was available under this line of credit.
Subsequent to year-end all line of credit amounts due were ultimately
refinanced with proceeds under a long-term debt agreement. Therefore, all
amounts outstanding as of December 31, 1998 have been classified as long-term
debt in the accompanying balance sheet.
7. SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized the issuance of 100,000,000 shares of no par
value common stock and 500,000 shares of no par value preferred stock. 250,000
shares of the preferred stock have been designated as 8% Series A Convertible
Preferred Stock ("Series A Stock"). Currently, each share of Series A Stock can
be converted at the option of the holder into shares of common stock. The
holders of the Series A Stock are entitled to dividends of 8% per share per
annum based on the issue price of $8.68 per share, payable in cash or common
stock. Dividends are cumulative and are payable only when and as declared by
the Board of Directors.
Each share of Series A Stock may be converted at any time into a number of
shares of common stock determined by dividing $8.68, plus all accrued and
unpaid dividends, by $2.17. If not converted before an initial public offering,
each share of Series A Stock is automatically converted into four shares of
common stock.
F-15
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company initiated a private offering for the Series A Stock in June
1998. Each unit consisted of (a) 1 share of Series A Stock and (b) detachable
warrants to purchase 4 shares of the Company's common stock for $4.17 per
share. Each unit was sold at $8.68 per unit and each unit was subject to the
acceptance of a subscription agreement by the Company. From June to November 4,
1998, the Company received cash payments and subscription agreements for 89,364
units. On November 4, 1998, the Company accepted and issued these 89,364 units
to investors. In addition, from November to December 1998, the Company received
cash payments and subscription agreements for an additional 51,756 units. The
Company accepted and issued these additional units in December 1998. The
private offering was closed subsequent to the acceptance of the 51,756 units
and of the $1,224,939 proceeds from the sale of these units, $906,459 was
allocated to the preferred stock and $318,480 was allocated to the warrants
based on the relative fair values at the date of grant. As each share of Series
A Stock is immediately convertible into 4 shares of common stock at the option
of the shareholder, a $1,447,440 preferred stock dividend has been recorded for
the fair market value of the conversion feature based upon a fair value of
$4.17 per common share as of December 31, 1998.
Common Stock Issued to Founders of M2Direct
On January 8, 1998, the Company issued 1,342,176 shares of its common stock
to founders of M2Direct for $80,000 cash. In addition, on March 5, 1998 the
Company issued 1,635,024 shares of its common stock to founders of M2Direct for
$920,000. The Company recorded $2,632,390 of stock compensation expense related
to the shares issued on March 5, 1998 based on the fair market value of the
common stock on the date of issuance.
Common Stock Issuances to DeskGate Employees during Inception Period
In 1997, the Company issued 576,988 shares of its common stock to members of
management for services rendered during 1996 and 1997. The Company recorded
$154,000 and $251,520 of stock compensation expense in 1996 and 1997,
respectively, based on the fair market value of the common stock on the date of
issuance. In 1998, the Company issued 140,093 shares of its common stock to
members of management for services rendered during 1998. The Company recorded
$286,764 of stock compensation expense in 1998, based on the fair market value
of the common stock on the date of issuance.
Stock Options
In March 1998, the Company granted options to purchase 13,846 shares of the
Company's common stock to an executive of the Company. These options vest 50%
at the date of grant and 25% on each of the first and second anniversaries at
an exercise price of $2.17 per share. No compensation expense has been recorded
for these options, as the option price was made at the estimated fair market
value of the common stock at the date of grant.
In June 1998, the Company granted options to purchase 160,000 shares of the
Company's common stock to directors of the Company. These options vest 50% at
the date of grant and 25% on each of the first and second anniversaries at an
exercise price of $1 per share, which management estimated to be the fair value
at the date of grant. The Company will record a total of approximately $507,200
of compensation expense over the vesting period of these options for the
difference
F-16
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
between the exercise price and the fair value of the common stock at the date
of grant as subsequently determined based upon transactions with third parties.
The Company recorded $253,600 of compensation expense for these options in
1998.
In June 1998, the Company granted options to purchase 250,000 shares of the
Company's common stock to executives of the Company at an exercise price of $1
per share, which management estimated to be the fair value at the date of
grant. Options to purchase 200,000 shares vest immediately, and options to
purchase 50,000 shares vest upon the effective date of an initial public
offering. The Company will record a total of approximately $792,500 of
compensation expense over the vesting period of these options for the
difference between the exercise price and the fair value of the common stock at
the date of grant as subsequently determined based upon transactions with third
parties. The Company recorded $634,000 of compensation expense for these
options in 1998.
At the closing of the Aberdeen purchase, the Company granted options to
purchase 175,000 shares of the Company's common stock to the former owners of
Aberdeen. The strike price of the options is fair market value at the date of
exercise, as determined by an independent appraisal firm. These options vest
upon meeting specified conditions by December 31, 1998. As these conditions
were not satisfied, these options were never issued.
In December 1998, consistent with the Board of Directors' policy, the
Company granted options to purchase 120,000 and 20,000 shares of the Company's
common stock, respectively, to new directors and a new executive of the
Company. These options vest 50% at the date of grant and 25% on each of the
first and second anniversaries at an exercise price of $4.17 per share. No
compensation expense has been recorded for these options as the option price
was made at the estimated fair market value of the common stock at the date of
grant.
Stock option activity for the year ended December 31, 1998, excluding the
options to purchase 175,000 shares to the former owners of Aberdeen which
expired unvested, is summarized as follows:
<TABLE>
<CAPTION>
Number Weighted
of Shares Average
Subject Exercise
to Grant Price
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................. 0 $ 0
Granted................................................. 563,846 1.82
Canceled................................................ 0 0
Exercised............................................... 0 0
------- -----
Options outstanding at December 31, 1998.................. 563,846 $1.82
======= =====
Exercisable at December 31, 1998.......................... 356,923 $1.64
======= =====
</TABLE>
F-17
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Prices of Shares Price Contractual Life of Shares Price
--------------- --------- -------- ---------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$1.00................... 410,000 $1.00 9.46 280,000 $ 1.00
2.17................... 13,846 2.17 9.18 6,923 2.17
4.17................... 140,000 4.17 9.93 70,000 4.17
------- ----- ---------- --------
563,846 $1.82 356,923 $ 1.64
======= ===== ========== ========
</TABLE>
During 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share as if the fair value-based method of accounting defined in
the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1998 using the minimum value
option pricing model as prescribed by SFAS No. 123 using the following weighted
average assumptions for grants in 1998:
<TABLE>
<S> <C>
Risk-free interest rate........................................ 4.58%-5.65%
Expected dividend yield........................................ 0%
Expected lives................................................. Five years
Expected volatility............................................ 40%
</TABLE>
The total value of the options granted during the year ended December 31,
1998 was computed as approximately $1,664,214 which would be amortized over the
vesting period of the options. If the Company had accounted for these options
in accordance with SFAS No. 123, the Company's reported pro forma net loss and
pro forma net loss per share for the year ended December 31, 1998 would have
increased to the following pro forma amounts:
<TABLE>
<S> <C>
Net loss attributable to common shareholders:
As reported................................................. $ (9,813,720)
Pro forma................................................... (10,190,560)
Basic:
As reported................................................. $(1.36)
Pro forma................................................... (1.42)
Diluted:
As reported................................................. $(1.36)
Pro forma................................................... (1.42)
</TABLE>
F-18
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. WARRANT WITH REDEMPTION FEATURE
An investment company has the option to require the Company to redeem its
warrant, at a purchase price equal to the fair market value, as defined. Upon
completion of an initial public offering by the Company, the redemption right
terminates. Accordingly, in periods prior to an initial public offering, the
Company has accounted for the warrants as temporary equity under Emerging
Issues Task Force 88-9, "Put Warrants." The excess of the redemption value over
the carrying value is being accrued by periodic charges to retained earnings
based on the fair market value of the Company's common stock. This accrual
amounted to $605,000 for the year ended December 31, 1998. Upon the completion
of an initial public offering, the value of the warrants will be transferred to
permanent equity.
9. RELATED-PARTY TRANSACTIONS
During the year ended December 31, 1998, the Company incurred fees of
approximately $194,158 for legal services to a law firm in which a director and
shareholder of the Company is a partner. As of December 31, 1998, approximately
$90,494 of such fees are included in accounts payable in the accompanying
balance sheets.
During the year ended December 31, 1998, the Company incurred fees of
approximately $211,619 for professional services to a local accounting firm in
which a director and shareholder of the Company is a partner.
During the year ended December 31, 1998, the Company provided professional
services of approximately $122,389 to a customer in which a director and
shareholder of the Company is chairman of the board of directors and chief
executive officer.
10. INCOME TAXES
A reconciliation of the recorded income tax benefit with the amount computed
at the statutory rate is as follows at December 31, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Benefit at statutory rate............... $(109,759) $(212,029) $(2,638,835)
State tax benefit, net of federal income
tax benefit............................ (12,784) (24,695) (307,347)
Nondeductible expenses.................. 58,543 87,924 2,072,942
Change in valuation allowance........... 64,000 148,800 873,240
--------- --------- -----------
Total............................... $ 0 $ 0 $ 0
========= ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Other................................................ $ (3,040) $ 15,851
Net operating loss carryforward...................... 215,840 1,844,900
Valuation allowance.................................. (212,800) (1,843,760)
--------- -----------
Net deferred tax assets.............................. $ 0 $ 16,991
========= ===========
</TABLE>
F-19
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $4,855,000, which will expire beginning in 2016 and continuing
through 2018. Due to changes in the Company's ownership structure, the
Company's use of its net operating losses in future years may be limited. The
Company has not recognized any benefit from the future use of such net
operating losses because the assumptions of future profitable operations
contain risks that do not provide sufficient assurance to recognize such tax
benefits currently.
11. RETIREMENT PLAN
The Company maintains a simplified employee pension plan ("SEP Plan") for
all eligible employees. Under the SEP Plan, the Company contributes a
discretionary amount each year to the individual retirement accounts of all
eligible employees. For 1998, the Company has elected to contribute 5% of each
eligible employee's compensation to the SEP Plan. The Company contributed
approximately $66,000 to the SEP Plan for the period ended December 31, 1998.
The Company sponsors a defined contribution retirement plan, which covers
all employees meeting age and years of service requirements provided in the
plan. The Plan allows participants to contribute up to 15% of their pretax
earnings. The Company makes matching contributions equal to 50% of each
participant's contributions up to 5% of his/her salary. The Company contributed
approximately $24,000 to the plan for the period ended December 31, 1998.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has certain noncancelable operating leases for facilities and
equipment. Rental expenses under noncancelable operating leases was
approximately $18,000, $19,000, and $844,000 for the years ended December 31,
1996, 1997, and 1998, respectively. At December 31, 1998, future minimum
payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 840,000
2000............................................................ 622,000
2001............................................................ 438,000
2002............................................................ 279,000
2003............................................................ 6,000
Thereafter...................................................... 0
----------
$2,185,000
==========
</TABLE>
13. SEGMENT REPORTING
The Company is a high-tech marketing company with continuing operations in
two segments--direct marketing and e-commerce.
The Company's direct marketing segment offers a complete range of
specialized, coordinated, and integrated direct marketing services. Services
such as direct mailings, teleservices, database analysis and modeling, creative
services, and fulfillment are provided in the direct marketing segment.
F-20
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's e-commerce segment specializes in delivering and selling
secured material over the Internet through the use of its internally developed
VIAexpress(TM), VIApublisher(TM), and No Click banner advertisement
technology.
Included in corporate activities are general corporate expenses. Assets of
corporate activities include unallocated cash, prepaid expenses, office
equipment, and other assets.
Segment information for fiscal years 1996, 1997, and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Direct
Marketing E-Commerce Corporate Total
--------- ---------- --------- -------
<S> <C> <C> <C> <C>
December 31, 1996:
Net revenue....................... $ 0 $ 1 $ 0 $ 1
Gross profit...................... 0 1 0 1
Depreciation and amortization..... 0 3 0 3
Operating loss.................... 0 (323) 0 (323)
Segment assets.................... 0 13 0 13
Capital expenditures.............. 0 15 0 15
December 31, 1997:
Net revenue....................... 0 3 0 3
Gross profit...................... 0 3 0 3
Depreciation and amortization..... 0 4 0 4
Operating loss.................... 0 (584) 0 (584)
Segment assets.................... 0 54 0 54
Capital expenditures.............. 0 25 0 25
December 31, 1998:
Net revenue....................... 25,925 1 0 25,926
Gross profit...................... 4,848 1 0 4,849
Depreciation and amortization..... 1,702 15 77 1,794
Operating loss.................... (1,227) (1,169) (4,737) (7,133)
Segment assets.................... 19,745 235 589 20,569
Capital expenditures.............. 291 24 311 626
</TABLE>
14. SUBSEQUENT EVENTS
On January 29, 1999 the company paid all principal and interest due on the
Promissory Note.
In February 1999, the Company's line of credit which matured in February
was repaid with a $350,000 bridge loan (the "Bridge Loan") from a bank.
On February 3, 1999, the Company entered into an agreement and plan of
merger with UST, Inc. ("UST"). Under the agreement, a wholly owned subsidiary
of the company was merged with and into UST, with UST surviving as a wholly
owned subsidiary of the Company, for $3,875,000 cash and 149,880 shares of the
Company's common stock at an estimated fair market value of $4.17 per share.
The Company placed $250,000 cash and 119,904 shares of its common stock in an
escrow account, and the amount of cash and number of shares to be retained by
the former owners of UST will be based on 1999 actual EBITDA performance for
the Company or UST, as defined. The preliminary excess of the cost over the
fair value of assets acquired was approximately $3.9 million and is being
amortized over 20 years using the straightline method.
F-21
<PAGE>
M2DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition of UST, the Company issued a $2.0 million
promissory note to an investment company. This note bears interest at 14% and
is due March 5, 2003. The Company also issued an additional warrant to the
investment company for the purchase of 157,207 shares of the Company's common
stock for $.01 per share. The proceeds from this promissory note were used to
pay the former owners of UST.
Also, in connection with the acquisition of UST, the Company issued warrants
to the sole shareholder of a bank for the purchase of 25,000 shares of the
Company's common stock at $4.17 per share in connection with a $2.5 million
promissory note to a bank due February 1, 2000. The proceeds from this
promissory note were used to pay the former owners of UST.
On March 30, 1999, M2Direct entered into a loan agreement (the "Loan
Agreement") with a bank. The terms of the Loan Agreement provide for a maximum
borrowing of $3.0 million bearing interest at prime and maturing June 30, 2000.
On March 30, 1999, M2Direct used borrowings under the Loan Agreement to repay
Note Payable One, Note Payable Two, Note Payable Three, Note Payable Four, all
amounts outstanding under its lines of credit and the Bridge Loan. All
historical line of credit agreements were terminated.
On February 12, 1999, pursuant to the terms of the note agreements,
Convertible Note One and Convertible Note Two were converted into 85,214 and
238,524 shares of common stock, respectively.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Control Group, Ltd.:
We have audited the accompanying balance sheets of CONTROL GROUP, LTD. (a
Delaware corporation) as of December 31, 1997 and February 28, 1998 and the
related statements of operations, stockholders' equity deficit, and cash flows
for each of the two years in the period ended December 31, 1997 and for the two
months ended February 28, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Control Group, Ltd. as of
December 31, 1997 and February 28, 1998 and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997
and for the two months ended February 28, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 19, 1999
F-23
<PAGE>
CONTROL GROUP, LTD.
BALANCE SHEETS
December 31, 1997 and February 28, 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 265,298 $ 135,412
Accounts receivable, net of allowance for doubtful
accounts of $15,000 in 1997 and 1998................ 1,880,633 1,145,676
Income taxes receivable.............................. 36,716 36,716
Deferred tax assets.................................. 924,740 926,985
Prepaid expenses and other........................... 51,850 50,891
---------- ----------
Total current assets............................... 3,159,237 2,295,680
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment and fixtures............................... 288,338 293,284
Vehicles............................................. 37,138 37,138
Leasehold improvements............................... 13,009 13,009
---------- ----------
338,485 343,431
Less accumulated depreciation........................ (238,541) (247,045)
---------- ----------
Property and equipment, net........................ 99,944 96,386
---------- ----------
OTHER ASSETS:
Notes receivable from officers (Note 3).............. 262,662 248,724
Loan receivable from related party (Note 3).......... 48,193 48,193
Deposits............................................. 9,406 9,406
Deferred tax assets.................................. 162,128 803,224
Noncompete agreement, net of accumulated amortization
of $70,833 in 1997 and $75,277 in 1998.............. 29,167 24,723
---------- ----------
Total other assets................................. 511,556 1,134,270
---------- ----------
Total assets....................................... $3,770,737 $3,526,336
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable..................................... $1,404,020 $1,595,845
Accrued production expenses.......................... 922,576 710,502
Customer deposits.................................... 56,794 36,222
Other accrued expenses............................... 199,256 119,663
Deferred revenue..................................... 2,447,000 2,738,000
Line of credit....................................... 0 652,138
Notes payable........................................ 460,026 352,092
---------- ----------
Total current liabilities.......................... 5,489,672 6,204,462
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' DEFICIT:
Common stock, $10 par value; 1,000 shares authorized;
100 shares issued and outstanding................... 1,000 1,000
Accumulated deficit.................................. (1,719,935) (2,679,126)
---------- ----------
Total stockholders' deficit........................ (1,718,935) (2,678,126)
---------- ----------
Total liabilities and stockholders' deficit........ $3,770,737 $3,526,336
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE>
CONTROL GROUP, LTD.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996 and 1997 and
for the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
NET REVENUES............................. $9,997,154 $ 7,182,166 $1,325,138
COSTS OF SERVICES........................ 7,521,451 7,221,523 2,433,288
---------- ----------- ----------
Gross profit......................... 2,475,703 (39,357) (1,108,150)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 2,446,287 2,554,680 491,037
---------- ----------- ----------
OPERATING INCOME (LOSS).................. 29,416 (2,594,037) (1,599,187)
---------- ----------- ----------
OTHER INCOME (EXPENSES):
Interest income........................ 0 25,914 3,816
Interest expense....................... (71,491) (105,738) (7,273)
Other (expense) income, net............ 0 (6,159) 112
---------- ----------- ----------
Total other expense, net............. (71,491) (85,983) (3,345)
---------- ----------- ----------
LOSS BEFORE INCOME TAXES................. (42,075) (2,680,020) (1,602,532)
(PROVISION) BENEFIT FOR INCOME TAXES..... (15,575) 1,083,672 643,341
---------- ----------- ----------
NET LOSS................................. $ (57,650) $(1,596,348) $ (959,191)
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
CONTROL GROUP, LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1996 and 1997 and
for the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
Common Stock Accumulated
------------- Earnings
Shares Amount (Deficit) Total
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995............. 100 $1,000 $ 344,658 $ 345,658
Net loss............................. 0 0 (57,650) (57,650)
--- ------ ----------- -----------
BALANCE, December 31, 1996............. 100 1,000 287,008 288,008
Distributions to stockholders (Note
3).................................. 0 0 (291,936) (291,936)
Forgiveness of related party loans
(Note 3)............................ 0 0 (118,659) (118,659)
Net loss............................. 0 0 (1,596,348) (1,596,348)
--- ------ ----------- -----------
BALANCE, December 31, 1997............. 100 1,000 (1,719,935) (1,718,935)
Net loss............................. 0 0 (959,191) (959,191)
--- ------ ----------- -----------
BALANCE, February 28, 1998............. 100 $1,000 $(2,679,126) $(2,678,126)
=== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
CONTROL GROUP, LTD.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1997 and
for the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (57,650) $(1,596,348) $(959,191)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation............................. 50,452 50,883 8,504
Amortization............................. 25,000 25,000 4,444
Changes in operating assets and
liabilities:
Accounts receivable.................... (193,858) (509,860) 734,957
Prepaid expenses and other............. 280,210 (50,076) 959
Deferred tax assets.................... 0 (1,086,868) (643,341)
Accounts payable....................... (411,688) 783,848 191,825
Accrued expenses and other............. 815,750 143,912 (312,239)
Deferred revenue....................... (25,800) 2,268,800 291,000
--------- ----------- ---------
Net cash provided by (used in)
operating activities................ 482,416 29,291 (683,082)
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (47,403) (33,686) (4,946)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advances and loans to stockholders.... (29,699) (389,647) 0
Stockholder repayments of advances......... 12,500 27,000 13,938
Proceeds from bank notes................... 601,734 1,334,562 952,137
Principal payments on bank notes........... (640,791) (1,244,065) (407,933)
--------- ----------- ---------
Net cash (used in) provided by
financing activities................ (56,256) (272,150) 558,142
--------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 378,757 (276,545) (129,886)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 163,086 541,843 265,298
--------- ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR..... $ 541,843 $ 265,298 $ 135,412
========= =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest.................................. $ 71,491 $ 101,218 $ 17,341
========= =========== =========
Income taxes.............................. $ 24,637 $ 59,193 $ 0
========= =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and February 28, 1998
1. DESCRIPTION OF BUSINESS
Control Group, Ltd. (the "Company") is a privately held direct marketing
company headquartered in Allentown, Pennsylvania. The Company provides direct
marketing and advertising services primarily to regional banks throughout the
United States. Offices are maintained in Pennsylvania, Delaware, and New
Jersey.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash and cash equivalents.
Property and Equipment
Property and equipment are stated at cost. When assets are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income. Expenditures for repairs and maintenance not considered to
substantially lengthen asset lives are expensed as incurred.
For financial reporting purposes, the Company utilizes the straightline
method of depreciation over the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Equipment and fixtures............................... Five to seven years
Vehicles............................................. Ten years
</TABLE>
Leasehold improvements are depreciated over the lesser of the useful lives
of the assets or the lease term.
Noncompete Agreement
The noncompete agreement has been recorded at cost and is being amortized on
a straight-line basis over the term of the agreement (four years). Amortization
expense for the years ended December 31, 1996 and 1997 and the two-month period
ended February 28, 1998 was $25,000, $25,000, and $4,444, respectively.
Income Taxes
The Company is a C corporation for U.S. federal income tax reporting
purposes and accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS")
F-28
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
No. 109, "Accounting for Income Taxes," which requires the use of an asset and
liability method of accounting for deferred income taxes. Under SFAS No. 109,
deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to apply to taxable income in the period in which
the deferred tax asset or liability is expected to be settled or realized.
Long-Lived Assets
The Company continually reevaluates the propriety of the carrying amounts of
long-lived assets as well as the related depreciation or amortization periods
to determine whether current events and circumstances warrant adjustments to
the carrying values and/or revised estimates of useful lives. This evaluation
is based on the Company's projection of the undiscounted cash flows over the
useful remaining lives of the related long-lived assets. To the extent such
projections indicate that the undiscounted cash flows are not expected to be
adequate to recover the carrying amounts of long-lived assets, such carrying
amounts are written down by charges to expense in amounts equal to the excess
of the carrying amount of long-lived assets over the related fair value of the
assets. Management believes that no significant impairment of long-lived assets
has occurred and that no reduction of the estimated useful lives is warranted.
Revenue Recognition and Deferred Revenue
Revenues represent direct marketing fees paid by customers for various
services. Revenues are primarily recognized as services are performed, except
in the case of certain longterm contracts which include clauses to guarantee
reimbursement to the customer if the revenues generated under the contract
during the first 12 months of the contract term do not exceed amounts billed in
advance. Amounts billed in advance related to such contracts are recognized at
the end of the 12-month guarantee period. As of December 31, 1997 and February
28, 1998, these amounts totaled approximately $2,260,000 and are included in
deferred revenue on the accompanying balance sheets.
Amounts billed in advance of services being completed are recorded as
deferred revenue and are recognized as revenue when the related services are
completed.
Accounts Receivable
The Company's accounts receivable consist of billed and unbilled accounts
receivable from customers. Unbilled receivables result from services that have
been completed before the customer has been billed. As of December 31, 1997 and
February 28, 1998, the Company's accounts receivable included $397,504 and
$309,143, respectively, of unbilled receivables.
A summary of changes in the allowance for doubtful accounts for the years
ended December 31, 1996 and 1997 and the two-month period ended February 28,
1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 0 $ 0 $15,000
Provisions.................................... 32,960 27,811 0
Write-offs, net of recoveries................. (32,960) (12,811) 0
-------- -------- -------
Balance, end of year............................ $ 0 $ 15,000 $15,000
======== ======== =======
</TABLE>
F-29
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial Instruments
The Company's carrying value of financial instruments (cash, accounts
receivable, accounts payable, and other financial instruments) approximates
fair value principally because of the short-term maturities of these
instruments. The fair value of the Company's debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
Under this method, the Company's fair value of debt was not significantly
different than the stated value at December 31, 1997 and February 28, 1998.
Concentration of Risk
During 1996, the Company's two largest customers accounted for approximately
40% and 30%, respectively, of net revenues. During 1997, the Company's four
largest customers accounted for approximately 27%, 17%, 15%, and 14%,
respectively, of net revenues. During the two-month period ended February 28,
1998, the Company's three largest customers accounted for approximately 55%,
12%, and 11%, respectively, of net revenues. The loss of any one of these
customers may have a material adverse effect on the Company's financial
position or results of operations.
3. RELATED-PARTY TRANSACTIONS
Notes Receivable From Stockholders
On February 28, 1995, the Company advanced money to the stockholders (the
"Stockholders") of the Company in exchange for notes receivable (the "1995
Notes"). The 1995 Notes bear interest at 7.5% and are repayable on demand;
however, payment may be delayed at the option of the Stockholders. The Company
forgave a portion of the 1995 Notes during 1997, which is presented as
distributions to stockholders in the accompanying statement of stockholders'
equity (deficit). As of December 31, 1997 and February 28, 1998, the 1995 Notes
had outstanding principal balances totaling $13,382.
On July 15, 1997, the Company also advanced $376,466 to the Stockholders in
exchange for notes receivable (the "1997 Notes"). The 1997 Notes bear interest
at prime plus 1% (9.5% as of December 31, 1997 and February 28, 1998). The
Company forgave a portion of the 1997 Notes during 1997, which is presented as
a capital distribution in the accompanying statement of stockholders' equity
(deficit). As of December 31, 1997 and February 28, 1998, the 1997 Notes had
outstanding principal balances totaling $233,006 and $219,070, respectively.
Transactions With Deebob Partnership
The Stockholders are partners in Deebob Partnership ("Deebob"), which rents
office space to the Company. The lease has a term of five years from March 31,
1995 to March 31, 2000. Rent expense for the years ended December 31, 1996 and
1997 and the two-month period ended February 28, 1998 was $69,500, $100,000,
and $0, respectively. Concurrent with the acquisition discussed in Note 8, the
Company's lease with Deebob was terminated.
In 1995, the Company advanced funds to Deebob in the amount of $57,450. The
Company forgave a portion during 1997 which is presented as a capital
distribution in the accompanying statement of stockholders' equity (deficit).
As of December 31, 1997 and February 28, 1998, $48,193
F-30
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
is included on the accompanying balance sheets as loans receivable from a
related party. Currently, there are no terms of repayment or provisions for
interest.
On May 3, 1995, Deebob Partnership entered into a note payable agreement for
$160,000 with CoreStates Bank (the "Bank"). Control Group Ltd. has guaranteed
the repayment of this note payable. As of December 31, 1997 and February 28,
1998, the remaining balance outstanding on this note payable was $121,776. This
note payable and the related asset are not included on the Company's
accompanying balance sheets.
Transactions With Applications Unlimited, Inc. ("AUI")
The Stockholders also had an ownership interest in AUI. During 1997, AUI
provided various marketing production services to the Company totaling
$570,701, which are included in cost of services in the accompanying statements
of operations. Additionally, the Company advanced money to and paid expenses on
behalf of AUI throughout 1997. These advances and expenses paid by the Company
on behalf of AUI were accounted as advances due from a related party of which
$109,402 was not repaid by AUI. In July 1997, AUI ceased operations, and the
unpaid advances were forgiven and have been recorded as a capital distribution
in the accompanying statements of stockholders' equity (deficit).
4. NOTES PAYABLE AND LINE OF CREDIT
Notes payable as of December 31, 1997 and February 28, 1998 consist of the
following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note payable to the Bank, interest payable monthly at
prime plus 1% (9.5% at December 31, 1997 and February
28, 1998); monthly principal payments of $4,482, plus
interest, through October 30, 1998; outstanding princi-
pal, plus interest, payable November 30, 1998; collater-
alized by substantially all of the assets of the Company
and personal guarantees of the Stockholders; principal
plus accrued interest due immediately upon event of de-
fault, which includes the sale or merger of the Company
(Note 8)................................................ $354,058 $349,575
Note payable to the Bank, interest payable monthly at
prime plus 1% (9.5% at December 31, 1997 and February
28, 1998); principal due January 31, 1998;
collateralized by substantially all of the assets of the
Company and personal guarantees of the Stockholders;
principal plus accrued interest due immediately upon
event of default, which includes the sale or merger of
the Company............................................. 100,000 0
Other.................................................... 5,968 2,517
-------- --------
$460,026 $352,092
======== ========
</TABLE>
Line of Credit
On November 27, 1996, the Company entered into a line-of-credit agreement
with the Bank that provides for borrowings of up to $1,000,000. Borrowings are
payable on demand, and interest is
F-31
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
payable monthly at prime plus 1%. Outstanding borrowings on the line of credit
were $0 and $652,138 as of December 31, 1997 and February 28, 1998,
respectively. The line-of-credit agreement expired on April 30, 1998 (Note 8).
Debt Covenants
The note payable to the Bank with an outstanding balance at December 31,
1997 and February 28, 1998 of $354,058 and $349,575, respectively, contains
certain restrictions which, among other things, require maintenance of certain
financial ratios. As of December 31, 1997 and February 28, 1998, the Company
was not in compliance with these requirements (Note 8).
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has certain noncancelable operating leases for facilities,
equipment, and vehicles. Rental expenses under noncancelable operating leases
were approximately $156,433, $333,711, and $55,837 for the years ended December
31, 1996 and 1997 and the two-month period ended February 28, 1998,
respectively. At February 28, 1998, future minimum payments under noncancelable
operating leases were as follows:
<TABLE>
<S> <C>
Period ending December 31:
1998............................................................ $210,360
1999............................................................ 244,153
2000............................................................ 137,430
2001............................................................ 39,924
2002............................................................ 0
--------
$631,867
========
</TABLE>
Purchase Commitment
During 1997, the Company entered into a joint commitment with AUI to
purchase $4.1 million in various printing and lettershop services from
Masterpiece Consulting Corporation ("Masterpiece"). Masterpiece is owned by two
former stockholders of AUI. As of February 28, 1998, the remaining purchase
commitment was $3,100,000. Services purchased of approximately $0, $880,000,
and $180,000 for the years ended December 31, 1996 and 1997 and the two-month
period ended February 28, 1998, respectively, are included in cost of services
in the accompanying statement of operations.
6. RETIREMENT PLAN
The Company maintains a simplified employee pension plan ("SEP Plan") for
all eligible employees. Under the SEP Plan, the Company contributes a
discretionary amount each year to the individual retirement accounts of all
eligible employees. For 1996, 1997, and 1998, the Company has elected to
contribute 5% of each eligible employee's compensation to the SEP Plan. The
Company's contributions of $60,558, $58,752, and $12,459 are included in
selling, general, and administrative expenses for the years ended December 31,
1996 and 1997 and the two-month period ended February 28, 1998, respectively.
F-32
<PAGE>
CONTROL GROUP, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES
The income tax benefit for the year ended December 31, 1997 and the two-
month period ended February 28, 1998 represents the income tax benefit from
current year operating losses.
The reconciliation of the federal statutory income tax rate to the Company's
effective tax rate for the years ended December 31, 1996 and 1997 and the two-
month period ended February 28, 1998 for income tax benefit (provision) is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- --------
<S> <C> <C> <C>
Benefit at statutory federal rate.......... $ 14,306 $ 911,207 $544,861
State tax benefit, net of federal income
tax benefit............................... 2,644 168,037 100,690
Other...................................... (12,233) 12,128 0
Nondeductible expenses..................... (20,292) (7,700) (2,210)
-------- ---------- --------
Total.................................... $(15,575) $1,083,672 $643,341
======== ========== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
February 28, 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Allowance for doubtful accounts....................... $ 6,041 $ 6,041
Contributions......................................... 8,705 10,950
Deferred revenue...................................... 909,994 909,994
Net operating loss carryforward....................... 162,128 803,224
---------- ----------
Net deferred tax assets............................... $1,086,868 $1,730,209
========== ==========
</TABLE>
The net operating loss carryforward of approximately $1,994,000 expires in
2017. The Company's management has determined that it is more likely than not
that the Company will be able to fully utilize the deferred tax assets.
8. SUBSEQUENT EVENTS
On March 6, 1998, the Company entered into an agreement and plan of merger
with M2Direct, Inc. ("M2Direct," formerly named MegaMarketing Corporation).
Under the agreement, a wholly owned subsidiary of M2Direct was merged with and
into the Company, with the Company surviving as a wholly owned subsidiary of
M2Direct. The Stockholders received consideration of $250,000 in cash and
2,076,720 shares of M2Direct common stock, payment of $250,000 in cash was
deferred until 1999.
The merger of the Company with M2Direct constituted an event of default
under the notes to the Bank. The Bank agreed to forbear from exercising its
rights and remedies as a result of the defaults through April 15, 1999, when
the notes would be due and payable in full.
On March 30, 1999, M2Direct entered into a loan agreement (the "Loan
Agreement") with First Union National Bank. The terms of the Loan Agreement
provide for maximum borrowings of $3,000,000 bearing interest at the prime rate
and maturing June 30, 2000. On March 30, 1999, M2Direct repaid all of the
Company's notes payable and line of credit amounts with proceeds from
borrowings under the Loan Agreement.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genesis Direct, Inc.:
We have audited the accompanying balance sheets of GENESIS DIRECT, INC. (a
Florida corporation) as of December 31, 1997 and February 28, 1998 and the
related statements of operations, shareholders' deficit, and cash flows for the
years ended December 31, 1996 and 1997 and for the two-month period ended
February 28, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Genesis Direct, Inc. as of
December 31, 1997 and February 28, 1998 and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1997 and for the two-
month period ended February 28, 1998 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 19, 1999
F-34
<PAGE>
GENESIS DIRECT, INC.
BALANCE SHEETS
December 31, 1997 and February 28, 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash..................................................... $145,333 $ 37,231
Accounts receivable, net of allowance for doubtful
accounts of $10,024 in 1997 and 1998.................... 243,530 429,172
Other current assets..................................... 117,396 131,399
-------- --------
Total current assets................................... 506,259 597,802
======== ========
PROPERTY AND EQUIPMENT:
Equipment and fixtures................................... 304,994 307,709
Vehicles................................................. 23,346 23,346
Leasehold improvements................................... 26,016 26,016
-------- --------
354,356 357,071
Less accumulated depreciation............................ (81,745) (93,814)
-------- --------
Property and equipment, net............................ 272,611 263,257
-------- --------
OTHER ASSETS............................................... 13,105 5,255
-------- --------
Total assets............................................. $791,975 $866,314
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable......................................... $265,809 $367,549
Accrued liabilities...................................... 70,803 85,761
Customer deposits........................................ 217,603 129,986
Current portion of long-term debt and capital leases..... 58,139 106,185
Shareholder loans........................................ 82,752 83,752
-------- --------
Total current liabilities.............................. 696,106 773,233
-------- --------
LONG-TERM DEBT AND CAPITAL LEASES, less current portion.... 162,263 160,918
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' DEFICIT:
Common stock, no par value; 10,000 shares authorized,
2,000 shares issued and outstanding..................... 21,300 21,300
Accumulated deficit...................................... (87,694) (89,137)
-------- --------
Total shareholders' deficit............................ (66,394) (67,837)
-------- --------
Total liabilities and shareholders' deficit............ $791,975 $866,314
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-35
<PAGE>
GENESIS DIRECT, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996 and 1997 and for
the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- --------
<S> <C> <C> <C>
NET REVENUES................................ $1,765,317 $3,346,843 $575,156
COSTS OF SALES.............................. 1,073,630 1,711,362 330,255
---------- ---------- --------
Gross profit............................ 691,687 1,635,481 244,901
---------- ---------- --------
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................... 718,231 1,481,065 242,410
---------- ---------- --------
OPERATING (LOSS) INCOME..................... (26,544) 154,416 2,491
---------- ---------- --------
OTHER (EXPENSE) INCOME:
Interest expense.......................... (17,029) (40,995) (3,976)
Other, net................................ (1,660) 77 42
---------- ---------- --------
Total other (expense), net.............. (18,689) (40,918) (3,934)
---------- ---------- --------
NET (LOSS) INCOME........................... $ (45,233) $ 113,498 $ (1,443)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
GENESIS DIRECT, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 1996 and 1997 and for
the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
Common Stock
--------------
Accumulated
Shares Amount Deficit Total
------ ------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995............... 1,500 $ 300 $ (17,556) $ (17,256)
Net loss............................... 0 0 (45,233) (45,233)
Distributions to shareholders.......... 0 0 (39,000) (39,000)
----- ------- --------- ---------
BALANCE, December 31, 1996............... 1,500 300 (101,789) (101,489)
Net income............................. 0 0 113,498 113,498
Distributions to shareholders.......... 0 0 (99,403) (99,403)
Issuance of common stock............... 500 21,000 0 21,000
----- ------- --------- ---------
BALANCE, December 31, 1997............... 2,000 21,300 (87,694) (66,394)
Net loss............................... 0 0 (1,443) (1,443)
----- ------- --------- ---------
BALANCE, February 28, 1998............... 2,000 $21,300 $ (89,137) $ (67,837)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
GENESIS DIRECT, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1997 and for
the Two-Month Period Ended February 28, 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $ (45,233) $ 113,498 $ (1,443)
Adjustments to reconcile net (loss) income to
net cash provided (used in) by operating
activities:
Depreciation expense........................ 19,136 60,744 12,069
Changes in operating assets and liabilities:
Accounts receivable....................... 35,133 (140,401) (185,642)
Other current assets...................... (179,123) (83,092) (14,003)
Other assets.............................. (8,332) 2,895 7,850
Accounts payable.......................... 96,386 114,363 101,740
Customer deposits......................... 46,207 171,396 (87,617)
Other current liabilities................. 102,981 35,128 14,958
--------- --------- ---------
Net cash provided by (used in) operating
activities............................. 67,155 274,531 (152,088)
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (200,425) (118,929) (2,715)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................ 300,628 567,635 55,000
Proceeds from shareholder loans............. 15,000 60,000 0
Principal payments on long-term debt........ (93,333) (592,941) (8,299)
Principal payments on shareholder loans..... 0 (26,248) 0
Distributions to shareholders............... (39,000) (99,403) 0
Issuance of common stock.................... 0 21,000 0
--------- --------- ---------
Net cash provided by (used in) financing
activities............................. 183,295 (69,957) 46,701
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH............... 50,025 85,645 (108,102)
CASH AT BEGINNING OF PERIOD................... 9,663 59,688 145,333
--------- --------- ---------
CASH AT END OF PERIOD......................... $ 59,688 $ 145,333 $ 37,231
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 17,029 $ 38,969 $ 4,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-38
<PAGE>
GENESIS DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997 and February 28, 1998
1. DESCRIPTION OF BUSINESS
Genesis Direct, Inc. (the "Company") is a single-source, direct-mail service
bureau that provides data processing, creative printing, laser imaging, and
mail processing services to clients in the insurance, health care, publishing,
retail, banking, and not-for-profit industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. When assets are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income. Expenditures for repairs and maintenance not considered to
substantially lengthen asset lives are expensed as incurred.
For financial reporting purposes, the Company utilizes the straight-line
method of depreciation over the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Equipment and fixtures............................... Five to seven years
Vehicles............................................. Five years
Leasehold improvements............................... Two years
</TABLE>
Customer Deposits
Customer deposits consist of payments made in advance by customers for
postage associated with production orders. The liability is relieved as orders
are completed and postage is used.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation and is therefore not liable for
federal or state income taxes. Shareholders are taxed individually on their
share of the Company's earnings. The Company's net income or loss is allocated
among the shareholders in accordance with the corporate charter.
Long-Lived Assets
The Company continually reevaluates the propriety of the carrying amounts of
long-lived assets as well as the related depreciation or amortization periods
to determine whether current events and circumstances warrant adjustments to
the carrying values and/or estimates of useful lives. This evaluation is based
on the Company's projection of the undiscounted cash flow before depreciation,
F-39
<PAGE>
GENESIS DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
amortization, and interest over the useful remaining lives of the related long-
lived assets. To the extent such projections indicate that the undiscounted
cash flow is not expected to be adequate to recover the carrying amounts of
long-lived assets, such carrying amounts are written down by charges to expense
in amounts equal to the excess of the carrying amount of long-lived assets over
the related fair value of the assets.
Revenue Recognition
Revenues are recognized upon completion of the production process and the
shipment of mailers.
Financial Instruments
The Company's carrying value of financial instruments (cash, accounts
receivable, accounts payable, and other financial instruments) approximates
fair value principally because of the short-term maturities of these
instruments. The fair value of the Company's debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
Under this method, the Company's fair value of debt was not significantly
different than the stated value at December 31, 1997 and February 28, 1998.
Concentration of Risk
During 1996, the Company's three largest customers accounted for 24%, 13%,
and 7%, respectively, of total net revenues. During 1997, the Company's three
largest customers accounted for 21%, 21%, and 13%, respectively, of total net
revenues. During 1998, the Company's three largest customers accounted for 21%,
12%, and 10%, respectively, of total net revenues. The loss of any one of these
customers may have a material effect on the Company's financial position or
results of operations.
3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consisted of the following at December 31,
1997 and February 28, 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Revolving credit facility.............................. $ 10,000 $ 65,000
Revenue equipment obligations.......................... 180,701 173,308
Capital leases......................................... 29,701 28,795
-------- --------
220,402 267,103
Less current portion................................... (58,139) (106,185)
-------- --------
$162,263 $160,918
======== ========
</TABLE>
The Company has a $85,000 revolving credit facility with a bank. Amounts
outstanding under the credit facility bear interest at the prime rate plus
1.75% (10.25% at February 28, 1998). The credit facility is due March 1999 and
is collateralized by accounts receivable, inventory, and certain equipment.
F-40
<PAGE>
GENESIS DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The revenue equipment obligations represent amounts payable to various
financial institutions, repayable in equal monthly installments. The
obligations bear interest at annual rates ranging from 9.25% to 9.66% and
mature at various dates ranging from May 2001 to September 2002. The
obligations are collateralized by certain equipment.
A portion of the Company's equipment was acquired under the terms of capital
leases. The leases provide for equal monthly installments for periods of five
years. The Company is also responsible for maintenance, taxes, and other
related expenses under these leases. The cost of equipment under capital leases
included in the accompanying balance sheets totaled $38,623 at December 31,
1997, and February 28, 1998, respectively. The related accumulated depreciation
at December 31, 1997 and February 28, 1998 was $9,012 and $10,299,
respectively. Minimum future obligations of capital leases in effect at
February 28, 1998 were as follows:
<TABLE>
<S> <C>
1998................................................................ $ 9,417
1999................................................................ 11,300
2000................................................................ 11,300
2001................................................................ 8,475
-------
Total minimum lease payments.................................... 40,492
Less amount representing interest................................... (11,697)
-------
Present value of net minimum lease payments......................... 28,795
Less current portion................................................ (5,008)
-------
Long-term obligations under capital leases.......................... $23,787
=======
</TABLE>
At February 28, 1998, maturities of long-term debt and capital leases were
$106,185 in 1998, $53,758 in 1999, $59,908 in 2000, $39,074 in 2001, and $8,178
in 2002 and thereafter.
4. SHAREHOLDER LOANS
During 1997, the Company entered into an asset purchase agreement with a
shareholder to purchase computer equipment from the shareholder. As
consideration for the purchase of the assets, the Company issued a noninterest-
bearing promissory note to the shareholder, payable in monthly installments of
$1,000 and maturing April 2002. The balance payable on the note at December 31,
1997 and February 28, 1998 was $44,755. The note was repaid on April 1, 1998.
The Company has three promissory notes payable to a shareholder. The notes
are payable in monthly installments ranging from $200 to $300, mature at
various dates from November 2000 to February 2001, and bear interest at a rate
of 7.5%. The aggregate amount payable on the three notes was $38,997 at
December 31, 1997 and February 28, 1998. The notes were repaid on April 1,
1998.
5. SHAREHOLDERS' DEFICIT
In April 1997, the Company issued 500 shares of its common stock to an
employee of the Company. In connection with this issuance, the Company recorded
$21,000 in compensation expense based on the estimated fair value of the
Company's common stock.
F-41
<PAGE>
GENESIS DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office and plant space under
noncancelable operating lease agreements. The leases have varying terms that
expire at various dates through January 2002. Future minimum annual rental
obligations under noncancelable operating leases as of February 28, 1998 are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $153,616
1999.............................................................. 138,850
2000.............................................................. 53,348
2001.............................................................. 49,071
2002.............................................................. 4,089
--------
$398,974
========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1997 and the two
months ended February 28, 1998 was $82,979, $223,793, and $37,724,
respectively.
7. RETIREMENT PLAN
The Company sponsors a defined contribution retirement plan which covers all
employees meeting age and years of service requirements provided in the plan.
The plan allows participants to contribute up to 15% of their pretax earnings.
The Company makes matching contributions equal to 50% of each participant's
contributions up to 5% of his/her salary. The Company's contributions to the
plan were approximately $0, $10,000, and $3,000 in 1996, 1997, and 1998,
respectively.
8. SUBSEQUENT EVENT
On March 6, 1998, the Company entered into an agreement and plan of merger
with M2Direct, Inc. ("M2Direct," formerly named MegaMarketing Corporation).
Under the agreement, the Company was merged with and into a wholly owned
subsidiary of M2Direct, with the subsidiary surviving as a wholly owned
subsidiary of M2Direct. The shareholders received consideration of $1,950,000
and 946,080 shares of M2Direct common stock.
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Aberdeen Marketing Group:
We have audited the accompanying combined balance sheet of THE ABERDEEN
MARKETING GROUP as of December 31, 1997 and the related combined statements of
operations, shareholders' deficit, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Aberdeen Marketing
Group as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 15, 1999
F-43
<PAGE>
THE ABERDEEN MARKETING GROUP
COMBINED BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 62,138
Accounts receivable, less allowance for doubtful accounts of
$107,111........................................................ 463,772
Prepaid expenses and other current assets........................ 31,700
----------
Total current assets........................................... 557,610
PROPERTY AND EQUIPMENT, net........................................ 571,474
OTHER ASSETS....................................................... 9,599
----------
Total assets................................................... $1,138,683
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................. $ 445,521
Borrowings under line of credit.................................. 275,000
Customer advances for postage.................................... 192,305
Current portion of long-term debt................................ 107,557
Other............................................................ 43,171
----------
Total current liabilities...................................... 1,063,554
----------
LONG-TERM DEBT..................................................... 100,902
----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' DEFICIT:
Common stock, Aberdeen Marketing, Inc., $1 par value; 500,000
shares authorized, 256 shares issued and outstanding............ 256
Common stock, ProMail, Inc., no par value; 100,000 shares
authorized, 1,000 shares issued and outstanding................. 421,642
Common stock, GlobalTel, Inc., no par value; 100,000 shares
authorized, 1,000 shares issued and outstanding................. 97,043
Accumulated deficit.............................................. (544,714)
----------
Total shareholders' deficit.................................... (25,773)
----------
Total liabilities and shareholders' deficit.................... $1,138,683
==========
</TABLE>
The accompanying notes are an integral part of this combined balance sheet.
F-44
<PAGE>
THE ABERDEEN MARKETING GROUP
COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
NET REVENUES....................................................... $5,293,719
COSTS OF SALES..................................................... 4,271,587
----------
Gross profit..................................................... 1,022,132
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 1,286,916
----------
OPERATING LOSS..................................................... (264,784)
OTHER INCOME (EXPENSE):
Other income..................................................... 47,895
Interest expense................................................. (51,384)
----------
Net loss....................................................... $ (268,273)
==========
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-45
<PAGE>
THE ABERDEEN MARKETING GROUP
COMBINED STATEMENT OF SHAREHOLDERS' DEFICIT
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------
Aberdeen
Marketing, Inc. ProMail, Inc. GlobalTel, Inc. Additional
------------------ ----------------- ----------------- Paid-In Accumulated Treasury
Shares Amount Shares Amount Shares Amount Capital Deficit Stock Total
------- ------ ------ --------- ------- -------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1996.... 800 $ 800 2,000 $ 552,183 2,000 $98,043 $ 1,408 $(390,284) $(369,650) $(107,500)
Issuance of
common stock........ 56 56 0 0 0 0 99,944 0 0 100,000
Retirement of
treasury stock...... (600) (600) (1,000) (130,541) (1,000) (1,000) (101,352) (136,157) 369,650 0
Forgiveness of note
due to related party
(Note 5)............ 0 0 0 0 0 0 0 250,000 0 250,000
Net loss............. 0 0 0 0 0 0 0 (268,273) 0 (268,273)
---- ----- ------ --------- ------- -------- --------- --------- --------- ---------
BALANCE,
December 31, 1997.... 256 $ 256 1,000 $ 421,642 1,000 $97,043 $ 0 $(544,714) $ 0 $ (25,773)
==== ===== ====== ========= ======= ======== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-46
<PAGE>
THE ABERDEEN MARKETING GROUP
COMBINED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $(268,273)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 149,053
Changes in operating assets and liabilities:
Accounts receivable........................................... 291,873
Prepaid expenses and other current assets..................... (25,254)
Deposit....................................................... 1,877
Accounts payable.............................................. 1,908
Customer deposits............................................. 30,834
Accrued liabilities........................................... (69,062)
---------
Net cash provided by operating activities................... 112,956
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (117,234)
Software development costs........................................ (188,138)
---------
Net cash used in investing activities....................... (305,372)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit............................... 59,095
Proceeds from issuance of notes payable........................... 249,348
Principal payments on notes payable............................... (215,714)
Proceeds from issuance of common stock............................ 100,000
---------
Net cash provided by financing activities................... 192,729
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 313
CASH AND CASH EQUIVALENTS, beginning of year........................ 61,825
---------
CASH AND CASH EQUIVALENTS, end of year.............................. $ 62,138
---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION :
Cash paid for interest............................................ $ 58,063
=========
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-47
<PAGE>
THE ABERDEEN MARKETING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF BUSINESS
Aberdeen Marketing, Inc. ("Aberdeen"), ProMail, Inc. ("ProMail"), and
GlobalTel, Inc. ("GlobalTel") (collectively referred to as "The Aberdeen
Marketing Group" or the "Group") provide specialized marketing programs to
businesses in various industries, primarily located in the metropolitan
Atlanta, Georgia, area. These programs include the creation and production of
"turn-key" marketing campaigns, teleservices, mailings, fulfillment, and other
services related to the marketing of products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of Aberdeen, ProMail,
and GlobalTel which are under common majority ownership. All significant
intercompany accounts and transactions have been eliminated in the combination.
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expense during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Group considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash is held in demand
accounts at financial institutions and cash balances may exceed the federally
insured amounts.
Property and Equipment
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment..................................... Five years
Office furniture....................................... Seven years
Machinery and equipment................................ Five to seven years
Software and software development...................... Three to five years
</TABLE>
Leasehold improvements are amortized over the lesser of the remaining lease
terms or the useful lives of the improvements using the straight-line method.
Software Development Costs
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") No. 981, "Accounting for the Costs of Computer Software
Developed or Obtained for
F-48
<PAGE>
THE ABERDEEN MARKETING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Internal Use." SOP No. 981 requires that certain costs attributable to
computer software developed or obtained for internal use be capitalized and
amortized on a straightline basis over the software's useful life. The Group
retroactively adopted SOP No. 981 effective January 1, 1997. During 1997,
$188,138 in software development costs were capitalized and are reflected in
the accompanying combined balance sheet as property and equipment (Note 2).
Amortization is computed using the straight-line method over the five-year
estimated useful life of the software. Amortization expense for 1997 was
$37,628.
Recognition of Revenue
Revenue from marketing services is recognized when the services have been
completed and accepted by the customer. Revenue from mailing and fulfillment
services and teleservices is recognized as the services are provided.
Accounts Receivable
The Group provides an allowance for doubtful accounts for the estimated
losses that will be incurred in collection of receivables. A summary of
changes in the allowance for doubtful accounts is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1996....................................... $ 80,000
Provision........................................................ 29,461
Write-offs....................................................... (2,350)
--------
Balance, December 31, 1997....................................... $107,111
========
</TABLE>
Income Taxes
Aberdeen, ProMail, and GlobalTel have each elected under the Internal
Revenue Code to be taxed as S corporations. Accordingly, no provision or
benefit for federal and state income taxes is necessary since income, losses,
and tax credits are reported on the shareholders' individual income tax
returns.
Concentration of Risk
During 1997, the Group's largest customer accounted for 19% of total net
revenues. The loss of this customer may have a material adverse effect on the
Group's financial position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Computer equipment.............................................. $ 413,278
Office furniture................................................ 104,928
Machinery and equipment......................................... 90,497
Software and software development............................... 227,690
Leasehold improvements.......................................... 36,285
---------
872,678
Less accumulated depreciation and amortization.................. (301,204)
---------
$ 571,474
=========
</TABLE>
Depreciation and amortization expense for the year ended December 31, 1997
was $149,053.
F-49
<PAGE>
THE ABERDEEN MARKETING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
4. LONG-TERM DEBT
Long-term debt at December 31, 1997, consisted of the following:
<TABLE>
<S> <C>
Note payable to a financial institution; interest at 8.9%,
payable in monthly principal and interest installments of
$4,898; secured by Aberdeen's accounts receivable and equipment
and the personal guarantee of one of the shareholders of
Aberdeen; matures April 2000................................... $123,123
Note payable to a financial institution; interest at 9.08%,
payable in monthly principal and interest installments of
$3,182; secured by Aberdeen's accounts receivable and equipment
and the personal guarantee of one of the shareholders of
Aberdeen; matures October 1999................................. 61,576
Note payable to a shareholder of Aberdeen; interest at 8.65%,
payable in monthly principal and interest installments of
$2,798; matures September 1998................................. 23,760
--------
208,459
Less current portion............................................ (107,557)
--------
$100,902
========
</TABLE>
The note payable with $61,576 outstanding as of December 31, 1997, requires
Aberdeen to adhere to certain financial covenants, with which Aberdeen was not
in compliance at December 31, 1997. Aberdeen has obtained a waiver from the
financial institution regarding such noncompliance.
At December 31, 1997, aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998.............................................................. $107,557
1999.............................................................. 82,034
2000.............................................................. 18,868
--------
$208,459
========
</TABLE>
Line of Credit
During 1997, Aberdeen renewed a $350,000 line-of-credit agreement through
June 1998 with a financial institution to provide working capital. Borrowings
outstanding under the line of credit totaled $275,000 at December 31, 1997.
Outstanding borrowings under the line of credit bear interest at prime plus 1%
(totaling 9.5% at December 31, 1997) and are limited to 75% of Aberdeen's prior
month's outstanding qualified accounts receivable (as defined) and are secured
by Aberdeen's accounts receivable and equipment, the unconditional guarantee of
a shareholder of Aberdeen and the limited guarantee of a second shareholder of
Aberdeen. At December 31, 1997, $75,000 was available for borrowing under this
agreement. The line of credit agreement requires Aberdeen to adhere to certain
covenants and contains cross default provisions with respect to note payable
agreements with the same financial institution. At December 31, 1997, Aberdeen
was not in compliance with reporting covenants under both the line of credit
and the note payable agreements and was not in compliance with certain
financial covenants under one of the note payable agreements. Aberdeen has
obtained a waiver from the lender regarding such noncompliance.
F-50
<PAGE>
THE ABERDEEN MARKETING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. SHAREHOLDERS' DEFICIT
During 1996, Aberdeen, ProMail, and GlobalTel each purchased a former
shareholder's ownership interest in each of the companies. In connection with
this purchase, each of the individual entities of the Group issued notes
payable to the former shareholder totaling $250,000. During 1997, the Group
filed an action against the former shareholder alleging a breach in the
noncompete agreement entered into as part of the stock purchase. The action
went to arbitration and in January 1998 the arbitrator ruled in favor of the
Group. Under the arbitrator's ruling, the Group's notes payable to the former
shareholder have been extinguished, each of the individual entities of the
Group will retain ownership in the former shareholder's shares of stock and the
Group has no future obligations to the former stockholder. The forgiveness of
the $250,000 note payable has been recorded as a capital contribution in the
accompanying statement of shareholders' deficit.
Effective December 31, 1997, each of the individual entities of the Group
retired all shares of common stock held by the respective entities as treasury
stock.
6. RETIREMENT PLAN
Aberdeen has established an employee retirement plan under Section 401(k) of
the Internal Revenue Code of 1986. Eligible employees (as defined) may elect to
defer from 2% to 15% of compensation each year up to a maximum of $7,000 as
employee contributions to the plan. Employer matching contributions may be made
in a percentage determined by the employer each year. Employee contributions
are 100% vested. Employer matching contributions are vested over a period of
six years. No employer matching contributions were made in 1997.
7. COMMITMENTS AND CONTINGENCIES
From time to time, the Group is involved in various proceedings and
litigation arising in the ordinary course of business. While any proceeding or
litigation has an element of uncertainty, the Group believes the outcome of any
lawsuit or claim that is pending or threatened, or all of them combined, will
not have a material adverse effect on its combined financial position or
results of operations.
The Group leases certain office and warehouse facilities and equipment under
noncancelable agreements accounted for as operating leases. These operating
lease terms expire from January 31, 1998 through February 28, 2003. Future
minimum lease payments at December 31, 1997, were as follows:
<TABLE>
<S> <C>
1998.............................................................. $188,180
1999.............................................................. 98,492
2000.............................................................. 61,202
2001.............................................................. 26,304
2002.............................................................. 26,304
Thereafter........................................................ 4,384
--------
$404,866
========
</TABLE>
Total rent expense incurred under all operating leases was approximately
$270,000 in 1997.
F-51
<PAGE>
THE ABERDEEN MARKETING GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
8. SUBSEQUENT EVENT
On June 19, 1998, the Group entered into an asset purchase agreement with
M2Direct, Inc. ("M2Direct," formerly named MegaMarketing Corporation). Under
this agreement, a wholly owned subsidiary of M2Direct acquired substantially
all of the assets of the Group for a maximum of 719,425 shares. Per the terms
of the asset purchase agreement, the ultimate number of shares may be reduced
based upon adjusted EBITDA, as defined. The Group's shareholders received
239,808 shares of M2Direct common stock as the target results were not
achieved.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UST, Inc.:
We have audited the accompanying balance sheets of UST, INC. (a Georgia
corporation) as of December 31, 1997 and 1998 and the related statements of
operations, shareholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UST, Inc. as of December
31, 1997 and 1998 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 30, 1999
F-53
<PAGE>
UST, INC.
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash................................................. $ 32,957 $ 25,922
Accounts receivable, net of allowance for doubtful
accounts of $33,313 and $50,000 at December 31, 1997
and 1998, respectively.............................. 632,942 977,382
Receivable from shareholder.......................... 41,785 0
Prepaid expenses..................................... 1,271 82,139
---------- ----------
Total current assets............................... 708,955 1,085,443
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment............................................ 386,980 692,417
Furniture and fixtures............................... 82,172 130,036
Leasehold improvements............................... 14,820 44,569
---------- ----------
483,972 867,022
Less accumulated depreciation........................ (189,694) (309,119)
---------- ----------
294,278 557,903
---------- ----------
OTHER ASSETS........................................... 0 15,729
---------- ----------
Total assets....................................... $1,003,233 $1,659,075
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 32,609 $ 67,556
Bank line of credit.................................. 370,000 473,500
Accounts payable..................................... 73,763 313,960
Accrued liabilities.................................. 101,285 0
Accrued payroll taxes................................ 34,299 25,258
Deferred revenue..................................... 27,535 558,945
---------- ----------
Total current liabilities.......................... 639,491 1,439,219
---------- ----------
LONG-TERM DEBT, less current maturities (Note 3)....... 75,551 74,797
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, authorized 1,000,000 shares of no par
value Class A (voting) stock and 1,000,000 Class B
(nonvoting) stock; 100,000 shares Class A stock
issued and outstanding in 1997 and 1998............. 26,400 26,400
Retained earnings.................................... 261,791 118,659
---------- ----------
Total shareholders' equity......................... 288,191 145,059
---------- ----------
Total liabilities and shareholders' equity......... $1,003,233 $1,659,075
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-54
<PAGE>
UST, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
NET REVENUES............................................ $4,219,676 $5,707,394
COSTS OF SALES.......................................... 1,469,055 2,241,235
---------- ----------
Gross profit........................................ 2,750,621 3,466,159
SELLING, GENERAL AND ADMINISTRATIVE..................... 2,614,417 3,160,543
---------- ----------
OPERATING INCOME........................................ 136,204 305,616
---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense...................................... (26,171) (29,977)
Gain on disposal of fixed assets...................... 100 0
---------- ----------
Total other (expense)............................... (26,071) (29,977)
---------- ----------
NET INCOME.............................................. $ 110,133 $ 275,639
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-55
<PAGE>
UST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock
--------------- Retained
Shares Amount Earnings Total
------- ------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996................ 100,000 $26,400 $ 151,658 $ 178,058
Net income for the year................. 0 0 110,133 110,133
------- ------- --------- ---------
BALANCE, December 31, 1997................ 100,000 26,400 261,791 288,191
Shareholder distributions............... 0 0 (418,771) (418,771)
Net income for the year................. 0 0 275,639 275,639
------- ------- --------- ---------
BALANCE, December 31, 1998................ 100,000 $26,400 $ 118,659 $ 145,059
======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
UST, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income............................................. $ 110,133 $ 275,639
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 47,214 119,426
Gain on disposal of fixed assets..................... (100) 0
Changes in operating assets and liabilities:
Accounts receivable................................ 93,859 (302,655)
Prepaid expenses................................... (1,271) (80,868)
Other assets....................................... 7,356 (15,729)
Accounts payable................................... (142,246) 240,197
Accrued liabilities................................ (79,678) (110,326)
Deferred revenue................................... (27,465) 531,410
--------- ---------
Total adjustments................................ 102,331 381,455
--------- ---------
Net cash provided by operating activities........ 7,802 657,094
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets............................... (239,498) (383,050)
Proceeds from sale of fixed assets..................... 30,219 0
--------- ---------
Net cash used in investing activities............ (209,279) (383,050)
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from bank line of credit...................... 520,000 848,500
Principal payments on bank line of credit.............. (400,000) (745,000)
Proceeds from issuance of long-term debt............... 115,670 80,000
Principal payments on long-term debt................... (23,836) (45,808)
Distributions to shareholders.......................... 0 (418,771)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 211,834 (281,079)
--------- ---------
NET INCREASE IN (DECREASE IN) CASH....................... 10,357 (7,035)
CASH AT BEGINNING OF YEAR................................ 22,600 32,957
--------- ---------
CASH AT END OF YEAR...................................... $ 32,957 $ 25,922
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 23,370 $ 29,977
========= =========
</TABLE>
The accompanying notes are integral part of these statements.
F-57
<PAGE>
UST, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
1. DESCRIPTION OF BUSINESS
UST, Inc. (the "Company"), located in Norcross, Georgia, provides business-
to-business teleservices and sales and marketing consulting services for
technology companies nationwide. The majority of the Company's clients are
Fortune 500 companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. When assets are retired or
otherwise disposed of, the related costs and accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income. Expenditures for repairs and maintenance not considered to
substantially lengthen asset lives are expensed as incurred.
For financial reporting purposes, the Company utilizes the straight-line
method of depreciation over the following useful lives of the assets:
<TABLE>
<S> <C>
Furniture and fixtures.................................... 3 to 7 years
Equipment................................................. 5 to 10 years
</TABLE>
Leasehold improvements are depreciated over the shorter of the useful lives
of the assets or the lease term.
Income Taxes
The Company, with the consent of its shareholders, has elected, under the
Internal Revenue Code, to be taxed as an S corporation. As a result of the S
corporation election, the Company does not incur income tax liabilities or
receive tax benefits from its income, loss, or credits (except in special
situations) but rather passes through the income, loss, or credits to be
reported on the individual income tax returns of the Company's shareholders.
Revenue Recognition and Deferred Revenue
Revenues are recognized as services are performed. Deferred revenue
represents amounts billed to customers before the services have been completed.
F-58
<PAGE>
UST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial Instruments
The Company's carrying value of financial instruments (cash, accounts
receivable, accounts payable, and other financial instruments) approximates
fair value principally because of the short-term maturities of these
instruments. The fair value of the Company's debt is estimated based on the
current rates offered to the Company for debt of similar terms and maturities.
Under this method, the Company's fair value of debt was not significantly
different than the stated value at December 31, 1997 and 1998.
Concentrations of Risk
For the year ended December 31, 1998 the Company's two largest customers
accounted for 30% and 13%, respectively, of net revenues. During 1997, the
Company's two largest customers accounted for 29% and 12%, respectively, of net
revenues. The loss of either one of these customers may have a material adverse
effect on the Company's financial position or results of operations.
3. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note payable to bank, collateralized by transportation
equipment, payable in monthly installments of $1,235,
including interest at 8.83%, due December 2000........... $ 38,796 $ 27,312
Note payable to bank, collateralized by equipment, payable
in monthly installments of $650, including interest at
10%, due April 2001...................................... 22,232 16,959
Note payable to bank, collateralized by transportation
equipment, payable in monthly installments of $943,
including interest at 7.9%, due September 2000........... 28,605 18,420
Note payable to bank, collateralized by equipment, payable
in monthly installments of $2,563, including interest at
9.5%, due May 2001....................................... 0 65,970
Note payable to bank, collateralized by transportation
equipment, payable in monthly installments of $526,
including interest at 8.95%, due May 2001................ 18,527 13,692
-------- --------
108,160 142,353
Less current maturities................................... (32,609) (67,556)
-------- --------
$ 75,551 $ 74,797
======== ========
</TABLE>
The following are maturities of long-term debt for each of the five years
subsequent to December 31, 1998:
<TABLE>
<S> <C>
1999............................................................. $ 67,556
2000............................................................. 65,193
2001............................................................. 9,604
2002............................................................. 0
2003............................................................. 0
--------
$142,353
========
</TABLE>
Line of Credit
The outstanding balance of the 9.5% bank line of credit was $370,000 and
$473,500 at December 31, 1997 and 1998, respectively. The note is
collateralized by accounts receivable.
F-59
<PAGE>
UST, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. RELATED PARTY TRANSACTION
The Company had a receivable outstanding in the amount of $41,785 and $0
from a shareholder at December 31, 1997 and 1998, respectively.
5. SHAREHOLDERS' EQUITY
On January 9, 1998, the Board of Directors declared a stock split on the
Company's Class "A" common stock. The stock split was effected in the form of a
stock dividend of 250 shares of common stock issued for each share of common
stock held by shareholder of record on January 9, 1998. The effect of the stock
split has been retroactively reflected in the statements of shareholders'
equity as of December 31, 1996.
6. COMMITMENTS AND CONTINGENCIES
The Company has certain noncancelable operating leases for equipment and
office space. Rental expenses under noncancelable operating leases was $185,737
and $268,580 for the years ended December 1997 and 1998. Future minimum lease
payments as of December 31, 1998 were as follows:
<TABLE>
<S> <C>
Fiscal year ending:
1999........................................................... $260,509
2000........................................................... 143,614
2001........................................................... 87,504
2002........................................................... 87,504
2003........................................................... 87,504
Thereafter..................................................... 0
--------
$666,635
========
</TABLE>
7. RETIREMENT PLAN
Employees are eligible to participate in the Company's 401(k) profit sharing
retirement plan after completing one year of service. Eligible employees have
the option to contribute up to 15% of their gross compensation, not to exceed
the legal maximum contribution. The Company matches 25% of employee
contributions, up to 6% of gross compensation. The Company contributed $16,572
and $9,089 to the retirement plan for the years ended December 31, 1997 and
1998, respectively.
8. SUBSEQUENT EVENT
On February 3, 1999, the Company entered into an agreement and plan of
merger with M2Direct, Inc. ("M2Direct," formerly named MegaMarketing
Corporation). Under the agreement, a wholly owned subsidiary of M2Direct was
merged with and into the Company, with the Company surviving as a wholly owned
subsidiary of M2Direct. The shareholders received consideration of $3,875,000
in cash and 149,880 shares of M2Direct common stock, of which 119,904 shares
have been placed in escrow to be delivered if specified 1999 adjusted EBITDA
targets are achieved.
F-60
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated balance sheet as
of December 31, 1998 gives effect to the acquisition of UST as if the purchase
had occurred on that date. The unaudited pro forma condensed consolidated
statement of operations gives effect to the acquisitions of Control Group,
Genesis Direct, Aberdeen Marketing and UST as if they had occurred on January
1, 1998. Because we accounted for the acquisition of DeskGate as a pooling of
interests, DeskGate's historical financial results are combined with
M2Direct's. The related pro forma adjustments are described in the accompanying
notes. The pro forma adjustments are based upon available information and
certain assumptions that management believes are reasonable. The pro forma
financial statements do not purport to represent what our results of operations
or financial condition would actually have been had our acquisitions in fact
occurred on the assumed dates. Nor do they purport to project our results of
operations or financial condition for any future period or date. It is
important that you read this pro forma financial statement along with our
historical financial statements and those of Control Group, Genesis Direct,
Aberdeen Marketing and UST included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have accounted for our acquisitions of Control Group, Genesis Direct,
Aberdeen Marketing and UST under the purchase method of accounting. The total
purchase price for such acquisitions has been allocated to the tangible and
identifiable intangible assets and liabilities of the acquired businesses based
on our preliminary estimates of their fair value with the remainder allocated
to goodwill. The allocation of purchase price for such acquisitions is subject
to revision when we obtain additional information concerning asset and
liability valuations.
F-61
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
M2Direct M2Direct
Historical UST Pro Forma Pro Forma
Consolidated Historical Adjustments Consolidated
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents............. $ 619,009 $ 25,922 $(3,875,000) $ 1,119,931
4,350,000
Accounts receivable,
net..................... 5,860,419 977,382 0 6,837,801
Deferred tax assets...... 16,991 0 0 16,991
Prepaid expenses and
other current assets.... 949,980 82,139 0 1,032,119
------------ ---------- ----------- ------------
Total current assets... 7,446,399 1,085,443 475,000 9,006,842
PROPERTY AND EQUIPMENT,
net....................... 1,295,615 557,903 0 1,853,518
OTHER ASSETS............... 376,152 15,729 100,000 491,881
GOODWILL AND OTHER
INTANGIBLES, net.......... 11,450,024 0 3,904,941 15,354,965
------------ ---------- ----------- ------------
TOTAL ASSETS........... $ 20,568,190 $1,659,075 $ 4,479,941 $ 26,707,206
============ ========== =========== ============
CURRENT LIABILITIES:
Accounts payable......... $ 4,201,661 $ 313,960 $ 0 $ 4,515,621
Accrued expenses and
other current
liabilities............. 4,695,038 584,203 0 5,279,241
Current position of long-
term debt............... 942,212 541,056 0 1,483,268
------------ ---------- ----------- ------------
Total current
liabilities........... 9,838,911 1,439,219 0 11,278,130
------------ ---------- ----------- ------------
LONG-TERM DEBT, less
current portion........... 3,235,948 74,797 3,975,000 7,285,745
------------ ---------- ----------- ------------
WARRANT WITH REDEMPTION
FEATURE................... 2,423,451 0 500,000 2,923,451
------------ ---------- ----------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock.......... 2,353,899 0 0 2,353,899
Common stock............. 12,890,874 26,400 125,000 13,015,874
(26,400)
Warrants outstanding..... 501,445 0 25,000 526,445
Accumulated earnings
(deficit)............... (10,676,338) 118,659 (118,659) (10,676,338)
------------ ---------- ----------- ------------
Total shareholders'
equity................ 5,069,880 145,059 4,941 5,219,880
------------ ---------- ----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.. $ 20,568,190 $1,659,075 $ 4,479,941 $ 26,707,206
============ ========== =========== ============
</TABLE>
F-62
<PAGE>
The pro forma condensed consolidated balance sheet reflects the acquisition
of UST as if it had occurred on December 31, 1998 as follows (the UST
acquisition occurred in February 1999; actual amounts will differ from amounts
estimated below):
(a) The acquisition will be accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations."
The purchase price is being allocated first to the tangible and
identifiable intangible assets and liabilities of UST based upon
preliminary estimates of their fair market values, with the remainder
allocated to goodwill. The total purchase price is as follows:
<TABLE>
<S> <C>
Cash paid to seller........................................... $3,875,000
Fair market value of M2Direct's common stock paid to seller
at closing date.............................................. 125,000
Acquisition expenses.......................................... 50,000
Book value of net assets acquired............................. (145,059)
----------
Increase in basis............................................. $3,904,941
==========
Estimated allocation of increase in basis:
Increase in goodwill........................................ $3,904,941
==========
</TABLE>
(b) Reflects net proceeds from the debt incurred with the acquisition as
follows (see footnote (d)):
<TABLE>
<S> <C>
Issuance of the $2,000,000 note to Sirrom and the $2,500,000 note to
Citizens Bank................................................................. $4,500,000
Acquisition expenses........................................................... (50,000)
Debt issuance costs............................................................ (100,000)
----------
$4,350,000
==========
</TABLE>
(c) Reflects the deferred debt issuance costs related to the Sirrom note
and the Citizens Bank note.
(d) Reflects the net adjustment to long-term debt as follows:
<TABLE>
<S> <C>
Issuance of the Sirrom and Citizens Bank note............... $4,500,000
Fair market value of warrant with redemption feature issued
to Sirrom.................................................. (500,000)
Fair market value of warrant issued to Citizens Bank........ (25,000)
----------
Net adjustment to long-term debt............................ $3,975,000
==========
</TABLE>
(e) Reflects the fair market value of warrant with redemption feature
issued with the Sirrom note.
(f) Reflects the elimination of UST equity balances.
(g) Reflects the fair market value of warrant issued with the Citizens
Bank note.
F-63
<PAGE>
1998 Unaudited Pro Forma Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
Two Months Two Months Six Months
Year Ended Ended Ended Ended Year Ended
December 31 February 28 February 28 June 30 Year Ended December 31 December 31
------------ ----------- ----------- ----------- ------------------------ -------------
Control Genesis Aberdeen Acquisition
M2Direct Group Direct Marketing UST Adjustments Pro Forma
------------ ----------- ----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 25,925,793 $ 1,325,138 $ 575,156 $ 1,306,049 $ 5,707,394 $ 0 $ 34,839,530
Costs of services....... 21,076,437 2,433,288 330,255 1,235,840 2,241,235 0 27,317,055
------------ ----------- --------- ----------- ----------- ------------ -------------
Gross profit............ 4,849,356 (1,108,150) 244,901 70,209 3,466,159 0 7,522,475
Selling, general and
administrative
expenses............... 6,056,706 478,089 230,341 398,189 3,041,117 0 10,204,442
Depreciation and
amortization........... 1,794,663 12,948 12,069 112,390 119,426 528,934(a) 2,580,430
Stock compensation
expense................ 3,806,754 0 0 0 0 0 3,806,754
Research and development
expense................ 324,427 0 0 0 0 0 324,427
------------ ----------- --------- ----------- ----------- ------------ -------------
Operating income
(loss)................. (7,133,194) (1,599,187) 2,491 (440,370) 305,616 (528,934) (9,393,578)
Interest expense, net... 659,580 3,457 3,976 24,969 29,977 639,500(b) 1,361,459
Other income............ (31,494) (112) (42) (361) 0 0 (32,009)
------------ ----------- --------- ----------- ----------- ------------ -------------
Income (loss) before
income taxes........... (7,761,280) (1,602,532) (1,443) (464,978) 275,639 (1,168,434) (10,723,028)
Provision (benefit) for
income taxes........... 0 (643,341) 0 0 0 643,341(c) 0
------------ ----------- --------- ----------- ----------- ------------ -------------
Net income (loss)....... $ (7,761,280) $ (959,191) $ (1,443) $ (464,978) $ 275,639 $ (1,811,775) $ (10,723,028)
============ =========== ========= =========== =========== ============ =============
</TABLE>
Discussion of acquisition adjustments:
(a) This adjustment to depreciation and amortization includes the following:
<TABLE>
<S> <C>
(1) two months of additional goodwill amortization, based on $4.2
million of goodwill amortized over an estimated useful life of
20 years, related to our purchase of Genesis Direct.............. $ 35,397
(2) two months of additional goodwill amortization, based on $5.9
million of goodwill amortized over a useful life of 20 years,
and two months of intangibles amortization, based on $1.2
million of intangibles amortized over an estimated useful life
of one year, related to our purchase of Control Group............ 260,427
(3) six months of additional goodwill amortization, based on $1.5
million of goodwill amortized over an estimated useful life of
20 years, related to our purchase of Aberdeen Marketing.......... 37,863
(4) twelve months of additional goodwill amortization, based on $3.9
million of goodwill amortized over an estimated useful life of
20 years, related to our acquisition of UST...................... 195,247
---------
$ 528,934
=========
(b) This adjustment to interest expense, net includes the following:
(1) two months of additional interest expense associated with $3.0
million we borrowed from Sirrom at an interest rate of 14% to
purchase Control Group and Genesis Direct........................ $ 70,000
(2) interest associated with $4.5 million we borrowed to purchase
UST, as follows:
. interest expense associated with $2.0 million we borrowed from
Sirrom at an interest rate of 14%................................ 280,000
. interest expense associated with $2.5 million we borrowed from
Citizens Bank at an interest rate of prime plus 0.25%............ 200,000
(3) additional debt discount amortization associated with the Sirrom
loans and the Citizens Bank loan................................. 89,500
---------
$ 639,500
=========
</TABLE>
(c) This adjustment to provision (benefit) for income taxes reflects a
valuation allowance related to the historical tax benefit recorded by
Control Group for the two month period ended February 28, 1998.
F-64
<PAGE>
M2Direct, Inc.
[LOGO]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
1998 Unaudited Pro Forma Condensed Consolidated Statement of Operations.. 19
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 34
Management............................................................... 49
Certain Transactions..................................................... 55
Principal and Selling Shareholders....................................... 58
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Where You Can Find More Information...................................... 66
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information in this prospectus may be accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus
or of any sale of our common stock.
Until , 1999, all dealers that buy, sell or trade our common stock,
whether or not these dealers are participating in this offering, may be
required to deliver a prospectus. This requirement is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table lists the expenses of the offering described in the
registration statement. With respect to shares sold by the selling shareholder,
M2Direct will bear all expenses other than the underwriting discounts. All
amounts are estimates except the SEC registration fee and the NASD fees:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $12,510
Nasdaq Fees...................................................... *
Blue Sky Fees and Expenses....................................... *
NASD Fees........................................................ $ 5,000
Printing and Engraving Expenses.................................. *
Legal Fees and Expenses.......................................... *
Accounting Fees and Expenses..................................... *
Transfer Agent Fees.............................................. *
Miscellaneous Expenses........................................... *
-------
Total.......................................................... $
=======
</TABLE>
- --------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
The Georgia Business Corporation Code permits a corporation to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, except a corporation cannot eliminate or limit the liability of a
director for:
. an appropriation, in violation of his duties, of any business opportunity
of the corporation;
. acts or omissions which involve intentional misconduct or a knowing
violation of law;
. unlawful corporate distributions; or
. any transaction from which the director received an improper personal
benefit.
This provision relates only to breaches of duty by directors in their
capacity as directors, and not in any other corporate capacity, such as
officers. It limits liability only for breaches of fiduciary duties under the
Georgia Code, and not for violation of other laws, such as the federal
securities laws. Our articles of incorporation exonerate our directors from
monetary liability to the extent described above.
In addition to the rights provided by law, our bylaws provide broad
indemnification rights to our directors and the officers, employees and agents
as the directors may select, with respect to various civil and criminal
liabilities and losses that may be incurred by the director, officer, agent or
employee in any pending or threatened litigation or other proceedings. This
indemnification does not apply in the same situations described above with
respect to the exculpation from liability of our directors. We are also
obligated to reimburse directors and other parties for expenses, including
legal fees, court costs and expert witness fees, incurred by those persons in
defending against any of these liabilities and losses, as long as the person in
good faith believes that he or she complied with the
II-1
<PAGE>
applicable standard of conduct with respect to the underlying accusations
giving rise to the liabilities or losses and agrees to repay to us any advances
made under the bylaws. Any amendment or other modification to the bylaws which
limits or otherwise adversely affects the rights to indemnification currently
provided in the bylaws shall apply only to proceedings based upon actions and
events occurring after the amendment and delivery of notice of it to the
indemnified parties.
We have entered into separate indemnification agreements with each of our
directors and some of our officers. We have agreed, among other things, to
provide for indemnification and advancement of expenses in a manner and under
terms and conditions similar to those stated in the bylaws. Our shareholders
cannot void these agreements. In addition, we hold an insurance policy covering
directors and officers under which the insurer agrees to pay, subject to
certain exclusions, for any claim made against our directors and officers for a
wrongful act that they may become legally obligated to pay or for which we are
required to indemnify the directors or officers.
Item 15. Recent Sales of Unregistered Securities.
The share numbers presented below are provided with respect to the shares of
common stock and Series A convertible preferred stock and reflect the
recapitalization of the Series A preferred stock into common stock, which will
occur upon the completion of the offering.
In January 1998, we sold an aggregate of 1,342,176 shares of common stock to
the six founders of M2Direct for $0.06 per share, or an aggregate offering
price of $80,000.
In March 1998, we issued and sold an aggregate of 1,635,024 shares of common
stock to the six founders of M2Direct and an additional four investors for
$0.56 per share, or an aggregate offering price of $920,000.
In March 1998, we borrowed $3 million from Sirrom Investments, Inc. As part
of this loan transaction, we issued to Sirrom warrants to purchase 260,192
shares of common stock at a purchase price of $0.01 per share.
In March 1998, we issued 2,076,720 shares of common stock to two
shareholders of Control Group, Ltd. under an agreement and plan of merger with
Control Group.
In March 1998, we issued 946,080 shares of common stock and cash
consideration to three shareholders of Genesis Direct, Inc. under an agreement
and plan of merger with Genesis Direct.
In June 1998, we issued 719,425 shares of common stock to the two
shareholders of Aberdeen Marketing, Inc. in exchange for substantially all of
its assets.
From June to December 1998, we sold investment units consisting of (a)
141,120 shares of Series A preferred stock and (b) warrants to purchase 564,480
shares of common stock at $4.17 per share. We sold the units to 25 accredited
investors at $2.17 per unit.
In February 1999, we borrowed $2.0 million from Sirrom Investments, Inc. to
finance the purchase of UST, Inc. As part of this loan transaction, we issued
to Sirrom warrants to purchase 157,207 shares of common stock at a purchase
price of $0.01 per share.
II-2
<PAGE>
In February 1999, we borrowed $2.5 million from Citizens Bank, Vienna,
Georgia. As part of this loan transaction, we issued to the holding company of
Citizens Bank warrants to purchase 25,000 shares of common stock at $4.17 per
share.
In February 1999, under an agreement and plan of merger with UST, Inc., we
issued 149,880 shares of common stock to its shareholders.
In March 1999, we issued 2,493,609 shares of common stock in exchange for
all of the outstanding shares of common stock of DeskGate Technologies, Inc.
under an agreement and plan of merger. We also issued warrants to purchase
673,781 shares of our common stock at an exercise price of $2.28 per share in
exchange for the cancellation of warrants to purchase DeskGate common stock.
In 1998, we issued options to purchase 685,000 shares of our common stock to
our employees and directors. In 1999, we issued options to purchase 200,000
shares of our common stock to our employees.
We issued the securities described above in reliance on one or more of the
exemptions from registration provided by Sections 3(a)(11), 4(2) and 4(6) of
the Securities Act, Regulation D and Rule 701 promulgated by the SEC under the
Securities Act. Recipients of securities in these transactions represented
their intention to acquire the securities for investment purposes only and not
with a view to or for the sale in connection with any distribution of those
securities, and we affixed appropriate legends to the share certificates issued
in those transactions. All recipients of these securities had adequate access,
through their relationships with us or otherwise, to information about us.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger by and among MegaMarketing Corporation,
MegaMarketing Acquisition One, Inc., Control Group Ltd. and the
shareholders of Control Group Ltd. dated as of March 6, 1998.
2.2 Agreement and Plan of Merger by and among MegaMarketing Corporation,
MegaMarketing Acquisition Two, Inc., Genesis Direct, Inc. and the
shareholders of Genesis Direct, Inc. dated March 6, 1998.
2.3 Asset Purchase Agreement by and among MegaMarketing Corporation,
MegaMarketing Acquisition Three, Inc., Promail, Inc., GlobalTel, Inc.
and the Shareholders of Aberdeen Marketing, Inc. dated as of June 19,
1998.
2.4 Agreement and Plan of Merger by and among MegaMarketing Corporation,
MegaMarketing Acquisition Four, Inc., UST, Inc. and Thomas A. DePrizio
and James Burgdorf dated as of January 31, 1999
2.5 Agreement and Plan of Merger by and among MegaMarketing Corporation,
MegaMarketing Acquisition Five, Inc., DeskGate Technologies, Inc. and
the Stockholders of DeskGate Technologies, Inc. dated as of February
3, 1999.
3.1 Amended and Restated Articles of Incorporation of M2Direct, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.2 Bylaws of M2Direct.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Articles of Incorporation and the M2Direct, Inc. Bylaws defining the
rights of the holders of common stock of M2Direct, Inc.
4.2* Specimen common stock certificate.
5.1* Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
10.1 Agreement by and between Applications Unlimited, Inc., Control Group,
Ltd. and Masterpiece Consulting Corporation dated as of July 15, 1997.
10.2 Agreement by and between Control Group Ltd. and The Provident Bank
dated as of June 30, 1997.
10.3** Agreement regarding Flights IV and V dated as of April 16, 1999 by and
between M2Direct, Inc. and Control Group, Ltd. and The Provident Bank.
10.4** Agreement regarding Data-related Matters dated as of April 16, 1999 by
and between M2Direct, Inc. and Control Group, Ltd. and The Provident
Bank.
10.5** Letter Agreement dated as of April 16, 1999 between M2Direct, Inc. and
The Provident Bank.
10.6 Stock Purchase Warrant issued as of April 16, 1999 by M2Direct, Inc.
to The Provident Bank.
10.7 Stock Purchase Warrant issued as of March 6, 1998 by M2Direct, Inc. to
Sirrom Investments, Inc.
10.8 Stock Purchase Warrant issued as of February 2, 1999 by M2Direct, Inc.
to Flag Financial Corporation.
10.9 Stock Purchase Warrant issued as of February 3, 1999 by M2Direct, Inc.
to Sirrom Investments, Inc.
10.10 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and Edward J. Rutkowski.
10.11 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and Theresa L. Swanda.
10.12 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and John P. Kelly.
10.13 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and Paul B. Byrum, III.
10.14 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and Michael J. Chomik.
10.15 Employment Agreement dated as of March 6, 1998 by and between
M2Direct, Inc. and William J. DeGrosky.
10.16 Form of Indemnification Agreement between M2Direct, Inc. and each of
its directors and executive officers.
10.17 Form of Stock Option Agreement between M2Direct, Inc. and each of its
outside directors.
10.18 Form of Investor Rights Agreement between M2Direct, Inc. and the
holders of Series A Convertible Preferred Stock.
10.19* Registration Rights Agreement dated as of February 3, 1999 between
M2Direct, Inc., Farley/Ventura LLC, Via Investment, LLC and Frank A.
Daniels III.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.20 Employment Agreement dated as of July 29, 1998 by and between
M2Direct, Inc. and Michael T. Kane.
10.21 Loan Agreement dated as of March 30, 1999 by and between M2Direct,
Inc. and First Union National Bank.
10.22 Promissory Note dated as of March 30, 1999 in favor of First Union
National Bank.
10.23 First Amendment to Promissory Note and Loan Agreement dated as of May
4, 1999 by and between M2Direct, Inc. and First Union National Bank.
10.24 Letter Agreement dated as of May 4, 1999 by and between M2Direct, Inc.
and Sirrom Investments, Inc.
21.1 Subsidiaries of M2Direct, Inc.
23.1* Consent of Nelson Mullins Riley & Scarborough, L.L.P.
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on signature pages hereto).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In
accordance with Rule 406, these confidential portions have been omitted
from this exhibit and filed separately with the Commission.
+ The Company agrees to furnish supplementally a copy of any omitted schedule
or exhibit to the Securities and Exchange Commission upon request, as
provided in Item 601(b)(2) of Regulation S-K.
Item 17. Undertakings.
M2Direct hereby undertakes to provide to the underwriters, at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
M2Direct pursuant to the foregoing provisions, or otherwise, M2Direct has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by M2Direct of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, M2Direct will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
M2Direct hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in
II-5
<PAGE>
reliance upon Rule 430A and contained in a form of prospectus filed by
M2Direct pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 5th day of May, 1999.
M2Direct, Inc.
/s/ John P. Kelly
By: ---------------------------------
John P. Kelly
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each of the undersigned officers and
directors of M2Direct, Inc., a Georgia corporation, for himself and not for one
another, does hereby constitute and appoint John P. Kelly and Michael T. Kane,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign his name to any and all amendments, including post-
effective amendments, to this registration statement, and to sign any
registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Section 462(b) of the
Securities Act of 1933, and all post-effective amendments thereto, and to cause
the same (together with all Exhibits thereto and all documents in connection
therewith) to be filed with the Securities and Exchange Commission, granting
unto said attorneys and each of them full power and authority to do and perform
each and every act and thing necessary and proper to be done in and about the
premises, as fully to all intents and purposes as the undersigned could do if
personally present, and each of the undersigned for himself hereby ratifies and
confirms all that said attorneys-in-fact and agents or any one of them, or his
or their substitute or substitutes, shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ John P. Kelly Chairman of the Board, May 5, 1999
- -------------------------------------- President and Chief
John P. Kelly Executive Officer
(Principal Executive
Officer)
/s/ Michael T. Kane Chief Financial Officer May 5, 1999
- -------------------------------------- (Principal Financial and
Michael T. Kane Accounting Officer)
/s/ Glenn W. Sturm Vice Chairman of the Board May 5, 1999
- -------------------------------------- and Secretary
Glenn W. Sturm
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Jeffrey T. Arnold Director May 5, 1999
- --------------------------------------
Jeffrey T. Arnold
/s/ John W. Collins Director May 5, 1999
- --------------------------------------
John W. Collins
/s/ Jill F. Dorsey Director May 5, 1999
- --------------------------------------
Jill F. Dorsey
/s/ Stephen R. Gross Director May 5, 1999
- --------------------------------------
Stephen R. Gross
/s/ Thomas P. Maletta Director May 5, 1999
- --------------------------------------
Thomas P. Maletta
/s/ Richard M. Stolbach Director May 5, 1999
- --------------------------------------
Richard M. Stolbach
</TABLE>
II-8
<PAGE>
AGREEMENT AND PLAN OF MERGER
by
and
among
MEGAMARKETING CORPORATION
MEGAMARKETING ACQUISITION ONE, INC.
CONTROL GROUP LTD.
and
THE SHAREHOLDERS OF CONTROL GROUP LTD.
Dated as of March 6, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 - THE MERGER.........................................................1
1.1 The Merger....................................................1
1.2 Closing.......................................................2
1.3 Effective Time of the Merger..................................2
1.4 Articles of Incorporation; Bylaws.............................2
1.5 Directors and Officers of the Surviving Corporation...........2
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES................2
2.1 Consideration.................................................2
(a) Cash Consideration......................................2
(b) Conversion of Shares; Seller Common Stock...............2
(c) Performance Option......................................3
2.2 No Fractional Shares..........................................3
2.3 Fair Market Value.............................................3
2.4 Stock Transfer Books..........................................3
2.5 Surrender and Exchange of Certificates Representing Seller
Common Stock..................................................4
(a) Surrender and Exchange of Certificates..................4
(b) Lost Certificates.......................................4
(c) No Interest.............................................4
(d) No Liability............................................4
2.6 Dissenting Stockholders.......................................4
2.7 Adjustments...................................................5
ARTICLE 3 - RULES OF CONSTRUCTION..............................................6
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE
SHAREHOLDERS.......................................................9
4.1 Corporate Organization........................................9
4.2 Capitalization................................................9
4.3 Authority; No Violation......................................10
4.4 Financial Statements.........................................11
4.5 Broker's and Other Fees......................................11
4.6 Absence of Certain Changes or Events.........................12
4.7 Legal Proceedings............................................12
4.8 Taxes and Tax Returns........................................12
4.9 Employee Benefit Plans and Relations.........................13
4.10 Compliance with Applicable Laws..............................15
4.11 Certain Contracts............................................15
i
<PAGE>
4.12 Properties and Insurance.....................................17
4.13 Environmental Matters........................................18
4.14 Intellectual Property........................................19
4.15 No Parachute Payments........................................19
4.16 Absence of Certain Agreements and Practices..................20
4.17 Major Vendors and Customers..................................20
4.18 Accounts Receivable..........................................21
4.19 Corporate Records............................................21
4.20 Combinations Involving Seller and the Seller Subsidiaries....21
4.21 Bank Accounts................................................21
4.22 Labor Relations..............................................21
4.23 Disclosure...................................................22
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS....................22
5.1 Ownership of Shares..........................................22
5.2 Authorization................................................22
5.3 Absence of Violations or Conflicts...........................22
5.4 No Consents Required.........................................23
5.5 No Claims Against Seller.....................................23
5.6 Litigation Related to this Agreement.........................23
5.7 Investment Intent............................................23
5.8 Access to Information; Accredited Investor Status............24
5.9 Economic Risk................................................24
5.10 Tax Advice...................................................25
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT..........................25
6.1 Corporate Organization.......................................25
6.2 Capitalization...............................................26
6.3 Authority; No Violation......................................26
6.4 Financial Statements.........................................27
6.5 Broker's and Other Fees......................................27
6.6 Parent Common Stock..........................................28
ARTICLE 7 - COVENANTS OF THE PARTIES..........................................28
7.1 Conduct of Business..........................................28
7.2 Negative Covenants...........................................28
7.3 No Solicitation..............................................31
7.4 Current Information..........................................31
7.5 Access to Properties and Records; Confidentiality............32
7.6 Regulatory Matters...........................................33
7.7 Best Efforts; Further Assurances; Cooperation................33
7.8 Public Announcements.........................................33
7.9 Failure to Fulfill Conditions................................33
7.10 Disclosure Supplements.......................................33
7.11 Affiliates...................................................34
7.12 Shareholders' Approval.......................................34
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<PAGE>
7.13 Release by the Shareholders..................................34
7.14 Shareholder Agreements.......................................34
7.15 Employee Matters.............................................34
(a) Employee Benefits......................................34
(b) Employment Agreements..................................35
7.16 No Transfers.................................................35
7.17 Special Provisions with Respect to Seller....................35
7.18 Release from Personal Guaranties; Loan Payments..............35
7.19 Tax Matters..................................................36
(a) Transfer Taxes.........................................36
(b) Cooperation and Exchange of Information................36
(c) Tax-Free Transaction...................................36
ARTICLE 8 - CLOSING CONDITIONS................................................36
8.1 Conditions of Each Party's Obligations Under this Agreement..36
(a) Approval of Shareholders...............................36
(b) Approvals and Regulatory Filings.......................36
(c) Suits and Proceedings..................................37
(d) Tax Opinion............................................37
(e) Other Merger...........................................37
8.2 Conditions to the Obligations of Parent and Merger Sub Under
this Agreement...............................................37
(a) Representations and Warranties; Covenants and
Agreements; Consents...................................37
(b) Opinion of Counsel.....................................37
(c) Certificates...........................................38
(d) Employment Agreements..................................38
(e) Shareholders Agreement.................................38
(f) Resignations...........................................38
(g) Financing..............................................38
8.3 Conditions to the Obligations of Seller and the Shareholders
Under this Agreement.........................................38
(a) Representations and Warranties; Covenants and
Agreements; Consents...................................38
(b) Opinion of Counsel to Parent...........................39
(c) Certificates...........................................39
(d) Employment Agreements..................................39
(e) Shareholders Agreement.................................39
(f) Funding by Shareholders of Parent......................39
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER.................................39
9.1 Termination..................................................39
9.2 Effect of Termination........................................40
9.3 Specific Performance.........................................40
9.4 Amendment....................................................40
9.5 Extension; Waiver............................................40
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<PAGE>
ARTICLE 10 - INDEMNIFICATION..................................................41
10.1 Indemnification by Shareholders..............................41
10.2 Indemnification by Parent....................................41
10.3 Claims for Indemnification...................................42
10.4 Defense of Claim by Third Parties............................42
10.5 Third Party Claim Assistance.................................42
10.6 Settlement of Indemnification Claims.........................43
10.7 Manner of Indemnification....................................43
10.8 Indemnification Exclusive Remedy.............................43
10.9 Certain Limitations..........................................43
ARTICLE 11 - MISCELLANEOUS....................................................44
11.1 Expenses.....................................................44
11.2 Notices......................................................44
11.3 Parties in Interest..........................................45
11.4 Entire Agreement.............................................45
11.5 Counterparts.................................................45
11.6 Governing Law................................................46
11.7 Arbitration..................................................46
11.8 Invalidity of any Part.......................................46
11.9 Time of the Essence; Computation of Time.....................46
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<PAGE>
EXHIBITS AND SCHEDULES
Exhibit No. Description
- ---------------- -----------
Exhibit 7.11 Affiliate Representation Letter
Exhibit 8.2(b) Form of Opinion of Counsel to Seller
Exhibit 8.2(d) Form of Employment Agreement
Exhibit 8.2(e) Form of Shareholders Agreement
Exhibit 8.3(b) Form of Opinion of Counsel to Parent
Schedule No. Description
- ----------------- -----------
Schedule 2.1 Deferred and Additional Consideration
Seller Disclosure
Schedule No. Description
- ----------------- -----------
Schedule 4.1 Seller's Subsidiaries; Corporate Documents
Schedule 4.2 Seller's Capitalization
Schedule 4.3 Defaults; Conflicts and Liens Created
Schedule 4.4 Seller Financial Statements
Schedule 4.5 Broker's and Other Fees
Schedule 4.6 Certain Changes and Events
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Certain Contracts
Schedule 4.12 Properties and Insurance Policies
Schedule 4.14 Intellectual Property
Schedule 4.15 Parachute Payments
Schedule 4.16 Absence of Certain Agreements and Practices
Schedule 4.17 Major Vendors and Customers
Schedule 4.18 Accounts Receivable
Schedule 4.21 Bank Accounts
Schedule 4.22 Labor Relations
v
<PAGE>
Shareholder Disclosure
Schedule No. Description
- ---------------------- -----------
Schedule 5.4 Consents
Schedule 5.5 Claims
Parent Disclosure
Schedule No. Description
- ---------------------- -----------
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent Financial Statements
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 6th day of March,
1998 (the "Agreement"), is by and among MegaMarketing Corporation, a Georgia
corporation ("Parent"), MegaMarketing Acquisition One, Inc., a Georgia
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), Control
Group Ltd., a Delaware corporation ("Seller"), and all of the shareholders of
Seller (each a "Shareholder" and, collectively, the "Shareholders").
WHEREAS, this Agreement provides for the strategic combination of
Parent and Seller in furtherance of the parties' long-term strategic plans;
WHEREAS, the combination will be accomplished by a merger of Merger
Sub with and into Seller with Seller surviving and the Shareholders receiving
the consideration hereinafter set forth (the "Merger");
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Boards of Directors of Seller, Parent and Merger Sub
have duly adopted and approved this Agreement, and the Board of Directors of
Seller has recommended this Agreement to its shareholders and directed that it
be submitted to its shareholders for approval, the approval of Merger Sub's sole
shareholder having been obtained; and
WHEREAS, the Shareholders have agreed to vote in favor of the
Merger.
NOW, THEREFORE, intending to be legally bound, the parties hereto
agree as follows:
ARTICLE 1 - THE MERGER
1.1 The Merger. At the Effective Time (as defined below), Merger
----------
Sub shall be merged with and into Seller in accordance with the provisions of
this Agreement, the Georgia Business Corporation Code (the "GBCC") and the
Delaware General Corporation Law (the "DGCL"), and the separate existence of
Merger Sub shall thereupon cease, and Seller, as the surviving corporation in
the Merger (sometimes referred to as the "Surviving Corporation Corporation"),
shall continue its corporate existence under the laws of the State of Delaware
as a wholly-owned subsidiary of Parent. The Merger shall have the effect
provided under the applicable laws of the states of Georgia and Delaware
including, but not limited to, Section 14-2-1106 of the GBCC and Sections 259,
260 and 261 of the DGCL.
<PAGE>
1.2 Closing. The consummation of the transactions contemplated by
-------
this Agreement (the "Closing") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 at 2:00 p.m. on March 6, 1998 (the "Closing Date"). At the
Closing, the parties shall execute and deliver the certificates, opinions and
other instruments and documents referred to in Article 8.
1.3 Effective Time of the Merger. Contemporaneous with or
----------------------------
immediately following the Closing, the parties shall cause a certificate of
merger (the "Certificate of Merger") to be executed, delivered and filed with
the Secretaries of State of Georgia and Delaware in accordance with the
provisions of the GBCC and DGCL, respectively. The Merger shall become effective
at the close of business on the day of such filing and acceptance unless a
different effective time is specified in the Certificate of Merger pursuant to
the GBCC and DGCL (the "Effective Time").
1.4 Articles of Incorporation; Bylaws. The Articles of
---------------------------------
Incorporation and Bylaws of Seller as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, until duly amended in accordance with applicable law.
1.5 Directors and Officers of the Surviving Corporation. At the
---------------------------------------------------
Effective Time, the persons who are directors and officers of Merger Sub at the
Effective Time will become the directors and officers of the Surviving
Corporation until such time as they may be replaced in accordance with the
Bylaws of the Surviving Corporation.
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES
2.1 Consideration. At the Effective Time, in consideration for the
-------------
Shareholders' entry into this Agreement and fulfillment of the obligations,
covenants, terms and conditions set forth herein:
(a) Cash Consideration. Parent shall deliver to the Shareholders a
------------------
total of $500,000.00 in cash, to be paid as set forth on Schedule 2.1 attached
------------
hereto, (fifty percent (50%), or $250,000.00 of which is to be deferred and
paid, if at all, pursuant to Schedule 2.1 attached hereto); and
------------
(b) Conversion of Shares; Seller Common Stock. At the Effective
-----------------------------------------
Time, by virtue of the Merger and without any action on the part of the
Shareholders:
(i) Seller Common Stock. Each issued and outstanding share of
-------------------
stock of Seller, par value $.10 per share (the "Seller Common
Stock") (an aggregate of 2,076,720 shares, excluding any such shares
held in the treasury of Seller) shall automatically be canceled and
extinguished and shall thereafter be converted into only the right
to receive that number of shares of common stock,
2
<PAGE>
without par value, of Parent (the "Parent Common Stock") set forth
on Schedule 2.1.
(ii) Treasury Shares. Each share of Seller Common Stock held in
---------------
the treasury of Seller shall be automatically canceled and
extinguished, and no payment shall be made in respect thereof.
(iii) Merger Sub Common Stock. Each issued and outstanding share
-----------------------
of Merger Sub common stock at the Effective Time shall be converted
into and shall thereafter represent one validly issued, fully paid
and nonassessable share of common stock of the Surviving
Corporation, which shall then constitute all of the issued and
outstanding shares of the Surviving Corporation.
(c) Performance Option. In addition to the consideration set forth
------------------
in Sections 2.1(a) and (b) (the "Merger Consideration"), each Shareholder shall
also receive an option to purchase 115,385 shares of Parent Common Stock (the
"Option") upon satisfaction of the conditions set forth on, and subject to the
terms and conditions of, Schedule 2.1.
------------
(d) Assumption of Debt; Transfer of Right to Payments. At the
-------------------------------------------------
Effective Time, Parent will assume the Shareholders' obligations to Seller
pursuant to that certain $376,466.28 Promissory Note, dated July 15, 1997, given
by the Shareholders to Seller, and the Shareholders will transfer to Parent all
right, title, and interest to benefits and payments held by Shareholders and
Applications Unlimited, Inc. ("AUI") pursuant to the following two contracts:
Settlement Agreement, dated July 15, 1997, between the Shareholders, AUI, and
certain other parties; and Service Agreement, dated July 15, 1997, between
Seller, AUI, and Masterpiece Consulting Corporation.
2.2 No Fractional Shares. No scrip or fractional shares of Parent
--------------------
Common Stock shall be issued in the Merger upon conversion of Seller Common
Stock as provided in Section 2.1(b). Each registered holder of Seller Common
Stock who would otherwise have been entitled to receive a fraction of a share of
Parent Common Stock upon conversion of his or her Seller Common Stock shall be
entitled to receive a cash payment with respect to such fractional share in an
amount equal to the product of the Fair Market Value (as defined below) of
Parent Common Stock multiplied by such fractional share. Parent will make
available promptly after the Effective Time the funds necessary for the purpose
of paying cash for fractional shares.
2.3 Fair Market Value. The parties agree that the "Fair Market
-----------------
Value" for Parent Common Stock as of the date of this agreement shall be $2.17
per share.
2.4 Stock Transfer Books. From and after the Effective Time, no
--------------------
transfer of Seller Common Stock outstanding prior to the Effective Time shall be
registered on the stock transfer books of the Surviving Corporation. If, after
the Effective Time, certificates for Seller Common Stock are presented to the
Surviving Corporation for transfer, such certificates shall be canceled and
exchanged for the Merger Consideration.
3
<PAGE>
2.5 Surrender and Exchange of Certificates Representing Seller
----------------------------------------------------------
Common Stock.
- ------------
(a) Surrender and Exchange of Certificates. Upon surrender to
--------------------------------------
Parent of an outstanding certificate or certificates that immediately prior to
the Effective Time represented Seller Common Stock (the "Certificates") at the
Closing or thereafter, the holder of such Certificates shall be entitled to
receive at the Closing, or promptly after such surrender if after the Closing,
in exchange therefor one or more certificates as requested by the holder
(properly issued, executed and countersigned, as appropriate) representing that
number of whole shares of Parent Common Stock to which such holder of Seller
Common Stock shall have become entitled pursuant to the provisions of Section
2.1 and the Certificates so surrendered shall forthwith be canceled. From the
Effective Time until surrender in accordance with the provisions of this Section
2.5, each Certificate (other than Certificates representing treasury shares)
shall represent for all purposes only the right to receive the Merger
Consideration. All payments in respect of Seller Common Stock that are made in
accordance with the terms hereof shall be deemed to have been made in full
satisfaction of all rights pertaining to such securities.
(b) Lost Certificates. In the case of any lost, misplaced, stolen
-----------------
or destroyed Certificate, the holder thereof may be required, as a condition
precedent to delivery to such holder of the Merger Consideration, to deliver to
Parent an indemnity agreement and a bond in such reasonable sum as Parent may
direct as indemnity against any claim that may be made against the Parent or the
Surviving Corporation with respect to the Certificate alleged to have been lost,
misplaced, stolen or destroyed.
(c) No Interest. No interest shall be paid or accrued on any
-----------
portion of the Merger Consideration regardless of the cause for delay in payment
of the Merger Consideration.
(d) No Liability. Neither Parent nor the Surviving Corporation
------------
shall be liable to any holder of shares of Seller Common Stock for any Parent
Common Stock (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any abandoned property, escheat or similar law.
2.6 Dissenting Stockholders. Any holder of Seller Common Stock who
-----------------------
dissents from the Merger and exercises appraisal rights in accordance with the
provisions of Section 262 of the DGCL and who perfects such rights pursuant to
such Section shall be entitled to receive, in lieu of the consideration provided
in Section 2.1, the value of such shares in cash as determined pursuant to the
applicable provisions of the DGCL. Notwithstanding the other provisions of this
Article 2, Seller Common Stock with respect to which a proper demand has been
made in accordance with Section 262(d) of the DGCL shall not be converted into
the right to receive Merger Consideration applicable to such shares as set forth
in Section 2.1, unless the holder thereof shall have lost his or her status as a
dissenting shareholder pursuant to Section 262 of the DGCL. Not less than twenty
(20) days prior to the meeting of
4
<PAGE>
the Shareholders of Seller at which the Merger is to be submitted for approval,
Seller shall notify each of its shareholders who was such on the record date for
such meeting that appraisal rights are available pursuant to Sections 262(b) and
(c) of the DGCL for any or all of the shares of Seller Common Stock, and shall
include in such notice a copy of this section.
2.7 Adjustments. In the event that at any time after the date
-----------
hereof and prior to the Effective Time, Parent shall effect (a) a dividend or
other distribution with respect to Parent Common Stock payable in Parent Common
Stock or other property (other than cash), including the common stock, preferred
stock or other securities of a Parent Subsidiary, (b) a combination of
outstanding Parent Common Stock into a smaller number of such Parent Common
Stock, or (c) any reorganization or reclassification, or any consolidation or
merger of Parent, with another corporation, or the sale of all or substantially
all of its assets to another corporation, in such a way that holders of
outstanding Parent Common Stock shall be entitled to receive (either directly or
upon subsequent liquidation) stock, securities or other property with respect to
or in exchange for such Parent Common Stock (any such event described in (a)-(c)
above referred to as a "Diluting Event"), then, as a condition of such Diluting
Event, lawful and adequate provision shall be made whereby the Shareholders
shall thereafter be entitled to receive (under the same terms otherwise
applicable to their receipt of Parent Common Stock), in lieu of the number of
shares of Parent Common Stock to which such Shareholders are entitled
immediately prior to such Diluting Event, such shares of stock, securities or
other property as may be issued or payable with respect to or in exchange for
that number of shares of Parent Common Stock to which the Shareholders were so
entitled, and in any case appropriate provision shall also be made with respect
to such Shareholders' rights and interests to the end that the provisions of
this Section 2.7 shall thereafter be applicable in relation to any shares of
stock, securities or other property thereafter deliverable to such Shareholders
pursuant to the provisions hereof. Notwithstanding the foregoing, a merger or
other transaction with the corporation named in Section 8.1(e) shall not be
considered a Diluting Event for purposes of this Section 2.7.
2.8 Put Option.
----------
(a) The Company hereby irrevocably grants and issues to each
Shareholder the right and option to sell to the Company its shares of Parent
Common Stock, beginning on December 31, 1999, in the event the Company has not
filed a registration statement covering a Qualified Initial Public Offering of
the Common Stock by such date (the "Put"). The Put will expire on March 31,
2000. The purchase price (the "Purchase Price") applicable to shares of Parent
Common Stock covered by the Put shall be the lesser of (a) the value of the
shares of Parent Common Stock as of the date of this Agreement or (b) the Fair
Market Value (as hereinafter defined) of the shares of Parent Common Stock on
the date the Shareholder exercises the Put.
(b) Within thirty (30) days of the Parent's receipt of written
notice, addressed as set forth in Section 11 hereto, from the Shareholder of its
intention to exercise the Put, Parent shall pay to the Shareholder, in cash or
by certified or cashier's check, the Purchase Price, upon delivery to Parent of
a certificate or certificates for the Shareholder's
5
<PAGE>
shares of Parent Common Stock.
(c) The Fair Market Value of the shares of Parent Common Stock for
purposes of the Put shall be based on a valuation of the Parent of ten (10)
times the Parent's trailing EBITDA, as of the date the Put is exercised.
(d) The Put described in this Section 2.8 is and shall at all times
remain subject to the rights of Parent's creditors as set forth in any agreement
to which Parent is a party, or otherwise. Notwithstanding anything to the
contrary in this Section 2.8, the Purchase Price may only be paid if the Parent
has paid, in full, Parent's then-current indebtedness under its loans from
CoreStates Bank, N.A. and Sirrom Investments, Inc.
(e) In the event a Shareholder attempts to exercise the Put and
Parent determines that it does not have sufficient cash to pay such Shareholder
the Purchase Price, such Shareholder may, in lieu of exercising the Put,
purchase from Parent such number of shares of common stock of the Surviving
Corporation ("Survivor Common Stock") as is necessary to give such Shareholder
the same percentage ownership of the Surviving Corporation as he or she
currently has of the Seller. The Shareholder's purchase price for such Survivor
Common Stock shall for the purposes hereof be equal to $300,000 from each
Shareholder as well as the return from each Shareholder of all Parent Common
Stock issued pursuant to this Agreement. Notwithstanding the foregoing, Parent
shall not sell any Survivor Common Stock pursuant to this Section 2.8(e) if such
sale would be prohibited by Parent's loan agreement and related loan documents,
dated March 6, 1998, with Sirrom Investments, Inc.
ARTICLE 3 - RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided
or the context otherwise requires:
(a) The singular includes the plural and vice versa and, in
particular (but without limiting the generality of the foregoing), any word or
expression defined in the singular has the corresponding meaning used in the
plural and vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause,
subclause, paragraph, subparagraph, Schedule or recital is a reference to an
Article, Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule
or recital of this Agreement;
(d) Any reference to any agreement, instrument or other document
(i) shall include all appendices, exhibits and schedules thereto and all
agreements, documents or other writings incorporated by reference therein, and
(ii) shall be a reference to such agreement,
6
<PAGE>
instrument or other document as amended, supplemented, modified, suspended,
restated or novated from time to time;
(e) Any reference to any statute shall be construed as including
all statutory provisions consolidating, amending or replacing such statute and
all governmental regulations and rules promulgated thereunder;
(f) Any reference to "writing" includes printing, typing,
-------
lithography and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
------- ---
constituting legal tender for the payment of public and private debts in the
the United States of America;
(i) The headings and Article, Section and paragraph numbering
contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement, nor shall such headings and numbering be
used in any manner to aid in the construction of this Agreement;
(j) References herein to the "Seller Disclosure Schedules" shall
mean the disclosure schedules, dated as of the date hereof, which have been
delivered on the date hereof by Seller or the Seller Subsidiaries to Parent and
all other documents, agreements, and other items disclosed by Seller or the
Seller Subsidiaries to Parent in connection with this Agreement, and references
to a numbered Seller Disclosure Schedule shall mean that portion of the Seller
Disclosure Schedules that refers to the specific section or subsection of
Article 4 of this Agreement;
(k) References herein to the "Shareholder Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date hereof, which have
been delivered on the date hereof by the Shareholders to Parent and all other
documents, agreements, and other items disclosed by each Shareholder to Parent
in connection with this Agreement, and references to a numbered Shareholder
Disclosure Schedule shall mean that portion of the Shareholder Disclosure
Schedules that refers to the specific section or subsection of Article 5 of this
Agreement;
(l) References herein to the "Parent Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date hereof, which have
been delivered on the date hereof by Parent to Seller and all other documents,
agreements, and other items disclosed by Parent to Seller in connection with
this Agreement and references to a numbered Parent Disclosure Schedule shall
mean that portion of the Parent Disclosure Schedules that refers to the specific
section or subsection of Article 6 of this Agreement;
7
<PAGE>
(m) The terms "hereof," "hereby," "hereunder" and similar terms
------ ------ ---------
terms shall refer to this Agreement as a whole;
(n) The term "including" shall mean "including, without
---------
limitation";
(o) The term "EBITDA" means earnings before income taxes,
depreciation and amortization, as determined by generally accepted accounting
principles and practices ("GAAP"), except, for purposes of the projections
referenced in Section 2.1(c), Schedule 2.1, and Section 7.18(b), such EBITDA
projection shall be as adjusted for any claims brought against Seller for
brokers or finders fees in connection with this Agreement;
(p) The term "Governmental Authority" means any United States
federal, state or local, or foreign, governmental, regulatory or administrative
authority, agency, department, board, investigative body or commission or any
court, tribunal, or judicial or arbitral body;
(q) The term "Material Adverse Effect" with respect to a person or
entity means any circumstance, change in, or effect on the business and affairs
of such person or entity or any Subsidiary thereof that, individually or in the
aggregate with any other circumstances, changes in, or effects on, the business
and affairs of such person or entity and its Subsidiaries: (i) is, or would
reasonably be expected to be, materially adverse to the business, operations,
assets or liabilities, prospects, results of operations or financial condition
of such person or entity and its Subsidiaries, taken as a whole, or (ii) would
reasonably be expected to materially adversely affect the ability of such person
or entity and its Subsidiaries to operate or conduct its or their business and
affairs in the manner in which it is currently operated or conducted or
contemplated by such person or entity to be operated or conducted;
(r) The term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity, directly or
indirectly, owns or controls the voting of at least a 50% share or other equity
interest or for which such person or entity, directly or indirectly, acts as a
general partner;
(s) The term "Parent Subsidiary" means any Subsidiary of Parent,
and the term "Seller Subsidiary" means any Subsidiary of Seller. Unless
otherwise specifically provided, all representations, warranties and covenants
made by, on behalf of or with respect to Seller herein shall be deemed to
include the Seller and the Seller Subsidiaries;
(t) Each party and its counsel has had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore, shall be
construed without regard to any presumption or other rule requiring construction
against the party causing the Agreement to be drafted.
8
<PAGE>
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
Seller and the Shareholders jointly and severally hereby represent
and warrant to Parent as follows:
4.1 Corporate Organization.
----------------------
(a) Seller is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware. Seller has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect on Seller.
(b) All Seller Subsidiaries are listed on Seller Disclosure
-----------------
Schedule 4.1. Each Seller Subsidiary is duly incorporated, validly existing and
- ------------
in good standing under the laws of its respective jurisdiction of incorporation.
Each Seller Subsidiary has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a Material Adverse
Effect on such Subsidiary.
(c) Seller Disclosure Schedule 4.1 sets forth copies of the
------------------------------
Articles of Incorporation, bylaws and other operating agreements, if any, of
Seller and each of the Seller Subsidiaries.
(d) Except as set forth in Seller Disclosure Schedule 4.1,
------------------------------
Seller does not own or control, directly or indirectly, any equity interest in
any corporation, company, association, partnership, joint venture or other
entity.
4.2 Capitalization. The authorized capital stock of Seller
--------------
consists of 1,000 shares of Seller Common Stock and no shares of preferred stock
or any other form of capital stock. As of the date hereof, there are 100 shares
of Seller Common Stock issued and outstanding. Seller Disclosure Schedule 4.2
------------------------------
sets forth the names and addresses of each of the Shareholders and the number of
shares of Seller Common Stock owned by each. Except as set forth on Seller
------
Disclosure Schedule 4.2, there are no shares of Seller Common Stock outstanding.
- -----------------------
Seller Disclosure Schedule 4.2 sets forth all options which may be exercised for
- ------------------------------
issuance of Seller Common Stock and the terms upon which the options may be
exercised ("Seller Stock Options"). Seller Disclosure Schedule 4.2 sets forth
------------------------------
copies of the option plans and agreements pursuant to which the Seller Stock
Options were granted and a list of each
9
<PAGE>
outstanding Seller Stock Options. All issued and outstanding shares of Seller
Common Stock, and all issued and outstanding shares of capital stock of each of
the Seller Subsidiaries have been duly authorized and validly issued and are
fully paid and nonassessable, were not issued in violation of any preemptive
rights and were issued under available exemptions from federal and state
securities laws. All of the outstanding shares of capital stock of each Seller
Subsidiary are owned by Seller and are free and clear of any liens,
encumbrances, charges, restrictions or rights of third parties. Except as
disclosed in Seller Disclosure Schedule 4.2, neither Seller nor any of the
------------------------------
Seller Subsidiaries nor any Shareholder has granted or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the transfer, purchase, subscription or issuance of
any shares of capital stock of Seller or any of the Seller Subsidiaries or any
securities representing the right to purchase, subscribe or otherwise receive
any shares of such capital stock or any securities convertible into any such
shares, and there are no agreements or understandings with respect to voting of
any such shares.
4.3 Authority; No Violation.
-----------------------
(a) Except for approval by the Shareholders of the Merger and
the filing of the Certificate of Merger in accordance with the GBCC and DGCL
(collectively, the "Seller Approvals"), no consents, approvals, authorizations,
clearances or orders of, filings or registrations with or notices to
(collectively "Authorizations") any third party or any Governmental Authority
are necessary on behalf of Seller, the Shareholders or the Seller Subsidiaries
in connection with (i) the execution and delivery by Seller and the Shareholders
of this Agreement and (ii) the consummation by Seller and the Shareholders of
the Merger and the other transactions contemplated hereby. Subject to receipt of
the Seller Approvals, Seller has the full corporate power and authority to
execute and deliver this Agreement and to consummate the Merger and the other
transactions contemplated hereby in accordance with the terms hereof. The
execution and delivery of this Agreement have been duly and validly approved by
the Board of Directors of Seller in accordance with the Articles of
Incorporation and bylaws of Seller and with applicable Laws (as defined
below). Except for the Seller Approvals, no other corporate proceedings on the
part of Seller or the Seller Subsidiaries are necessary for the Seller and the
Shareholders to execute and deliver this Agreement and be bound by the terms
hereof. This Agreement has been duly and validly executed and delivered by
Seller and the Shareholders and constitutes the valid and binding obligation of
Seller and Shareholders enforceable against Seller and the Shareholders in
accordance with its terms.
(b) Neither the execution and delivery of this Agreement by
Seller or the Shareholders, nor the consummation by Seller and the Shareholders
of the Merger and the other transactions contemplated hereby in accordance with
the terms hereof, nor compliance by Seller and the Shareholders with any of the
terms or provisions hereof, will: (i) violate any provision of Seller's Articles
of Incorporation or bylaws; (ii) assuming that the Seller Approvals are duly
obtained, violate any United States federal, state or local or foreign statute,
code, ordinance, rule, regulation, judgment, order, writ, ruling, decree or
injunction of any Governmental Authority (collectively, "Laws") applicable to
Seller, any of the Seller Subsidiaries, the Shareholders or any of its or their
respective properties or assets; or (iii)
10
<PAGE>
except as set forth in Seller Disclosure Schedule 4.3, violate, conflict with,
------------------------------
result in a breach of any provisions 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 of, accelerate the performance required by, or result
in the creation of any lien, mortgage, security interest, pledge, charge, other
right of third parties or other encumbrance (collectively, "Liens") upon any of
the respective properties or assets of Seller, the Seller Subsidiaries or the
Shareholders under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Seller, any of the Seller Subsidiaries or any
of the Shareholders is a party, or by which they or any of their respective
properties or assets may be bound or affected.
4.4 Financial Statements.
--------------------
(a) Seller Disclosure Schedule 4.4 sets forth copies of: (i)
------------------------------
the consolidated balance sheet of Seller and the Seller Subsidiaries as of
December 31, 1997 and the consolidated statements of income, shareholders'
equity and cash flows for the period ended December 31, 1997, (collectively,
together with the related notes and any additional financial statements
delivered pursuant to Section 7.4, the "Seller Financial Statements"). The
Seller Financial Statements present fairly, in all material respects, the
consolidated financial position of Seller and the Seller Subsidiaries as of the
respective dates set forth therein, and the consolidated results of Seller's and
the Seller Subsidiaries' operations and their cash flows for the respective
periods set forth therein.
(b) The books and records of Seller and the Seller Subsidiaries
have been maintained in compliance with applicable legal and accounting
requirements. Such books and records will, on or before December 31, 1998, also
be maintained in accordance with GAAP.
(c) Except as and to the extent reflected, disclosed or reserved
against in the Seller Financial Statements, or as disclosed in Seller Disclosure
-----------------
Schedule 4.4, as of December 31, 1997, neither Seller nor any of the Seller
- ------------
Subsidiaries had any liabilities or obligations of any kind, whether absolute,
accrued, contingent or otherwise ("Liabilities"). Since December 31,
1997, Seller and the Seller Subsidiaries have not incurred any Liabilities
except in the ordinary course of business and consistent with past practice,
which in the aggregate are not material.
4.5 Broker's and Other Fees. Except as disclosed in Seller
----------------------- ------
Disclosure Schedule 4.5, neither Seller nor the Shareholders have employed any
- -----------------------
broker or finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement. There are no fees (other than time charges billed at usual and
customary rates) payable to any consultants, including lawyers and accountants,
in connection with this Agreement or the transactions contemplated hereby or
which would be triggered by consummation of this Agreement or the transactions
contemplated hereby or the termination of the services of such consultants by
Seller or the Shareholders.
11
<PAGE>
4.6 Absence of Certain Changes or Events.
------------------------------------
(a) Except as disclosed in Seller Disclosure Schedule 4.6, there
------------------------------
has been no Material Adverse Effect on the Seller since December 31, 1997 and to
the best of Seller's and each Shareholder's knowledge, no facts or conditions
exists which will cause a Material Adverse Effect on Seller (or the Surviving
Corporation after the Merger) in the future.
(b) Except as set forth in Seller Disclosure Schedule 4.6, neither
------------------------------
Seller nor any of the Seller Subsidiaries nor any of the Shareholders has taken
or permitted any of the actions set forth in Section 7.2(a) since December 31,
1997 and, except for execution of this Agreement, Seller has conducted its
business only in the ordinary course, consistent with past practice. Prior to
December 31, 1997, no such party hereto has taken or permitted any of the
actions set forth in Section 7.2(a) that are not reflected in the Seller
Financial Statements and notes related thereto.
4.7 Legal Proceedings. Except as disclosed in Seller Disclosure
----------------- -----------------
Schedule 4.7, neither Seller nor any of the Seller Subsidiaries nor any of the
- ------------
Shareholders is a party to any, and there are no pending or, to Seller's or the
Shareholders' knowledge, threatened legal, administrative, arbitral or other
proceedings, claims, actions or governmental investigations of any nature
against Seller or any of the Seller Subsidiaries. Except as disclosed in Seller
------
Disclosure Schedule 4.7, neither Seller nor any of the Seller Subsidiaries is a
- -----------------------
party to any order, judgment or decree entered in any lawsuit or proceeding.
Without limiting the foregoing, except as disclosed in Seller Disclosure
-----------------
Schedule 4.7, no actions, suits, demands, notices, claims, investigations or
- ------------
proceedings are pending or, to Seller's or the Shareholders' knowledge,
threatened against or otherwise involving, directly or indirectly, any officer,
director, employee or agent of Seller or the Seller Subsidiaries (in connection
with such officer's, director's, employee's or agent's activities on behalf of
Seller or the Seller Subsidiaries or that otherwise relate, directly or
indirectly to Seller or the Seller Subsidiaries or its properties or securities)
including without limitation any notices, demand letters or requests from any
Governmental Authority relating to such potential Liabilities, nor, to the
knowledge of Seller or the Shareholders, are there any circumstances which could
lead to such actions, suits, demands, notices, claims, investigations or
proceedings.
4.8 Taxes and Tax Returns. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.8:
- ------------
(a) Seller and the Seller Subsidiaries have duly filed (and
until the Effective Time will so file) all returns, declarations, reports,
information returns and statements ("Returns") required to be filed by
them in respect of any United States federal, state or local or foreign Taxes
and have duly paid (and until the Effective Time will so pay) all such Taxes due
and payable as finally determined by the applicable Governmental Authority,
other than Taxes which are being contested in good faith (and disclosed to
Parent in writing). As used herein, "Tax" or "Taxes" means and includes
any and all taxes, fees, levies, assessments, duties, tariffs, imposts, and
other charges of any kind (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
12
<PAGE>
any Governmental Authority, including, without limitation: foreign, domestic,
central, local, state or other jurisdictional taxes or other charges on or with
respect to income, estimated income, franchises, business, occupation, windfall
or other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains taxes; license, registration and
documentation fees; and customs duties, tariffs, and similar charges. Seller and
the Seller Subsidiaries have established (and until the Effective Time will
establish) on their books and records reserves that are adequate for the payment
of all Taxes not yet due and payable, but are incurred in respect of Seller or
any of the Seller Subsidiaries through such date.
(b) None of the Returns of Seller or any of the Seller
Subsidiaries have been examined by the United States Internal Revenue Service
(the "IRS"), or any other United States federal, state or local or any
foreign Governmental Authority within the past six years. To the knowledge of
Seller or the Shareholders, there are no audits or other Governmental Authority
proceedings presently pending nor any other disputes pending with respect to, or
claims asserted for, Taxes upon Seller or any of the Seller Subsidiaries, nor
has Seller or any of the Seller Subsidiaries given any currently outstanding
waivers or comparable consents regarding the application of any statute of
limitations with respect to any Taxes or Returns. There are no Liens for Taxes
upon the assets of Seller or any of the Seller Subsidiaries, except for Liens
for Taxes not yet due. Seller and each of the Seller Subsidiaries has complied
(and until the Effective Time will comply) in all respects with all applicable
Laws relating to the payment and withholding of Taxes.
(c) Neither Seller nor any of the Seller Subsidiaries: (i) has
requested any extension of time within which to file any Return which Return
has not since been filed; (ii) is a party to any agreement providing for the
indemnification, allocation or sharing of Taxes; (iii) is required to include in
income any adjustment by reason of a voluntary change in accounting method
initiated by Seller or any of the Seller Subsidiaries (nor does Seller or the
Shareholders have any knowledge that any Governmental Authority has proposed any
such adjustment or change of accounting method); (iv) has filed a consent with
any Governmental Authority pursuant to which Seller has agreed to recognize gain
(in any manner) relating to or as a result of this Agreement or the transactions
contemplated hereby; or (v) has been a member of an affiliated group other than
one of which the Seller was the common parent.
4.9 Employee Benefit Plans and Relations. Except as disclosed in
------------------------------------
Seller Disclosure Schedule 4.9:
- ------------------------------
(a) Neither Seller nor any of the Seller Subsidiaries maintains
or contributes to any "employee pension benefit plan" (the "Seller Pension
Plans"), as such term is defined in Section 3 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), including any pension,
profit-sharing, retirement, thrift or stock bonus plan, "employee welfare
benefit plan" (the "Seller Welfare Plans"), as such term is
defined in Section 3 of ERISA, or any other stock option plan, stock purchase
plan, restricted stock plan, deferred compensation plan, severance plan, phantom
stock plan, bonus plan or other similar
13
<PAGE>
plan, program or arrangement (collectively the "Employee Plans"). Neither Seller
nor any of the Seller Subsidiaries has contributed to, or been required to
contribute to, any "Multiemployer Plan," as such term is defined in Section
3(37) of ERISA.
(b) Each of the Seller Pension Plans is intended to be a qualified
plan within the meaning of Section 401(a) of the Code, and Seller is not aware
of any fact or circumstance that would adversely affect the qualified status of
any such plan.
(c) Each of the Seller Pension Plans, Seller Welfare Plans and
other Employee Plans has been operated in compliance in all material respects
with the provisions of ERISA, the Code, and all other applicable Laws.
(d) Neither Seller nor any of the Seller Subsidiaries, nor, to the
knowledge of Seller or the Shareholders, any trustee, fiduciary or administrator
of any Seller Pension Plan or Seller Welfare Plan or any trust created
thereunder, has engaged in a "prohibited transaction" as such term is defined in
Section 4975 of the Code, which could subject Seller or any of the Seller
Subsidiaries, or, to the knowledge of Seller or the Shareholders, any trustee,
fiduciary or administrator thereof, to the tax or penalty on prohibited
transactions imposed by said Section 4975.
(e) No Seller Pension Plan or any trust created thereunder
has been terminated, nor have there been any "reportable events" for which the
30 day notice has not been waived with respect to any Seller Pension Plan, as
that term is defined in Section 4043(b) of ERISA.
(f) There are no pending, or, to the knowledge of Seller or the
Shareholders, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Seller Pension Plans or the
Seller Welfare Plans or any trusts related thereto.
(g) Accruals; Funding
(i) Pension/Profit Sharing Plans. None of the Employee
----------------------------
Plans is a Pension/Profit Sharing Plan subject to ERISA Title IV
(including those for retired, terminated or other former employees
and agents).
(ii) Other Plans. Seller Disclosure Schedule 4.9 fully and
----------- ------------------------------
accurately sets forth any funding liability under each Employee Plan
not subject to ERISA Title IV, whether insured or otherwise,
specifically setting forth any liabilities under any retiree medical
arrangement and specifically designating any insured plan that
provides for retroactive premium or other adjustments. The levels of
insurance reserves and accrued liabilities with regard to each such
Employee Plan are reasonable and are sufficient to provide for all
incurred but unreported claims and any retroactive premium
adjustments.
14
<PAGE>
(iii) Contributions. Except as set forth on Seller Disclosure
------------- -----------------
Schedule 4.9: (A) Seller and each trade or business (whether or not
------------
incorporated), which together with Seller is treated as a single
employer pursuant to Code Section 414(b),(c),(m) or (o) ("an ERISA
Affiliate"), has made full and timely payment of all amounts
required to be contributed under the terms of each Employee Plan and
applicable Law, or required to be paid as expense under such
Employee Plan, including the Pension Benefit Guaranty Corporation
("PBGC") premiums and amounts required to be contributed under
Code Section 412; (B) all contributions have been made in accordance
with the actuarial recommendations; and (C) no excise taxes are
assessable as a result of any nondeductible or other contributions
made or not made to an Employee Plan.
(h) Summary plan descriptions and all other returns, reports,
registration statements, prospectuses, documents, statements and communications
that are required to have been filed, published or disseminated under ERISA or
other Laws and the rules and regulations promulgated by the Department of Labor
under ERISA and the Treasury Department or by the Securities and Exchange
Commission (the "SEC") with respect to the Employee Plans have been so filed,
published or disseminated.
4.10 Compliance with Applicable Laws. Except as set forth in Seller
------------------------------- ------
Disclosure Schedule 4.10, Seller and each of the Seller Subsidiaries hold all
- ------------------------
licenses, franchises, permits, consents and authorizations ("Licenses")
necessary for the lawful conduct of their respective businesses. No proceeding
is pending or threatened seeking the revocation or suspension of any License.
The Seller and the Seller Subsidiaries are and have been in compliance in all
material respects with all applicable Laws, and neither Seller nor the Seller
Subsidiaries nor any Shareholder has received any notices of any allegation of
any violation of any Laws or Licenses.
4.11 Certain Contracts
-----------------
(a) Seller Disclosure Schedule 4.11 lists the following agreements
-------------------------------
(collectively, the "Material Contracts"), including, without limitation, leases,
purchase contracts and commitments, to which Seller or the Seller Subsidiaries
is a party or by which Seller or the Seller Subsidiaries or any of its or their
properties or assets is bound:
(i) all agreements that involve an annual commitment or
payment by any party thereto of more than $10,000 individually or
$50,000 in the aggregate or which have a fixed term extending more
than 12 months from the date hereof;
(ii) all joint venture, sales agency, sales representative or
distributorship, broker, franchise, license or similar agreements;
(iii) all leases;
15
<PAGE>
(iv) all notes, bonds, mortgages, security agreements,
guarantees and other agreements and instruments for or relating to
any lending or borrowing by Seller or the Seller Subsidiaries in any
amount (exclusive of advances to employees for expenses in the
ordinary course of business);
(v) all powers of attorney, guarantees, suretyships or
similar agreements;
(vi) all material agreements relating to the Seller's
obligations to AUI or Masterpiece Consulting Corporation; and
(vii) all other written agreements the breach of or default
under which could have a Material Adverse Effect on Seller or the
Seller Subsidiaries.
Each of the Material Contracts is valid, binding and enforceable on
the parties thereto in accordance with its terms.
(b) Except as disclosed in Seller Disclosure Schedule 4.11, (i)
-------------------------------
neither Seller nor any of the Seller Subsidiaries is a party to or bound by any
agreement or understanding (whether written or oral) with respect to the
employment of any officers, employees, directors or consultants, and (ii) the
consummation of the transactions contemplated by this Agreement will not (either
alone or upon the occurrence of any additional acts or events) result in any
payment (whether of severance pay or otherwise) becoming due from Seller or any
of the Seller Subsidiaries to any officer, employee, director or consultant
thereof. Seller Disclosure Schedule 4.11 sets forth true and correct copies of
-------------------------------
all severance or employment agreements with officers, directors, employees,
agents or consultants to which Seller or any of the Seller Subsidiaries is a
party.
(c) Except as disclosed in Seller Disclosure Schedule 4.11, no
-------------------------------
agreement or understanding to which Seller or any of the Seller Subsidiaries is
a party or by which any of them is bound limits the freedom of Seller or any of
the Seller Subsidiaries to compete in any line of business or with any person.
(d) Except as disclosed in Seller Disclosure Schedule 4.11,
-------------------------------
neither Seller nor any of the Seller Subsidiaries nor, to the knowledge of
Seller and the Shareholders, any other party thereto, is in default under any of
the Material Contracts or any other agreement to which the Seller or the Seller
Subsidiaries is a party or to which it or its properties is bound; no event has
occurred which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default thereunder
entitling any party to terminate a Material Contract or other such agreement;
and the continuation, validity and effectiveness of all such Material Contracts
and agreements under the current terms thereof and the current rights and
obligations of Seller and the Seller Subsidiaries thereunder will in no way be
affected, altered or impaired by the consummation of the transactions
contemplated hereby. Except as disclosed in Seller Disclosure Schedule 4.11,
-------------------------------
upon consummation of the Merger, the Surviving Corporation will be entitled to
enjoy the advantages and benefits of the
16
<PAGE>
business arrangements, opportunities and relationships as enjoyed by the Seller
and the Seller Subsidiaries prior to the date hereof without interference or
interruption.
4.12 Properties and Insurance.
------------------------
(a) Except as disclosed in Seller Disclosure Schedule 4.12,
-------------------------------
Seller and the Seller Subsidiaries have good and, as to owned real property,
marketable title to all assets and properties, whether real or personal,
tangible or intangible, reflected in the Seller Financial Statements as of
December 31, 1997, or owned and acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for fair value in
the ordinary course of business since such date), subject to no Liens except (i)
statutory liens for amounts not yet delinquent or which are being contested in
good faith and (ii) such Liens and title imperfections that do not in the
aggregate have an adverse effect upon the business, operations, assets, and
financial condition of Seller and the Seller Subsidiaries taken as a whole.
Seller and the Seller Subsidiaries as lessees have the right under valid and
subsisting leases to occupy, use, possess and control all real property leased
by Seller and the Seller Subsidiaries as presently occupied, used, possessed and
controlled by Seller and the Seller Subsidiaries or necessary in the operation
of their businesses as currently conducted.
(b) The business operations and all insurable properties and assets
of Seller and the Seller Subsidiaries are insured for their benefit against all
risks which, in the reasonable judgment of the Shareholders, should be insured
against, in each case under policies or bonds issued by insurers of recognized
responsibility, in such amounts with such deductibles and against such risks and
losses as are in the opinion of the Shareholders adequate for the business
engaged in by Seller and the Seller Subsidiaries. Copies of all such policies as
in effect on the date hereof are attached hereto as part of Seller Disclosure
-----------------
Schedule 4.12. Neither Seller nor any of the Seller Subsidiaries nor any of the
- -------------
Shareholders has received any notice of cancellation or notice of a material
amendment of any such insurance policy or bond and neither Seller nor the Seller
Subsidiaries is in default under any such policy or bond, no coverage thereunder
is being disputed and all material claims thereunder have been filed in a timely
fashion.
(c) No person other than Seller or the Seller Subsidiaries is
currently entitled to possession of any of the properties of Seller or the
Seller Subsidiaries, whether owned or leased by Seller or the Seller
Subsidiaries. To the knowledge of Seller and the Shareholders, the real
property, buildings, structures and improvements owned or leased by Seller or
the Seller Subsidiaries conform to all applicable Laws, including zoning
regulations, none of which would upon consummation of the transactions
contemplated hereby adversely interfere with the use of such properties,
buildings, structures or improvements for the purposes for which they are now
utilized. Seller has not received notice nor does Seller have actual knowledge
of (i) any pending or contemplated condemnation or eminent domain proceeding
affecting the properties owned or leased by Seller or the Seller Subsidiaries,
(ii) any proposal for increasing the assessed value of any such properties for
state, county, local or other ad valorem Taxes or (iii) any pending or
contemplated proceedings or public improvements that would result in the levy of
any special Tax or assessment against any such properties; and there are no
outstanding requirements or recommendations by Seller's or the Seller
Subsidiaries'
17
<PAGE>
insurance providers requiring or recommending any repairs or work to be done
with reference to any such properties or any basis for such. The properties and
assets owned or leased by Seller and the Seller Subsidiaries are adequate for
the conduct of their businesses as presently conducted and are in good repair
and operating condition, normal wear and tear excepted. The properties and
assets owned by Seller and the Seller Subsidiaries constitute all of the
property and assets that Seller and the Seller Subsidiaries use or may
reasonably need in connection with the operation of their businesses as
presently conducted, and the consummation of the transactions contemplated by
this Agreement will not impair the ability of Parent to use such properties and
assets.
4.13 Environmental Matters.
---------------------
(a) The operations of Seller and the Seller Subsidiaries comply,
and have complied, in all respects with all applicable Environmental Laws (as
defined below).
(b) Seller and the Seller Subsidiaries have obtained all
environmental, health and safety Licenses and other authorizations necessary for
the operation of Seller and the Seller Subsidiaries' businesses, all of which
are valid and in good standing and are not subject to any modification or
revocation proceeding, and Seller is in compliance in all respects with all
terms and conditions thereof.
(c) Neither Seller, nor any of the Seller Subsidiaries nor any of
the Shareholders has received any written notice of any pending or threatened
investigation, proceeding or claim to the effect that any of Seller or the
Seller Subsidiaries is or may be liable to any person or entity, or responsible
or potentially responsible for the costs of any remedial or removal action or
other cleanup costs, as a result of noncompliance with any Environmental Laws or
arising out of the presence, generation, storage or disposal of hazardous waste,
including liability under the United States Comprehensive Environmental
Response, Compensation and Liability Act, as amended, any state superfund law or
any Environmental Law, and there is no past or present action, activity,
condition or circumstance that could be expected to give rise to any such
liability on the part of Seller or the Seller Subsidiaries to any person or
entity or for any such cleanup costs.
(d) The term "Environmental Laws" shall mean all Laws relating to
pollution or protection of the environment.
18
<PAGE>
4.14 Intellectual Property.
---------------------
(a) Seller Disclosure Schedule 4.14 (i) lists and describes all
-------------------------------
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, and all patent, trademark and
service mark licenses, (ii) describes all copyrights, computer software,
databases, and all other intellectual property that are owned by or registered
in the name of Seller or to which Seller has any rights as licensee or
otherwise, which list specifies which items are owned and to which items Seller
has rights as a licensee or otherwise; and (iii) lists and describes all
contracts, agreements or understandings pursuant to which Seller has authorized
any person to use, or which any person otherwise has the right to use, in any
business or commercial activity, any of the items listed in clauses (i) and (ii)
above.
(b) The items listed or described in the Seller Disclosure
-----------------
Schedule 4.14 pursuant to the preceding subsection (a) constitute or represent
- -------------
all of the intellectual property necessary to the conduct of Seller's business,
and Seller's ownership and use rights with respect thereto are free and clear of
Liens.
(c) All federal trademark or service mark registrations, and all
applications to register any trademarks or service marks or any trademark
register maintained by the United States government or any state or provincial
government are based on truthful affidavits or declarations of use.
(d) Seller has not infringed upon, and Parent's conduct of Seller's
business after the Closing as presently conducted will not infringe upon, any
patent, service mark, trade name, trademark, copyright, trade secret or other
intellectual property belonging to any other person or entity; and Seller has
not agreed to indemnify any person or entity for or against any infringement of
or by the intellectual property set forth in the Seller Disclosure Schedule
--------------------------
4.14. To the knowledge of Seller and Shareholders, no person or entity is
- ----
infringing upon any of Seller's patents, patent applications, trade names,
trademarks, service marks, trademark and service mark registrations, licenses,
copyrights, computer software or other intellectual property.
(e) Seller has, and immediately after the Closing Parent will
have, all computer software and databases that are necessary to conduct Seller's
business as presently conducted by Seller and all documentation relating to all
such computer software and databases. The computer software performs in
accordance with the documentation related thereto or used in connection
therewith and is free of defects in programming and operation. Seller Disclosure
-----------------
Schedule 4.14 identifies each person or entity to whom Seller has sold,
- -------------
licensed, leased or otherwise transferred or granted any interest in or rights
to any of the computer software and databases and the date of each such sale,
license, lease or other transfer or grant.
4.15 No Parachute Payments. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.15, no officer, director, employee or agent (or former officer,
- -------------
director, employee or agent) of Seller or any of the Seller Subsidiaries is
entitled now, or will or may be entitled as a consequence of this Agreement or
the Merger, to any payment or benefit from Seller or
19
<PAGE>
any of the Seller Subsidiaries or from Parent, which if paid or provided would
constitute an "excess parachute payment," as defined in Section 280G of the
Code.
4.16 Absence of Certain Agreements and Practices.
-------------------------------------------
(a) Except as set forth in Seller Disclosure Schedule 4.16 or in
-------------------------------
connection with customary transactions in the ordinary course of business, no
present or former officer, director or shareholder of Seller or any of the
Seller Subsidiaries:
(i) owes money to Seller or any of the Seller Subsidiaries;
(ii) has any claim against Seller or any of the Seller
Subsidiaries;
(iii) has any interest in any property or assets used by Seller
or any of the Seller Subsidiaries in its or their business;
(iv) has any benefits that are contingent on the transactions
contemplated by this Agreement, other than as stated herein;
(v) has any agreement with Seller or any of the Seller
Subsidiaries that is not terminable by Seller or any of the Seller
Subsidiaries without penalty or notice;
(vi) has any agreement providing severance benefits or other
benefits, which are conditioned upon a change of control after the
termination of employment of such employee regardless of the reason
for such termination of employment; or
(vii) has any agreement or plan, any of the benefits of which
will be increased, vested or accelerated by the occurrence of any of
the transactions contemplated by this Agreement.
(b) Neither Seller, any of the Seller Subsidiaries, nor any of its
or their directors, officers, agents, affiliates or employees, nor any other
person acting on behalf of Seller or the Seller Subsidiaries has (i) given or
agreed to give any gift or similar benefit having a value of $1,000 or more to
any customer, supplier or governmental employee or official or any other person,
for the purpose of directly or indirectly furthering the business of Seller or
the Seller Subsidiaries, (ii) used any corporate funds for contributions,
payments, gifts or entertainment, or made any expenditures relating to political
activities to government officials or others in violation of any applicable
Laws, or (iii) received any unlawful contributions, payments, gifts or
expenditures in connection with the business of Seller or the Seller
Subsidiaries.
4.17 Major Vendors and Customers. Seller Disclosure Schedule 4.17
--------------------------- -------------------------------
sets forth a list of each licensor, developer, remarketer, distributor and
supplier of property or services to, and each licensee, end-user or customer of,
Seller and the Seller Subsidiaries, to
20
<PAGE>
whom Seller and the Seller Subsidiaries paid or billed in the aggregate in
excess of $30,000 during calendar year 1997.
4.18 Accounts Receivable. Seller Disclosure Schedule 4.18 sets forth
------------------- -------------------------------
the accounts receivable of Seller and the Seller Subsidiaries as of December 31,
1997, as reflected in the Seller Financial Statements as of that date, together
with an aging of these accounts. These accounts receivable, and all accounts
receivable of Seller and the Seller Subsidiaries created after that date, arose
from valid transactions in the ordinary course of business and will be good and
collectible at the recorded amounts thereof. No portion of the accounts
receivable is subject to counterclaim or setoff.
4.19 Corporate Records. The corporate record books (including the
-----------------
share records) of Seller and the Seller Subsidiaries are complete, accurate and
up to date with all necessary signatures and set forth all meetings and actions
taken by the stockholders and directors of Seller and the Seller Subsidiaries
and all transactions involving the shares of Seller and the Seller Subsidiaries
(and contain all canceled share certificates).
4.20 Combinations Involving Seller and the Seller Subsidiaries. All
---------------------------------------------------------
mergers, consolidations or other business combinations involving Seller or any
of the Seller Subsidiaries and all liquidations, purchases or other transactions
by which Seller or any of the Seller Subsidiaries acquired any of their business
and property were conducted in accordance with applicable certificates of
incorporation, bylaws, any other applicable agreements, instruments and
documents and applicable Laws.
4.21 Bank Accounts. Seller Disclosure Schedule 4.21 lists all bank,
------------- -------------------------------
money market, savings and similar accounts and safe deposit boxes of Seller and
each of the Seller Subsidiaries, specifying the account numbers and the
authorized signatories or persons having access to them.
4.22 Labor Relations. Except as disclosed on Seller Disclosure
--------------- -----------------
Schedule 4.22, Seller and each of the Seller Subsidiaries is in compliance with
- -------------
all federal and state Laws respecting employment and employment practices, terms
and conditions of employment, wages and hours, and is not engaged in any unfair
labor or unlawful employment practice. There is no unlawful employment practice
or discrimination charge pending before the Equal Employment Opportunity
Commission ("EEOC") or any EEOC recognized state "referral agency." There is
no unfair labor practice charge or complaint against Seller or any of the Seller
Subsidiaries pending before the National Labor Relations Board ("NLRB").
There is no labor strike, dispute, slowdown or stoppage actually pending or, to
the knowledge of Seller or the Shareholders, threatened against or involving or
affecting Seller or the Seller Subsidiaries and no NLRB representation question
exists respecting any of its employees. No grievance or arbitration proceeding
is pending and no written claim therefor exists. There is no collective
bargaining agreement that is binding on Seller or the Seller Subsidiaries.
Except for any Material Contract disclosed pursuant to Section 4.11, neither
Seller nor any of the Seller Subsidiaries is a party to or bound by any
agreement, arrangement or understanding with any employee or consultant that
cannot be terminated on notice of ninety (90) or fewer days
21
<PAGE>
without liability to Seller or the Seller Subsidiaries or that entitles the
employee or consultant to receive any salary continuation or severance payment
or retain any specified position with Seller or the Seller Subsidiaries.
4.23 Disclosure. No representation, warranty, or statement made by
----------
Seller or the Shareholders in this Agreement or in any document or certificate
furnished or to be furnished to Parent pursuant to this Agreement contains or
will contain any untrue or incomplete statement or omits or will omit to state
any fact necessary to make the statements contained herein or therein not
misleading. All facts known or reasonably available to Seller or the
Shareholders that are material to the financial condition, operation, or
prospects of the business and assets of Seller and the Seller Subsidiaries have
been disclosed to Parent.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
Each Shareholder represents and warrants to Parent, severally and
not jointly, with respect to himself or herself and his or her ownership of
Seller Common Stock, as follows:
5.1 Ownership of Shares. The Shareholder owns of record and
-------------------
beneficially all of the Seller Common Stock set forth opposite his or her name
on Seller Disclosure Schedule 4.2. Such Shareholder owns all right, title and
------------------------------
interest in and to such Seller Common Stock, free and clear of all Liens
(including those for federal or state estate or inheritance taxes), options,
rights of refusal or similar rights or other transfer restrictions of any nature
whatsoever (including any arising from any pending or threatened litigation)
other than restrictions on transfers arising out of applicable federal and state
securities Laws and the agreements identified on Seller Disclosure Schedule 4.2
------------------------------
(which shall be terminated at or prior to the Closing). The Shareholder owns no
other securities of Seller.
5.2 Authorization. With respect to this Agreement and any other
-------------
agreements, instruments and documents executed and delivered by the Shareholder
pursuant to this Agreement (this Agreement and such other agreements,
instruments and documents are collectively referred to as the "Shareholder
Delivered Agreements"): (i) such Shareholder has the right, power and authority
to enter into the Shareholder Delivered Agreements executed and delivered by him
or her and to consummate the transactions contemplated by, and otherwise to
comply with and perform his obligations under them; and (ii) the Shareholder
Delivered Agreements will, when delivered, constitute valid and binding
obligations of such Shareholder enforceable against such Shareholder in
accordance with their terms.
5.3 Absence of Violations or Conflicts. The execution and delivery
----------------------------------
of the Shareholder Delivered Agreements and the consummation by such Shareholder
of the transactions contemplated by, or other compliance with the performance
under them do not and will not with the passing of time or giving of notice or
both: (i) constitute a violation of, be in conflict with, constitute a default
or require any payment under, permit a termination of, or
22
<PAGE>
result in the creation or imposition of any Lien upon any assets of Seller or
any of the Seller Common Stock under (A) any contract, agreement, commitment,
undertaking or understanding (including rights of refusal or similar rights or
other transfer restrictions) to which such Shareholder is a party or to which he
or she or his or her properties or Seller or its properties are subject or
bound, (B) any judgment, decree or order of any Governmental Authority to which
such Shareholder or his or her properties are subject or bound, or (C) any
applicable Laws; or (ii) create, or cause the acceleration of the maturity of,
any debt, obligation or liability of such Shareholder that would result in any
Lien or other claim upon the assets of Seller.
5.4 No Consents Required. Except as set forth on Shareholder
-------------------- -----------
Disclosure Schedule 5.4, no Authorization of or with any Governmental Authority
- -----------------------
or any other Authorization of or with any other third party on the part of such
Shareholder is required in connection with his or her execution or delivery of
the Shareholder Delivered Agreements or the consummation of the transactions
contemplated by, or other compliance with the performance under, such
Shareholder Delivered Agreements by such Shareholder.
5.5 No Claims Against Seller. Except as set forth on Shareholder
------------------------ -----------
Disclosure Schedule 5.5, such Shareholder has no claim against Seller, except
- -----------------------
for accrued compensation and benefits and expenses or similar obligations
incurred in the ordinary course of business (including reimbursement of medical
expenses pursuant to the Employee Plans disclosed pursuant to this Agreement),
and except as otherwise specifically provided in this Agreement.
5.6 Litigation Related to this Agreement. Such Shareholder is not a
------------------------------------
party to or subject to any judgment, decree or order entered in any lawsuit or
proceeding brought by any Governmental Authority or other third party seeking to
prevent the execution of this Agreement or the consummation of the transactions
contemplated hereby.
5.7 Investment Intent.
-----------------
(a) Such Shareholder will acquire the Parent Common Stock pursuant
to this Agreement for his or her own account, to hold for investment and with no
present intention of dividing his or her participation with others or reselling
or otherwise participating, directly or indirectly, in a distribution thereof,
and he or she will not make any sale, transfer or other disposition of the
Parent Common Stock in violation of the Securities Act of 1933 (the "1933 Act")
or any applicable state securities laws (the "State Acts"). Without
limiting the foregoing, such Shareholder has no plan or intention to sell or
otherwise dispose of any of the Parent Common Stock issued to him or her
pursuant to this Agreement or to effect any other transaction which would
adversely affect the status of the Merger as a tax-free reorganization under the
Code. Such Shareholder agrees that there will be placed on the certificate or
other evidence of the Parent Common Stock, or any substitutions therefor, a
legend stating in substance:
23
<PAGE>
THE SECURITIES EVIDENCED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE SECURITIES ACT), OR ANY
STATE SECURITIES LAWS IN RELIANCE ON ONE OR
MORE EXEMPTIONS THEREUNDER AND MAY NOT BE
SOLD OR TRANSFERRED EXCEPT IN TRANSACTIONS
EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS
OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT THEREUNDER. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH
IN AN AGREEMENT AND PLAN OF MERGER (THE
AGREEMENT) DATED MARCH 6, 1998 AMONG THE
CORPORATION AND THE HOLDER OF THESE
SECURITIES AND OTHERS. ANY ATTEMPTED
TRANSFER IN VIOLATION OF THE AGREEMENT SHALL
BE NULL AND VOID. A COPY OF THE AGREEMENT OR
A SUMMARY OF SUCH RESTRICTIONS IS AVAILABLE
FROM THE CORPORATION UPON REQUEST.
(b) Without limiting the foregoing, there is no plan or intention
by such Shareholder to sell, exchange, or otherwise dispose of a number of
Parent's shares received as a result of the Merger that would reduce any of the
Shareholder's ownership of acquired shares to a number of shares having a value,
as of the date of the Merger, of less than 50 percent of the value of all of the
formerly outstanding stock of the Seller as of the same date. For purposes of
this representation, shares of Seller's stock exchanged for cash or other
property, surrendered by dissenters, or exchanged for cash in lieu of Parent's
fractional shares will be treated as outstanding stock of Seller on the date of
the Merger. Moreover, shares of Seller's stock and Parent's shares held by the
Shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to
the Merger will be considered in making this representation.
5.8 Access to Information; Accredited Investor Status. Such
-------------------------------------------------
Such Shareholder has been given access to all material and relevant information
concerning Parent, thereby enabling such Shareholder to make an informed
investment decision concerning his or her investment in the Parent Common Stock.
Such Shareholder has relied solely upon an independent investigation made by him
or her and his or her representatives, if any, and has, prior to the date
hereof, been given access to and the opportunity to examine data and information
relating to Parent. In making his or her investment decision to acquire the
Parent Common Stock pursuant to this Agreement, such Shareholder is not relying
on any oral or written representations or assurances from Parent or any other
person or any representative of Parent or any other person other than as set
forth in this Agreement. Such Shareholder has reviewed the definition of
"accredited investor" in Rule 501 of Regulation D under the 1933 Act and such
Shareholder is an accredited investor.
5.9 Economic Risk. Such Shareholder represents that he or she is
-------------
able to bear the economic risk of an investment in the Parent Common Stock,
which such Shareholder
24
<PAGE>
acknowledges is currently illiquid, including a possible total loss of his or
her investment. In making this statement, such Shareholder hereby represents and
warrants to Parent that he or she has adequate means of providing for his or her
current needs and contingencies; he or she is able to afford to hold the Parent
Common Stock for an indefinite period and he or she further represents that he
or she has such knowledge and experience in financial and business matters that
he or she is capable of evaluating the merits and risks of the investment in the
Parent Common Stock. Further, such Shareholder represents that he or she has no
present need for liquidity in the Parent Common Stock and is willing to accept
such investment risks.
5.10 Tax Advice. Such Shareholder has reviewed with his or her tax
----------
advisor the United States federal, state, local and foreign tax consequences of
an investment in the Parent Common Stock and the transactions contemplated by
this Agreement. Such Shareholder is relying solely on such advisors and not on
any statements or representations of Parent or any of its agents, except as
provided herein and in the tax opinion delivered hereunder and understands that
he or she (and not Parent) shall be responsible for his or her own tax liability
that will arise as a result of this investment or the transactions contemplated
by this Agreement.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to Seller and the Shareholders
as follows:
6.1 Corporate Organization.
----------------------
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia. Parent has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect on Parent.
(b) All Subsidiaries of Parent are listed on Parent Disclosure
-----------------
Schedule 6.1. Each Subsidiary is duly organized and validly existing
- ------------
and in good standing under the laws of its state or other jurisdiction of
incorporation. Each Parent Subsidiary has the corporate power and authority to
own or lease all of its properties and assets and to carry on its business as it
is now being conducted and is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary, except where
the failure to be so licensed, qualified or in good standing would not have a
Material Adverse Effect on Parent. Parent Disclosure Schedule 6.1 sets forth
------------------------------
copies of the Articles of Incorporation and bylaws, if any, as in effect on the
date hereof, of Parent and each of the Parent Subsidiaries. Except as set forth
in the Parent Disclosure Schedule 6.1, Parent does not own or control, directly
------------------------------
or indirectly, any equity interest in any corporation, company, association,
partnership, joint venture or other entity.
25
<PAGE>
6.2 Capitalization. As of the date hereof, the authorized capital
--------------
stock of Parent consists of 10,000,000 shares of Parent Common Stock and 500,000
shares of preferred stock, without par value ("Parent Preferred Stock"). As of
the date hereof, there were 2,977,200 shares of Parent Common Stock issued and
outstanding, no shares of Parent Preferred Stock issued and outstanding, 260,192
shares reserved for issuance upon the exercise of that certain Stock Purchase
Warrant issued by Parent to Sirrom Investments, Inc. on the date hereof (which
amount is subject to adjustment pursuant to the Stock Purchase Warrant), and
13,846 shares of Parent Common Stock reserved for issuance upon the exercise of
outstanding stock options and warrants ("Parent Stock Options"). All issued and
outstanding shares of Parent Common Stock, and all issued and outstanding shares
of capital stock of each of the Parent Subsidiaries, have been duly authorized
and validly issued and are fully paid and nonassessable. All of the outstanding
shares of capital stock of each Parent Subsidiary are owned by Parent and are
free and clear of any Liens. Except as disclosed above, neither Parent nor any
of the Parent Subsidiaries has granted nor is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the transfer, purchase, subscription or issuance of any
shares of capital stock of Parent or any of the Parent Subsidiaries or any
securities representing the right to purchase, subscribe or otherwise receive
any shares of such capital stock or any securities convertible into any such
shares, and there are no agreements or understandings with respect to voting of
any such shares.
6.3 Authority; No Violation.
-----------------------
(a) Except for the filings of the Merger documents as required by
the GBCC and the DGCL (collectively, the "Parent Approvals"), no Authorization
of any Governmental Authority is necessary on behalf of Parent in connection
with the execution and delivery by Parent of this Agreement and the consummation
by Parent of the Merger and the other transactions contemplated hereby. Subject
to receipt of the Parent Approvals, Parent has the full corporate power and
authority to execute and deliver this Agreement and to consummate the Merger and
the other transactions contemplated hereby in accordance with the terms hereof.
The execution and delivery of this Agreement and the consummation of the Merger
and the other transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Parent in accordance with the Articles of
Incorporation of Parent and applicable Laws. Except for the Parent Approvals, no
other corporate proceedings on the part of Parent are necessary to consummate
the Merger and the other transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by Parent and constitutes the valid
and binding obligation of Parent enforceable against Parent in accordance with
its terms.
(b) Neither the execution and delivery of this Agreement by Parent,
nor the consummation by Parent of the Merger and the other transactions
contemplated hereby in accordance with the terms hereof, or compliance by Parent
with any of the terms or provisions hereof, will (i) assuming that the Parent
Approvals are duly obtained, violate any provision of Parent's Articles of
Incorporation or bylaws, (ii) assuming that the Parent Approvals are duly
26
<PAGE>
obtained, violate any Law applicable to Parent, any of the Parent Subsidiaries,
or any of their respective properties or assets, or (iii) except as set forth in
Parent Disclosure Schedule 6.3, violate, conflict with, result in a breach of
- ------------------------------
any provisions 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
of, accelerate the performance required by, or result in the creation of any
Lien upon any of the respective properties or assets of Parent or the Parent
Subsidiaries under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Parent or any of the Parent Subsidiaries is a
party, or by which they or any of their respective properties or assets may be
bound or affected except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a Material Adverse Effect on the
Parent, and which will not prevent or delay the consummation of the Merger and
the other transactions contemplated hereby.
(c) Subject to receipt of the Parent Approvals, Merger Sub
has the full corporate power and authority to execute and deliver this Agreement
and to consummate the Merger and the other transactions contemplated hereby in
accordance with the terms hereof. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors and the sole shareholder of Merger
Sub in accordance with the Articles of Incorporation of Merger Sub and
applicable Laws. Except for the Parent Approvals, no other corporate proceedings
on the part of Merger Sub are necessary to consummate the Merger or the other
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Merger Sub and constitutes the valid and binding obligation of
Merger Sub enforceable against Merger Sub in accordance with its terms.
6.4 Financial Statements.
--------------------
(a) The financial statements of Parent set forth in Parent
------
Disclosure Schedule 6.4 (the "Parent Financial Statements"), as of their
- -----------------------
respective dates, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(b) Since February 10, 1998, there has not been any change,
occurrence or circumstance in the business, results of operations or financial
condition of Parent or any Parent Subsidiary having, individually or in the
aggregate, a Material Adverse Effect on Parent, other than changes, occurrences
and circumstances disclosed by the Parent prior to the date hereof.
6.5 Broker's and Other Fees. Neither Parent nor any of the Parent
-----------------------
Subsidiaries nor any of their directors or officers has employed any broker or
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
27
<PAGE>
6.6 Parent Common Stock. At the Effective Time, the Parent Common
-------------------
Stock to be issued pursuant to the Merger will be duly authorized and validly
issued, fully paid and nonassessable, free of preemptive rights and free and
clear of all Liens created by or through Parent (except as set forth in this
Agreement and the documents and agreements executed in connection herewith).
ARTICLE 7 - COVENANTS OF THE PARTIES
7.1 Conduct of Business. Seller and the Shareholders agree that
-------------------
from the date hereof to the Effective Time, Seller shall, and shall cause each
of the Seller Subsidiaries to conduct their respective businesses only in the
ordinary course and consistent with prudent business practice and past practice,
except for transactions permitted hereunder or with the prior written consent of
Parent, which consent shall not be unreasonably withheld. Without limiting the
generality of the foregoing, Seller shall use its best efforts to:
(a) maintain its status in good standing in all jurisdictions in
which it is required to be qualified or registered to conduct its business;
(b) maintain all of its tangible assets in good operating condition
and maintain the protection of all intellectual property in substantially the
same standing as exists on the date hereof;
(c) continue performance in the ordinary course of its obligations
under its contracts and agreements;
(d) preserve its business organization intact, keep available
its present officers and employees and preserve its present relationships with
suppliers, customers and others having business relationships with it; and
(e) maintain its existing insurance, subject to variations in
amount required by the ordinary operations of its business.
7.2 Negative Covenants.
------------------
(a) Seller and the Shareholders agree that from the date
hereof to the Effective Time, except as otherwise approved by Parent in writing
or as permitted or required by this Agreement, Seller will not, nor will Seller
permit any of the Seller Subsidiaries to:
(i) change any provision of its Articles of Incorporation or
bylaws;
(ii) issue any additional shares of Seller Common Stock or
other securities or change the number of shares of its authorized or
issued capital stock or issue or grant any option, warrant, call,
commitment, subscription, right to purchase or agreement of any
character relating to the authorized or issued capital stock of
Seller or any of the Seller Subsidiaries or any securities
convertible into shares of such stock, or split, combine or
reclassify any shares
28
<PAGE>
of its capital stock, or declare, set aside or pay any dividend or
other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock;
(iii) directly or indirectly redeem, purchase or otherwise
acquire any capital stock of Seller or any of the Seller
Subsidiaries;
(iv) grant any severance or termination pay (other than
pursuant to policies or contracts in effect on the date hereof and
that were not required to be modified or terminated pursuant to the
terms hereof and that have been disclosed to Parent pursuant hereto)
to, or enter into or amend any employment or severance agreement
with, any of its directors, officers or employees; adopt any new
employee benefit plan or arrangement of any type; or award any
increase in compensation or benefits to its directors, officers or
employees except with respect to employee increases in the ordinary
course of business and consistent with past practices and policies
and, with regard to bonuses in amounts that do not result in a
material variance from the amounts reserved for such payments
through the date of the most recent balance sheet included in the
Seller Financial Statements;
(v) sell or dispose of any assets other than in the ordinary
course of business consistent with past practices;
(vi) make any capital expenditures outside the ordinary course
of business;
(vii) acquire in any manner whatsoever any business or entity;
(viii) enter into, terminate, modify or amend any agreement or
arrangement with any officer or director of Seller or any of the
Seller Subsidiaries or any "affiliate" of any such officer or
director, as that term is defined in Regulation 14A of the
Securities Exchange Act of 1934 (the "1934 Act") (an "Affiliate");
(ix) make any change in its accounting methods or practices;
(x) incur, create, assume or guarantee any Liabilities except
in the ordinary course of business;
(xi) increase, or make any change in any assumptions
underlying the method of calculating any bad debt, contingency or
other reserves from those reflected in the Seller Financial
Statements set forth on Seller Disclosure Schedule 4.4;
------------------------------
29
<PAGE>
(xii) make any change in the method of valuing assets
included in the Seller Financial Statements set forth on Seller
------
Disclosure Schedule 4.4;
-----------------------
(xiii) pay, discharge or satisfy any Liabilities, other than by
payment, discharge or satisfaction in the ordinary course of
business;
(xiv) permit or allow any of its assets (real, personal or
mixed, tangible or intangible) to be subjected to any Lien;
(xv) write down the value of any inventory or write off as
uncollectible any notes or accounts receivable, except for
write-downs and write-offs in the ordinary course of business;
(xvi) cancel or waive any claims or rights, or sell,
transfer, distribute or otherwise dispose of any assets or
properties, except in the ordinary course of business;
(xvii) declare, file or permit to be filed any voluntary or
involuntary bankruptcy, receivership, insolvency or other similar
proceeding or petition with any Governmental Authority with respect
to Seller, any of the Seller Subsidiaries or any of the
Shareholders;
(xviii) fail to perform its obligations under any Material
Contract (except those being contested in good faith) or enter into,
assume or amend any agreement that would be a Material Contract
other than agreements to provide services entered into in the
ordinary and usual course of business;
(xix) take any action that would or could reasonably be
expected to result in (A) a Material Adverse Effect on Seller or (B)
any of its representations and warranties contained in Article 4 not
being true and correct in any material respect at the Effective
Time, or that would cause any of its conditions to Closing not to be
satisfied; or
(xx) directly or indirectly agree to do any of the foregoing.
(b) Parent agrees that from the date hereof to the Effective
Time, except as otherwise approved by Seller in writing or as permitted or
required by this Agreement, it will not, nor will it permit any of the Parent
Subsidiaries to:
(i) declare, set aside or pay any dividend or other
distribution of cash or property (other than capital stock) in
respect of its capital stock, other than regular cash dividends in
amounts not materially greater than customarily paid by Parent;
(ii) make any material change in its accounting methods or
practices, other than changes required by GAAP or by Governmental
Authorities;
30
<PAGE>
(iii) take any action that would result in any of its
representations and warranties contained in Article 6 not being true
and correct in any material respect at the Effective Time or that
would cause any of its conditions to Closing not to be satisfied; or
(iv) directly or indirectly agree to do any of the foregoing.
7.3 No Solicitation. From the date hereof to the Effective
---------------
Time or the earlier termination of this Agreement in accordance with its terms,
Seller and the Shareholders:
(a) shall not, and Seller shall direct and use its best efforts to
cause its Affiliates, officers, directors, employees, agents and representatives
(including without limitation, the Shareholders, any investment banker, attorney
or accountant retained by it) not 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 the Shareholders)
with respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
equity securities of, Seller or any of the Seller Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal") or
engage in any negotiations concerning, or provide any information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal;
(b) 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 Seller will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 7.3; and
(c) will notify Parent immediately of the identity of any potential
acquirer and the terms of any Acquisition Proposals.
7.4 Current Information.
-------------------
(a) During the period from the date of this Agreement to the
Effective Time or the earlier termination of this Agreement in accordance with
its terms, on a frequent basis;
(i) Seller will cause one or more of its representatives to
confer with representatives of Parent regarding its business,
operations, properties, assets and financial condition; and
(ii) each of Seller and Parent will cause one or more of
its representatives to confer with representatives of the other
party regarding matters relating to the completion of the
transactions contemplated herein.
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<PAGE>
(b) Prior to the Effective Time, as soon as practicable after the
end of every month (but in no event later than thirty days thereafter) beginning
with the month in which this Agreement is signed, Seller will deliver to Parent
an unaudited balance sheet as of the end of such month, and related statements
of income and cash flows for such month, each certified by an officer of Seller
as meeting the standards for financial statements set forth in Section 4.4.
7.5 Access to Properties and Records; Confidentiality.
-------------------------------------------------
(a) Seller shall permit Parent and its representatives reasonable
access to its and the Seller Subsidiaries' respective properties, and shall
disclose and make available to Parent and its representatives all books, papers
and records and information relating to it and the Seller Subsidiaries, its and
their assets, stock ownership, properties, operations, obligations and
liabilities, including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
meetings, organizational documents, agreements, filings with any Governmental
Authority, accountants' work papers, litigation files, plans affecting
employees, and any other records and information in which Parent and its
representatives may have a reasonable interest.
(b) All information furnished by the parties hereto previously in
connection with transactions contemplated by this Agreement or pursuant hereto
shall be used solely for the purpose of evaluating the Merger and shall be
treated as the sole property of the party delivering the information until
consummation of the Merger contemplated hereby and, if Merger shall not occur,
each party and each party's advisors shall return to the other party all
documents or other materials containing, reflecting or referring to such
information, will not retain any copies of such information, shall use
commercially reasonable efforts to keep confidential all such information, and
shall not directly or indirectly use such information for any competitive or
other commercial purposes. In the event that the Merger does not occur, all
documents, notes and other writings prepared by a party hereto or its advisors
based on information furnished by the other party shall be promptly destroyed.
The obligation to keep such information confidential shall continue for three
years from the date the Merger is abandoned but shall not apply to (i) any
information which (A) the party receiving the information can establish by
convincing evidence was already in its possession prior to the disclosure
thereof to it by the other party; (B) was then generally known to the public;
(C) became known to the public through no fault of the party receiving such
information; or (D) was disclosed to the party receiving such information by a
third party not bound by an obligation of confidentiality; or (ii) any
information that is requested or required (by interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
processes) to be disclosed by Law or Governmental Authority, to the extent that
the party subject to such request or requirement provides the other parties
hereto with prompt notice thereof so that they may seek an appropriate
protective order or waive compliance with the provisions of this Section 7.5.
If, in the absence of a protective order or the receipt of a waiver hereunder,
any party hereto is nonetheless, in the opinion of its counsel, compelled to
disclose information that is protected hereunder to any Governmental Authority
or else stand liable for contempt or suffer other censure or penalty, said party
may disclose such information to such Governmental Authority without liability
hereunder.
32
<PAGE>
(c) No investigation by Parent heretofore or hereafter made shall
affect the representations and warranties of Seller and the Shareholders, and
each such representations and warranties shall survive any such investigation,
subject to Article 10.
7.6 Regulatory Matters. Each of the parties will promptly furnish
------------------
each other with copies of written communications received by them or any of
their respective Subsidiaries from, or delivered by any of the foregoing to, any
Governmental Authorities in respect of the transactions contemplated hereby.
7.7 Best Efforts; Further Assurances; Cooperation. Subject to the
---------------------------------------------
other provisions in this Agreement, the parties hereto shall in good faith
perform their obligations under this Agreement before, at and after the
Effective Time, and shall each use their reasonable best efforts to do, or cause
to be done, all things necessary, proper or advisable under applicable Laws to
obtain all Authorizations and satisfy all conditions to the obligations of the
parties under this Agreement and to cause the transactions contemplated by this
Agreement to be carried out promptly in accordance with the terms hereof and
shall cooperate fully with each other and their respective officers, directors,
employees, agents, counsel, accountants and other designees in connection with
any steps required to be taken as part of their respective obligations under
this Agreement. Upon the execution of this Agreement and thereafter, each party
shall take such actions and execute and deliver such documents as may be
reasonably requested by the other parties hereto in order to consummate the
transactions contemplated by this Agreement.
7.8 Public Announcements. Neither Seller nor any of the
--------------------
Shareholders shall make any public announcement regarding any aspect of this
Agreement without Parent's prior written consent.
7.9 Failure to Fulfill Conditions. In the event that Parent or
-----------------------------
Seller determines that a material condition to its or the other's obligation to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to April 30, 1998 (the "Deadline Date"), it will promptly notify
the other party. Except for any acquisition or merger discussions Parent may
enter into with other parties, Seller and Parent will promptly inform the other
of any facts applicable to Seller or Parent that would be likely to prevent or
materially delay consummation of the Merger.
7.10 Disclosure Supplements. From time to time prior to the
----------------------
Effective Time, each party hereto will promptly notify the other party of any
inaccuracy in its respective Disclosure Schedules delivered pursuant hereto
including, without limitation, any matter which, if existing, occurring or known
at the date of this Agreement, would have been required to be set forth or
described in such Schedule or which is necessary to correct any information in
such Schedule that has been rendered inaccurate. Notwithstanding the foregoing,
for the purpose of determining satisfaction of the conditions set forth in
Article 8, no such notification shall be deemed to amend such Disclosure
Schedules or shall be deemed to be part hereof unless agreed to by the other
party.
33
<PAGE>
7.11 Affiliates. Simultaneously with the execution and delivery of
----------
this Agreement, Seller shall deliver to Parent copies of letter agreements, each
substantially in the form of Exhibit 7.11, executed by all directors, executive
------------
officers and by any other person who is an "affiliate" of Seller for purposes of
Rule 145 under the 1933 Act providing that such person will not sell, pledge,
transfer or otherwise dispose of any shares of Seller Common Stock held by such
"affiliate" the shares of Parent Common Stock to be received by such "affiliate"
in the Merger, except, in the case of shares of Parent Common Stock only, in
compliance with the applicable provisions of the 1933 Act and the rules and
regulations thereunder. The certificates of Parent Common Stock issued to
"affiliates" of Seller will bear an appropriate legend reflecting the foregoing.
7.12 Shareholders' Approval. As soon as practicable following the
----------------------
date hereof, all of the Shareholders shall approve the Merger in compliance with
applicable law. The Shareholders may effect such approval by unanimous written
consent in lieu of a shareholders' meeting.
7.13 Release by the Shareholders. If the Closing occurs as
---------------------------
contemplated by this Agreement, then the Shareholders hereby release Seller and
the Seller Subsidiaries from any and all claims, rights and causes of action
that the Shareholders may have or may have had against Seller or the Seller
Subsidiaries arising out of any transactions between the Shareholders and Seller
or the Seller Subsidiaries prior to, or arising with respect to any act or
omissions occurring prior to the Effective Time; provided, however, that the
foregoing release does not apply to accrued compensation and benefits and
expenses or similar obligations incurred in the ordinary course of business
(including reimbursement of medical expenses pursuant to the Employee Plans
disclosed pursuant to this Agreement).
7.14 Shareholder Agreements. On or prior to the Closing Date, all
----------------------
agreements among the Shareholders and Seller relating to Seller or any stock or
securities of Seller other than the Seller Stock Options shall have been
canceled at no cost to Seller.
7.15 Employee Matters.
----------------
(a) Employee Benefits. Parent shall take all action necessary or
-----------------
appropriate to permit the employees of Seller at the Effective Time who shall
continue to be employed by the Surviving Corporation thereafter ("Continuing
Employees") to participate after the Effective Time in Parent's employee benefit
programs and to cause the Surviving Corporation to take all actions necessary or
appropriate to adopt Parent's employee benefit programs effective as of the
Effective Time. Parent will cause the Surviving Corporation to give each
Continuing Employee full credit for service with Seller for purposes of
eligibility to participate in, vesting and payment of benefits under, and
eligibility for any subsidized benefit provided under (but not, except as
provided in the preceding sentence, for purposes of determining the amount of
any benefit under) any Parent employee benefit plan; provided, however, that
nothing in this Agreement shall be deemed to require Parent to cause to be
continued any employee's employment, responsibilities or officer title for any
definite period, or to change the terms or conditions of any existing employee
benefit program.
34
<PAGE>
(b) Employment Agreements. On or prior to the Closing Date, all
---------------------
employment agreements between Seller and each of Michael J. Chomik and William
J. DeGrosky, Jr. (other than agreements relating to confidentiality, ownership
of inventions and materials and similar agreements benefiting Seller) shall have
been canceled at no cost to Seller.
7.16 No Transfers. Except pursuant to this Agreement or with the
------------
prior written consent of Purchaser, none of the Shareholders shall transfer any
of the Seller Common Stock after the date of this Agreement.
7.17 Special Provisions with Respect to Seller. If the Closing
-----------------------------------------
occurs as provided herein, then at that time all representations, warranties,
covenants and agreements to the extent made or adopted by Seller (and only to
such extent) shall expire and be of no further force and effect, and Seller's
having made representations, warranties, covenants and agreements shall in no
way limit the liability of the Shareholders for those representations,
warranties, covenants and agreements pursuant to this Agreement.
7.18 Release from Personal Guaranties; Loan Payments.
-----------------------------------------------
(a) If Seller's obligations under its currently outstanding loans
from CoreStates Bank, N.A. ("CoreStates"), which loans are set forth on Seller
------
Disclosure Schedule 4.3, are assumed by Parent, Parent shall use all reasonable
- -----------------------
efforts to obtain the release from CoreStates of Michael J. Chomik, Barbara A.
Chomik, William J. DeGrosky, and Deborah A. DeGrosky from their obligations
under their respective guaranties to CoreStates, dated December 11, 1997 (the
"Personal Guaranties").
(b) In addition, if the Surviving Corporation, as evidenced by an
audit performed by Arthur Andersen, L.L.P., achieves eighty percent (80%) of its
projected EBITDA for the year ending December 31, 1998 of $1,250,000.00, Parent
shall cause certain of its shareholders and executive officers, namely John P.
Kelly and Glenn W. Sturm, to execute personal guaranties to CoreStates for such
loans (the "Additional Personal Guaranties").
(c) Parent hereby represents and warrants that the loans
from CoreStates set forth on Seller Disclosure Schedule 4.3 are senior to the
------------------------------
Sirrom Subordinated Debt (as defined in Section 8.3(g) below), to be set forth
in that certain Intercreditor Agreement by and between Sirrom Investments, Inc.
and CoreStates. Parent agrees that, in the event a default occurs in respect of
any of such loans from CoreStates, Parent will use its best efforts to have
CoreStates first seek satisfaction from the Parent's assets to satisfy any
indebtedness to CoreStates before allowing CoreStates to seek payment pursuant
to any of the Personal Guaranties or the Additional Personal Guaranties, if any.
35
<PAGE>
(d) Parent agrees to make all further monthly payments, and the
final "balloon" payment (due on November 30, 1998) pursuant that certain
$376,466.28 Commercial Promissory Note, dated July 15, 1997, from Seller to
CoreStates.
7.19 Employee Bonuses. Parent agrees not to prohibit or otherwise
----------------
interfere with the Surviving Corporation's payment of employee bonuses pursuant
to currently outstanding agreements between Seller and the following employees
of Seller: Matthew DeGrosky, Joseph DiMarino, Thomas Dunn, Renee Felder,
Kathleen M. Halligan, Kathleen P. Houlihan, Douglas Prutzman, and Michael
Rapposelli.
7.20 Tax Matters.
-----------
(a) Transfer Taxes. The Shareholders shall pay all stock transfer
--------------
and other similar Taxes and fees in respect of the exchange of the Seller Common
Stock and shall be responsible for paying all the costs of filing all Returns
relating to such Taxes and fees.
(b) Cooperation and Exchange of Information. The Shareholders, the
---------------------------------------
Surviving Corporation and Parent agree to furnish, or to cause to be furnished
in good faith to each other, such cooperation and assistance as is reasonably
necessary to file any future returns, to respond to audits, to negotiate
settlements with Governmental Authorities and to prosecute and defend against
Tax claims.
(c) Tax-Free Transaction. The parties hereto intend that the Merger
--------------------
shall be treated as a tax-free reorganization under the Code, shall report the
Merger as such for federal and state income tax purposes, and shall take no
action after the Effective Time to adversely affect the status of the Merger as
a tax-free reorganization under the Code.
ARTICLE 8 - CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement.
-----------------------------------------------------------
The respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the satisfaction, or, where permissible under
applicable Law, waiver at or prior to the Closing Date of the following
conditions:
(a) Approval of Shareholders. This Agreement, the Merger and the
------------------------
transactions contemplated hereby shall have been approved by the requisite vote
of the shareholders of Seller.
(b) Approvals and Regulatory Filings. All necessary Authorizations
--------------------------------
of Governmental Authorities required to consummate the transactions contemplated
hereby shall have been obtained without any term or condition that would
materially impair the value of Seller and the Seller Subsidiaries, taken as a
whole, or that would materially impair the value of Parent and the Parent
Subsidiaries, taken as a whole. All conditions required to be satisfied
36
<PAGE>
prior to the Effective Time by the terms of such approvals and consents shall
have been satisfied; and all statutory waiting periods in respect thereof shall
have expired.
(c) Suits and Proceedings. The consummation of the transactions
---------------------
contemplated hereby will not violate the provisions of any injunction, order,
judgment, decree or Law applicable or effective with respect to Parent or Seller
or the Seller Subsidiaries or their officers and directors. No suit or
proceeding shall have been instituted by any person, or, to the knowledge of
Parent or Seller, shall have been threatened by any Governmental Authority, and
not subsequently withdrawn, dismissed or otherwise eliminated, which seeks (i)
to prohibit, restrict or delay consummation of the transactions contemplated
hereby or to limit in any material respect the right of Parent to control any
material aspect of the business of Parent and the Parent Subsidiaries or Seller
or the Seller Subsidiaries after the Effective Time, or (ii) to subject
Purchaser or Seller or their respective directors or officers to material
liability on the ground that it or they have breached any Law or otherwise acted
improperly in relation to the transactions contemplated by this Agreement.
(d) Tax Opinion. Parent and Seller each shall have received the
-----------
opinions of Nelson Mullins Riley & Scarborough, L.L.P., dated as of the Closing
Date, in form and substance reasonably satisfactory to Parent and to Seller and
their counsel, that the Merger will qualify as a tax-free reorganization under
the Code, and that no gain or loss will be recognized by the holders of Seller
Common Stock as to Parent Common Stock received by them.
(e) Other Merger. The merger of Genesis Direct, Inc., a Florida
------------
corporation, with a Subsidiary of Parent shall have been consummated prior to or
simultaneously with the Merger.
8.2 Conditions to the Obligations of Parent and Merger Sub Under
------------------------------------------------------------
this Agreement. The obligations of Parent and Merger Sub under this Agreement
- --------------
shall be further subject to the satisfaction or waiver, at or prior to the
Closing Date (and continued until the Effective Time), of the following
conditions:
(a) Representations and Warranties; Covenants and Agreements;
---------------------------------------------------------
Consents. The representations and warranties of Seller and the Shareholders
- --------
contained in this Agreement shall be true and correct in all respects as of the
date hereof and shall also be true and correct in all material respects on the
Closing Date as though made on and as of the Closing Date, except that those
representations and warranties which are confined to a particular date shall
speak only as of such date, and Seller and the Shareholders shall have performed
in all material respects the agreements, covenants and obligations to be
performed by it or them at or prior to the Effective Time. All Authorizations of
or with any nongovernmental third party that are required for or in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby by Seller and the Shareholders shall have been
obtained or made.
(b) Opinion of Counsel. Parent shall have received an opinion of
------------------
counsel to Seller, dated the Closing Date, in form and substance reasonably
satisfactory to Parent, covering the matters set forth on Exhibit 8.2(b).
--------------
37
<PAGE>
(c) Certificates. Seller shall have furnished Parent with such
------------
certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Article 8 and otherwise to
consummate the transactions contemplated pursuant to this Agreement as Parent
may reasonably request.
(d) Employment Agreements. Certain of the Shareholders shall have
---------------------
executed and delivered Employment Agreements with Parent in the form attached
hereto as Exhibit 8.2(d), with the blanks therein properly completed, the
-------------
effectiveness of which are expressly conditioned upon consummation of the
Merger.
(e) Shareholders Agreement. Certain of the Shareholders shall have
----------------------
executed and delivered a Shareholders Agreement with Parent in the form attached
hereto as Exhibit 8.2(e), with the blanks therein properly completed, the
-------------
effectiveness of which is expressly conditioned upon consummation of the Merger.
(f) Resignations. Seller shall have delivered to Parent, to the
------------
extent requested by Parent, the written resignations of the directors and
officers of Seller and the Seller Subsidiaries.
(g) Financing. Parent shall have closed and received the proceeds
---------
of financing, upon terms and conditions satisfactory to Parent in all respects,
from Sirrom Investments, Inc. in the amount of $3,000,000.00 (the "Sirrom
Subordinated Debt"), and CoreStates shall have consented in writing to the
assumption by Parent of Seller's obligations to CoreStates pursuant to the
CoreStates loans disclosed on Seller Disclosure Schedule 4.3.
------------------------------
8.3 Conditions to the Obligations of Seller and the Shareholders
------------------------------------------------------------
Under this Agreement. The obligations of Seller and the Shareholders under this
- --------------------
Agreement shall be further subject to the satisfaction or waiver, at or prior to
the Closing Date (and continued until the Effective Time), of the following
conditions:
(a) Representations and Warranties; Covenants and Agreements;
---------------------------------------------------------
Consents. The representations and warranties of Parent and Merger Sub contained
- --------
in this Agreement, including but not limited to any financial projections
disclosed by Seller to Parent, shall be true and correct in all respects as of
the date hereof and shall also be true and correct in all material respects on
the date hereof and on the Closing Date as though made on and as of the Closing
Date, except that those representations and warranties that are confined to a
particular date shall speak only as of such date, and Parent shall have
performed in all material respects the agreements, covenants and obligations to
be performed by it at or prior to the Effective Time. All Authorizations of or
with any nongovernmental third party that are required for or in connection with
the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby by Parent and the Merger Sub shall have been
obtained or made, except where the failure to obtain any such Authorizations
would not have a Material Adverse Effect on Parent or the Parent Subsidiaries,
taken as a whole.
38
<PAGE>
(b) Opinion of Counsel to Parent. Seller shall have received an
----------------------------
opinion of counsel to Parent, dated the Closing Date, substantially in the form
and substance set forth on Exhibit 8.3(b).
(c) Certificates. Parent and Merger Sub shall have furnished Seller
------------
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions set forth in this Article 8 and otherwise
to consummate the transactions contemplated pursuant to this Agreement as Seller
may reasonably request.
(d) Employment Agreements. The Parent shall have executed and
---------------------
delivered Employment Agreements with Parent in the form attached hereto as
Exhibit 8.2(d), with the blanks therein properly completed, the effectiveness of
- --------------
which are expressly conditioned upon consummation of the Merger.
(e) Shareholders Agreements. The Parent shall have executed and
-----------------------
delivered a Shareholders Agreement with certain of the Shareholders in the form
attached hereto as Exhibit 8.2(e), with the blanks therein properly completed,
-------------
the effectiveness of which is expressly conditioned upon consummation of the
Merger.
(f) Funding by Shareholders of Parent. The shareholders of Parent
---------------------------------
shall have provided an aggregate of $1,000,000.00 cash to fund the business of
Parent and its Subsidiaries.
(g) Certain Payments by Parent. Parent shall have paid to
--------------------------
CoreStates the $60,000.00 payment due at Closing pursuant to Seller's loans from
CoreStates which loans are disclosed on Seller Disclosure Schedule 4.3.
------------------------------
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated prior to the
-----------
Effective Time, whether before or after approval of this Agreement by the
shareholders of Merger Sub, Parent and Seller:
(a) by mutual written consent of Parent and Seller;
(b) by Parent or Seller if the Effective Time shall not have
occurred on or prior to the Deadline Date;
(c) by Parent if there has been a material breach of any
representation, warranty, covenant, agreement or obligation of Seller hereunder
in each case which either is not capable of being remedied, or, if capable of
being remedied, shall not have been remedied within 20 days after receipt by
Seller of notice in writing from Parent to Seller specifying the nature of such
breach and requesting that it be remedied;
39
<PAGE>
(d) by Seller if there has been a material breach in any
representation, warranty, covenant, agreement or obligation of Parent hereunder
in each case which either is not capable of being remedied, or, if capable of
being remedied, shall not have been remedied within 20 days after receipt by
Parent of notice in writing from Seller specifying the nature of such breach and
requesting that it be remedied;
(e) by Parent if any of the conditions set forth in Section 8.1 or
8.2 is not satisfied and is no longer capable of being satisfied by the Deadline
Date; or
(f) by Seller if any of the conditions set forth in Section 8.1 or
8.3 is not satisfied and is no longer capable of being satisfied by the Deadline
Date.
9.2 Effect of Termination. If either Parent or Seller terminates
---------------------
and abandons this Agreement pursuant to Section 9.1, this Agreement, other than
Sections 7.5, 7.6, 7.13, this Section 9.2, Article 10 and Section 11.1 (each of
which shall survive termination) shall forthwith become void and have no effect,
without any liability on the part of any party or its officers, directors or
shareholders; provided, however, that nothing contained in this Section 9.2
shall relieve any party from any liability for any breach of this Agreement.
9.3 Specific Performance. The parties acknowledge that the rights
--------------------
of each party to consummate the transactions contemplated hereby are special,
unique, and of extraordinary character, and that, in the event that any party
violates or fails or refuses to perform any covenant made by it herein, the
other party or parties will be without adequate remedy at law. Each party
agrees, therefore, that in the event that it violates, fails or refuses to
perform any covenant or agreement made by it herein, the other party or parties
so long as it or they are not in breach hereof, may, in addition to the remedies
at law, institute and prosecute an action in a court of competent jurisdiction
to enforce specific performance of such covenant or agreement or seek any other
equitable relief.
9.4 Amendment. This Agreement may be amended by action taken by the
---------
parties hereto at any time before or after approval of this Agreement and
matters related thereto, as the case may be, by the shareholders of Merger Sub
or Seller but, after any such approval, no amendment shall be made that changes
the amount or changes the form of the consideration to be delivered to the
Shareholders without the approval of the shareholders of the company that would
be negatively affected by any such change. This Agreement may not be amended
except by an instrument in writing signed on behalf of all the parties hereto.
9.5 Extension; Waiver. The parties may, at any time prior to the
-----------------
Effective Time of the Merger, (a) extend the time for the performance of any of
the obligations or other acts of the other parties hereto; (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto; or (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party against which the waiver is
sought to be enforced and shall apply only to the specific condition,
representation or warranty identified by such writing as being waived, extended
or modified.
40
<PAGE>
ARTICLE 10 - INDEMNIFICATION
10.1 Indemnification by Shareholders. Subject to the terms of this
-------------------------------
Article 10, Seller and the Shareholders (but after the consummation of the
Merger, solely the Shareholders, and not the Seller) shall, jointly and
severally, indemnify, defend, save and hold harmless Parent, Merger Sub (and
Seller, after the consummation of the Merger) (collectively, the "Parent
Indemnified Parties"), from and against any demands, claims, actions, losses,
damages, deficiencies, liabilities, costs and expenses (including, without
limitation, reasonable attorneys' and accountants' fees and expenses), together
with interest and penalties, if any, awarded by court order or otherwise agreed
to (collectively, "Indemnifiable Damages"), suffered by the Parent Indemnified
Parties that arise out of or result from any of the following (whether or not a
third party initiates the proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties, covenants
or agreements made by Seller or the Shareholders in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Seller or the
Shareholders at the Closing; or
(c) any expenses, charges, fees, or costs associated with any audit
of Seller or the Seller Subsidiaries for Taxes related to periods prior to the
Closing Date, and any Taxes imposed as a result of any such audit, even though
any such audit commences, or a party does not become aware of any such audit
until after the Closing Date.
10.2 Indemnification by Parent. Subject to the terms of this Article
-------------------------
10, Parent shall indemnify, defend, save and hold harmless Seller and the
Shareholders (but after consummation of the Merger, solely the Shareholders, and
not the Seller) (collectively, the "Seller Indemnified Parties Parties"), from
and against any Indemnifiable Damages suffered by the Seller Indemnified Parties
that arise out of or result from any of the following (whether or not a third
party initiates the proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties, covenants
and agreements made by Parent in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Parent at the
Closing; or
(c) any fees, claims, assessments or actions made, brought or
raised against Seller or the Shareholders in connection with the agreements
referenced in Section 4.11(a)(vi) of this Agreement.
41
<PAGE>
10.3 Claims for Indemnification. The representations, warranties,
--------------------------
covenants and agreements in this Agreement shall survive the Closing subject to
the limitations set forth herein and shall not be affected by any investigation
made by the parties hereto prior to the date hereof or the Effective Time. The
party seeking indemnification (the "Indemnified Party") shall give the party
from whom indemnification is sought (the "Indemnifying Party") a written notice
("Notice of Claim") within sixty (60) days of the discovery of any loss,
liability, claim or expense in respect of which the right to indemnification
contained in this Article 10 may be claimed; provided, however, that the failure
to give such notice within such sixty (60) day period shall not result in the
waiver or loss of any right to bring such claim hereunder after such period
unless, and only to the extent that, the other party is actually prejudiced by
such failure. In the event a claim is pending or threatened or the Indemnified
Party has a reasonable belief as to the validity of the basis for such claim,
the Indemnified Party may give written notice (a "Notice of Possible Claim") of
such claim to the Indemnifying Party, regardless of whether a loss has arisen
from such claim. A party shall have no liability under this Article 10 for
breach of a representation or warranty, unless a Notice of Claim or Notice of
Possible Claim therefor is delivered by the Indemnified Party prior to the
second anniversary of the Effective Time; provided, however, that as to any
liability arising pursuant to Sections 4.1, 4.2, 4.3, 4.8, 4.9, 4.13, 4.14,
Article 5 and Sections 6.1, 6.2 and 6.3 hereof, any Notice of Claim or Notice of
Possible Claim must be delivered by the Indemnified Party not later than ninety
(90) days after the expiration of the applicable statute of limitations
(including any extensions) therefor; and provided, further, that the limitations
set forth in this Section 10.3 shall not apply to liability under this Article
10 for any intentional breach of a representation or warranty in this Agreement.
Any Notice of Claim or Notice of Possible Claim shall set forth the
representations, warranties, covenants and agreements with respect to which the
claim is made, the specific facts giving rise to an alleged basis for the claim
and the amount of liability asserted or anticipated to be asserted by reason of
the claim.
10.4 Defense of Claim by Third Parties. If any claim is made by a
---------------------------------
third party against a party to this Agreement that, if sustained, would give
rise to a liability of another party under this Agreement, the party against
whom the claim is made shall promptly cause notice of the claim to be delivered
to the other party and shall afford the other party and its counsel, at the
other party's sole expense, the opportunity to join in the defense and
settlement of the claim. The failure to provide such notice will not relieve the
Indemnifying Party of liability under this Agreement unless, and only to the
extent that, the Indemnifying Party is actually prejudiced by such failure.
10.5 Third Party Claim Assistance. From time to time after the
----------------------------
Closing, Parent, the Surviving Corporation, and the Shareholders shall provide
or cause their appropriate employees or representatives to provide the other
party with information or data in connection with the handling and defense of
any third party claim or litigation (including counterclaims filed by the
parties) in respect to which a party may be required to indemnify another party
under this Agreement. The party receiving such information or data shall
reimburse the other party for all of its reasonable costs and expenses in
providing these services, including, without limitation, (i) all out of pocket,
travel and similar expenses
42
<PAGE>
incurred by its personnel in rendering these services; and (ii) all fees and
expenses for services performed by third parties engaged by or at the request of
such other party.
10.6 Settlement of Indemnification Claims. If a recipient of a
------------------------------------
Notice of Claim desires to dispute such claim, it shall, within thirty (30) days
after receipt of the Notice of Claim, give counternotice, setting forth the
basis for disputing such claim, to Parent or the Shareholders, as the case may
be. If no such counternotice is given within such thirty (30) day period, or if
Parent or the Shareholders, as the case may be, acknowledges liability for
indemnification, then the amount claimed shall be promptly satisfied as provided
in Section 10.7. If, within thirty (30) days after the receipt of counternotice
by Parent or the Shareholders, as the case may be, the Shareholders and Parent
shall not have reached agreement as to the claim in question, then the party
disputing the claim shall satisfy any undisputed amount as specified in Section
10.7 and the disputed amount of the claim of indemnification shall be submitted
to and settled by arbitration in accordance with the then prevailing commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall be held in the Atlanta, Georgia area before a panel of three (3)
arbitrators, one selected by each of the parties and the third selected by
mutual agreement of the first two, and all of whom shall be independent and
impartial under the rules of the American Arbitration Association. The decision
of the arbitrators shall be final and binding as to any matter submitted under
this Agreement. To the extent the decision of the arbitrators is that a party
shall be indemnified hereunder, the amount shall be satisfied as provided in
Section 10.7. Judgment upon any award rendered by the arbitrators may be entered
in any court of competent jurisdiction. The date of the arbitrator's decision or
the date a claim otherwise becomes payable pursuant to this Section 10.6 is
referred to as the "Determination Date."
10.7 Manner of Indemnification. All indemnification under this
-------------------------
Article 10 shall be made by payment of cash or delivery of a certified or
cashier's check in the amount of the indemnification liability no later than
five (5) days following the Determination Date.
10.8 Indemnification Exclusive Remedy. In the absence of fraud, and
--------------------------------
except for non-monetary equitable relief, if the Closing occurs, indemnification
pursuant to the provisions of this Article 10 shall be the sole and exclusive
remedy of the parties for any breach of any representation or warranty contained
in this Agreement.
10.9 Certain Limitations. The foregoing indemnification obligations
-------------------
are subject to the limitation that no Indemnifying Party shall have any
liability for indemnification for breaches of representations and warranties
pursuant to this Article 10 unless the total Indemnifiable Damages for which the
Indemnifying Party would be liable exceed $10,000 in the aggregate, and then
only for the excess; provided, however, that the foregoing limitation shall not
-------- -------
apply to any Indemnifiable Damages with respect to, as a result of or involving
any intentional breach of a representation or warranty in this Agreement. In no
event shall the liability of the Shareholders and Parent under this Article 10
exceed the total consideration paid by Parent for the Seller Common Stock, and
in no event shall an individual Shareholder's liability under this Article 10
exceed the total consideration paid by Parent for such Shareholder's Seller
Common Stock.
43
<PAGE>
ARTICLE 11 - MISCELLANEOUS
11.1 Expenses.
--------
(a) Except as otherwise expressly stated herein, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including legal, accounting and investment banking fees and
expenses) shall be borne by the party incurring such costs and expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if either of the parties shall willfully default in its obligations
hereunder, the non-defaulting party may pursue any remedy available at law or in
equity to enforce its rights and shall be paid by the willfully defaulting party
for all damages, costs and expenses, including without limitation reasonable
legal, reasonable accounting, reasonable investment banking and reasonable
printing expenses incurred or suffered by the non-defaulting party in connection
herewith or in the enforcement of its rights hereunder.
11.2 Notices. All notices or other communications which are required
-------
or permitted hereunder shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
(a) If to Parent or Merger Sub, to:
MegaMarketing Corporation
2625 Cumberland Parkway
Suite 400
Atlanta, GA 30339
Attn: John P. Kelly, President and Chief Executive Officer
Telefax: (770) 432-3473
Copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: Glenn W. Sturm
Telefax: (404) 817-6050
44
<PAGE>
(b) If to Seller, to:
Control Group Ltd.
5940 Hamilton Blvd., Suite C
Allentown, PA 18106-9648
Attn: Michael J. Chomik, Chief Executive Officer
Telefax: (610) 366-7964
Copy to:
Edward A. Fedok, Esq.
Stevens & Lee, P.C.
190 Brodhead Road
Suite 200
P.O. Box 20830
Lehigh Valley, PA 18002-0830
Telefax: (610) 591-7175
(c) If to the Shareholders, to their respective addresses as set
forth on the signature page to this Agreement;
or to such other addresses and telefax numbers as shall be furnished
in writing by any party, and any such notice or communications shall be deemed
to have been given as of three business days after the date actually sent via
overnight or express courier, eight days after mailed and upon telefax
confirmation of receipt to addressee by the sender.
11.3 Parties in Interest. This Agreement shall be binding on and
-------------------
shall inure to the benefit of the parties hereto and their respective
successors, representatives and assigns. This Agreement (and the rights and
interests herein) may not be assigned by any party without the written consent
of the other parties; provided, however, Parent may assign its interests herein
to (a) an entity controlling, controlled by or under common control with Parent
or (b) a purchaser or transferee of all or substantially all of the business or
assets of Parent or the Surviving Corporation, whether by sale of stock or
assets, merger or otherwise. Any attempted assignment in contravention of the
foregoing shall be null and void. Nothing in this Agreement is intended to
confer, expressly or by implication, upon any other person any rights or
remedies under or by reason of this Agreement.
11.4 Entire Agreement. This Agreement, which includes the
----------------
Disclosure Schedules and the other documents, agreements and instruments
executed and delivered pursuant to or in connection with this Agreement, contain
the entire agreement between the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all prior negotiations,
arrangements or understandings, written or oral, with respect thereto.
11.5 Counterparts. This Agreement may be executed by each party upon
------------
a separate copy, and in such case one counterpart of this Agreement shall
consist of enough of such copies to reflect the signatures of all of the
parties. This Agreement may be executed in
45
<PAGE>
two or more counterparts, each of which shall be an original, and each of which
shall constitute one and the same agreement. Any party may deliver an executed
copy of this Agreement and of any documents contemplated hereby by facsimile
transmission to another party and such delivery shall have the same force and
effect as any other delivery of a manually signed copy of this Agreement or of
such other documents.
11.6 Governing Law.
-------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF GEORGIA,
EXCLUDING CHOICE OF LAW PRINCIPLES.
(b) Parent, Seller and the Shareholders consent to the exclusive
jurisdiction and venue of the courts of Fulton County, Georgia and the United
States Federal District Court for the Northern District of Georgia, in any
judicial proceeding brought to enforce this Agreement. The parties agree that
any forum other than the State of Georgia is an inconvenient forum and that a
lawsuit (or non-compulsory counterclaim) brought by one party against another
party, in a court of any jurisdiction other than the State of Georgia should be
forthwith dismissed or transferred to a court located in the State of Georgia.
11.7 Arbitration. Any dispute, controversy or claim arising out of
-----------
or relating to this Agreement or any other related documents, agreements,
certificates or other writing, or the breach, termination, construction,
validity or enforceability hereof or thereof, shall be settled by binding
arbitration in accordance with the rules of the American Arbitration Association
in force at the time and in the manner described in Section 10.6.
11.8 Invalidity of any Part. If any provision or part of this
----------------------
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement and shall be construed as if such invalid,
illegal or unenforceable provision or part thereof had never been contained
herein, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
11.9 Time of the Essence; Computation of Time. Time is of the
----------------------------------------
essence of each and every provision of this Agreement. Whenever the last day for
the exercise of any right or the discharge of any duty under this Agreement
shall fall upon Saturday, Sunday or a federal, public or legal holiday, the
party having such right or duty shall have until 5:00 p.m., Atlanta, Georgia
time on the next succeeding regular business day to exercise such right or to
discharge such duty.
46
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub, Seller and Shareholders have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
MEGAMARKETING CORPORATION
/s/ John P. Kelly
-------------------------------
By: John P. Kelly
----------------------------
Its: President
----------------------------
MEGAMARKETING ACQUISITION
ONE, INC.
/s/ Edward J. Rutkowski
-------------------------------
By: Edward J. Rutkowski
----------------------------
Its: President
----------------------------
CONTROL GROUP LTD.
/s/ William J. DeGrosky, Jr.
-------------------------------
By: William J. DeGrosky, Jr.
----------------------------
Its: President
----------------------------
SHAREHOLDERS:
/s/ William J. DeGrosky, Jr.
-------------------------------
Name: William J. DeGrosky, Jr.
------------------------
Address:
------------------------
/s/ Michael J. Chomik
-------------------------------
Name: Michael J. Chomik
------------------------
Address:
------------------------
<PAGE>
I, Michael J. Chomik, the Secretary of Control Group Ltd., hereby
certify, pursuant to Sections 251 and 252 of the Delaware General Corporation
Law, that a majority of the Shareholders of Control Group Ltd. have voted for
the adoption of this agreement.
/s/ Michael J. Chomik
-------------------------------
Michael J. Chomik
Secretary
Control Group Ltd.
<PAGE>
AGREEMENT AND PLAN OF MERGER
by
and
among
MEGAMARKETING CORPORATION
MEGAMARKETING ACQUISITION TWO, INC.
GENESIS DIRECT, INC.
and
THE SHAREHOLDERS OF GENESIS DIRECT, INC.
Dated as of March 6, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 - THE MERGER.........................................................1
1.1 The Merger....................................................1
1.2 Closing.......................................................2
1.3 Effective Time of the Merger..................................2
1.4 Articles of Incorporation; Bylaws.............................2
1.5 Directors and Officers of the Surviving Corporation...........2
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF
SHARES....................................................................2
2.1 Consideration; Conversion of Shares...........................2
(a) Merger Consideration....................................2
(b) Treasury Shares.........................................2
(c) Merger Sub Common Stock.................................3
2.2 No Fractional Shares..........................................3
2.3 Fair Market Value.............................................3
2.4 Stock Transfer Books..........................................3
2.5 Surrender and Exchange of Certificates Representing Seller
Common Stock..................................................3
(a) Surrender and Exchange of Certificates..................3
(b) Lost Certificates.......................................3
(c) No Interest.............................................4
(d) No Liability............................................4
2.6 Dissenting Stockholders.......................................4
2.7 Adjustments...................................................4
ARTICLE 3 - RULES OF CONSTRUCTION..............................................5
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS......7
4.1 Corporate Organization........................................7
4.2 Capitalization................................................8
4.3 Authority; No Violation.......................................8
4.4 Financial Statements.........................................10
4.5 Broker's and Other Fees......................................10
4.6 Absence of Certain Changes or Events.........................10
4.7 Legal Proceedings............................................10
4.8 Taxes and Tax Returns........................................11
4.9 Employee Benefit Plans and Relations.........................12
4.10 Compliance with Applicable Laws..............................13
4.11 Certain Contracts............................................13
<PAGE>
4.12 Properties and Insurance.....................................15
4.13 Environmental Matters........................................16
4.14 Intellectual Property........................................16
4.15 No Parachute Payments........................................17
4.16 Absence of Certain Agreements and Practices..................17
4.17 Major Vendors and Customers..................................18
4.18 Accounts Receivable..........................................18
4.19 Corporate Records............................................18
4.20 Combinations Involving Seller................................18
4.21 Bank Accounts................................................19
4.22 Labor Relations..............................................19
4.23 Disclosure...................................................19
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS....................20
5.1 Ownership of Shares..........................................20
5.2 Authorization................................................20
5.3 Absence of Violations or Conflicts...........................20
5.4 No Consents Required.........................................21
5.5 No Claims Against Seller.....................................21
5.6 Litigation Related to this Agreement.........................21
5.7 Investment Intent............................................21
5.8 Access to Information........................................22
5.9 Economic Risk................................................22
5.10 Tax Advice...................................................22
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...........22
6.1 Corporate Organization.......................................22
6.2 Capitalization...............................................23
6.3 Authority; No Violation......................................24
6.4 Financial Statements.........................................25
6.5 Broker's and Other Fees......................................25
6.6 Parent Common Stock; Merger Sub Common Stock.................25
6.7 Disclosure...................................................25
ARTICLE 7 - COVENANTS OF THE PARTIES..........................................25
7.1 Conduct of Business..........................................25
7.2 Negative Covenants...........................................26
7.3 No Solicitation..............................................28
7.4 Current Information..........................................29
7.5 Access to Properties and Records; Confidentiality............29
7.6 Regulatory Matters...........................................30
7.7 Best Efforts; Further Assurances; Cooperation................30
7.8 Public Announcements.........................................31
7.9 Failure to Fulfill Conditions................................31
7.10 Disclosure Supplements.......................................31
ii
<PAGE>
7.11 Affiliates...................................................31
7.12 Shareholders' Approval.......................................31
7.13 Release by Seller and the Shareholders.......................32
7.14 Shareholder Agreements.......................................32
7.15 Employee Matters.............................................32
(a) Employee Benefits......................................32
(b) Employment Agreements..................................33
7.16 No Transfers.................................................33
7.17 Special Provisions with Respect to Seller...................33
7.18 Release from Personal Guaranties............................33
7.19 Tax Matters.................................................33
(a) Transfer Taxes.........................................33
(b) Cooperation and Exchange of Information................33
(c) Tax-Free Transaction...................................33
ARTICLE 8 - CLOSING CONDITIONS................................................33
8.1 Conditions of Each Party's Obligations Under this Agreement..33
(a) Approval of Shareholders...............................34
(b) Approvals and Regulatory Filings.......................34
(c) Suits and Proceedings..................................34
(d) Tax Opinion............................................34
(e) Other Merger...........................................34
8.2 Conditions to the Obligations of Parent and Merger Sub Under
this Agreement...............................................34
(a) Representations and Warranties; Covenants and
Agreements; Consents...................................34
(b) Opinion of Counsel.....................................35
(c) Certificates...........................................35
(d) Employment Agreements..................................35
(e) Shareholders Agreement.................................35
(f) Resignation; Severance Agreement and General Release...35
(g) Financing..............................................35
8.3 Conditions to the Obligations of Seller and the Shareholders
Under this Agreement.........................................35
(a) Representations and Warranties; Covenants and
Agreements; Consents...................................35
(b) Opinion of Counsel to Parent...........................36
(c) Certificates...........................................36
(d) Employment Agreements..................................36
(e) Shareholders Agreement.................................36
(f) Seller's Payments to Certain Shareholders..............36
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER.................................36
9.1 Termination..................................................36
9.2 Effect of Termination........................................37
9.3 Specific Performance.........................................37
iii
<PAGE>
9.4 Amendment....................................................37
9.5 Extension; Waiver............................................38
ARTICLE 10 - INDEMNIFICATION..................................................38
10.1 Indemnification by Shareholders..............................38
10.2 Indemnification by Parent....................................38
10.3 Claims for Indemnification...................................39
10.4 Defense of Claim by Third Parties............................39
10.5 Third Party Claim Assistance.................................39
10.6 Settlement of Indemnification Claims.........................40
10.7 Manner of Indemnification....................................40
10.8 Indemnification Exclusive Remedy.............................40
10.9 Certain Limitations..........................................40
ARTICLE 11 - MISCELLANEOUS ...................................................41
11.1 Expenses.....................................................41
11.2 Notices......................................................41
11.3 Parties in Interest..........................................42
11.4 Entire Agreement.............................................43
11.5 Counterparts.................................................43
11.6 Governing Law................................................43
11.7 Arbitration..................................................43
11.8 Invalidity of any Part.......................................43
11.9 Time of the Essence; Computation of Time.....................44
iv
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit No. Description
- ----------------- -----------
Exhibit 7.11 Affiliate Representation Letter
Exhibit 8.1(f) Form of Escrow Agreement
Exhibit 8.2(b) Form of Opinion of Counsel to Seller
Exhibit 8.2(d) Form of Employment Agreement
Exhibit 8.2(e) Form of Shareholders Agreement
Exhibit 8.2(f) Form of Severance Agreement and General Release
Exhibit 8.3(b) Form of Opinion of Counsel to Parent
Schedule No. Description
- ----------------- -----------
Schedule 2.1 Consideration
Seller Disclosure
Schedule No. Description
- ----------------- -----------
Schedule 4.1 Corporate Documents
Schedule 4.2 Seller's Capitalization
Schedule 4.3 Defaults; Conflicts and Liens Created
Schedule 4.4 Seller Financial Statements
Schedule 4.6 Certain Changes and Events
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Certain Contracts
Schedule 4.12 Properties and Insurance Policies
Schedule 4.14 Intellectual Property
Schedule 4.15 Parachute Payments
Schedule 4.16 Absence of Certain Agreements and Practices
Schedule 4.17 Major Vendors and Customers
Schedule 4.18 Accounts Receivable
Schedule 4.21 Bank Accounts
Schedule 4.22 Labor Relations
v
<PAGE>
Shareholder Disclosure
Schedule No. Description
- ---------------------- -----------
Schedule 5.4 Consents
Schedule 5.5 Claims
Parent Disclosure
Schedule No. Description
- ---------------------- -----------
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent Financial Statements
vi
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 6th day of March
1998 (the "Agreement"), is by and among MegaMarketing Corporation, a Georgia
corporation ("Parent"), MegaMarketing Acquisition Two, Inc., a Georgia
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), Genesis
Direct, Inc., a Florida corporation ("Seller"), and all of the shareholders of
Seller (each a "Shareholder" and, collectively, the "Shareholders").
WHEREAS, this Agreement provides for the strategic combination of
Parent and Seller in furtherance of the parties' long-term strategic plans;
WHEREAS, the combination will be accomplished by a merger of Seller
with and into Merger Sub with Merger Sub surviving and the Shareholders
receiving the consideration hereinafter set forth (the "Merger");
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Boards of Directors of Seller, Parent and Merger Sub
have duly adopted and approved this Agreement, and the Board of Directors of
Seller has recommended this Agreement to its shareholders and directed that it
be submitted to its shareholders for approval, the approval of Merger Sub's sole
shareholder having been obtained;
WHEREAS, the Shareholders have agreed to vote in favor of the
Merger;
NOW, THEREFORE, intending to be legally bound, the parties hereto
agree as follows:
ARTICLE 1 - THE MERGER
1.1 The Merger. At the Effective Time (as defined below),
----------
Seller shall be merged with and into Merger Sub in accordance with the
provisions of this Agreement, the Georgia Business Corporation Code (the "GBCC")
and the Florida Business Corporation Act (the "FBCA"), and the separate
existence of Seller shall thereupon cease, and Merger Sub, as the surviving
corporation in the Merger (sometimes referred to as the "Surviving
Corporation"), shall continue its corporate existence under the laws of the
State of Georgia as a wholly-owned subsidiary of Parent. The Merger shall have
the effect provided under the applicable laws of the states of Georgia and
Florida including, but not limited to, Section 14-2-1106 of the GBCC and Section
607.1106 of the FBCA.
<PAGE>
1.2 Closing. The consummation of the transactions templated by this
-------
Agreement (the "Closing") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 at 2:00 p.m. on March 6, 1998 or at such other location and time
as the parties agree, or by telecopy and courier with respect to Bruce MacIntyre
(the "Closing Date"). At the Closing, the parties shall execute and deliver the
certificates, opinions and other instruments and documents referred to in
Article 8.
1.3 Effective Time of the Merger. Contemporaneous with or
----------------------------
immediately following the execution hereof, the parties shall cause articles of
merger (the "Articles of Merger") to be executed, delivered and filed with the
Secretaries of State of Georgia and Florida in accordance with the provisions of
the GBCC and FBCA, respectively. The Merger shall become effective at the close
of business on the day of such filing and acceptance unless a different
effective time is specified in the Articles of Merger pursuant to the GBCC and
FBCA (the "Effective Time").
1.4 Articles of Incorporation; Bylaws. The Articles of
---------------------------------
Incorporation and Bylaws of Merger Sub as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, until duly amended in accordance with applicable law.
1.5 Directors and Officers of the Surviving Corporation. At the
---------------------------------------------------
Effective Time, the persons who are directors and officers of Merger Sub at the
Effective Time will become the directors and officers of the Surviving
Corporation until such time as they may be replaced in accordance with the
Bylaws of the Surviving Corporation.
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES
2.1 Consideration; Conversion of Shares. At the Effective Time,
-----------------------------------
in consideration for the Shareholders' entry into this Agreement and fulfillment
of the obligations, covenants, terms and conditions set forth herein, andby
virtue of the Merger and without any action on the part of the holder thereof:
(a) Merger Consideration. Each issued and outstanding share of
--------------------
common stock of Seller, no par value per share (the "Seller Common Stock"), (an
aggregate of 2,000 shares, excluding any such shares held in the treasury of
Seller) shall automatically be canceled and extinguished and shall thereafter be
converted into only the right to receive cash and/or shares of common stock,
without par value, of Parent (the "Parent Common Stock") as set forth on
Schedule 2.1 attached hereto (the "Merger Consideration").
- ------------
(b) Treasury Shares. Each share of Seller Common Stock held in the
---------------
treasury of Seller shall be automatically canceled and extinguished, and no
payment shall be made in respect thereof.
2
<PAGE>
(c) Merger Sub Common Stock. Each share of Merger Sub common stock,
-----------------------
without par value ("Merger Sub Common Stock"), issued and outstanding at the
Effective Time shall continue to represent one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation, which shall
then constitute all of the issued and outstanding shares of the Surviving
Corporation.
2.2 No Fractional Shares. No scrip or fractional shares of Parent
--------------------
Common Stock shall be issued in the Merger upon conversion of Seller Common
Stock as provided in Section 2.1. Each registered holder of Seller Common Stock
who would otherwise have been entitled to receive a fraction of a share of
Parent Common Stock upon conversion of his or her Seller Common Stock shall be
entitled to receive a cash payment with respect to such fractional share in an
amount equal to the product of the Fair Market Value (as defined below) of
Parent Common Stock multiplied by such fractional share. Parent will make
available promptly after the Effective Time the funds necessary for the purpose
of paying cash for fractional shares.
2.3 Fair Market Value. The parties agree that the "Fair Market
-----------------
Value" for Parent Common Stock as of the date of this Agreement shall be $2.17
per share.
2.4 Stock Transfer Books. From and after the Effective Time, no
--------------------
no transfer of Seller Common Stock outstanding prior to the Effective Time shall
be registered on the stock transfer books of the Surviving Corporation. If,
after the Effective Time, certificates for Seller Common Stock are presented to
the Surviving Corporation for transfer, such certificates shall be canceled and
exchanged for the Merger Consideration.
2.5 Surrender and Exchange of Certificates Representing Seller
----------------------------------------------------------
Common Stock.
- ------------
(a) Surrender and Exchange of Certificates. Upon surrender to
--------------------------------------
Parent of an outstanding certificate or certificates that immediately prior to
the Effective Time represented Seller Common Stock (the "Certificates") at the
Closing or thereafter, the holder of such Certificates shall be entitled to
receive at the times set forth in Section 2.1, in exchange therefor one or more
certificates as requested by the holder (properly issued, executed and
countersigned, as appropriate) representing that number of whole shares of
Parent Common Stock and/or cash to which such holder of Seller Common Stock
shall have become entitled pursuant to the provisions of Section 2.1 and the
Certificates so surrendered shall forthwith be canceled. From the Effective Time
until surrender in accordance with the provisions of this Section 2.5, each
Certificate (other than Certificates representing treasury shares) shall
represent for all purposes only the right to receive the Merger Consideration.
All payments in respect of Seller Common Stock that are made in accordance with
the terms hereof shall be deemed to have been made in full satisfaction of all
rights pertaining to such securities.
(b) Lost Certificates. In the case of any lost, misplaced, stolen
-----------------
or destroyed Certificate, the holder thereof may be required, as a condition
precedent to delivery to such holder of the Merger Consideration, to deliver to
Parent an indemnity agreement and a bond in such reasonable sum as Parent may
direct as indemnity against any claim that may be made
3
<PAGE>
against the Parent or the Surviving Corporation with respect to the Certificate
alleged to have been lost, misplaced, stolen or destroyed.
(c) No Interest. No interest shall be paid or accrued on any
-----------
portion of the Merger Consideration regardless of the cause for delay in payment
of the Merger Consideration.
(d) No Liability. Neither Parent nor the Surviving
------------
Corporation shall be liable to any holder of shares of Seller Common Stock for
any Parent Common Stock (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any abandoned property, escheat or
similar law.
2.6 Dissenting Stockholders. Any holder of Seller Common Stock who
-----------------------
dissents from the Merger and exercises appraisal rights in accordance with the
provisions of Sections 607.1301, 607.1302, and 607.1320 of the FBCA and who
perfects such rights pursuant to Section 607.1320 of the FBCA shall be entitled
to receive, in lieu of the consideration provided in Section 2.1, the value of
such shares in cash as determined pursuant to Section 607.1320 of the FBCA.
Notwithstanding the other provisions of this Article 2, Seller Common Stock with
respect to which a proper demand has been made in accordance with Section
607.1320 of the FBCA shall not be converted into the right to receive Merger
Consideration applicable to such shares as set forth in Section 2.1, unless the
holder thereof shall have lost his or her status as a dissenting shareholder
pursuant to Section 607.1320 of the FBCA. Within ten (10) days after the
Effective Time, the Surviving Corporation shall notify in writing each holder of
Seller Common Stock who has made demand in accordance with Section 607.1320 of
the FBCA, and shall make a written offer to each such shareholder to pay for
such shares the fair value thereof, as deemed by the Surviving Corporation. Such
notice shall include a copy of certain financial statements of Seller, as
required by Section 607.1320 of the FBCA.
2.7 Adjustments. In the event that at any time after the date
-----------
hereof and prior to the Effective Time, Parent shall effect (a) a dividend or
other distribution with respect to Parent Common Stock payable in Parent Common
Stock or other property (other than cash), including the common stock, preferred
stock or other securities of a Parent Subsidiary, (b) a combination of
outstanding Parent Common Stock into a smaller number of such Parent Common
Stock, or (c) any reorganization or reclassification, or any consolidation or
merger of Parent, with another corporation, or the sale of all or substantially
all of its assets to another corporation, in such a way that holders of
outstanding Parent Common Stock shall be entitled to receive (either directly or
upon subsequent liquidation) stock, securities or other property with respect to
or in exchange for such Parent Common Stock (any such event described in (a)-(c)
above referred to as a "Diluting Event"), then, as a condition of such Diluting
Event, lawful and adequate provision shall be made whereby the Shareholders
shall thereafter be entitled to receive (under the same terms otherwise
applicable to their receipt of Parent Common Stock), in lieu of the
number of shares of Parent Common Stock to which such Shareholders are entitled
immediately prior to such Diluting Event, such shares of stock, securities or
other property as may be issued or payable with respect to or in exchange for
that
4
<PAGE>
number of shares of Parent Common Stock to which the Shareholders were so
entitled, and in any case appropriate provision shall also be made with respect
to such Shareholders' rights and interests to the end that the provisions of
this Section 2.7 shall thereafter be applicable in relation to any shares of
stock, securities or other property thereafter deliverable to such Shareholders
pursuant to the provisions hereof. Notwithstanding the foregoing, a merger or
other transaction with the corporation named in Section 8.1(e) shall not be
considered a Diluting Event for purposes of this Section 2.7.
ARTICLE 3 - RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided
or the context otherwise requires:
(a) The singular includes the plural and vice versa and, in
particular (but without limiting the generality of the foregoing), any word or
expression defined in the singular has the corresponding meaning used in the
plural and vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause,
subclause, paragraph, subparagraph, Schedule or recital is a reference to an
Article, Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule
or recital of this Agreement;
(d) Any reference to any agreement, instrument or other
document (i) shall include all appendices, exhibits and schedules thereto and
all agreements, documents or other writings incorporated by reference therein,
and (ii) shall be a reference to such agreement, instrument or other document as
amended, supplemented, modified, suspended, restated or novated from time to
time;
(e) Any reference to any statute shall be construed as including
all statutory provisions consolidating, amending or replacing such statute and
all governmental regulations and rules promulgated thereunder;
(f) Any reference to "writing" includes printing, typing,
-------
lithography and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
------- -
constituting legal tender for the payment of public and private debts in the
United States of America;
(i) The headings and Article, Section and paragraph
numbering contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement,
5
<PAGE>
nor shall such headings and numbering be used in any manner to aid in the
construction of this Agreement;
(j) References herein to the "Seller Disclosure Schedules" shall
mean the disclosure schedules, dated as of the date hereof, which have been
delivered on the date hereof by Seller to Parent and all other documents,
agreements, and other items disclosed by Seller to Parent in connection with
this Agreement, and references to a numbered Seller Disclosure Schedule shall
mean that portion of the Seller Disclosure Schedules that refers to the specific
section or subsection of Article 4 of this Agreement. The disclosure of
information under any such disclosure schedule shall constitute disclosure for
all purposes of such schedule and the Agreement;
(k) References herein to the "Shareholder Disclosure
Schedules" shall mean the disclosure schedules, dated as of the date hereof,
which have been delivered on the date hereof by the Shareholders to Parent and
all other documents, agreements, and other items disclosed by each Shareholder
to Parent in connection with this Agreement, and references to a numbered
Shareholder Disclosure Schedule shall mean that portion of the Shareholder
Disclosure Schedules that refers to the specific section or subsection of
Article 5 of this Agreement. The disclosure of information under any such
disclosure schedule shall constitute disclosure for all purposes of such
schedule and the Agreement;
(l) References herein to the "Parent Disclosure Schedules" shall
mean the disclosure schedules, dated as of the date hereof, which have been
delivered on the date hereof by Parent to Seller and all other documents,
agreements, and other items disclosed by Parent to Seller in connection with
this Agreement and references to a numbered Parent Disclosure Schedule shall
mean that portion of the Parent Disclosure Schedules that refers to the specific
section or subsection of Article 6 of this Agreement. The disclosure of
information under any such disclosure schedule shall constitute disclosure for
all purposes of such schedule and the Agreement;
(m) The terms "hereof," "hereby," "hereunder" and similar shall
------ ------ ---------
refer to this Agreement as a whole;
(n) The term "including" shall mean "including, without
---------
limitation";
(o) The term "EBITDA" means earnings before income taxes,
depreciation and amortization, as determined by generally accepted accounting
principles and practices ("GAAP").
(p) The term "Governmental Authority" means any United States
federal, state or local, or foreign, governmental, regulatory or administrative
authority, agency, department, board, investigative body or commission or any
court, tribunal, or judicial or arbitral body;
(q) The term "Material Adverse Effect" with respect to a person or
entity means any circumstance, change in, or effect on the business and affairs
of such person or
6
<PAGE>
entity or any Subsidiary thereof that, individually or in the aggregate with any
other circumstances, changes in, or effects on, the business and affairs of such
person or entity and its Subsidiaries: (i) is, or would reasonably be expected
to be, materially adverse to the business, operations, assets or liabilities,
prospects, results of operations or financial condition of such person or entity
and its Subsidiaries, taken as a whole, or (ii) would reasonably be expected to
materially adversely affect the ability of such person or entity and its
Subsidiaries to operate or conduct its or their business and affairs in the
manner in which it is currently operated or conducted or contemplated by such
person or entity to be operated or conducted;
(r) The term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity, directly or
indirectly, owns or controls the voting of at least a 50% share or other equity
interest or for which such person or entity, directly or indirectly, acts as a
general partner;
(s) The term "Parent Subsidiary" means any Subsidiary of Parent,
and the term "Seller Subsidiary" means any Subsidiary of Seller.
(t) Each party and its counsel has had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore, shall be
construed without regard to any presumption or other rule requiring construction
against the party causing the Agreement to be drafted.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
Seller and each of the Shareholders hereby represent and warrant to
Parent as follows:
4.1 Corporate Organization.
----------------------
(a) Seller is a corporation duly incorporated, validly existing and
in active status under the laws of the State of Florida. Seller has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have, in the aggregate, a Material Adverse Effect
on Seller.
(b) Seller does not have any Subsidiaries.
(c) Seller Disclosure Schedule 4.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws of Seller.
7
<PAGE>
(d) Except as set forth in Seller Disclosure Schedule 4.1, Seller
------------------------------
does not own or control, directly or indirectly, any equity interest in any
corporation, company, association, partnership, joint venture or other entity.
4.2 Capitalization. The authorized capital stock of Seller consists
--------------
of 10,000 shares of Seller Common Stock and no shares of preferred stock or any
other form of capital stock. As of the date hereof, there are 2,000 shares of
Seller Common Stock issued and outstanding. Seller Disclosure Schedule 4.2 sets
------------------------------
forth the names and addresses of each of the Shareholders and the number of
shares of Seller Common Stock owned by each. Except as set forth on Seller
Disclosure Schedule 4.2, there are no shares of Seller Common Stock outstanding.
- -----------------------
Seller Disclosure Schedule 4.2 sets forth all options which may be exercised for
- ------------------------------
issuance of Seller Common Stock and the terms upon which the options may be
exercised ("Seller Stock Options"). Seller Disclosure Schedule 4.2 sets forth
------------------------------
copies of the option plans and agreements pursuant to which the Seller Stock
Options were granted and a list of each outstanding Seller Stock Options. All
issued and outstanding shares of Seller Common Stock have been duly authorized
and validly issued and are fully paid and nonassessable, were not issued in
violation of any preemptive rights and were issued under available exemptions
from federal and state securities laws. Except as disclosed in Seller Disclosure
-----------------
Schedule 4.2, each Shareholder represents that neither Seller nor he or she has
- ------------
granted or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
subscription or issuance of any shares of capital stock of Seller or any
securities representing the right to purchase, subscribe or otherwise receive
any shares of such capital stock or any securities convertible into any such
shares, and there are no agreements or understandings with respect to voting of
any such shares.
4.3 Authority; No Violation.
-----------------------
(a) Except for approval by the Shareholder of the Merger and the
filing of the Articles of Merger in accordance with the GBCC and FBCA
(collectively, the "Seller Approvals") and satisfaction of other conditions
precedent under this Agreement, no consents, approvals, authorizations,
clearances or orders of, filings or registrations with or notices to
(collectively "Authorizations") any third party or any Governmental Authority
are necessary on behalf of Seller or the Shareholder in connection with (i) the
execution and delivery by Seller and the Shareholder of this Agreement and (ii)
the consummation by Seller and the Shareholder of the Merger and the other
transactions contemplated hereby. Subject to receipt of the Seller Approvals,
Seller has the full corporate power and authority to execute and deliver this
Agreement and to consummate the Merger and the other transactions contemplated
hereby in accordance with the terms hereof. The execution and delivery of this
Agreement have been duly and validly approved by the Board of Directors of
Seller in accordance with the Articles of Incorporation and bylaws of Seller and
with applicable Laws (as defined below). Except for the Seller Approvals, no
other corporate proceedings on the part of Seller are necessary for the Seller
and the Shareholder to execute and deliver this Agreement and be bound by the
terms hereof. This Agreement has been duly and validly executed and delivered by
Seller and the Shareholder and, assuming it is a valid and binding obligation of
Parent and
8
<PAGE>
Merger Sub, constitutes the valid and binding obligation of Seller and the
Shareholder enforceable against Seller and the Shareholder in accordance with
its terms.
(b) Neither the execution and delivery of this Agreement by Seller
or the Shareholder, nor the consummation by Seller and the Shareholder of the
Merger and the other transactions contemplated hereby in accordance with the
terms hereof, nor compliance by Seller and the Shareholder with any of the terms
or provisions hereof, will: (i) violate any provision of Seller's Articles of
Incorporation or bylaws; (ii) assuming that the Seller Approvals are duly
obtained, violate any United States federal, state or local or foreign statute,
code, ordinance, rule, regulation, judgment, order, writ, ruling, decree or
injunction of any Governmental Authority (collectively, "Laws") applicable to
Seller, the Shareholder or any of its or his or her respective properties or
assets; or (iii) except as set forth in Seller Disclosure Schedule 4.3, violate,
------------------------------
conflict with, result in a breach of any provisions 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 of, accelerate the performance
required by, or result in the creation of any lien, mortgage, security interest,
pledge, charge, other right of third parties or other encumbrance (collectively,
"Liens") upon any of the respective properties or assets of Seller or the
Shareholder under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Seller or the Shareholder is a party, or by
which they or any of their respective properties or assets may be bound or
affected.
4.4 Financial Statements.
--------------------
(a) Seller Disclosure Schedule 4.4 sets forth copies of: (i) the
------------------------------
balance sheet of Seller as of December 31, 1997 and the statements of income,
shareholders' equity and cash flows for the period ended December 31, 1997
(collectively, together with the related notes and any additional financial
statements delivered pursuant to Section 7.4, the "Seller Financial
Statements"). The Seller Financial Statements have been prepared in accordance
with GAAP, applied consistently during the periods involved (except as may be
indicated therein or in the notes thereto), and present fairly, in all material
respects, the financial position of Seller as of the respective dates set forth
therein, and the results of Seller's operations and its cash flows for the
respective periods set forth therein, in accordance with GAAP.
(b) The financial books and records of Seller have been
maintained in compliance with applicable legal and accounting requirements,
including GAAP.
(c) Except as and to the extent reflected, disclosed or reserved
against in the Seller Financial Statements, or as disclosed in Seller Disclosure
-----------------
Schedule 4.4, as of December 31, 1997, Seller has not had any liabilities or
- ------------
obligations of any kind, whether absolute, accrued, contingent or otherwise
("Liabilities"). Since December 31, 1997, Seller has not incurred any
Liabilities except in the ordinary course of business and consistent with past
practice, which in the aggregate are not material.
9
<PAGE>
4.5 Broker's and Other Fees. Neither Seller nor the
-----------------------
Shareholder have employed any broker or finder or incurred any liability for any
broker's or finder's fees or commissions in connection with any of the
transactions contemplated by this Agreement. There are no fees (other than time
charges billed at usual and customary rates) payable to any consultants,
including lawyers and accountants, in connection with this Agreement or the
transactions contemplated hereby or which would be triggered by consummation of
this Agreement or the transactions contemplated hereby or the termination of the
services of such consultants by Seller or the Shareholder.
4.6 Absence of Certain Changes or Events.
------------------------------------
(a) Except as contemplated by this Agreement or disclosed in Seller
------
Disclosure Schedule 4.6, there has been no Material Adverse Effect on the Seller
- -----------------------
since December 31, 1997 and to the best of Seller's and each Shareholder's
knowledge, no facts or conditions exist which will cause a Material Adverse
Effect on Seller (or the Surviving Corporation after the Merger) in the future.
(b) Except as contemplated by Section 8.2(f) or as set forth in
Seller Disclosure Schedule 4.6, neither Seller nor the Shareholder has taken or
- ------------------------------
permitted any of the actions set forth in Section 7.2(a) since December 31, 1997
and, except for execution of this Agreement, Seller has conducted its business
only in the ordinary course, consistent with past practice. Prior to December
31, 1997, neither the Seller nor the Shareholder has taken or permitted any of
the actions set forth in Section 7.2(a) that are not reflected in the Seller
Financial Statements and notes related thereto.
4.7 Legal Proceedings. Except as disclosed in Seller
----------------- ------
Disclosure Schedule 4.7, neither Seller nor the Shareholder is a party to any,
- -----------------------
and there are no pending or, to Seller's or the Shareholder's knowledge,
threatened legal, administrative, arbitral or other proceedings, claims, actions
or governmental investigations of any nature against Seller. Except as disclosed
in Seller Disclosure Schedule 4.7, Seller is not a party to any order, judgment
------------------------------
or decree entered in any lawsuit or proceeding. Without limiting the foregoing,
except as disclosed in Seller Disclosure Schedule 4.7, no actions, suits,
------------------------------
demands, notices, claims, investigations or proceedings are pending or, to
Seller's or the Shareholder's knowledge, threatened against or otherwise
involving, directly or indirectly, any officer, director, employee or agent of
Seller (in connection with such officer's, director's, employee's or agent's
activities on behalf of Seller or that otherwise relate, directly or indirectly
to Seller or its properties or securities) including without limitation any
notices, demand letters or requests from any Governmental Authority relating to
such potential Liabilities, nor, to the knowledge of Seller or the Shareholder,
are there any circumstances which could lead to such actions, suits, demands,
notices, claims, investigations or proceedings.
10
<PAGE>
4.8 Taxes and Tax Returns. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.8, except for taxes, tax returns and tax reports for any tax period
- ------------
for which no taxes are owed or the applicable limitation period has expired, and
except for any tax liabilities that would not have, in the aggregate, a Material
Adverse Effect on Seller:
(a) Seller has duly filed (and until the Effective Time will so
file) all returns, declarations, reports, information returns and statements
("Returns") required to be filed by them in respect of any United States
federal, state or local or foreign Taxes and have duly paid (and until the
Effective Time will so pay) all such Taxes due and payable as finally determined
by the applicable Governmental Authority, other than Taxes which are being
contested in good faith (and disclosed to Parent in writing). As used herein,
"Tax" or "Taxes" means and includes any and all taxes, fees, levies,
assessments, duties, tariffs, imposts, and other charges of any kind (together
with any and all interest, penalties, additions to tax and additional amounts
imposed with respect thereto) imposed by any Governmental Authority, including,
without limitation: foreign, domestic, central, local, state or other
jurisdictional taxes or other charges on or with respect to income, estimated
income, franchises, business, occupation, windfall or other profits, gross
receipts, property, sales, use, capital stock, payroll, employment, social
security, workers' compensation, unemployment compensation, or net worth; taxes
or other charges in the nature of excise, withholding, ad valorem, stamp,
transfer, value added, or gains taxes; license, registration and documentation
fees; and customs duties, tariffs, and similar charges. Seller has established
(and until the Effective Time will establish) on its books and records reserves
that are adequate for the payment of all Taxes not yet due and payable, but are
incurred in respect of Seller through such date.
(b) None of the Returns of Seller has been examined by the
United States Internal Revenue Service (the "IRS"), or any other United States
federal, state or local or any foreign Governmental Authority within the past
six years. To the knowledge of Seller or the Shareholder, there are no audits or
other Governmental Authority proceedings presently pending nor any other
disputes pending with respect to, or claims asserted for, Taxes upon Seller, nor
has Seller given any currently outstanding waivers or comparable consents
regarding the application of any statute of limitations with respect to any
Taxes or Returns. There are no Liens for Taxes upon the assets of Seller, except
for Liens for Taxes not yet due. Seller has complied (and until the Effective
Time will comply) in all respects with all applicable Laws relating to the
payment and withholding of Taxes.
(c) Seller: (i) has not requested any extension of time
within which to file any Return which Return has not since been filed; (ii) is
not a party to any agreement providing for the indemnification, allocation or
sharing of Taxes; (iii) is not required to include in income any adjustment by
reason of a voluntary change in accounting method initiated by Seller (nor does
Seller or the Shareholder have any knowledge that any Governmental Authority has
proposed any such adjustment or change of accounting method); (iv) has filed a
consent with any Governmental Authority pursuant to which Seller has agreed to
recognize gain (in any manner) relating to or as a result of this Agreement or
the transactions contemplated hereby; or (v) has been a member of an affiliated
group other than one of which the Seller was the common parent.
11
<PAGE>
4.9 Employee Benefit Plans and Relations. Except as disclosed in
------------------------------------
Seller Disclosure Schedule 4.9:
- ------------------------------
(a) Seller does not maintain or contribute to any "employee pension
benefit plan" (the "Seller Pension Plans"), as such term is defined in Section 3
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including any pension, profit-sharing, retirement, thrift or stock bonus plan,
"employee welfare benefit plan" (the "Seller Welfare Plans"), as such term is
defined in Section 3 of ERISA, or any other stock option plan, stock purchase
plan, restricted stock plan, deferred compensation plan, severance plan, phantom
stock plan, bonus plan or other similar plan, program or arrangement
(collectively the "Employee Plans"). Seller has not contributed to, or been
required to contribute to, any "Multiemployer Plan," as such term is defined in
Section 3(37) of ERISA.
(b) Each of the Seller Pension Plans is intended to be a
qualified plan within the meaning of Section 401(a) of the Code, and Seller is
not aware of any fact or circumstance that would adversely affect the qualified
status of any such plan.
(c) Each of the Seller Pension Plans, Seller Welfare Plans and
other Employee Plans has been operated in compliance in all material respects
with the provisions of ERISA, the Code, and all other applicable Laws.
(d) Seller, nor, to the knowledge of Seller or the Shareholder, any
trustee, fiduciary or administrator of any Seller Pension Plan or Seller Welfare
Plan or any trust created thereunder, has not engaged in a "prohibited
transaction" as such term is defined in Section 4975 of the Code, which could
subject Seller, or, to the knowledge of Seller or the Shareholder, any trustee,
fiduciary or administrator thereof, to the tax or penalty on prohibited
transactions imposed by said Section 4975.
(e) No Seller Pension Plan or any trust created thereunder has been
terminated, nor have there been any "reportable events" for which the 30 day
notice has not been waived with respect to any Seller Pension Plan, as that term
is defined in Section 4043(b) of ERISA.
(f) There are no pending, or, to the knowledge of Seller or the
Shareholder, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Seller Pension Plans or the
Seller Welfare Plans or any trusts related thereto, other than routine claims
for benefits made in the ordinary course for which plan administrative review
procedures have not been exhausted.
(g) Accruals; Funding
(i) Pension/Profit Sharing Plans. None of the Employee Plans
----------------------------
is a Pension/Profit Sharing Plan subject to ERISA Title IV
(including those for retired, terminated or other former employees
and agents).
12
<PAGE>
(ii) Other Plans. Seller Disclosure Schedule 4.9 fully and
----------- ------------------------------
accurately sets forth any funding liability under each Employee Plan
not subject to ERISA Title IV, whether insured or otherwise,
specifically setting forth any liabilities under any retiree medical
arrangement and specifically designating any insured plan that
provides for retroactive premium or other adjustments.
(iii) Contributions. Except as set forth on Seller Disclosure
------------- -----------------
Schedule 4.9: (A) Seller and each trade or business (whether or not
------------
incorporated), which together with Seller is treated as a single
employer pursuant to Code Section 414(b),(c),(m) or (o) ("an ERISA
Affiliate"), has made full and timely payment of all amounts
required to be contributed under the terms of each Employee Plan and
applicable Law, or required to be paid as expense under such
Employee Plan, including the Pension Benefit Guaranty Corporation
("PBGC") premiums and amounts required to be contributed under Code
Section 412; (B) all contributions have been made in accordance with
the actuarial recommendations; and (C) no excise taxes are
assessable as a result of any nondeductible or other contributions
made or not made to an Employee Plan.
(h) Summary plan descriptions and all other returns, reports,
registration statements, prospectuses, documents, statements and communications
that are required to have been filed, published or disseminated under ERISA or
other Laws and the rules and regulations promulgated by the Department of Labor
under ERISA and the Treasury Department or by the Securities and Exchange
Commission (the "SEC") with respect to the Employee Plans have been so filed,
published or disseminated, except for those, the absence of which would not, in
the aggregate, have a Material Adverse Effect on Seller.
4.10 Compliance with Applicable Laws. Except as set forth in Seller
------------------------------- ------
Disclosure Schedule 4.10, Seller holds all licenses, franchises, permits,
- ------------------------
consents and authorizations ("Licenses") necessary for the lawful conduct of its
business, except for those, the absence of which would not, in the aggregate,
have a Material Adverse Effect on Seller. No proceeding is pending or threatened
seeking the revocation or suspension of any License. The Seller is and has been
in compliance in all material respects with all applicable Laws, and neither
Seller nor the Shareholder has received any notices of any allegation of any
violation of any Laws or Licenses.
4.11 Certain Contracts.
-----------------
(a) Seller Disclosure Schedule 4.11 lists the following
-------------------------------
agreements (collectively, the "Material Contracts"), including, without
limitation, leases, purchase contracts and commitments, to which Seller is a
party or by which Seller or any of its properties or assets is bound:
(i) all agreements that involve an annual commitment or
payment by any party thereto of more than $10,000 individually or
$50,000 in the aggregate
13
<PAGE>
or which have a fixed term extending more than 12 months from the
date hereof;
(ii) all joint venture, sales agency, sales representative or
distributorship, broker, franchise, license or similar agreements;
(iii) all leases;
(iv) all notes, bonds, mortgages, security agreements,
guarantees and other agreements and instruments for or relating to
any lending or borrowing by Seller in any amount (exclusive of
advances to employees for expenses in the ordinary course of
business);
(v) all powers of attorney, guarantees, suretyships or
similar agreements; and
(vi) all other written agreements the breach of or default
under which could have a Material Adverse Effect on Seller.
Each of the Material Contracts is valid, binding and enforceable on
the parties thereto in accordance with its terms, assuming it is a valid and
binding obligation of the other parties to the Material Contract.
(b) Except as disclosed in Seller Disclosure Schedule 4.11, (i)
-------------------------------
Seller is not a party to or bound by any agreement or understanding (whether
written or oral) with respect to the employment of any officers, employees,
directors or consultants, and (ii) the consummation of the transactions
contemplated by this Agreement will not (either alone or upon the occurrence of
any additional acts or events) result in any payment (whether of severance pay
or otherwise) becoming due from Seller to any officer, employee, director or
consultant thereof. Seller Disclosure Schedule 4.11 sets forth true and correct
-------------------------------
copies of all severance or employment agreements with officers, directors,
employees, agents or consultants to which Seller is a party.
(c) Except as disclosed in Seller Disclosure Schedule 4.11, no
-------------------------------
agreement or understanding to which Seller is a party or by which any of them is
bound limits the freedom of Seller to compete in any line of business or
with any person.
(d) Except as disclosed in Seller Disclosure Schedule 4.11, Seller
-------------------------------
nor, to the knowledge of Seller and the Shareholder, any other party thereto, is
not in default under any of the Material Contracts or any other agreement to
which the Seller is a party or to which it or its properties is bound; no event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default
thereunder entitling any party to terminate a Material Contract or other such
agreement; and the continuation, validity and effectiveness of all such Material
Contracts and agreements under the current terms thereof and the current rights
and obligations of Seller thereunder will in no way be adversely affected,
altered or impaired by the consummation of the transactions
14
<PAGE>
contemplated hereby. Except as disclosed in Seller Disclosure Schedule 4.11,
-------------------------------
upon consummation of the Merger, the Surviving Corporation will be entitled to
enjoy the advantages and benefits of the business arrangements, opportunities
and relationships as enjoyed by the Seller prior to the date hereof without
interference or interruption.
4.12 Properties and Insurance.
------------------------
(a) Except as disclosed in Seller Disclosure Schedule 4.12, Seller
-------------------------------
has good and, as to owned real property, marketable title to all assets and
properties, whether real or personal, tangible or intangible, reflected in the
Seller Financial Statements as of December 31, 1997, or owned and acquired
subsequent thereto (except to the extent that such assets and properties have
been disposed of for fair value in the ordinary course of business since such
date), subject to no Liens except (i) statutory liens for amounts not yet
delinquent or which are being contested in good faith and (ii) such Liens and
title imperfections that do not in the aggregate have a Material Adverse Effect
upon the business, operations, assets, and financial condition of Seller. Seller
as lessee has the right under valid and subsisting leases to occupy, use,
possess and control all real property leased by Seller as presently occupied,
used, possessed and controlled by Seller or necessary in the operation of its
business as currently conducted.
(b) The business operations and all insurable properties and assets
of Seller are insured for their benefit against all material risks which, in the
reasonable judgment of the Shareholder, should be insured against, in each case
under policies or bonds issued by insurers of recognized responsibility, in such
amounts with such deductibles and against such risks and losses as are in the
reasonable opinion of the Shareholder adequate for the business engaged in by
Seller. Copies of all such policies as in effect on the date hereof are attached
hereto as Seller Disclosure Schedule 4.12. Neither Seller nor the Shareholder
-------------------------------
has received any notice of cancellation or notice of a material amendment of any
such insurance policy or bond and Seller is not in default under any such policy
or bond, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion.
(c) No person other than Seller is currently entitled to possession
of any of the properties of Seller, whether owned or leased by Seller. To the
knowledge of Seller and the Shareholder, the real property, buildings,
structures and improvements owned or leased by Seller conform to all applicable
Laws, including zoning regulations, none of which would upon consummation of the
transactions contemplated hereby materially adversely interfere with the use of
such properties, buildings, structures or improvements for the purposes for
which they are now utilized. Seller has not received notice nor does Seller have
actual knowledge of (i) any pending or contemplated condemnation or eminent
domain proceeding affecting the properties owned or leased by Seller, (ii) any
proposal for increasing the assessed value of any such properties for state,
county, local or other ad valorem Taxes or (iii) any pending or contemplated
proceedings or public improvements that would result in the levy of any special
Tax or assessment against any such properties; and there are no outstanding
requirements or recommendations by Seller's insurance providers requiring or
recommending any repairs or work to be done with reference to any such
properties or any basis for such. The properties and assets owned or leased by
Seller are adequate for the conduct of their businesses as
15
<PAGE>
presently conducted and are in good repair and operating condition, normal wear
and tear excepted. The properties and assets owned by Seller constitute all of
the property and assets that Seller uses in connection with the operation of its
business as presently conducted, and the consummation of the transactions
contemplated by this Agreement will not impair the ability of Parent to use such
properties and assets.
4.13 Environmental Matters.
---------------------
(a) The operations of Seller comply, and have complied, in all
material respects with all applicable Environmental Laws (as defined below).
(b) Seller has obtained all material environmental, health and
safety Licenses and other authorizations necessary for the operation of Seller's
business, all of which are valid and in good standing and are not subject to any
modification or revocation proceeding, and Seller is in compliance in all
material respects with all terms and conditions thereof.
(c) Neither Seller nor the Shareholder has received any written
notice of any pending or threatened investigation, proceeding or claim to the
effect that Seller is or may be liable to any person or entity, or responsible
or potentially responsible for the costs of any remedial or removal action or
other cleanup costs, as a result of noncompliance with any Environmental Laws or
arising out of the presence, generation, storage or disposal of hazardous waste,
including liability under the United States Comprehensive Environmental
Response, Compensation and Liability Act, as amended, any state superfund law or
any Environmental Law.
(d) The term "Environmental Laws" shall mean all Laws relating to
pollution or protection of the environment.
4.14 Intellectual Property.
---------------------
(a) Seller Disclosure Schedule 4.14 (i) lists and describes all
-------------------------------
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, and all patent, trademark and
service mark licenses, (ii) describes all material copyrights, computer
software, databases, and all other intellectual property that are owned by or
registered in the name of Seller or to which Seller has any rights as licensee
or otherwise, which list specifies which items are owned and to which items
Seller has rights as a licensee or otherwise; and (iii) lists and describes all
material contracts, agreements or understandings pursuant to which Seller has
authorized any person to use, or which any person otherwise has the right to
use, in any business or commercial activity, any of the items listed in clauses
(i) and (ii) above.
(b) The items listed or described in the Seller Disclosure Schedule
--------------------------
4.14 pursuant to the preceding subsection (a) constitute or represent all of the
- ----
intellectual property necessary to the conduct of Seller's business, and
Seller's ownership and use rights with respect thereto are free and clear of
Liens, subject to those, the absence of which would not
16
<PAGE>
have a Material Adverse Effect on Seller.
(c) All federal trademark or service mark registrations, and all
applications to register any trademarks or service marks or any trademark
register maintained by the United States government or any state or provincial
government are based on truthful affidavits or declarations of use.
(d) Seller has not infringed upon, and Parent's conduct of Seller's
business after the Closing as presently conducted will not infringe upon, any
patent, service mark, trade name, trademark, copyright, trade secret or other
intellectual property belonging to any other person or entity; and Seller has
not agreed to indemnify any person or entity for or against any infringement of
or by the intellectual property set forth in the Seller Disclosure Schedule
--------------------------
4.14. Except as disclosed on Seller Disclosure Schedule 4.14, to the best
- ---- -------------------------------
knowledge of Seller and the Shareholder, no person or entity is infringing upon
any of Seller's patents, patent applications, trade names, trademarks, service
marks, trademark and service mark registrations, licenses, copyrights, computer
software or other intellectual property.
(e) Seller has, and immediately after the Closing Parent will have,
all computer software and databases that are necessary to conduct Seller's
business as presently conducted by Seller and all documentation relating to all
such computer software and databases, except for those, the absence of which
would not have a Material Adverse Effect on Seller. The computer software
performs, in all material respects, in accordance with the documentation related
thereto or used in connection therewith and is free of material defects in
programming and operation. Seller Disclosure Schedule 4.14 identifies each
-------------------------------
person or entity to whom Seller has sold, licensed, leased or otherwise
transferred or granted any interest in or rights to any of the computer software
and databases and the date of each such sale, license, lease or other transfer
or grant.
4.15 No Parachute Payments. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.15, no officer, director, employee or agent (or former officer,
- -------------
director, employee or agent) of Seller is entitled now, or will or may be
entitled as a consequence of this Agreement or the Merger, to any payment or
benefit from Seller or from Parent, which if paid or provided would constitute
an "excess parachute payment," as defined in Section 280G of the Code.
4.16 Absence of Certain Agreements and Practices.
-------------------------------------------
(a) Except as set forth in Seller Disclosure Schedule 4.16 or in
-------------------------------
connection with customary transactions in the ordinary course of business, no
present or former officer, director or shareholder of Seller:
(i) owes money to Seller;
(ii) has any claim against Seller;
17
<PAGE>
(iii) has any interest in any property or assets used by Seller
in its business;
(iv) has any benefits that are contingent on the transactions
contemplated by this Agreement, other than as stated herein;
(v) has any agreement with Seller that is not terminable by
Seller without penalty or notice;
(vi) has any agreement providing severance benefits or other
benefits, which are conditioned upon a change of control after the
termination of employment of such employee regardless of the reason
for such termination of employment; or
(vii) has any agreement or plan, any of the benefits of which
will be increased, vested or accelerated by the occurrence of any of
the transactions contemplated by this Agreement.
(b) Neither Seller nor any of its directors, officers, agents,
affiliates or employees, nor any other person acting on behalf of Seller has (i)
given or agreed to give any gift or similar benefit having a value of $1,000 or
more to any customer, supplier or governmental employee or official or any other
person, for the purpose of directly or indirectly furthering the business of
Seller, (ii) used any corporate funds for contributions, payments, gifts or
entertainment, or made any expenditures relating to political activities to
government officials or others in violation of any applicable Laws, or (iii)
received any unlawful contributions, payments, gifts or expenditures in
connection with the business of Seller.
4.17 Major Vendors and Customers. Seller Disclosure Schedule 4.17
--------------------------- -------------------------------
sets forth a list of each licensor, developer, remarketer, distributor and
supplier of property or services to, and each licensee, end-user or customer of,
Seller, to whom Seller paid or billed in the aggregate in excess of $30,000
during calendar year 1997.
4.18 Accounts Receivable. Seller Disclosure Schedule 4.18 sets forth
------------------- -------------------------------
the accounts receivable of Seller as of December 31, 1997, as reflected in the
Seller Financial Statements as of that date, together with an aging of these
accounts. These accounts receivable, and all accounts receivable of Seller
created after that date, arose from valid transactions in the ordinary course of
business, are not subject to discount, except for normal cash discounts, and
have been appropriately reduced to their estimated net realizable value.
4.19 Corporate Records. The corporate record books (including the
-----------------
share records) of Seller are complete, accurate and up to date with all
necessary signatures and set forth all meetings and actions taken by the
stockholders and directors of Seller and all transactions involving the shares
of Seller (and contain all canceled share certificates).
4.20 Combinations Involving Seller. All mergers, consolidations or
-----------------------------
other business combinations involving Seller and all liquidations, purchases or
other transactions by
18
<PAGE>
which Seller acquired any of its business and property were conducted in
accordance with applicable certificates of incorporation, bylaws, any other
applicable agreements, instruments and documents and applicable Laws.
4.21 Bank Accounts. Seller Disclosure Schedule 4.21 lists all bank,
------------- -------------------------------
money market, savings and similar accounts and safe deposit boxes of Seller,
specifying the account numbers and the authorized signatories or persons having
access to them.
4.22 Labor Relations. Except as disclosed on Seller Disclosure
--------------- -----------------
Schedule 4.22, Seller is in material compliance with all federal and state Laws
- -------------
respecting employment and employment practices, terms and conditions of
employment, wages and hours, and is not engaged in any unfair labor or unlawful
employment practice. There is no unlawful employment practice or discrimination
charge pending before the Equal Employment Opportunity Commission ("EEOC") or
any EEOC recognized state "referral agency." There is no unfair labor practice
charge or complaint against Seller pending before the National Labor Relations
Board ("NLRB"). There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the knowledge of Seller or the Shareholder, threatened against or
involving or affecting Seller. There is no collective bargaining agreement that
is binding on Seller. Except for any Material Contract disclosed pursuant to
Section 4.11, Seller is not a party to or bound by any agreement, arrangement or
understanding with any employee or consultant that cannot be terminated on
notice of ninety (90) or fewer days without liability to Seller or that entitles
the employee or consultant to receive any salary continuation or severance
payment or retain any specified position with Seller.
4.23 Disclosure. No representation, warranty, or statement made by
----------
Seller or the Shareholder in this Agreement or in any document or certificate
furnished or to be furnished to Parent pursuant to this Agreement contains or
will contain any untrue or incomplete statement or omits or will omit to state
any fact necessary to make the statements contained herein or therein not
misleading. All facts known or reasonably available to Seller or the Shareholder
that are material to the financial condition, operation, or prospects of the
business and assets of Seller have been disclosed to Parent.
With respect to all representations and warranties made by Bruce
MacIntyre in this Article 4, those representations and warranties are made to
Mr. MacIntyre's actual knowledge, without independent investigation or
verification, and are limited to acts, events, conditions, and circumstances
that have occurred since April 1, 1997, when he became a shareholder of Seller.
Additionally, to the extent any agent, employee, or representative of Parent or
Merger Sub has knowledge of a fact not disclosed by Seller or the Shareholder
that should have been disclosed so as to make the foregoing representations and
warranties otherwise affected by the omission true and correct and not
misleading, the Shareholder shall not be in breach of the foregoing
representations and warranties by reason of the failure to disclose the fact.
19
<PAGE>
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
Each Shareholder represents and warrants to Parent, severally and
not jointly, with respect to himself or herself and his or her ownership of
Seller Common Stock, as follows, except that the representations and warranties
set forth in Sections 5.7, 5.8, and 5.9 do not apply to, and are not made by,
Bruce MacIntyre:
5.1 Ownership of Shares. The Shareholder owns of record and
-------------------
beneficially all of the Seller Common Stock set forth opposite his or her name
on Seller Disclosure Schedule 4.2. Such Shareholder owns all right, title and
------------------------------
interest in and to such Seller Common Stock, free and clear of all Liens
(including those for federal or state estate or inheritance taxes), options,
rights of refusal or similar rights or other transfer restrictions of any nature
whatsoever (including any arising from any pending or threatened litigation)
other than restrictions on transfers arising out of applicable federal and state
securities Laws and the agreements identified on Seller Disclosure Schedule 4.2
------------------------------
(which shall be terminated at or prior to the Closing). The Shareholder owns no
other securities of Seller.
5.2 Authorization. With respect to this Agreement and any other
-------------
agreements, instruments and documents executed and delivered by the Shareholder
pursuant to this Agreement (this Agreement and such other agreements,
instruments and documents are collectively referred to as the "Shareholder
Delivered Agreements"): (i) such Shareholder has the right, power and authority
to enter into the Shareholder Delivered Agreements executed and delivered by him
or her and to consummate the transactions contemplated by, and otherwise to
comply with and perform his obligations under them; and (ii) the Shareholder
Delivered Agreements will, when delivered, constitute valid and binding
obligations of such Shareholder enforceable against such Shareholder in
accordance with their terms, assuming they are valid and binding obligations of
the other parties to this Agreement.
5.3 Absence of Violations or Conflicts. The execution and delivery
----------------------------------
of the Shareholder Delivered Agreements and the consummation by such Shareholder
of the transactions contemplated by, or other compliance with the performance
under them do not and will not with the passing of time or giving of notice or
both: (i) constitute a violation of, be in conflict with, constitute a default
or require any payment under, permit a termination of, or result in the creation
or imposition of any Lien upon any assets of Seller or any of the Seller Common
Stock under (A) any contract, agreement, commitment, undertaking or
understanding (including rights of refusal or similar rights or other transfer
restrictions) to which such Shareholder is a party or to which he or she or his
or her properties or Seller or its properties are subject or bound, (B) any
judgment, decree or order of any Governmental Authority to which such
Shareholder or his or her properties are subject or bound, or (C) any applicable
Laws; or (ii) create, or cause the acceleration of the maturity of, any debt,
obligation or liability of such Shareholder that would result in any Lien or
other claim upon the assets of Seller.
20
<PAGE>
5.4 No Consents Required. Except as set forth on Shareholder
-------------------- -----------
Disclosure Schedule 5.4, no Authorization of or with any Governmental Authority
- -----------------------
or any other Authorization of or with any other third party on the part of such
Shareholder is required in connection with his or her execution or delivery of
the Shareholder Delivered Agreements or the consummation of the transactions
contemplated by, or other compliance with the performance under, such
Shareholder Delivered Agreements by such Shareholder.
5.5 No Claims Against Seller. Except as set forth on Shareholder
------------------------ -----------
Disclosure Schedule 5.5, such Shareholder has no claim against Seller, except
- -----------------------
for accrued compensation and benefits and expenses or similar obligations
incurred in the ordinary course of business (including reimbursement of medical
expenses pursuant to the Employee Plans disclosed pursuant to this Agreement),
and except as otherwise specifically provided in this Agreement.
5.6 Litigation Related to this Agreement. Such Shareholder is not a
------------------------------------
party to or subject to any judgment, decree or order entered in any lawsuit or
proceeding brought by any Governmental Authority or other third party seeking to
prevent the execution of this Agreement or the consummation of the transactions
contemplated hereby.
5.7 Investment Intent. Such Shareholder will acquire the Parent
-----------------
Common Stock pursuant to this Agreement for his or her own account, to hold for
investment and with no present intention of dividing his or her participation
with others or reselling or otherwise participating, directly or indirectly, in
a distribution thereof, and he or she will not make any sale, transfer or other
disposition of the Parent Common Stock in violation of the Securities Act of
1933 (the "1933 Act") or any applicable state securities laws (the "State
Acts"). Without limiting the foregoing, such Shareholder has no plan or
intention to sell or otherwise dispose of any of the Parent Common Stock issued
to him or her pursuant to this Agreement or to effect any other transaction
which would adversely affect the status of the Merger as a tax-free
reorganization under the Code. Such Shareholder agrees that there will be placed
on the certificate or other evidence of the Parent Common Stock, or any
substitutions therefor, a legend stating in substance:
THE SECURITIES EVIDENCED HEREBY
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT), OR ANY STATE SECURITIES
LAWS IN RELIANCE ON ONE OR MORE EXEMPTIONS
THEREUNDER AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN TRANSACTIONS EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT THEREUNDER. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFER SET
FORTH IN AN AGREEMENT AND PLAN OF MERGER
(THE AGREEMENT) DATED MARCH 6, 1998 AMONG
THE CORPORATION AND THE HOLDER OF THESE
21
<PAGE>
SECURITIES AND OTHERS. ANY ATTEMPTED
TRANSFER IN VIOLATION OF THE AGREEMENT SHALL
BE NULL AND VOID. A COPY OF THE AGREEMENT OR
A SUMMARY OF SUCH RESTRICTIONS IS AVAILABLE
FROM THE CORPORATION UPON REQUEST.
5.8 Access to Information. Such Shareholder has been given access
---------------------
to all material and relevant information concerning Parent, thereby enabling
such Shareholder to make an informed investment decision concerning his or her
investment in the Parent Common Stock. Such Shareholder has relied solely upon
an independent investigation made by him or her and his or her representatives,
if any, and has, prior to the date hereof, been given access to and the
opportunity to examine data and information relating to Parent. In making his or
her investment decision to acquire the Parent Common Stock pursuant to this
Agreement, such Shareholder is not relying on any oral or written
representations or assurances from Parent or any other person or any
representative of Parent or any other person other than as set forth in this
Agreement.
5.9 Economic Risk. Such Shareholder represents that he or she is
-------------
able to bear the economic risk of an investment in the Parent Common Stock,
which such Shareholder acknowledges is currently illiquid, including a possible
total loss of his or her investment. In making this statement, such Shareholder
hereby represents and warrants to Parent that he or she has adequate means of
providing for his or her current needs and contingencies; he or she is able to
afford to hold the Parent Common Stock for an indefinite period and he or she
further represents that he or she has such knowledge and experience in financial
and business matters that he or she is capable of evaluating the merits and
risks of the investment in the Parent Common Stock. Further, such Shareholder
represents that he or she has no present need for liquidity in the Parent Common
Stock and is willing to accept such investment risks.
5.10 Tax Advice. Such Shareholder has reviewed with his or her tax
----------
advisor the United States federal, state, local and foreign tax consequences of
the transactions contemplated by this Agreement. Such Shareholder is relying
solely on such advisors and not on any statements or representations of Parent
or any of its agents, except as provided herein and in the tax opinion delivered
hereunder and understands that he or she (and not Parent) shall be responsible
for his or her own tax liability that will arise as a result of this investment
or the transactions contemplated by this Agreement.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
AND MERGER SUB
Parent and Merger Sub hereby represent and warrant to Seller and the
Shareholders as follows:
6.1 Corporate Organization.
----------------------
(a) Parent and Merger Sub are corporations duly organized, validly
existing and in good standing under the laws of the State of Georgia. Parent and
Merger Sub have the
22
<PAGE>
corporate power and authority to own or lease all of their properties and assets
and to carry on their businesses as they are now being conducted, are duly
licensed or qualified to do business and are in good standing in each
jurisdiction in which the nature of the business conducted by them or the
character or location of the properties and assets owned or leased by them makes
such licensing or qualification necessary, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse Effect
on Parent or Merger Sub, as the case may be.
(b) All Subsidiaries of Parent are listed on Parent Disclosure
-----------------
Schedule 6.1. Each Subsidiary is duly organized and validly existing and in good
- ------------
standing under the laws of its state or other jurisdiction of incorporation.
Each Parent Subsidiary has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a Material Adverse
Effect on Parent. Parent Disclosure Schedule 6.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws, if any, as in effect on the date hereof,
of Parent and each of the Parent Subsidiaries. Except as set forth in the Parent
------
Disclosure Schedule 6.1, Neither Parent nor Merger Sub owns or controls,
- -----------------------
directly or indirectly, any equity interest in any corporation, company,
association, partnership, joint venture or other entity.
6.2 Capitalization. As of the date hereof, the authorized capital
--------------
stock of Parent consists of 10,000,000 shares of Parent Common Stock and 500,000
shares of preferred stock, without par value ("Parent Preferred Stock"). As of
the date hereof, there were 2,977,200 shares of Parent Common Stock issued and
outstanding, no shares of Parent Preferred Stock issued and outstanding, 260,192
shares reserved for issuance upon the exercise of that certain Stock Purchase
Warrant issued by Parent to Sirrom Investments, Inc. on the date hereof (which
amount is subject to adjustment pursuant to the Stock Purchase Warrant), and
13,846 shares of Parent Common Stock reserved for issuance upon the exercise of
outstanding stock options ("Parent Stock Options"). As of the date hereof, the
authorized capital stock of Merger Sub consists of 10,000 shares of Merger Sub
Common Stock. As of the date hereof, there were 1,000 shares of Merger Sub
Common Stock issued and outstanding and no shares of Merger Sub Common Stock
reserved for issuance upon the exercise of outstanding stock options and
warrants. All issued and outstanding shares of Parent Common Stock, and all
issued and outstanding shares of capital stock of each of the Parent
Subsidiaries, have been duly authorized and validly issued and are fully paid
and nonassessable. All of the outstanding shares of capital stock of each Parent
Subsidiary are owned by Parent and are free and clear of any Liens. Except as
disclosed above, neither Parent nor any of the Parent Subsidiaries has granted
nor is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase,
subscription or issuance of any shares of capital stock of Parent or any of the
Parent Subsidiaries or any securities representing the right to purchase,
subscribe or otherwise receive any shares of such capital stock or any
securities convertible into any such shares, and there are no agreements or
understandings with respect to voting of any such shares.
23
<PAGE>
6.3 Authority; No Violation.
-----------------------
(a) Except for the filings of the Merger documents as required by
the GBCC and the FBCA (collectively, the "Parent Approvals"), no Authorization
of any Governmental Authority is necessary on behalf of Parent or Merger Sub in
connection with the execution and delivery by Parent and Merger Sub of this
Agreement and the consummation by Parent and Merger Sub of the Merger and the
other transactions contemplated hereby. Subject to receipt of the Parent
Approvals, Parent has the full corporate power and authority to execute and
deliver this Agreement and to consummate the Merger and the other transactions
contemplated hereby in accordance with the terms hereof. The execution and
delivery of this Agreement and the consummation of the Merger and the other
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Parent in accordance with the Articles of Incorporation of
Parent and applicable Laws. Except for the Parent Approvals, no other corporate
proceedings on the part of Parent are necessary to consummate the Merger and the
other transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Parent and constitutes the valid and binding
obligation of Parent enforceable against Parent in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Parent,
nor the consummation by Parent of the Merger and the other transactions
contemplated hereby in accordance with the terms hereof, or compliance by Parent
with any of the terms or provisions hereof, will (i) assuming that the Parent
Approvals are duly obtained, violate any provision of Parent's Articles of
Incorporation or bylaws, (ii) assuming that the Parent Approvals are duly
obtained, violate any Law applicable to Parent, any of the Parent Subsidiaries,
or any of their respective properties or assets, or (iii) except as set forth in
Parent Disclosure Schedule 6.3, violate, conflict with, result in a breach of
- ------------------------------
any provisions 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
of, accelerate the performance required by, or result in the creation of any
Lien upon any of the respective properties or assets of Parent or the Parent
Subsidiaries under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Parent or any of the Parent Subsidiaries is a
party, or by which they or any of their respective properties or assets may be
bound or affected except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a Material Adverse Effect on the
Parent, and which will not prevent or delay the consummation of the Merger and
the other transactions contemplated hereby.
(c) Subject to receipt of the Parent Approvals, Merger Sub has the
full corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and the other transactions contemplated hereby in
accordance with the terms hereof. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors and the sole shareholder of Merger
Sub in accordance with the Articles of Incorporation of Merger Sub and
applicable Laws. Except for the Parent Approvals, no other corporate proceedings
on the part of Merger Sub are necessary to consummate the Merger or the other
transactions so
24
<PAGE>
contemplated. This Agreement has been duly and validly executed and delivered by
Merger Sub and constitutes the valid and binding obligation of Merger Sub
enforceable against Merger Sub in accordance with its terms.
6.4 Financial Statements.
--------------------
(a) The financial statements of Parent set forth in Parent
------
Disclosure Schedule 6.4 (the "Parent Financial Statements") are prepared in
- -----------------------
accordance with GAAP, and, as of their respective dates, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(b) Since February 10, 1998, there has not been any change,
occurrence or circumstance in the business, results of operations or financial
condition of Parent or any Parent Subsidiary having, individually or in the
aggregate, a Material Adverse Effect on Parent, other than changes, occurrences
and circumstances set forth in Parent Disclosure Schedule 6.4.
------------------------------
6.5 Broker's and Other Fees. Neither Parent nor any of the Parent
-----------------------
Subsidiaries nor any of their directors or officers has employed any broker or
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
6.6 Parent Common Stock; Merger Sub Common Stock. At the Effective
--------------------------------------------
Time, the Parent Common Stock to be issued pursuant to the Merger, and all
issued and outstanding shares of Merger Sub Common Stock, will be duly
authorized and validly issued, fully paid and nonassessable, free of preemptive
rights and free and clear of all Liens created by or through Parent or Merger
Sub (except as set forth in this Agreement and the documents and agreements
executed in connection herewith).
6.7 Disclosure. No representation, warranty, or statement made by
----------
Parent or Merger Sub in this Agreement or in any document or certificate
furnished or to be furnished to Seller or the Shareholder pursuant to this
Agreement contains or will contain any untrue or incomplete statement or omits
or will omit to state any fact necessary to make the statements contained herein
or therein not misleading. All facts known or reasonably available to Parent or
Merger Sub that are material to the financial condition, operation, or prospects
of the business and assets of Parent or Merger Sub have been disclosed to Seller
and the Shareholders.
ARTICLE 7 - COVENANTS OF THE PARTIES
7.1 Conduct of Business. Seller, the Shareholders, Parent and
-------------------
Merger Sub agree that from the date hereof to the Effective Time, Seller,
Parent and Merger Sub shall conduct their business only in the ordinary course
and consistent with prudent business practice
25
<PAGE>
and past practice, except for transactions permitted hereunder (or, in the case
of Seller, with the prior written consent of Parent, and in the case of Parent
or Merger Sub, with the written consent of Seller, which consent shall not be
unreasonably withheld). Without limiting the generality of the foregoing,
Seller, Parent and Merger Sub shall use their best efforts to:
(a) maintain their status in good standing in all jurisdictions in
which they are required to be qualified or registered to conduct its business;
(b) maintain all of their tangible assets in good operating
condition and maintain the protection of all intellectual property in
substantially the same standing as exists on the date hereof;
(c) continue performance in the ordinary course of their
obligations under their contracts and agreements;
(d) preserve their business organization intact, keep available
their present officers and employees (except that Seller shall not continue to
employ Bruce MacIntyre) and preserve their present relationships with suppliers,
customers and others having business relationships with them; and
(e) maintain their existing insurance, subject to variations in
amount required by the ordinary operations of their business.
7.2 Negative Covenants.
------------------
(a) Seller and the Shareholders agree that from the date hereof to
the Effective Time, except as otherwise approved by Parent in writing or as
permitted or required by this Agreement, Seller will not:
(i) change any provision of its Articles of
Incorporation or bylaws;
(ii) issue any additional shares of Seller Common Stock or
securities or change the number of shares of its authorized or
other issued capital stock or issue or grant any option, warrant,
call, commitment, subscription, right to purchase or agreement of
any character relating to the authorized or issued capital stock of
Seller or any securities convertible into shares of such stock, or
split, combine or reclassify any shares of its capital stock, or
declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock;
(iii) directly or indirectly redeem, purchase or otherwise
acquire any capital stock of Seller;
(iv) grant any severance or termination pay (other than
pursuant to policies or contracts in effect on the date hereof and
that were not required to be modified or terminated pursuant to the
terms hereof and that have been disclosed
26
<PAGE>
to Parent pursuant hereto) to, or enter into or amend any employment
or severance agreement with, any of its directors, officers or
employees; adopt any new employee benefit plan or arrangement of any
type; or award any increase in compensation or benefits to its
directors, officers or employees except with respect to employee
increases in the ordinary course of business and consistent with
past practices and policies and, with regard to bonuses in amounts
that do not result in a material variance from the amounts reserved
for such payments through the date of the most recent balance sheet
included in the Seller Financial Statements;
(v) sell or dispose of any assets other than in the ordinary
course of business consistent with past practices;
(vi) make any capital expenditures outside the ordinary course
of business;
(vii) acquire in any manner whatsoever any business or entity;
(viii) enter into, terminate, modify or amend any agreement or
arrangement with any officer or director of Seller or any
"affiliate" of any such officer or director, as that term is defined
in Regulation 14A of the Securities Exchange Act of 1934 (the "1934
Act") (an "Affiliate");
(ix) make any change in its accounting methods or practices;
(x) incur, create, assume or guarantee any Liabilities except
in the ordinary course of business;
(xi) increase, or make any change in any assumptions underlying
the method of calculating any bad debt, contingency or other
reserves from those reflected in the Seller Financial Statements set
forth on Seller Disclosure Schedule 4.4;
------------------------------
(xii) make any change in the method of valuing assets included
in the Seller Financial Statements set forth on Seller Disclosure
-----------------
Schedule 4.4;
------------
(xiii) pay, discharge or satisfy any Liabilities, other than by
payment, discharge or satisfaction in the ordinary course of
business;
(xiv) permit or allow any of its assets (real, personal or
mixed, tangible or intangible) to be subjected to any Lien;
(xv) write down the value of any inventory or write off as
uncollectible any notes or accounts receivable, except for write-
downs and write-offs in the ordinary course of business;
27
<PAGE>
(xvi) cancel or waive any claims or rights, or sell, transfer,
distribute or otherwise dispose of any assets or properties, except
in the ordinary course of business;
(xvii) declare, file or permit to be filed any voluntary or
involuntary bankruptcy, receivership, insolvency or other similar
proceeding or petition with any Governmental Authority with respect
to Seller or any of the Shareholders;
(xviii) fail to perform its obligations under any Material
Contract (except those being contested in good faith) or enter into,
assume or amend any agreement that would be a Material Contract
other than agreements to provide services entered into in the
ordinary and usual course of business;
(xix) take any action that would or could reasonably be
expected to result in (A) a Material Adverse Effect on Seller or (B)
any of its representations and warranties contained in Article 4 not
being true and correct in any material respect at the Effective
Time, or that would cause any of its conditions to Closing not to be
satisfied; or
(xx) directly or indirectly agree to do any of the foregoing.
(b) Parent agrees that from the date hereof to the Effective
Time, except as otherwise approved by Seller in writing or as permitted or
required by this Agreement, it will not, nor will it permit any of the Parent
Subsidiaries to:
(i) declare, set aside or pay any dividend or other
distribution of cash or property (other than capital stock) in
respect of its capital stock, other than regular cash dividends in
amounts not materially greater than customarily paid by Parent;
(ii) make any material change in its accounting methods or
practices, other than changes required by GAAP or by Governmental
Authorities;
(iii) take any action that would result in any of its
representations and warranties contained in Article 6 not being true
and correct in any material respect at the Effective Time or that
would cause any of its conditions to Closing not to be satisfied; or
(iv) directly or indirectly agree to do any of the foregoing.
7.3 No Solicitation. From the date hereof to the Effective Time or
---------------
the earlier termination of this Agreement in accordance with its terms, Seller
and the Shareholders:
(a) shall not, and Seller shall direct and use its best efforts to
cause its Affiliates, officers, directors, employees, agents and representatives
(including without
28
<PAGE>
limitation, the Shareholders, any investment banker, attorney or accountant
retained by it) not 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 the Shareholders) with
respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
equity securities of, Seller (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any information or data to, or have any discussions with,
any person relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal;
(b) 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 Seller will take the necessary steps
to inform the individuals or entities referred to above of the obligations
undertaken in this Section 7.3; and
(c) will notify Parent immediately of the receipt and terms of any
Acquisition Proposal, but neither Seller nor the Shareholders shall be obligated
to notify Parent of the identity of any potential acquirer.
7.4 Current Information.
-------------------
(a) During the period from the date of this Agreement to the
Effective Time or the earlier termination of this Agreement in accordance with
its terms, on a frequent basis;
(i) Seller will cause one or more of its representatives
to confer with representatives of Parent regarding its business,
operations, properties, assets and financial condition; and
(ii) each of Seller and Parent will cause one or more of
its representatives to confer with representatives of the other
party regarding matters relating to the completion of the
transactions contemplated herein.
(b) Prior to the Effective Time, as soon as practicable after the
end of every month (but in no event later than thirty days thereafter) beginning
with the month in which this Agreement is signed, Seller will deliver to Parent
an unaudited balance sheet as of the end of such month, and related statements
of income and cash flows for such month, each certified by an officer of Seller
as meeting the standards for financial statements set forth in Section 4.4.
7.5 Access to Properties and Records; Confidentiality.
-------------------------------------------------
(a) Seller shall permit Parent and its representatives reasonable
access to its properties, and shall disclose and make available to Parent and
its representatives all books, papers and records and information relating to
its assets, stock ownership, properties, operations, obligations and
liabilities, including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
29
<PAGE>
meetings, organizational documents, agreements, filings with any Governmental
Authority, accountants' work papers, litigation files, plans affecting
employees, and any other records and information in which Parent and its
representatives may have a reasonable interest.
(b) All information furnished by the parties hereto previously in
connection with transactions contemplated by this Agreement or pursuant hereto
shall be used solely for the purpose of evaluating the Merger and shall be
treated as the sole property of the party delivering the information until
consummation of the Merger contemplated hereby and, if Merger shall not occur,
each party and each party's advisors shall return to the other party all
documents or other materials containing, reflecting or referring to such
information, will not retain any copies of such information, shall use
commercially reasonable efforts to keep confidential all such information, and
shall not directly or indirectly use such information for any competitive or
other commercial purposes. In the event that the Merger does not occur, all
documents, notes and other writings prepared by a party hereto or its advisors
based on information furnished by the other party shall be promptly destroyed.
The obligation to keep such information confidential shall continue for three
years from the date the Merger is abandoned but shall not apply to (i) any
information which (A) the party receiving the information can establish by
convincing evidence was already in its possession prior to the disclosure
thereof to it by the other party; (B) was then generally known to the public;
(C) became known to the public through no fault of the party receiving such
information; or (D) was disclosed to the party receiving such information by a
third party not bound by an obligation of confidentiality; or (ii) any
information that is requested or required (by interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
processes) to be disclosed by Law or Governmental Authority, to the extent that
the party subject to such request or requirement provides the other parties
hereto with prompt notice thereof so that they may seek an appropriate
protective order or waive compliance with the provisions of this Section 7.5.
If, in the absence of a protective order or the receipt of a waiver hereunder,
any party hereto is nonetheless, in the opinion of its counsel, compelled to
disclose information that is protected hereunder to any Governmental Authority
or else stand liable for contempt or suffer other censure or penalty, said party
may disclose such information to such Governmental Authority without liability
hereunder.
(c) No investigation by Parent heretofore or hereafter made shall
affect the representations and warranties of Seller and the Shareholders, and
each such representations and warranties shall survive any such investigation,
subject to Article 10.
7.6 Regulatory Matters. Each of the parties will promptly furnish
------------------
each other with copies of written communications received by them or any of
their respective Subsidiaries from, or delivered by any of the foregoing to,
any Governmental Authorities in respect of the transactions
contemplated hereby.
7.7 Best Efforts; Further Assurances; Cooperation. Subject to the
---------------------------------------------
other provisions in this Agreement, the parties hereto shall in good faith
perform their obligations under this Agreement before, at and after the
Effective Time, and shall each use their reasonable best efforts to do, or cause
to be done, all things necessary, proper or advisable
30
<PAGE>
under applicable Laws to obtain all Authorizations and satisfy all conditions to
the obligations of the parties under this Agreement and to cause the
transactions contemplated by this Agreement to be carried out promptly in
accordance with the terms hereof and shall cooperate fully with each other and
their respective officers, directors, employees, agents, counsel, accountants
and other designees in connection with any steps required to be taken as part of
their respective obligations under this Agreement. Upon the execution of this
Agreement and thereafter, each party shall take such actions and execute and
deliver such documents as may be reasonably requested by the other parties
hereto in order to consummate the transactions contemplated by this Agreement.
7.8 Public Announcements. No party shall make any public
--------------------
announcement regarding any aspect of this Agreement without the prior written
consent of the other parties hereto.
7.9 Failure to Fulfill Conditions. In the event that Parent or
-----------------------------
Seller determines that a material condition to its or the other's obligation to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to April 30, 1998 (the "Deadline Date"), it will promptly notify the other
party. Except for any acquisition or merger discussions Parent may enter into
with other parties, Seller and Parent will promptly inform the other of any
facts applicable to Seller or Parent that would be likely to prevent or
materially delay consummation of the Merger.
7.10 Disclosure Supplements. From time to time prior to the
----------------------
Effective Time, each party hereto will promptly notify the other party of any
inaccuracy in its respective Disclosure Schedules delivered pursuant hereto
including, without limitation, any matter which, if existing, occurring or known
at the date of this Agreement, would have been required to be set forth or
described in such Schedule or which is necessary to correct any information in
such Schedule that has been rendered inaccurate. Notwithstanding the foregoing,
for the purpose of determining satisfaction of the conditions set forth in
Article 8, no such notification shall be deemed to amend such Disclosure
Schedules or shall be deemed to be part hereof unless agreed to by the other
party.
7.11 Affiliates. Simultaneously with the execution and delivery of
----------
this Agreement, Seller shall deliver to Parent copies of letter agreements, each
substantially in the form of Exhibit 7.11, executed by all directors, executive
------------
officers and by any other person who is an "affiliate" of Seller for purposes of
Rule 145 under the 1933 Act (collectively, the "Affiliates") who are to receive
Parent Common Stock pursuant to this Agreement, as set forth in Schedule 2.1.
------------
Each letter agreement shall provide that such person will not sell, pledge,
transfer or otherwise dispose of any shares of Parent Common Stock to be
received by such Affiliate in the Merger, except in compliance with the
applicable provisions of the 1933 Act and the rules and regulations thereunder.
The certificates of Parent Common Stock issued to Affiliates of Seller will bear
an appropriate legend reflecting the foregoing.
7.12 Shareholders' Approval. As soon as practicable following the
----------------------
date hereof, all of the Shareholders shall approve the Merger in compliance with
applicable law.
31
<PAGE>
The Shareholders may effect such approval by unanimous written consent in lieu
of a shareholders' meeting.
7.13 Release by Seller and the Shareholders.
--------------------------------------
(a) If the Merger occurs as contemplated by this Agreement, then
the Shareholders hereby release Seller from any and all claims, rights and
causes of action that the Shareholders may have or may have had against Seller
arising out of any transactions between the Shareholders and Seller prior to, or
arising with respect to any act or omissions occurring prior to the Effective
Time; provided, however, that the foregoing release does not apply to accrued
compensation and benefits and expenses or similar obligations incurred in the
ordinary course of business (including reimbursement of medical expenses
pursuant to the Employee Plans disclosed pursuant to this Agreement).
(b) If the Merger occurs as contemplated by this Agreement, then
Seller hereby releases each Shareholder from any and all claims, rights and
causes of action that Seller may have or may have had against such Shareholder
arising out of any transactions between such Shareholder and Seller prior to, or
arising with respect to any act or omissions occurring prior to the Effective
Time; provided, however, that the foregoing release does not apply to accrued
compensation and benefits and expenses or similar obligations incurred in the
ordinary course of business (including reimbursement of medical expenses
pursuant to the Employee Plans disclosed pursuant to this Agreement).
7.14 Shareholder Agreements. On or prior to the Closing Date, all
----------------------
agreements among the Shareholders and Seller relating to Seller or any stock or
securities of Seller shall have been canceled at no cost to Seller.
7.15 Employee Matters.
----------------
(a) Employee Benefits. Parent shall take all action necessary or
-----------------
appropriate to permit the employees of Seller at the Effective Time who shall
continue to be employed by the Surviving Corporation thereafter ("Continuing
Employees") to participate after the Effective Time in Parent's employee benefit
programs and to cause the Surviving Corporation to take all actions necessary or
appropriate to adopt Parent's employee benefit programs effective as of the
Effective Time. Parent will cause the Surviving Corporation to give each
Continuing Employee full credit for service with Seller for purposes of
eligibility to participate in, vesting and payment of benefits under, and
eligibility for any subsidized benefit provided under (but not, except as
provided in the preceding sentence, for purposes of determining the amount of
any benefit under) any Parent employee benefit plan; provided, however, that
nothing in this Agreement shall be deemed to require Parent to cause to be
continued any employee's employment, responsibilities or officer title for any
definite period, or to change the terms or conditions of any existing employee
benefit program.
32
<PAGE>
(b) Employment Agreements. On or prior to the Closing Date, all
---------------------
employment agreements between Seller and any of the Shareholders shall have been
canceled at no cost to Seller.
7.16 No Transfers. Except pursuant to this Agreement or with the
------------
prior written consent of Purchaser, none of the Shareholders shall transfer any
of the Seller Common Stock after the date of this Agreement.
7.17 Special Provisions with Respect to Seller. If the Closing
-----------------------------------------
occurs as provided herein, then at that time all representations, warranties,
covenants and agreements to the extent made or adopted by Seller (and only to
such extent) shall expire and be of no further force and effect, and Seller's
having made representations, warranties, covenants and agreements shall in no
way limit the liability of the Shareholders for those representations,
warranties, covenants and agreements pursuant to this Agreement.
7.18 Release from Personal Guaranties. If the closing occurs as
--------------------------------
provided herein, Parent shall use all reasonable efforts to obtain the release
of the Shareholders from the personal guaranties set forth on Seller
------
Disclosure Schedule 4.11.
- ------------------------
7.19 Tax Matters
-----------
(a) Transfer Taxes. The Shareholders shall pay all stock transfer
--------------
and other similar Taxes and fees in respect of the exchange of the Seller Common
Stock and shall be responsible for paying all the costs of filing all Returns
relating to such Taxes and fees.
(b) Cooperation and Exchange of Information. The Shareholders, the
---------------------------------------
Surviving Corporation and Parent agree to furnish, or to cause to be furnished
in good faith to each other, such cooperation and assistance as is reasonably
necessary to file any future returns, to respond to audits, to negotiate
settlements with Governmental Authorities and to prosecute and defend against
Tax claims.
(c) Tax-Free Transaction. The parties hereto intend that the Merger
--------------------
shall be treated as a tax-free reorganization under the Code, shall report the
Merger as such for federal and state income tax purposes, and shall take no
action after the Effective Time to adversely affect the status of the Merger as
a tax-free reorganization under the Code.
ARTICLE 8 - CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement.
-----------------------------------------------------------
The respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the satisfaction, or, where permissible under
applicable Law, waiver at or prior to the Closing Date of the following
conditions:
33
<PAGE>
(a) Approval of Shareholders. This Agreement, the Merger and the
------------------------
transactions contemplated hereby shall have been approved by the requisite vote
of the shareholders of Seller.
(b) Approvals and Regulatory Filings. All necessary Authorizations
--------------------------------
of Governmental Authorities required to consummate the transactions contemplated
hereby shall have been obtained without any term or condition that would
materially impair the value of Seller, or that would materially impair the value
of Parent and the Parent Subsidiaries, taken as a whole. All conditions required
to be satisfied prior to the Effective Time by the terms of such approvals and
consents shall have been satisfied; and all statutory waiting periods in respect
thereof shall have expired.
(c) Suits and Proceedings. The consummation of the transactions
---------------------
contemplated hereby will not violate the provisions of any injunction, order,
judgment, decree or Law applicable or effective with respect to Parent or Seller
or their officers, directors or shareholders. No suit or proceeding shall have
been instituted by any person, or, to the knowledge of Parent or Seller, shall
have been threatened by any Governmental Authority, and not subsequently
withdrawn, dismissed or otherwise eliminated, which seeks (i) to prohibit,
restrict or delay consummation of the transactions contemplated hereby or to
limit in any material respect the right of Parent to control any material aspect
of the business of Parent and the Parent Subsidiaries or Seller after the
Effective Time, or (ii) to subject Purchaser or Seller or their respective
directors, officers or shareholders to material liability on the ground that it
or they have breached any Law or otherwise acted improperly in relation to the
transactions contemplated by this Agreement.
(d) Tax Opinion. Parent and Seller each shall have received the
-----------
opinions of Nelson Mullins Riley & Scarborough, L.L.P., dated as of the Closing
Date, in form and substance reasonably satisfactory to Parent and to Seller and
their counsel, that the Merger will qualify as a tax-free reorganization under
the Code.
(e) Other Merger. The merger of Control Group Ltd., a Delaware
------------
corporation, with a Subsidiary of Parent shall have been consummated prior to or
simultaneously with the Merger.
8.2 Conditions to the Obligations of Parent and Merger Sub Under
------------------------------------------------------------
this Agreement. The obligations of Parent and Merger Sub under this Agreement
- --------------
shall be further subject to the satisfaction or waiver, at or prior to the
Closing Date (and continues until the Effective Time in the case of Section
8.2(a)), of the following conditions:
(a) Representations and Warranties; Covenants and Agreements;
---------------------------------------------------------
Consents. The representations and warranties of Seller and the Shareholders
- --------
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and shall also be true and correct in all material
respects on the Closing Date as though made on and as of the Closing Date,
except that those representations and warranties which are confined to a
particular date shall speak only as of such date, and Seller and the
Shareholders shall have performed in all material respects the agreements,
covenants and obligations to be performed by it or them at or
34
<PAGE>
prior to the Effective Time. All Authorizations of or with any nongovernmental
third party that are required for or in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby by Seller and the Shareholders shall have been obtained or made, except
where the failure to obtain any such Authorization would not have a Material
Adverse Effect on Seller.
(b) Opinion of Counsel. Parent shall have received an opinion of
------------------
counsel to Seller, dated the Closing Date, in form and substance reasonably
satisfactory to Parent, covering the matters set forth on Exhibit 8.2(b).
--------------
(c) Certificates. Seller shall have furnished Parent with such
------------
certificates of its officers and such other documents to evidence fulfillment of
the conditions set forth in this Article 8 and otherwise to consummate the
transactions contemplated pursuant to this Agreement as Parent may reasonably
request.
(d) Employment Agreements. David Comar, Ronald L. Diehl, and
---------------------
Elizabeth K. Ryan shall have executed and delivered Employment Agreements with
Parent in the form attached hereto as Exhibit 8.2(d), with the blanks therein
-------------
properly completed, the effectiveness of which are expressly conditioned upon
consummation of the Merger.
(e) Shareholders Agreement. David Comar, Ronald L. Diehl, and
----------------------
Elizabeth K. Ryan shall have executed and delivered a Shareholders Agreement
with Parent in the form attached hereto as Exhibit 8.2(e), with the blanks
-------------
therein properly completed, the effectiveness of which is expressly conditioned
upon consummation of the Merger.
(f) Resignation; Severance Agreement and General Release. Seller
----------------------------------------------------
and Bruce MacIntyre shall have executed and delivered to Parent a Severance
Agreement and General Release in the form attached hereto as Exhibit 8.2(f),
--------------
with the blanks therein properly completed.
(g) Financing. Parent shall have closed and received the proceeds
---------
of financing, upon terms and conditions satisfactory to Parent in all respects
from Sirrom Investments, Inc. in the amount of $3,000,000.00, and CoreStates
Bank, N.A. shall have consented in writing to the assumption by Parent of
Control Group Ltd.'s obligations to CoreStates Bank, N.A. pursuant to certain
loans from CoreStates Bank, N.A. to Control Group Ltd.
8.3 Conditions to the Obligations of Seller and the Shareholders
------------------------------------------------------------
Under this Agreement. The obligations of Seller and the Shareholders under this
- --------------------
Agreement shall be further subject to the satisfaction or waiver, at or prior to
the Closing Date (and continues until the Effective Time in the case of Section
8.3(a)), of the following conditions:
(a) Representations and Warranties; Covenants and Agreements;
--------------------------------------------------------
Consents. The representations and warranties of Parent and Merger Sub contained
- --------
in this Agreement, including but not limited to any financial projections
disclosed by Seller to Parent, shall be true
35
<PAGE>
and correct in all respects as of the date hereof and shall also be true and
correct in all material respects on the date hereof and on the Closing Date as
though made on and as of the Closing Date, except that those representations and
warranties that are confined to a particular date shall speak only as of such
date, and Parent shall have performed in all material respects the agreements,
covenants and obligations to be performed by it at or prior to the Effective
Time. All Authorizations of or with any nongovernmental third party that are
required for or in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby by Parent and the
Merger Sub shall have been obtained or made, except where the failure to obtain
any such Authorizations would not have a Material Adverse Effect on Parent or
the Parent Subsidiaries, taken as a whole.
(b) Opinion of Counsel to Parent. Seller shall have received an
----------------------------
opinion of counsel to Parent, dated the Closing Date, substantially in the form
and substance set forth on Exhibit 8.3(b). Bruce MacIntyre shall have
-------------
received a letter from counsel to Parent permitting him to rely on such opinion.
(c) Certificates. Parent and Merger Sub shall have furnished Seller
------------
with such certificates of its officers or others and such other documents to
evidence fulfillment of the conditions set forth in this Article 8 and
otherwise to consummate the transactions contemplated pursuant to this Agreement
as Seller may reasonably request.
(d) Employment Agreements. The Parent shall have executed and
---------------------
delivered Employment Agreements to each of David Comar, Ronald L. Diehl and
Elizabeth K. Ryan in the form attached hereto as Exhibit 8.2(d), with the blanks
--------------
therein properly completed, the effectiveness of which are expressly conditioned
upon consummation of the Merger.
(e) Shareholders Agreement. The Parent shall have executed and
----------------------
delivered a Shareholders Agreement with certain of the Shareholders in the form
attached hereto as Exhibit 8.2(e), with the blanks therein properly completed,
-------------
the effectiveness of which is expressly conditioned upon consummation of the
Merger.
(f) Seller's Payments to Certain Shareholders. Certain Shareholders
-----------------------------------------
shall have received payment from Seller for certain amounts due and payable from
Seller, as set forth on Schedule 2.1 hereto.
------------
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated prior to the
-----------
Effective Time, whether before or after approval of this Agreement by the
shareholders of Merger Sub, Parent and Seller:
(a) by mutual written consent of Parent and Seller;
(b) by Parent or Seller if the Effective Time shall not have
occurred on or prior to the Deadline Date;
36
<PAGE>
(c) by Parent if there has been a material breach of any
representation, warranty, covenant, agreement or obligation of Seller hereunder
in each case which either is not capable of being remedied, or, if capable of
being remedied, shall not have been remedied within 20 days after receipt by
Seller of notice in writing from Parent to Seller specifying the nature of such
breach and requesting that it be remedied;
(d) by Seller, if there has been a material breach in any
representation, warranty, covenant, agreement or obligation of Parent hereunder
in each case which either is not capable of being remedied, or, if capable of
being remedied, shall not have been remedied within 20 days after receipt by
Parent of notice in writing from Seller specifying the nature of such breach and
requesting that it be remedied;
(e) by Parent if any of the conditions set forth in Section 8.1 or
8.2 is not satisfied and is no longer capable of being satisfied by the Deadline
Date; or
(f) by Seller if any of the conditions set forth in Section 8.1 or
8.3 is not satisfied and is no longer capable of being satisfied by the Deadline
Date.
9.2 Effect of Termination. If either Parent or Seller terminates
---------------------
and abandons this Agreement pursuant to Section 9.1, this Agreement, other than
Sections 7.5, 7.6, 7.13, this Section 9.2, Article 10 and Section 11.1 (each of
which shall survive termination) shall forthwith become void and have no effect,
without any liability on the part of any party or its officers, directors or
shareholders; provided, however, that nothing contained in this Section 9.2
shall relieve any party from any liability for any breach of this Agreement.
9.3 Specific Performance. The parties acknowledge that the rights of
--------------------
each party to consummate the transactions contemplated hereby are special,
unique, and of extraordinary character, and that, in the event that any party
violates or fails or refuses to perform any covenant made by it herein, the
other party or parties will be without adequate remedy at law. Each party
agrees, therefore, that in the event that it violates, fails or refuses to
perform any covenant or agreement made by it herein, the other party or parties
so long as it or they are not in breach hereof, may, in addition to the remedies
at law, institute and prosecute an action in a court of competent jurisdiction
to enforce specific performance of such covenant or agreement or seek any other
equitable relief.
9.4 Amendment. This Agreement may be amended by action taken by the
---------
parties hereto at any time before or after approval of this Agreement and
matters related thereto, as the case may be, by the shareholders of Merger Sub
or Seller but, after any such approval, no amendment shall be made that changes
the amount or changes the form of the consideration to be delivered to the
Shareholders without the approval of the shareholders of the company that would
be negatively affected by any such change (and specifically the approval of all
the Shareholders). This Agreement may not be amended except by an instrument in
writing signed on behalf of all the parties hereto.
37
<PAGE>
9.5 Extension; Waiver. The parties may, at any time prior to the
-----------------
Effective Time of the Merger, (a) extend the time for the performance of any of
the obligations or other acts of the other parties hereto; (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto; or (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of any
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party against which the waiver is
sought to be enforced and shall apply only to the specific condition,
representation or warranty identified by such writing as being waived, extended
or modified.
ARTICLE 10 - INDEMNIFICATION
10.1 Indemnification by Shareholders. Subject to the terms of this
-------------------------------
Article 10, Seller and each Shareholder (but after the consummation of the
Merger, solely the Shareholders, and not the Seller) shall indemnify, defend,
save and hold harmless Parent, Merger Sub (and Seller, after the consummation of
the Merger) (collectively, the "Parent Indemnified Parties"), from and against
any demands, claims, actions, losses, damages, deficiencies, liabilities, costs
and expenses (including, without limitation, reasonable attorneys' and
accountants' fees and expenses), together with interest and penalties, if any,
awarded by court order or otherwise agreed to (collectively, "Indemnifiable
Damages"), suffered by the Parent Indemnified Parties that arise out of or
result from any of the following (whether or not a third party initiates the
proceeding or claim giving rise to such Indemnifiable Damages):
(a) any breach of any of the representations, warranties, covenants
or agreements made by Seller or the Shareholders in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Seller or the
Shareholders at the Closing; or
(c) any expenses, charges, fees, or costs associated with any audit
of Seller for Taxes related to periods prior to the Closing Date, and any Taxes
imposed as a result of any such audit, even though any such audit commences, or
a party does not become aware of any such audit until after the Closing Date.
10.2 Indemnification by Parent. Subject to the terms of this Article
-------------------------
10, Parent shall indemnify, defend, save and hold harmless Seller and the
Shareholders (but after consummation of the Merger, solely the Shareholders, and
not the Seller) (collectively, the "Seller Indemnified Parties"), from and
against any Indemnifiable Damages suffered by the Seller Indemnified Parties
that arise out of or result from any of the following (whether or not a third
party initiates the proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties, covenants
and agreements made by Parent or Merger Sub in this Agreement;
38
<PAGE>
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Parent or Merger
Sub at the Closing; or
(c) any claim made against any Shareholder pursuant to any of the
personal guaranties of such Shareholder on contracts disclosed on Seller
------
Disclosure Schedule 4.11.
- ------------------------
10.3 Claims for Indemnification. The representations, warranties,
--------------------------
covenants and agreements in this Agreement shall survive the Closing subject to
the limitations set forth herein. The party seeking indemnification (the
"Indemnified Party") shall give the party from whom indemnification is sought
(the "Indemnifying Party") a written notice ("Notice of Claim") within sixty
(60) days of the discovery of any loss, liability, claim or expense in respect
of which the right to indemnification contained in this Article 10 may be
claimed; provided, however, that the failure to give such notice within such
sixty (60) day period shall not result in the waiver or loss of any right to
bring such claim hereunder after such period unless, and only to the extent
that, the other party is actually prejudiced by such failure. In the event a
claim is pending or threatened or the Indemnified Party has a reasonable belief
as to the validity of the basis for such claim, the Indemnified Party may give
written notice (a "Notice of Possible Claim") of such claim to the Indemnifying
Party, regardless of whether a loss has arisen from such claim. A party shall
have no liability under this Article 10 for breach of a representation or
warranty, unless a Notice of Claim or Notice of Possible Claim therefor is
delivered by the Indemnified Party prior to the second anniversary of the
Effective Time; provided, however, that as to any liability arising pursuant to
Sections 4.1, 4.2, 4.3, 4.8, 4.9, 4.13, 4.14, Article 5 and Sections 6.1, 6.2
and 6.3 hereof, any Notice of Claim or Notice of Possible Claim must be
delivered by the Indemnified Party not later than ninety (90) days after the
expiration of the applicable statute of limitations (including any extensions)
therefor; and provided, further, that the limitations set forth in this Section
10.3 shall not apply to liability under this Article 10 for any intentional
breach of a representation or warranty in this Agreement. Any Notice of Claim or
Notice of Possible Claim shall set forth the representations, warranties,
covenants and agreements with respect to which the claim is made, the specific
facts giving rise to an alleged basis for the claim and the amount of liability
asserted or anticipated to be asserted by reason of the claim.
10.4 Defense of Claim by Third Parties. If any claim is made by a
---------------------------------
third party against a party to this Agreement that, if sustained, would give
rise to a liability of another party under this Agreement, the party against
whom the claim is made shall promptly cause notice of the claim to be delivered
to the other party and shall afford the other party and its counsel, at the
other party's sole expense, the opportunity to join in the defense and
settlement of the claim. The failure to provide such notice will not relieve the
Indemnifying Party of liability under this Agreement unless, and only to the
extent that, the Indemnifying Party is actually prejudiced by such failure.
10.5 Third Party Claim Assistance. From time to time after the
----------------------------
Closing, Parent, the Surviving Corporation, and the Shareholders shall provide
or cause their appropriate employees or representatives to provide the other
party with information or data in connection with the handling and defense of
any third party claim or litigation (including
39
<PAGE>
counterclaims filed by the parties) in respect to which a party may be required
to indemnify another party under this Agreement. The party receiving such
information or data shall reimburse the other party for all of its reasonable
costs and expenses in providing these services, including, without limitation,
(i) all out of pocket, travel and similar expenses incurred by its personnel in
rendering these services; and (ii) all fees and expenses for services performed
by third parties engaged by or at the request of such other party.
10.6 Settlement of Indemnification Claims. If a recipient of a
------------------------------------
Notice of Claim desires to dispute such claim, it shall, within thirty (30) days
after receipt of the Notice of Claim, give counternotice, setting forth the
basis for disputing such claim, to Parent or the Shareholders, as the case may
be. If no such counternotice is given within such thirty (30) day period, or if
Parent or the Shareholders, as the case may be, acknowledges liability for
indemnification, then the amount claimed shall be promptly satisfied as provided
in Section 10.7. If, within thirty (30) days after the receipt of counternotice
by Parent or the Shareholders, as the case may be, the Shareholders and Parent
shall not have reached agreement as to the claim in question, then the party
disputing the claim shall satisfy any undisputed amount as specified in Section
10.7 and the disputed amount of the claim of indemnification shall be submitted
to and settled by arbitration in accordance with the then prevailing commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall be held in the Atlanta, Georgia area before a panel of three (3)
arbitrators, one selected by each of the parties and the third selected by
mutual agreement of the first two, and all of whom shall be independent and
impartial under the rules of the American Arbitration Association. The decision
of the arbitrators shall be final and binding as to any matter submitted under
this Agreement. To the extent the decision of the arbitrators is that a party
shall be indemnified hereunder, the amount shall be satisfied as provided in
Section 10.7. Judgment upon any award rendered by the arbitrators may be entered
in any court of competent jurisdiction. The date of the arbitrator's decision or
the date a claim otherwise becomes payable pursuant to this Section 10.6 is
referred to as the "Determination Date."
10.7 Manner of Indemnification. All indemnification under this
-------------------------
Article 10 shall be made by payment of cash or delivery of a certified or
cashier's check in the amount of the indemnification liability no later than
five (5) days following the Determination Date.
10.8 Indemnification Exclusive Remedy. In the absence of fraud, and
--------------------------------
except for non-monetary equitable relief, if the Closing occurs, indemnification
pursuant to the provisions of this Article 10 shall be the sole and exclusive
remedy of the parties for any breach of any representation or warranty contained
in this Agreement.
10.9 Certain Limitations. The foregoing indemnification obligations
-------------------
are subject to the limitation that no Indemnifying Party shall have any
liability for indemnification for breaches of representations and warranties
pursuant to this Article 10 unless the total Indemnifiable Damages for which the
Indemnifying Party would be liable exceed $10,000 in the aggregate, and then
only for the excess; provided, however, that the foregoing limitation shall not
-------- -------
apply to any Indemnifiable Damages with respect to, as a result of or involving
any intentional breach of a representation or warranty in this Agreement. In no
event shall the
40
<PAGE>
liability of the Shareholders and Parent under this Article 10 exceed the total
consideration paid by Parent for the Seller Common Stock, and in no event shall
an individual Shareholder's liability under this Article 10 exceed the total
consideration paid by Parent for such Shareholder's Seller Common Stock pursuant
to Sections 2.1(a) and (b). Additionally, the maximum cumulative, aggregate
amount of Bruce MacIntyre's liability under this Article 10 is limited to
$50,000.00, and Mr. MacIntyre shall not have any liability under this Article 10
on account of any of those matters, whether individually or in the aggregate, in
excess of $50,000.00.
ARTICLE 11 - MISCELLANEOUS
11.1 Expenses.
--------
(a) Except as otherwise expressly stated herein, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including legal, accounting and investment banking fees and
expenses) shall be borne by the party incurring such costs and expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if either of the parties shall default in its obligations hereunder,
the non-defaulting party may pursue any remedy available at law or in equity to
enforce its rights and shall be paid by the defaulting party for all damages,
costs and expenses, including without limitation reasonable legal, reasonable
accounting, reasonable investment banking and reasonable printing expenses
incurred or suffered by the non-defaulting party in connection herewith or in
the enforcement of its rights hereunder.
11.2 Notices. All notices or other communications which are required
-------
or permitted hereunder shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
(a) If to Parent or Merger Sub, to:
MegaMarketing Corporation
2625 Cumberland Parkway
Suite 400
Atlanta, GA 30339
Attn: John P. Kelly, President and Chief Executive Officer
Telefax: (770) 432-3473
41
<PAGE>
Copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E., Suite 1400
Atlanta, Georgia 30309
Attn: Glenn W. Sturm
Telefax: (404) 817-6050
(b) If to Seller, to:
Genesis Direct, Inc.
391 Roberts Road, Suite 1
Oldsmar, FL 34677-4918
Attn: Ronald L. Diehl, President
Telefax: (813) 855-0969
Copy to:
Thomas P. McNamara
2909 Bay to Bay Blvd.
Suite 309
Tampa, FL 33629
Telefax: (813) 837-1532
(c) If to the Shareholders, to their respective addresses as set
forth on the signature page to this Agreement and if to Bruce MacIntyre, with a
copy to:
Sharon D. Danco
Glenn, Rasmussen & Fogarty, P.A.
100 S. Ashley Drive, Suite 1300
P. O. Box 3333
Tampa, FL 33602
Telefax: (813) 229-5946
or to such other addresses and telefax numbers as shall be furnished
in writing by any party, and any such notice or communications shall be deemed
to have been given as of three business days after the date actually sent via
overnight or express courier, eight days after mailed and upon telefax
confirmation of receipt to addressee by the sender.
11.3 Parties in Interest. This Agreement shall be binding on and
-------------------
shall inure to the benefit of the parties hereto and their respective
successors, representatives and assigns. This Agreement (and the rights and
interests herein) may not be assigned by any party without the written consent
of the other parties; provided, however, Parent may assign its interests herein
to (a) an entity controlling, controlled by or under common control with Parent
or (b) a purchaser or transferee of all or substantially all of the business or
assets of Parent or the Surviving Corporation, whether by sale of stock or
assets, merger or otherwise. Any
42
<PAGE>
attempted assignment in contravention of the foregoing shall be null and void.
Nothing in this Agreement is intended to confer, expressly or by implication,
upon any other person any rights or remedies under or by reason of this
Agreement.
11.4 Entire Agreement. This Agreement, which includes the Disclosure
----------------
Schedules and the other documents, agreements and instruments executed and
delivered pursuant to or in connection with this Agreement, contain the entire
agreement between the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all prior negotiations,
arrangements or understandings, written or oral, with respect thereto.
11.5 Counterparts. This Agreement may be executed by each party upon
------------
a separate copy, and in such case one counterpart of this Agreement shall
consist of enough of such copies to reflect the signatures of all of the
parties. This Agreement may be executed in two or more counterparts, each of
which shall be an original, and each of which shall constitute one and the same
agreement. Any party may deliver an executed copy of this Agreement and of any
documents contemplated hereby by facsimile transmission to another party and
such delivery shall have the same force and effect as any other delivery of a
manually signed copy of this Agreement or of such other documents.
11.6 Governing Law.
-------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF GEORGIA,
EXCLUDING CHOICE OF LAW PRINCIPLES.
(b) Parent, Seller and the Shareholders consent to the exclusive
jurisdiction and venue of the courts of Fulton County, Georgia and the United
States Federal District Court for the Northern District of Georgia, in any
judicial proceeding brought to enforce this Agreement. The parties agree that
any forum other than the State of Georgia is an inconvenient forum and that a
lawsuit (or non-compulsory counterclaim) brought by one party against another
party, in a court of any jurisdiction other than the State of Georgia should be
forthwith dismissed or transferred to a court located in the State of Georgia.
11.7 Arbitration. Any dispute, controversy or claim arising out of
-----------
or relating to this Agreement or any other related documents, agreements,
certificates or other writing, or the breach, termination, construction,
validity or enforceability hereof or thereof, shall be settled by binding
arbitration in accordance with the rules of the American Arbitration Association
in force at the time and in the manner described in Section 10.6.
11.8 Invalidity of any Part. If any provision or part of this
----------------------
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement and shall be construed as if such invalid,
illegal or unenforceable provision or part thereof had never been contained
herein, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of
43
<PAGE>
being enforced, the parties hereto will negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
by this Agreement are consummated to the extent possible.
11.9 Time of the Essence; Computation of Time. Time is of the
----------------------------------------
essence of each and every provision of this Agreement. Whenever the last day for
the exercise of any right or the discharge of any duty under this Agreement
shall fall upon Saturday, Sunday or a federal, public or legal holiday, the
party having such right or duty shall have until 5:00 p.m., Atlanta, Georgia
time on the next succeeding regular business day to exercise such right or to
discharge such duty.
44
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub, Seller and Shareholders have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
MEGAMARKETING CORPORATION
/s/ John P. Kelly
------------------------------
By: John P. Kelly
--------------------------
Its: President
--------------------------
MEGAMARKETING ACQUISITION
TWO, INC.
/s/ Edward J. Rutkowski
------------------------------
By: Edward J. Rutkowski
--------------------------
Its: President
--------------------------
GENESIS DIRECT, INC.
/s/ Ronald L. Diehl
------------------------------
By: Ronald L. Diehl
--------------------------
Its: President
--------------------------
SHAREHOLDERS:
/s/ Ronald L. Diehl
------------------------------
Name: Ronald L. Diehl
----------------------
Address:
----------------------
/s/ David Comar
------------------------------
Name: David Comar
----------------------
Address:
----------------------
45
<PAGE>
/s/ Elizabeth K. Ryan
------------------------------
Name: Elizabeth K. Ryan
----------------------
Address:
----------------------
/s/ Bruce MacIntyre
------------------------------
Name: Bruce MacIntyre
----------------------
Address:
----------------------
46
<PAGE>
ASSET PURCHASE AGREEMENT
by
and
among
MEGAMARKETING CORPORATION
MEGAMARKETING ACQUISITION THREE, INC.
ABERDEEN MARKETING, INC.
PROMAIL, INC.
GLOBALTEL, INC.
and
THE SHAREHOLDERS OF ABERDEEN MARKETING, INC.
Dated June 19, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 - THE EXCHANGE.......................................................1
1.1 Terms of the Exchange.........................................1
1.2 Closing.......................................................4
ARTICLE 2 - ESCROW OF SHARES...................................................5
ARTICLE 3 - RULES OF CONSTRUCTION..............................................8
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE
SHAREHOLDERS............................................................10
4.1 Corporate Organization......................................10
4.2 Capitalization..............................................10
4.3 Authority; No Violation.....................................11
4.4 Financial Statements........................................12
4.5 Broker's and Other Fees.....................................12
4.6 Absence of Certain Changes or Events........................12
4.7 Legal Proceedings...........................................13
4.8 Taxes and Tax Returns.......................................13
4.9 Employee Benefit Plans and Relations........................14
4.10 Compliance with Applicable Laws.............................15
4.11 Certain Contracts...........................................16
4.12 Properties and Insurance....................................17
4.13 Environmental Matters.......................................18
4.14 Intellectual Property.......................................18
4.15 No Parachute Payments.......................................19
4.16 Absence of Certain Agreements and Practices.................19
4.17 Major Vendors and Customers.................................20
4.18 Accounts Receivable.........................................20
4.19 Corporate Records...........................................20
4.20 Combinations Involving Seller...............................21
4.21 Bank Accounts...............................................21
4.22 Labor Relations.............................................21
4.23 Disclosure..................................................21
4.24 Investment Intent...........................................21
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS....................22
5.1 Ownership of Shares..........................................22
5.2 Authorization................................................22
5.3 Absence of Violations or Conflicts...........................22
5.4 No Consents Required.........................................23
5.5 No Claims Against Seller.....................................23
5.6 Litigation Related to this Agreement.........................23
5.7 Investment Intent............................................23
<PAGE>
5.8 Access to Information; Accredited Investor Status............24
5.9 Economic Risk................................................24
5.10 Tax Advice...................................................24
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT..........................24
6.1 Corporate Organization.......................................24
6.2 Capitalization...............................................25
6.3 Authority; No Violation......................................25
6.4 Financial Statements.........................................26
6.5 Broker's and Other Fees......................................27
6.6 Parent Common Stock..........................................27
6.7 Disclosure...................................................27
ARTICLE 7 - COVENANTS AND CERTAIN TRANSACTIONS OF THE PARTIES.................27
7.1 Best Efforts; Further Assurances; Cooperation................27
7.2 Public Announcements.........................................27
7.3 Shareholders' Approval.......................................27
7.4 Shareholder Agreements.......................................28
7.5 Employee Matters.............................................28
(a) Employee Benefits......................................28
(b) Employment Agreements..................................28
7.6 Tax Matters;.................................................28
(a) Cooperation and Exchange of Information................28
ARTICLE 8 - CLOSING CONDITIONS................................................29
8.1 Conditions of Each Party's Obligations Under this Agreement..29
(a) Approval of Shareholders...............................29
(b) Approvals and Regulatory Filings.......................29
(c) Suits and Proceedings..................................29
8.2 Conditions to the Obligations of Parent and Purchaser Under
this Agreement...............................................29
(a) Representations and Warranties; Covenants and
Agreements; Consents...................................29
(b) Opinion of Counsel.....................................30
(c) Certificates...........................................30
(d) Employment Agreements..................................30
(e) Shareholders Agreement................................ 30
(f) Wachovia Financing.....................................30
8.3 Conditions to the Obligations of Seller and the Shareholders
Under this Agreement.........................................30
(a) Representations and Warranties; Covenants and Agreements;
Consents...............................................30
(b) Opinion of Counsel to Parent...........................31
(c) Certificates...........................................31
(d) Employment Agreements..................................31
(e) Shareholders Agreements................................31
2
<PAGE>
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER.................................32
9.1 Specific Performance.........................................32
9.2 Amendment....................................................32
9.3 Extension; Waiver............................................32
ARTICLE 10 - INDEMNIFICATION..................................................32
10.1 Indemnification by Seller and the Shareholders...............32
10.2 Indemnification by Parent....................................33
10.3 Claims for Indemnification...................................33
10.4 Defense of Claim by Third Parties............................34
10.5 Third Party Claim Assistance.................................34
10.6 Settlement of Indemnification Claims.........................34
10.7 Manner of Indemnification....................................35
10.8 Indemnification Exclusive Remedy.............................35
10.9 Certain Limitations..........................................35
ARTICLE 11 - MISCELLANEOUS....................................................35
11.1 Expenses.....................................................35
11.2 Notices......................................................36
11.3 Parties in Interest..........................................38
11.4 Entire Agreement.............................................38
11.5 Counterparts.................................................38
11.6 Governing Law................................................38
11.7 Arbitration..................................................39
11.8 Invalidity of any Part.......................................39
11.9 Time of the Essence; Computation of Time.....................39
3
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit No. Description
----------- -----------
Exhibit 8.2(b) Form of Opinion of Counsel to Seller
Exhibit 8.2(d) Form of Employment Agreement
Exhibit 8.2(e) Form of Shareholders Agreement
and First Amendment Thereto
Exhibit 8.3(b) Form of Opinion of Counsel to Parent
Schedule No. Description
----------------- -----------
Schedule 1.1(a) Excluded Assets
Schedule 1.1(a)(ii) Certain Obligations to Shareholders Assumed
by Purchaser
Schedule 1.1(c) Allocation of Consideration
Schedule 1.3 Liens and Encumbrances
Schedule 1.5 Other Insurance Presently in Effect
Schedule 2.2(a) Certain Customers
Seller Disclosure
Schedule No. Description
----------------- -----------
Schedule 4.1 Corporate Documents
Schedule 4.2 Seller's Capitalization
Schedule 4.3 Authorizations; Defaults; Conflicts and
Liens Created
Schedule 4.4 Seller Financial Statements
Schedule 4.5 Broker's and Other Fees
Schedule 4.6 Material Adverse Effects
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Material Contracts
Schedule 4.12 Properties and Insurance
Schedule 4.14 Properties and Intellectual Property
Schedule 4.15 Parachute Payments
Schedule 4.16 Absence of Agreements and Practices
Schedule 4.17 Major Vendors and Customers
Schedule 4.18 Accounts Receivable
Schedule 4.21 Bank Accounts
Schedule 4.22 Labor Relations
4
<PAGE>
Shareholder Disclosure
Schedule No. Description
---------------------- -----------
Schedule 5.4 Required Authorizations
Schedule 5.5 Claims by Shareholders against Seller
Parent Disclosure
Schedule No. Description
---------------------- ----------
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.2 Parent's Capitalization
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent Financial Statements
Schedule 7.5(c) Insurance Benefits
5
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT, dated the 19th day of June 1998 (the
"Agreement"), is by and among MegaMarketing Corporation, a Georgia corporation
("Parent"); MegaMarketing Acquisition Three, Inc., a Georgia corporation and a
wholly-owned subsidiary of Parent ("Purchaser," which will change its name to
Aberdeen Marketing Group, Inc.); Aberdeen Marketing, Inc. ("Aberdeen
Marketing"); a Georgia corporation; ProMail, Inc. ("ProMail"), a Georgia
corporation; GlobalTel, Inc. ("GlobalTel"), a Georgia corporation; and the
undersigned shareholders (each a "Shareholder" and, collectively, the
"Shareholders") of Seller ("Seller" as used in this Agreement means Aberdeen
Marketing, Aberdeen Corp, ProMail and GlobalTel, collectively, and except as
otherwise indicated herein or unless the context otherwise requires, any
reference to Seller herein shall include all of such corporations or each of
such corporations as the context requires.)
Recitals
--------
(1) The parties to this Agreement have agreed that Purchaser will
acquire substantially all of the assets of Seller for the consideration
described in this Agreement (the "Transaction").
(2) The Boards of Directors of Seller, Parent and Purchaser have
duly adopted and approved this Agreement, and the Boards of Directors of Seller
have recommended this Agreement to the Shareholders and directed that it be
submitted to the Shareholders for approval.
(3) The Shareholders have agreed to vote in favor of the
Transaction.
NOW, THEREFORE, intending to be legally bound, the parties hereto
agree as follows:
ARTICLE 1 - THE EXCHANGE
1.1 Terms of the Exchange. On the basis of the representations,
---------------------
warranties, covenants, and agreements contained in this Agreement and subject to
the terms and conditions of this Agreement:
(a) Seller shall sell, assign, transfer, and convey as a
going concern to Purchaser at the Closing (as defined below) all properties and
assets of Seller at the date of the Closing of every kind and nature whatsoever
(other than the assets listed in Schedule 1.1(a) (the "Excluded Assets")),
---------------
including the names, trademarks, contractual rights, books and records (other
than minute books, stock ledgers and stock transfer books), business, and
goodwill of Seller; and, in consideration therefor, Purchaser shall:
(i) Deliver to Seller at the Closing a certificate
registered in its name for 719,425 shares of the Common Stock, without par value
("Parent Common Stock") of
<PAGE>
Parent (the "Shares," which certificate shall be deposited into escrow as
provided in Article 2);
(ii) Assume at the Closing all obligations and
liabilities of Seller as are in conformity with the representations and
warranties of Seller and the Shareholders except for the following (the
"Excluded Liabilities"):
(A) any tax or other obligation or liability
arising out of or based upon the transactions contemplated by this Agreement or
incurred by Seller or any Shareholder by reason of the preparation of this
Agreement (provided that Purchaser agrees to assume and pay expenses, charges,
fees and costs associated with the Transaction in an amount not to exceed
$23,000, not less than $11,500 of which shall be paid to The Hishon Firm, LLC);
(B) any obligation or liability under any
contract, agreement, lease, license, instrument, understanding, or arrangement
which is assigned by Seller to Purchaser (x) if failure to obtain a required
consent to assignment by Seller to Purchaser deprives Purchaser of the enjoyment
of any of Seller's material rights thereunder, or (y) if such contract,
agreement, lease, license, instrument, understanding, or arrangement is not
assigned by Seller to Purchaser as a result of Section 1.1(e) or otherwise;
(C) any tax-related obligation whatsoever other
than the Indemnified Tax Claim (as defined below);
(D) any liability whatsoever to R. David Farr,
Jr. and any and all expenses, charges, fees and costs related thereto or arising
out of the defense or prosecution of any claim by or against Seller, Parent,
Purchaser (or their officers, directors, employees and agents) or the
Shareholders by or against Mr. Farr (whether heretofore or hereafter incurred)
(collectively, the "Farr Liabilities"), provided that all legal fees and
disbursements owed to The Hishon Firm, LLC through the Closing Date for legal
services related to litigation or arbitration with Mr. Farr shall not be part of
the Farr Liabilities and consequently shall be assumed by Purchaser;
(E) any obligation or liability arising out of,
based upon, or in connection with the Excluded Assets;
(F) the following obligations of Aberdeen
Marketing: that certain memorandum between Aberdeen Marketing and William Knight
and Bruce Malloy dated November 4, 1997 relating to consulting services in
support of Aberdeen's acquisition activity, that certain engagement letter
between Aberdeen Marketing and Hanevan Financial Services dated March 31, 1997,
and that certain engagement letter between Aberdeen Marketing and Cushman &
Wakefield of Georgia, Inc.; and
(G) any and all claims, rights and causes of
action that the Shareholders may have or may have had against Seller arising out
of any transactions between the Shareholders and Seller prior to, or arising
with respect to any act or omissions occurring
2
<PAGE>
prior to the Closing; provided, however, that the foregoing shall not include
accrued compensation and benefits and expenses or similar obligations incurred
in the ordinary course of business (including reimbursement of medical expenses
pursuant to the Employee Plans disclosed pursuant to this Agreement), nor shall
it apply to the obligations listed on Schedule 1.1(a)(ii) and assumed by
---------------
Purchaser. (The Shareholders hereby agree that if the obligations listed on
Schedule 1.1(a)(ii) are not paid in full on or before December 31, 1998, the
- -------------------
Shareholders shall be deemed to have waived any and all claim against Purchaser
or Parent for repayment of the same.)
(b) Except as set forth in Section 1.1(a)(ii) Purchaser
shall not assume or be responsible for any obligation or liability of Seller of
any nature, accrued or contingent.
(c) The consideration paid by Purchaser shall be
allocated among Seller's assets as set forth in Schedule 1.1(c).
---------------
(d) With respect to any properties or assets sold under
this Agreement that cannot be physically delivered to Purchaser because they are
in the possession of third parties, or otherwise, Seller and the Shareholders
shall give irrevocable instructions to the party in possession thereof, if such
be the case, with copies to Purchaser, that all right, title, and interest
therein have been vested in Purchaser and that the same are to be held for
Purchaser's exclusive use and benefit.
(e) To the extent that the assignment by Seller to
Purchaser of any contract, agreement, lease, license instrument, understanding,
or arrangement to be assigned to Purchaser under this Agreement shall require
the consent of a party other than Seller or any Shareholder which has not been
obtained by the Closing and if Purchaser shall nevertheless elect to consummate
the transactions contemplated by this Agreement, this Agreement shall not
constitute an agreement to assign the same if an attempted assignment without
such consent would constitute a breach thereof unless Purchaser before, at, or
after the Closing elects in a writing delivered to the Shareholders,
specifically identifying such absent consent, to waive such consent.
"Indemnified Tax Claim" - means the liability of Mr. Ellinger and
his spouse to the Internal Revenue Service (the "I.R.S.") arising out of the
I.R.S.' claim that the Ellingers owe additional tax, interest and penalties for
their 1995 taxable year as reflected in the correspondence from the I.R.S. to
them, true and correct copies of which have been delivered to Purchaser. The
claim relates solely to two issues: (i) whether Mr. Ellinger had sufficient
basis in his ProMail and GlobalTel stock to permit him to deduct his
distributive share of the their taxable loss for 1995, and (ii) whether Aberdeen
Marketing's income for 1995 should be computed based upon the accrual method of
accounting (the "Adjustments"). Mr. Ellinger, Parent and Purchaser each
acknowledge and agree that the impact of the Adjustments, if sustained by the
United States Tax Court or otherwise settled with the I.R.S., may have an impact
upon the Ellingers' taxable income for 1996, 1997 and 1998. Purchaser and Parent
agree to indemnify and hold the Ellingers harmless from and against the amount
of such indemnity for 1995 as finally determined; provided, however, that the
amount of such liability shall be reduced by the accumulation of any tax and
interest incurred as a result of the
3
<PAGE>
consistent application of the Adjustments and tax benefit (including interest)
received by the Ellingers for their 1996, 1997 or 1998 taxable years as a result
of the consistent application of the Adjustments. The foregoing indemnification
obligation is conditioned upon Purchaser's written approval of the final
settlement of such claim by Mr. and Mrs. Ellinger (if such a settlement is
entered into), which approval shall not be unreasonably withheld. Purchaser
shall pay the reasonable attorney's fees and expenses of The Hishon Firm, LLC
incurred after the date of execution of this Agreement attributable to the
Adjustments. Purchaser shall, however, have the right in its sole discretion
exercisable after December 31, 1998, to appoint other counsel if Purchaser is
dissatisfied with the fees, expenses or progress of the Tax Court case.
1.2 Closing. The consummation of the transactions contemplated by
-------
this Agreement (the "Closing") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 at 2:00 p.m. on June 19, 1998 (the "Closing Date"). At the
Closing, the parties shall execute and deliver the certificates, opinions and
other instruments and documents referred to in Article 8.
1.3 Transactions at the Closing. The following transactions shall
---------------------------
take place at the Closing:
(a) Seller and the Shareholders shall deliver to Purchaser
all such warranty deeds in form for recording, bills of sale, assignments,
evidences of consent, and other instruments or documents as in the opinion of
counsel to Purchaser may be necessary or desirable to evidence or perfect the
sale, assignment, transfer, and conveyance of good title to all properties and
assets to be sold to Purchaser by Seller under this Agreement, in each case free
and clear of all liens, mortgages, security interests, pledges, charges, and
encumbrances (except such as are listed in Schedule 1.3). Seller shall also
------------
deliver to Purchaser all books and records of Seller (except minute books, stock
ledgers and stock transfer books, which shall always be available for inspection
by Purchaser); provided, however, that Seller and its officers, employees,
counsel, and agents shall be afforded free and full access to its tax and
accounting records relating to periods prior to the Closing and shall be
permitted to make extracts from and copies of such records.
(b) Parent shall deliver to Seller the Shares, which shall be
deposited into escrow as provided in Article 2.
(c) Purchaser shall deliver to Seller an instrument of
assumption of the obligations and liabilities of Seller which Purchaser has
agreed to assume pursuant to Section 1.1(a)(ii). In addition, Purchaser shall
deliver a specific instrument of assumption of any contractual obligation of
Seller that Purchaser has agreed to assume pursuant to Section 1.1(a)(ii) if a
party thereto (other than Seller or any Shareholder) shall condition the
assignment thereof to Purchaser on receipt of such specific instrument.
(d) Parent shall deliver to Purchaser those certain stock
option agreements granting the Shareholders the right to purchase as many as
175,000 shares of Parent Common Stock on the terms provided therein.
4
<PAGE>
(e) If and to the extent required by creditors and other
obligees of Seller, Parent shall on the Closing Date and thereafter deliver such
guarantees to such creditors and obligees, provided that they are in a form
reasonably acceptable to Parent and its counsel.
ARTICLE 2 - ESCROW OF SHARES
2.1. Escrow Agreement. Stock certificates for the Shares shall be
----------------
deposited into escrow in accordance with that certain Escrow Agreement (the
"Escrow Agreement") among Parent, the Shareholders and First Union National Bank
(the "Escrow Agent") dated the date of this Agreement. The number of Shares in
escrow shall be subject to adjustment and released from escrow as provided in
this Article 2. In each instance in which a portion of the Shares is to be
released or cancelled and another portion is to remain in escrow, Parent shall
cause appropriate stock certificates to be prepared and delivered to the Escrow
Agent.
2.2 EBITDA Adjustment.
-----------------
(a) The number of Shares in escrow shall first be adjusted in
accordance with this Section 2.2 based upon Purchaser's Adjusted EBITDA (as
defined below) determined by Parent's public accounting firm, which shall be of
nationally recognized reputation (the "Accountants"). The parties to this
Agreement agree that Arthur Andersen LLP is such a firm and is acceptable to
each of them. (Arthur Andersen shall not be deemed to be an arbitrator, however,
and the determination of Adjusted EBITDA as provided in this Section 2.2 shall
be subject to arbitration as provided in this Agreement.) Not later than
February 28, 1999, the Accountants shall complete their audit of the financial
statements of Purchaser for the period from the Closing Date through December
31, 1998. As a part of their audit the Accountants shall determine "Adjusted
EBITDA," which shall mean EBITDA (as defined below), adjusted as follows:
EBITDA shall be annualized by dividing EBITDA by the number of days
in the period from the Closing Date through December 31, 1998, then multiplying
the result by 365.
Adjusted EBITDA is equal to annualized EBITDA multiplied by six (6),
minus the sum of:
(i) the Net Cash (as defined below) provided to
Purchaser by Parent or its affiliates through December 31, 1998;
(ii) fifty percent (50%) of the amount of annualized
EBITDA derived from sales by Purchaser to Genesis Direct, Inc. and Control
Group, Ltd. and their customers who are not already customers of Seller on the
Closing Date or listed in Schedule 2.2(a) to this Agreement;
--------------
(iii) The excess liability, if any, as of the Closing
Date for postage collected by Seller from customers but not expended on behalf
of customers over the sum of funds held in escrow or otherwise segregated to pay
postage for customers (provided that such
5
<PAGE>
liability shall not be taken into account in calculating EBITDA given that it is
being deducted here in the calculation of Adjusted EBITDA); and
(iv) all legal fees and disbursements owed to The
Hishon Firm, LLC for legal services related to the Indemnified Tax Claim that
were provided during the period beginning on the Closing Date and ending on
December 31, 1998.
"EBITDA" - means the sum of (i) Net Income (as defined below) of
Purchaser from the Closing Date through December 31, 1998, plus (ii) the
following items of Purchaser for such period: interest and tax expense,
depreciation and amortization, all determined in accordance with GAAP (as
defined below).
"GAAP" - means generally accepted accounting principles consistently
applied and maintained throughout the period.
"Net Cash" - (a) the cash advanced by Parent and its affiliates to
Purchaser, minus (b) the sum of (i) repayments by Purchaser of such advances and
(ii) prepayments of equipment loans owed to Wachovia Bank, N.A. Net Cash up to
$500,000 shall be provided to Purchaser only upon the request of Mr. Ellinger,
provided that Purchaser shall pay its payables and incur expenses in the
ordinary course of prudent business management as approved by the board of
directors of Purchaser. Without limiting the foregoing, Purchaser's payables
shall be current in accordance with the standard practices and expectations in
the industry. Net Cash shall not include any cash advanced to pay off secured
indebtedness for money borrowed or capitalized obligations. Repayment of cash
advanced by Parent shall be made as soon as practicable after the request of Mr.
Ellinger, provided that Purchaser's working capital shall not be unduly
depleted.
"Net Income" - the net income (or net loss) of Purchaser from the
Closing Date through December 31, 1998 after giving effect to deduction of or
provision for all operating expenses, all taxes and reserves (including reserves
for deferred taxes) and all other proper deductions, all determined in
accordance with GAAP, provided that there shall be excluded:
(i) any net gains or losses on the sale or other
disposition, not in the ordinary course of business, of fixed or capital assets,
and any taxes on such excluded gains and any tax deductions or credits on
account of any such excluded losses;
(ii) any write-up of any asset to the extent that the
amount thereof exceeds write-downs taken of such asset within the period;
(iii) the proceeds of any life insurance policy;
(iv) any reversal of any contingency reserve, except to
the extent that provision for such contingency reserve shall have been made from
income arising during such period and except for the reversal of any bad debt
allowance in accordance with GAAP; and
(v) any other extraordinary items.
6
<PAGE>
(b) If Adjusted EBITDA is $3,000,000 or more, then all of the
Shares shall remain in escrow to serve as collateral for the representations and
warranties of Seller and the Shareholders in this Agreement. If Adjusted EBITDA
is less than $3,000,000 but more than $1,000,000, then the number of Shares in
escrow shall be decreased to a number of Shares equal to the product of (x) the
number of Shares in escrow, multiplied by (y) a fraction having a numerator
equal to the amount of Adjusted EBITDA and a denominator of $3,000,000. If
Adjusted EBITDA is $1,000,000 or less, then the number of Shares in escrow shall
be decreased to 239,808.
(c) Parent shall direct the Accountants to prepare and deliver
a written report (the "Accountants' Instructions") to Parent and the
Shareholders reflecting the foregoing calculations and instructing the Escrow
Agent to retain or exchange stock certificates for the Shares as required by
this Section 2.2. Parent and the Shareholders shall deliver the Accountants'
Instructions to the Escrow Agent (along with appropriate stock certificates
prepared by Parent, if applicable). The number of Shares equal to (x) the number
of Shares originally deposited into escrow, minus (y) the reduced number of
Shares, if applicable, shall by virtue of this Agreement be deemed for all
purposes to be cancelled effective upon the delivery to the Escrow Agent of the
replacement stock certificates for the reduced number of Shares. The Shares
originally deposited into escrow, or the reduced number of Shares, as
applicable, shall remain in escrow to serve as collateral for the
representations and warranties of Seller and the Shareholders in this Agreement.
2.3 Release of Additional Shares from Escrow from Time to Time
----------------------------------------------------------
Prior to December 31, 1999. If Shares are to be used to satisfy claims for
- --------------------------
indemnification pursuant to Section 10.7, Parent and the Shareholders shall
jointly deliver instructions to the Escrow Agent providing for the release from
the escrow of the applicable number of Shares, which shall be deemed for all
purposes to be cancelled effective upon the delivery to the Escrow Agent of the
replacement stock certificates prepared by Parent for the applicable reduced
number of Shares that are to remain in escrow. Further, if under Section 7.7
below the Shareholders have the opportunity to sell a portion of their Shares in
a public offering of the Company's Common Stock, and if and to the extent that
Shares sufficient for such sale have not already been released from escrow,
Parent and the Shareholders shall jointly deliver instructions to the Escrow
Agent providing for the release from the escrow of the applicable number of
Shares, and the remaining Shares in escrow shall continue to serve as collateral
for the representations and warranties of Seller and the Shareholders in this
Agreement.
2.4 Release of Additional Shares from Escrow on June 1, 1999.
--------------------------------------------------------
Parent and the Shareholders shall jointly deliver instructions to the Escrow
Agent providing for the release from the escrow on June 1, 1999 of 119,904
Shares to the Shareholders, but only to the extent that such 119,904 Shares are
not then subject to being delivered to Parent pursuant to a Notice of Claim or
Notice of Possible Claim (as defined in Section 10.3 below) and have not
previously been cancelled under Section 2.3 above.
2.5 Release of Additional Shares from Escrow on the Earlier of
----------------------------------------------------------
Parent's Initial Public Offering or January 2, 2000. If no claim for
- ---------------------------------------------------
indemnification by the Parent Indemnified
7
<PAGE>
Parties is pending on December 31, 1999, then all of the Shares then in escrow
shall be released from escrow to the Shareholders (pro rata) on January 2, 2000.
If either a Notice of Claim or a Notice of Possible Claim therefor is delivered
by a Parent Indemnified Party to the Shareholders on or before December 31, 1999
and the amount of the claim for indemnification has not been satisfied by cash,
then the number of Shares subject to being delivered to Parent in satisfaction
of such claim shall remain in escrow until either the claim is paid in cash, the
Shares are delivered to Parent in satisfaction of such claim based upon joint
instructions from Parent and the Shareholders, or the claim is otherwise settled
by Parent and the Shareholders. Parent and the Shareholders shall jointly
instruct the Escrow Agent in accordance with the foregoing.
ARTICLE 3 - RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided
or the context otherwise requires:
(a) The singular includes the plural and vice versa and, in
particular (but without limiting the generality of the foregoing), any word or
expression defined in the singular has the corresponding meaning used in the
plural and vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause,
subclause, paragraph, subparagraph, Schedule or recital is a reference to an
Article, Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule
or recital of this Agreement;
(d) Any reference to any agreement, instrument or other document
(i) shall include all appendices, exhibits and schedules thereto and all
agreements, documents or other writings incorporated by reference therein, and
(ii) shall be a reference to such agreement, instrument or other document as
amended, supplemented, modified, suspended, restated or novated from time to
time;
(e) Any reference to any statute shall be construed as including
all statutory provisions consolidating, amending or replacing such statute and
all governmental regulations and rules promulgated thereunder;
(f) Any reference to "writing" includes printing, typing,
-------
lithography and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
------- ---
constituting legal tender for the payment of public and private debts in the
United States of America;
8
<PAGE>
(i) The headings and Article, Section and paragraph numbering
contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement, nor shall such headings and numbering be
used in any manner to aid in the construction of this Agreement;
(j) References herein to the "Seller Disclosure Schedules" shall
mean the disclosure schedules, dated as of the date hereof, which have been
delivered on the date hereof by Seller to Parent, and references to a numbered
Seller Disclosure Schedule shall mean that portion of the Seller Disclosure
Schedules that refers to the specific section or subsection of Article 4 of this
Agreement;
(k) References herein to the "Shareholder Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date hereof, which have
been delivered on the date hereof by the Shareholders to Parent, and references
to a numbered Shareholder Disclosure Schedule shall mean that portion of the
Shareholder Disclosure Schedules that refers to the specific section or
subsection of Article 5 of this Agreement;
(l) References herein to the "Parent Disclosure Schedules" shall
mean the disclosure schedules, dated as of the date hereof, which have been
delivered on the date hereof by Parent to Seller, and references to a numbered
Parent Disclosure Schedule shall mean that portion of the Parent Disclosure
Schedules that refers to the specific section or subsection of Article 6 of this
Agreement;
(m) The terms "hereof," "hereby," "hereunder" and similar terms
------ ------ ---------
shall refer to this Agreement as a whole;
(n) The term "including" shall mean "including, without
---------
limitation";
(o) The term "Governmental Authority" means any United States
federal, state or local, or foreign, governmental, regulatory or administrative
authority, agency, department, board, investigative body or commission or any
court, tribunal, or judicial or arbitral body;
(p) The term "Material Adverse Effect" with respect to a person or
entity means any circumstance, change in, or effect on the business and affairs
of such person or entity or any Subsidiary thereof that, individually or in the
aggregate with any other circumstances, changes in, or effects on, the business
and affairs of such person or entity and its Subsidiaries: (i) is, or would
reasonably be expected to be, materially adverse to the business, operations,
assets or liabilities, prospects, results of operations or financial condition
of such person or entity and its Subsidiaries, taken as a whole, or (ii) would
reasonably be expected to materially adversely affect the ability of such person
or entity and its Subsidiaries to operate or conduct its or their business and
affairs in the manner in which it is currently operated or conducted or
contemplated by such person or entity to be operated or conducted;
(q) The term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity, directly or
indirectly, owns
9
<PAGE>
or controls the voting of at least a 50% share or other equity interest or for
which such person or entity, directly or indirectly, acts as a general partner;
(r) The term "Parent Subsidiary" means any Subsidiary of Parent;
(s) Each party and its counsel has had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore, shall be
construed without regard to any presumption or other rule requiring construction
against the party causing the Agreement to be drafted.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
Seller and the Shareholders jointly and severally hereby represent
and warrant to Parent and Purchaser as follows:
4.1 Corporate Organization
----------------------
(a) Seller is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Georgia. Seller has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect on Seller.
(b) Seller has no Subsidiaries. Aberdeen Corporation, which has
been administratively dissolved, had no assets.
(c) Seller Disclosure Schedule 4.1 sets forth copies of Seller's
------------------------------
Articles of Incorporation and bylaws.
(d) Except as set forth in Seller Disclosure Schedule 4.1, Seller
------------------------------
does not own or control, directly or indirectly, any equity interest in any
corporation, company, association, partnership, joint venture or other entity.
4.2 Capitalization. The authorized capital stock of Seller is as
--------------
disclosed on Seller Disclosure Schedule 4.2. Seller Disclosure Schedule 4.2 sets
------------------------------ ------------------------------
forth the names and addresses of each of the Shareholders and the number of
shares of common equity securities ("Seller Common Stock") owned by each. Except
as set forth on Seller Disclosure Schedule 4.2, there are no shares of Seller
------------------------------
Common Stock outstanding. Seller Disclosure Schedule 4.2 sets forth all options
------------------------------
which may be exercised for issuance of Seller Common Stock and the terms upon
which the options may be exercised ("Seller Stock Options"). Seller Disclosure
-----------------
Schedule 4.2 sets forth copies of the option plans and agreements pursuant to
- ------------
which the Seller Stock Options
10
<PAGE>
were granted and a list of each outstanding Seller Stock Options. All issued and
outstanding shares of Seller Common Stock have been duly authorized and validly
issued; are fully paid and nonassessable; were not issued in violation of any
preemptive rights; were issued under available exemptions from federal and state
securities laws; and are owned by the Shareholders free and clear of any liens,
encumbrances, charges, restrictions or rights of third parties. Except as
disclosed in Seller Disclosure Schedule 4.2, neither Seller nor any Shareholder
------------------------------
has granted or is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the transfer,
purchase, subscription or issuance of any shares of capital stock of Seller or
any securities representing the right to purchase, subscribe or otherwise
receive any shares of such capital stock or any securities convertible into any
such shares, and there are no agreements or understandings with respect to
voting of any such shares.
4.3 Authority; No Violation.
-----------------------
(a) Except for approval by the Shareholders of the
Transaction (the "Seller Approvals"), no consents, approvals, authorizations,
clearances or orders of, filings or registrations with or notices to
(collectively "Authorizations") any third party or any Governmental Authority
are necessary on behalf of Seller or the Shareholders in connection with (i) the
execution and delivery by Seller and the Shareholders of this Agreement; and
(ii) the consummation by Seller and the Shareholders of the Transaction and the
other transactions contemplated hereby. Subject to receipt of the Seller
Approvals, Seller has the full corporate power and authority to execute and
deliver this Agreement and to consummate the Transaction and the other
transactions contemplated hereby in accordance with the terms hereof. The
execution and delivery of this Agreement have been duly and validly approved by
the Board of Directors of Seller in accordance with the Articles of
Incorporation and bylaws of Seller and with applicable Laws (as defined below).
Except for the Seller Approvals, no other corporate proceedings on the part of
Seller are necessary for the Seller and the Shareholders to execute and deliver
this Agreement and be bound by the terms hereof. This Agreement has been duly
and validly executed and delivered by Seller and the Shareholders and
constitutes the valid and binding obligation of Seller and Shareholders
enforceable against Seller and the Shareholders in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by
Seller or the Shareholders, nor the consummation by Seller and the Shareholders
of the Transaction and the other transactions contemplated hereby in accordance
with the terms hereof, nor compliance by Seller and the Shareholders with any of
the terms or provisions hereof, will: (i) violate any provision of Seller's
Articles of Incorporation or bylaws; (ii) assuming that the Seller Approvals are
duly obtained, violate any United States federal, state or local or foreign
statute, code, ordinance, rule, regulation, judgment, order, writ, ruling,
decree or injunction of any Governmental Authority (collectively, "Laws")
applicable to Seller, the Shareholders or any of its or their respective
properties or assets; or (iii) except as set forth in Seller Disclosure Schedule
--------------------------
4.3, violate, conflict with, result in a breach of any provisions 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 of, accelerate the
performance required by, or result in the creation of any lien, mortgage,
security interest, pledge, charge, other right of third parties or other
11
<PAGE>
encumbrance (collectively, "Liens") upon any of the respective properties or
assets of Seller or the Shareholders under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Seller or any of the
Shareholders is a party, or by which they or any of their respective properties
or assets may be bound or affected.
4.4 Financial Statements.
--------------------
(a) Seller Disclosure Schedule 4.4 sets forth copies of: (i)
------------------------------
the combined balance sheet of Seller as of December 31, 1997 and the combined
statements of income, shareholders' equity and cash flows for the period ended
December 31, 1997, (collectively, together with the related notes and any
additional financial statements delivered pursuant to Section 7.4, the "Seller
Financial Statements"). The Seller Financial Statements present fairly, in all
material respects, the combined financial position of Seller as of the
respective dates set forth therein, and the combined results of Seller's
operations and cash flows for the respective periods set forth therein.
(b) The books and records of Seller have been maintained in
compliance with applicable legal and accounting requirements. Such books and
records will, on or before December 31, 1998, also be maintained in accordance
with GAAP.
(c) Except as and to the extent reflected, disclosed or
reserved against in the Seller Financial Statements, or as disclosed in Seller
------
Disclosure Schedule 4.4, as of December 31, 1997, Seller had no liabilities or
- -----------------------
obligations of any kind, whether absolute, accrued, contingent or otherwise
("Liabilities"). Since December 31, 1997, and except as disclosed in Seller
------
Disclosure Schedule 4.4, Seller has not incurred any Liabilities except in the
- -----------------------
ordinary course of business and consistent with past practice, which in the
aggregate are not material.
4.5 Broker's and Other Fees. Except as disclosed in Seller
----------------------- ------
Disclosure Schedule 4.5, neither Seller nor the Shareholders have employed any
- -----------------------
broker or finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement. There are no fees (other than charges totaling $23,000) payable to
any consultants, including lawyers and accountants, in connection with this
Agreement or the transactions contemplated hereby or which would be triggered by
consummation of this Agreement or the transactions contemplated hereby or the
termination of the services of such consultants by Seller or the Shareholders.
4.6 Absence of Certain Changes or Events.
------------------------------------
(a) Except as disclosed in Seller Disclosure Schedule 4.6,
------------------------------
there has been no Material Adverse Effect on the Seller since December 31, 1997
and to the best of Seller's and each Shareholder's knowledge, no facts or
conditions exists which will cause a Material Adverse Effect on Seller (or
Purchaser after the Transaction) in the future.
12
<PAGE>
(b) Except as set forth in Seller Disclosure Schedule 4.6,
------------------------------
since December 31, 1997 Seller has conducted its business only in the ordinary
course, consistent with past practice.
4.7 Legal Proceedings. Except as disclosed in Seller Disclosure
----------------- -----------------
Schedule 4.7, neither Seller nor either of the Shareholders is a party to any,
- ------------
and there are no pending or, to Seller's or the Shareholders' knowledge,
threatened legal, administrative, arbitral or other proceedings, claims, actions
or governmental investigations of any nature against Seller or either of the
Shareholders. Except as disclosed in Seller Disclosure Schedule 4.7, neither
------------------------------
Seller nor either of the Shareholders is a party to any order, judgment or
decree entered in any lawsuit or proceeding. Without limiting the foregoing,
except as disclosed in Seller Disclosure Schedule 4.7, no actions, suits,
------------------------------
demands, notices, claims, investigations or proceedings are pending or, to
Seller's or the Shareholders' knowledge, threatened against or otherwise
involving, directly or indirectly, any officer, director, employee or agent of
Seller (in connection with such officer's, director's, employee's or agent's
activities on behalf of Seller or that otherwise relate, directly or indirectly
to Seller or its properties or securities) including without limitation any
notices, demand letters or requests from any Governmental Authority relating to
such potential Liabilities, nor, to the knowledge of Seller or the Shareholders,
are there any circumstances which could lead to such actions, suits, demands,
notices, claims, investigations or proceedings.
4.8 Taxes and Tax Returns. Except as disclosed in Seller
--------------------- ------
Disclosure Schedule 4.8:
- -----------------------
(a) Seller has duly filed all returns, declarations, reports,
information returns and statements ("Returns") required to be filed by it in
respect of any United States federal, state or local or foreign Taxes and has
duly paid all such Taxes due and payable as finally determined by the applicable
Governmental Authority, other than Taxes which are being contested in good faith
(and disclosed to Parent in writing). As used herein, "Tax" or "Taxes" means and
includes any and all taxes, fees, levies, assessments, duties, tariffs, imposts,
and other charges of any kind (together with any and all interest, penalties,
additions to tax and additional amounts imposed with respect thereto) imposed by
any Governmental Authority, including, without limitation: foreign, domestic,
central, local, state or other jurisdictional taxes or other charges on or with
respect to income, estimated income, franchises, business, occupation, windfall
or other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth; taxes or other charges in the nature of excise, withholding, ad
valorem, stamp, transfer, value added, or gains taxes; license, registration and
documentation fees; and customs duties, tariffs, and similar charges. Seller has
established on its books and records reserves that are adequate for the payment
of all Taxes not yet due and payable, but are incurred in respect of Seller
through such date.
(b) None of the Returns of Seller has been examined by the
I.R.S., or any other United States federal, state or local or any foreign
Governmental Authority within the past six years. To the knowledge of Seller or
the Shareholders, there are no audits or other Governmental Authority
proceedings presently pending nor any other disputes pending with respect to, or
claims asserted for, Taxes upon Seller, nor has Seller given any currently
13
<PAGE>
outstanding waivers or comparable consents regarding the application of any
statute of limitations with respect to any Taxes or Returns. There are no Liens
for Taxes upon the assets of Seller, except for Liens for Taxes not yet due.
Seller has complied in all respects with all applicable Laws relating to the
payment and withholding of Taxes.
(c) Seller: (i) has not requested any extension of time
within which to file any Return which Return has not since been filed; (ii) is
not a party to any agreement providing for the indemnification, allocation or
sharing of Taxes; (iii) is not required to include in income any adjustment by
reason of a voluntary change in accounting method initiated by Seller (nor does
Seller or the Shareholders have any knowledge that any Governmental Authority
has proposed any such adjustment or change of accounting method, other than as
related to the Indemnified Tax Claim); (iv) has not filed a consent with any
Governmental Authority pursuant to which Seller has agreed to recognize gain (in
any manner) relating to or as a result of this Agreement or the transactions
contemplated hereby; or (v) has not been a member of an affiliated group other
than one of which the Seller was the common parent.
4.9 Employee Benefit Plans and Relations. Except as disclosed in
------------------------------------
Seller Disclosure Schedule 4.9:
- ------------------------------
(a) Seller does not maintain or contribute to any "employee
pension benefit plan" (the "Seller Pension Plans"), as such term is defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including any pension, profit-sharing, retirement, thrift or stock
bonus plan, "employee welfare benefit plan" (the "Seller Welfare Plans"), as
such term is defined in Section 3 of ERISA, or any other stock option plan,
stock purchase plan, restricted stock plan, deferred compensation plan,
severance plan, phantom stock plan, bonus plan or other similar plan, program or
arrangement (collectively the "Employee Plans"). Seller has not contributed to,
or been required to contribute to, any "Multiemployer Plan" as such term is
defined in Section 3(37) of ERISA.
(b) Each of the Seller Pension Plans is intended to be a
qualified plan within the meaning of Section 401(a) of the Code, and Seller is
not aware of any fact or circumstance that would adversely affect the qualified
status of any such plan.
(c) Each of the Seller Pension Plans, Seller Welfare Plans
and other Employee Plans has been operated in compliance in all material
respects with the provisions of ERISA, the Code, and all other applicable Laws.
(d) Neither Seller nor, to the knowledge of Seller or the
Shareholders, any trustee, fiduciary or administrator of any Seller Pension Plan
or Seller Welfare Plan or any trust created thereunder, has engaged in a
"prohibited transaction" as such term is defined in Section 4975 of the Code,
which could subject Seller, or, to the knowledge of Seller or the Shareholders,
any trustee, fiduciary or administrator thereof, to the tax or penalty on
prohibited transactions imposed by said Section 4975.
(e) No Seller Pension Plan or any trust created thereunder
has been terminated, nor have there been any "reportable events" for which the
30 day notice has not
14
<PAGE>
been waived with respect to any Seller Pension Plan, as that term is defined in
Section 4043(b) of ERISA.
(f) There are no pending, or, to the knowledge of Seller or
the Shareholders, threatened or anticipated claims (other than routine claims
for benefits) by, on behalf of or against any of the Seller Pension Plans or the
Seller Welfare Plans or any trusts related thereto.
(g) Accruals; Funding
(i) Pension/Profit Sharing Plans. None of the Employee
----------------------------
Plans is a Pension/Profit Sharing Plan subject to ERISA Title IV (including
those for retired, terminated or other former employees and agents).
(ii) Other Plans. Seller Disclosure Schedule 4.9 fully
----------- ------------------------------
and accurately sets forth any funding liability under each Employee Plan not
subject to ERISA Title IV, whether insured or otherwise, specifically setting
forth any liabilities under any retiree medical arrangement and specifically
designating any insured plan that provides for retroactive premium or other
adjustments. The levels of insurance reserves and accrued liabilities with
regard to each such Employee Plan are reasonable and are sufficient to provide
for all incurred but unreported claims and any retroactive premium adjustments.
(iii) Contributions. Except as set forth on Seller
------------- ------
Disclosure Schedule 4.9: (A) Seller and each trade or business (whether or not
- -----------------------
incorporated), which together with Seller is treated as a single employer
pursuant to Code Section 414(b),(c),(m) or (o) ("an ERISA Affiliate"), has made
full and timely payment of all amounts required to be contributed under the
terms of each Employee Plan and applicable Law, or required to be paid as
expense under such Employee Plan, including the Pension Benefit Guaranty
Corporation ("PBGC") premiums and amounts required to be contributed under Code
Section 412; (B) all contributions have been made in accordance with the
actuarial recommendations; and (C) no excise taxes are assessable as a result of
any nondeductible or other contributions made or not made to an Employee Plan.
(h) Summary plan descriptions and all other returns,
reports, registration statements, prospectuses, documents, statements and
communications that are required to have been filed, published or disseminated
under ERISA or other Laws and the rules and regulations promulgated by the
Department of Labor under ERISA and the Treasury Department or by the Securities
and Exchange Commission (the "SEC") with respect to the Employee Plans have been
so filed, published or disseminated.
4.10 Compliance with Applicable Laws. Except as set forth in Seller
------------------------------- ------
Disclosure Schedule 4.10, Seller holds all licenses, franchises, permits,
- ------------------------
consents and authorizations ("Licenses") necessary for the lawful conduct of
their respective businesses except where the failure to hold such License would
not have a Material Adverse Effect on Seller. No proceeding is pending or
threatened seeking the revocation or suspension of any License. Seller is and
has been in compliance in all material respects with all applicable Laws, and
15
<PAGE>
neither Seller nor any Shareholder has received any notices of any allegation of
any violation of any Laws or Licenses.
4.11 Certain Contracts.
-----------------
(a) Seller Disclosure Schedule 4.11 lists the following
-------------------------------
agreements (collectively, the "Material Contracts"), including, without
limitation, leases, purchase contracts and commitments, to which Seller is a
party or by which Seller or any of its properties or assets is bound:
(i) all agreements that involve an annual commitment or
payment by any party thereto of more than $10,000 individually or $50,000 in the
aggregate with the same party or which have a fixed term extending more than 12
months from the date hereof;
(ii) all joint venture, sales agency, sales
representative or distributorship, broker, franchise, license or similar
agreements;
(iii) all leases;
(iv) all notes, bonds, mortgages, security agreements,
guarantees and other agreements and instruments for or relating to any lending
or borrowing by Seller in any amount (exclusive of advances to employees for
expenses in the ordinary course of business);
(v) all powers of attorney, guarantees, suretyships or
similar agreements; and
(vi) all other written agreements the breach of or
default under which could have a Material Adverse Effect on Seller.
Each of the Material Contracts is valid, binding and enforceable on
the parties thereto in accordance with its terms.
(b) Except as disclosed in Seller Disclosure Schedule 4.11, (i)
-------------------------------
Seller is not a party to or bound by any agreement or understanding (whether
written or oral) with respect to the employment of any officers, employees,
directors or consultants, and (ii) the consummation of the transactions
contemplated by this Agreement will not (either alone or upon the occurrence of
any additional acts or events) result in any payment (whether of severance pay
or otherwise) becoming due from Seller to any officer, employee, director or
consultant thereof. Seller Disclosure Schedule 4.11 sets forth true and correct
-------------------------------
copies of all severance or employment agreements with officers, directors,
employees, agents or consultants to which Seller is a party.
(c) Except as disclosed in Seller Disclosure Schedule 4.11, no
-------------------------------
agreement or understanding to which Seller is a party or by which any of them is
bound limits the freedom of Seller to compete in any line of business or with
any person.
16
<PAGE>
(d) Except as disclosed in Seller Disclosure Schedule 4.11, neither
-------------------------------
Seller nor, to the knowledge of Seller and the Shareholders, any other party
thereto, is in default under any of the Material Contracts or any other
agreement to which the Seller is a party or to which it or its properties are
bound; no event has occurred which (whether with or without notice, lapse of
time or the happening or occurrence of any other event) would constitute a
default thereunder entitling any party to terminate a Material Contract or other
such agreement; and the continuation, validity and effectiveness of all such
Material Contracts and agreements under the current terms thereof and the
current rights and obligations of Seller thereunder will in no way be affected,
altered or impaired by the consummation of the transactions contemplated hereby.
Except as disclosed in Seller Disclosure Schedule 4.11, upon consummation of the
-------------------------------
Transaction, Purchaser will be entitled to enjoy the advantages and benefits of
the business arrangements, opportunities and relationships as enjoyed by Seller
prior to the date hereof without interference or interruption.
4.12 Properties and Insurance.
------------------------
(a) Except as disclosed in Seller Disclosure Schedule 4.12,
-------------------------------
Seller has good and, as to owned real property, marketable title to all assets
and properties, whether real or personal, tangible or intangible, reflected in
the Seller Financial Statements as of December 31, 1997, or owned and acquired
subsequent thereto (except to the extent that such assets and properties have
been disposed of for fair value in the ordinary course of business since such
date), subject to no Liens except (i) statutory liens for amounts not yet
delinquent or which are being contested in good faith and (ii) such Liens and
title imperfections that do not in the aggregate have an adverse effect upon the
business, operations, assets, and financial condition of Seller. Seller as
lessee has the right under valid and subsisting leases to occupy, use, possess
and control all real property leased by Seller as presently occupied, used,
possessed and controlled by Seller or necessary in the operation of its business
as currently conducted.
(b) The business operations and all insurable properties and
assets of Seller are insured for their benefit under policies or bonds issued by
insurers, in such amounts with such deductibles and against such risks and
losses as are specified in the copies of all such policies as in effect on the
date hereof attached hereto as Seller Disclosure Schedule 4.12. Neither Seller
-------------------------------
nor either of the Shareholders has received any notice of cancellation or notice
of a material amendment of any such insurance policy or bond, and Seller is not
in default under any such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a timely fashion.
(c) Except as disclosed in Seller Disclosure Schedule 4.12,
-------------------------------
no person other than Seller is currently entitled to possession of any of the
properties of Seller, whether owned or leased by Seller. To the knowledge of
Seller and the Shareholders, the real property, buildings, structures and
improvements owned or leased by Seller conform to all applicable Laws, including
zoning regulations, none of which would upon consummation of the transactions
contemplated hereby adversely interfere with the use of such properties,
buildings, structures or improvements for the purposes for which they are now
utilized. Seller has not received notice nor does Seller have actual knowledge
of (i) any pending or contemplated condemnation or eminent domain proceeding
affecting the properties owned or leased by
17
<PAGE>
Seller, (ii) any proposal for increasing the assessed value of any such
properties for state, county, local or other ad valorem Taxes or (iii) any
pending or contemplated proceedings or public improvements that would result in
the levy of any special Tax or assessment against any such properties; and there
are no outstanding requirements or recommendations by Seller's insurance
providers requiring or recommending any repairs or work to be done with
reference to any such properties or any basis for such. The properties and
assets owned or leased by Seller are adequate for the conduct of their
businesses as presently conducted and are in good repair and operating
condition, normal wear and tear excepted. The properties and assets owned by
Seller constitute all of the property and assets that Seller uses or may
reasonably need in connection with the operation of its business as presently
conducted, and the consummation of the transactions contemplated by this
Agreement will not impair the ability of Parent to use such properties and
assets.
4.13 Environmental Matters.
---------------------
(a) The operations of Seller comply, and have complied, in
all respects with all applicable Environmental Laws (as defined below).
(b) Seller has obtained all environmental, health and safety
Licenses and other authorizations necessary for the operation of Seller's
business, all of which are valid and in good standing and are not subject to any
modification or revocation proceeding, and Seller is in compliance in all
respects with all terms and conditions thereof.
(c) Neither Seller nor either of the Shareholders has
received any written notice of any pending or threatened investigation,
proceeding or claim to the effect that Seller is or may be liable to any person
or entity, or responsible or potentially responsible for the costs of any
remedial or removal action or other cleanup costs, as a result of noncompliance
with any Environmental Laws or arising out of the presence, generation, storage
or disposal of hazardous waste, including liability under the United States
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, any state superfund law or any Environmental Law, and there is no past
or present action, activity, condition or circumstance that could be expected to
give rise to any such liability on the part of Seller to any person or entity or
for any such cleanup costs.
(d) The term "Environmental Laws" shall mean all Laws
relating to pollution or protection of the environment.
4.14 Intellectual Property.
---------------------
(a) Seller Disclosure Schedule 4.14 (i) lists and describes
-------------------------------
all patents, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations and applications, and all patent,
trademark and service mark licenses, (ii) describes all copyrights, computer
software, databases, and all other intellectual property that are owned by or
registered in the name of Seller or to which Seller has any rights as licensee
or otherwise, which list specifies which items are owned and to which items
Seller has rights as a licensee or otherwise, identifying each as third party
software or as custom developed software ("Custom Software"); and (iii) lists
and describes all contracts, agreements or understandings pursuant to
18
<PAGE>
which Seller has authorized any person to use, or which any person otherwise has
the right to use, in any business or commercial activity, any of the items
listed in clauses (i) and (ii) above.
(b) The items listed or described in the Seller Disclosure
-----------------
Schedule 4.14 pursuant to the preceding subsection (a) constitute or represent
- -------------
all of the intellectual property necessary to the conduct of Seller's business,
and Seller's ownership and use rights with respect thereto are free and clear
Liens. Seller either owns, has a valid license to use, or otherwise has such
rights as may be necessary to use all of the intellectual property listed in
Schedule 4.14, and all such rights can be transferred to Seller.
(c) All federal trademark or service mark registrations,
and all applications to register any trademarks or service marks or any
trademark register maintained by the United States government or any state or
provincial government are based on truthful affidavits or declarations of use.
(d) The Custom Software has not infringed upon, and Parent's
use of the Custom Software after the Closing, conduct of Seller's business after
the Closing as presently conducted will not infringe upon any copyright, trade
secret or other similar intellectual property belonging to any other person or
entity. Except as identified in Seller Disclosure Schedule 4.14, Seller has not
-------------------------------
agreed to indemnify any person or entity for or against any infringement of or
by the intellectual property set forth in the Seller Disclosure Schedule 4.14.
-------------------------------
To the knowledge of Seller and Shareholders, no person or entity is infringing
upon any of Seller's, and Seller is not infringing on any other person's,
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations, licenses, copyrights, computer software or other
intellectual property.
(e) Seller has, and immediately after the Closing Parent will
have, rights to use all computer software and databases that are necessary to
conduct Seller's business as presently conducted by Seller and all documentation
relating to all such computer software and databases. The Custom Software, and
to Seller's knowledge all of other computer software used by Seller, performs in
accordance with the documentation related thereto or used in connection
therewith and is free of material defects in programming and operation. Seller
------
Disclosure Schedule 4.14 identifies each person or entity to whom Seller has
- ------------------------
sold, licensed, leased or otherwise transferred or granted any interest in or
rights to any of the computer software and databases and the date of each such
sale, license, lease or other transfer or grant.
4.15 No Parachute Payments. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.15, no officer, director, employee or agent (or former officer,
- -------------
director, employee or agent) of Seller is entitled now, or will or may be
entitled as a consequence of this Agreement or the Transaction, to any payment
or benefit from Seller or from Parent, which if paid or provided would
constitute an "excess parachute payment," as defined in Section 280G of the
Code.
4.16 Absence of Certain Agreements and Practices.
-------------------------------------------
(a) Except as set forth in Seller Disclosure Schedule 4.16
-------------------------------
or in connection with customary transactions in the ordinary course of business,
no present or former officer, director or shareholder of Seller:
19
<PAGE>
(i) owes money to Seller;
(ii) has any claim against Seller;
(iii) has any interest in any property or assets used by
Seller in business;
(iv) has any benefits that are contingent on the
transactions contemplated by this Agreement, other than as stated herein;
(v) has any agreement with Seller that is not
terminable by Seller without penalty or notice;
(vi) has any agreement providing severance benefits or
other benefits, which are conditioned upon a change of control after the
termination of employment of such employee regardless of the reason for such
termination of employment; or
(vii) has any agreement or plan, any of the benefits of
which will be increased, vested or accelerated by the occurrence of any of the
transactions contemplated by this Agreement.
(b) Neither Seller nor any of its directors, officers,
agents, affiliates or employees, nor any other person acting on behalf of Seller
has (i) given or agreed to give any gift or similar benefit having a value of
$1,000 or more to any customer, supplier or governmental employee or official or
any other person, for the purpose of directly or indirectly furthering the
business of Seller, (ii) used any corporate funds for contributions, payments,
gifts or entertainment, or made any expenditures relating to political
activities to government officials or others in violation of any applicable
Laws, or (iii) received any unlawful contributions, payments, gifts or
expenditures in connection with the business of Seller.
4.17 Major Vendors and Customers. Seller Disclosure Schedule 4.17
--------------------------- -------------------------------
sets forth a list of each licensor, developer, remarketer, distributor and
supplier of property or services to, and each licensee, end-user or customer of,
Seller, to whom Seller paid or billed in the aggregate in excess of $25,000
during calendar year 1997.
4.18 Accounts Receivable. Seller Disclosure Schedule 4.18 sets forth
------------------- -------------------------------
the accounts receivable of Seller as of December 31, 1997, as reflected in the
Seller Financial Statements as of that date, together with an aging of these
accounts. These accounts receivable, and all accounts receivable of Seller
created after that date (other than the receivable from R. David Farr, Jr.
included within the Excluded Assets), arose from valid transactions in the
ordinary course of business and will be good and collectible at the recorded
amounts thereof, subject to the allowance for doubtful accounts included in the
Seller Financial Statements. No portion of the accounts receivable is subject to
counterclaim or setoff.
4.19 Corporate Records. The corporate record books (including the
-----------------
share records) of Seller are complete, accurate and up to date with all
necessary signatures and set forth all
20
<PAGE>
meetings and actions taken by the shareholders and directors of Seller and all
transactions involving the shares of Seller (and contain all canceled share
certificates).
4.20 Combinations Involving Seller. All mergers, consolidations or
-----------------------------
other business combinations involving Seller and all liquidations, purchases or
other transactions by which Seller acquired any of its business and properties
were conducted in accordance with applicable certificates of incorporation,
bylaws, any other applicable agreements, instruments and documents and
applicable Laws.
4.21 Bank Accounts. Seller Disclosure Schedule 4.21 lists all bank,
------------- -------------------------------
money market, savings and similar accounts and safe deposit boxes of Seller,
specifying the account numbers and the authorized signatories or persons
4.22 Labor Relations. Except as disclosed on Seller Disclosure
--------------- -----------------
Schedule 4.22, Seller is in compliance with all federal and state Laws
- -------------
respecting employment and employment practices, terms and conditions of
employment, wages and hours, and is not engaged in any unfair labor or unlawful
employment practice. There is no unlawful employment practice or discrimination
charge pending before the Equal Employment Opportunity Commission ("EEOC") or
any EEOC recognized state "referral agency." There is no unfair labor practice
charge or complaint against Seller pending before the National Labor Relations
Board ("NLRB"). There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the knowledge of Seller or the Shareholders, threatened against
or involving or affecting Seller and no NLRB representation question exists
respecting any of its employees. No grievance or arbitration proceeding is
pending and no written claim therefor exists. There is no collective bargaining
agreement that is binding on Seller. Except for any Material Contract disclosed
pursuant to Section 4.11, Seller is not a party to or bound by any agreement,
arrangement or understanding with any employee or consultant that cannot be
terminated on notice of ninety (90) or fewer days without liability to Seller or
that entitles the employee or consultant to receive any salary continuation or
severance payment or retain any specified position with Seller.
4.23 Disclosure. No representation, warranty, or statement made by
----------
Seller or the Shareholders in this Agreement or in any document or certificate
furnished or to be furnished to Parent pursuant to this Agreement contains or
will contain any untrue or incomplete statement or omits or will omit to state
any fact necessary to make the statements contained herein or therein not
misleading. All facts known or reasonably available to Seller or the
Shareholders that are material to the financial condition, operation, or
prospects of the business and assets of Seller have been disclosed to Parent.
4.24 Investment Intent. Seller is acquiring the Parent Common Stock
-----------------
pursuant to this Agreement for its own account, to hold for investment and with
no present intention of dividing its participation with others or reselling or
otherwise participating, directly or indirectly, in a distribution thereof, and
it will not make any sale, transfer or other disposition of the Parent Common
Stock in violation of the Securities Act of 1933 (the "1933 Act") or any
applicable state securities laws (the "State Acts"). Without limiting the
foregoing, Seller has no plan or intention to sell or otherwise dispose of any
of the Parent Common Stock
21
<PAGE>
transferred to it other than in connection with its liquidation and the
distribution of the Shares to the Shareholders subject to the escrow. Seller
agrees that there will be placed on the certificate or other evidence of the
Parent Common Stock, or any substitutions therefor, a legend stating in
substance as provided in Section 5.7.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
Each Shareholder represents and warrants to Parent, severally and
not jointly, with respect to himself and his ownership of Seller Common Stock,
as follows:
5.1 Ownership of Shares. The Shareholder owns of record and
-------------------
beneficially all of the Seller Common Stock set forth opposite his name on
Seller Disclosure Schedule 4.2. Such Shareholder owns all right, title and
- ------------------------------
interest in and to such Seller Common Stock, free and clear of all Liens
(including those for federal or state estate or inheritance taxes), options,
rights of refusal or similar rights or other transfer restrictions of any nature
whatsoever (including any arising from any pending or threatened litigation)
other than restrictions on transfers arising out of applicable federal and state
securities Laws and the agreements identified on Seller Disclosure Schedule 4.2
------------------------------
(which restrictions shall be terminated at or prior to the Closing). The
Shareholder owns no other securities of Seller.
5.2 Authorization. With respect to this Agreement and any other
-------------
agreements, instruments and documents executed and delivered by the Shareholder
pursuant to this Agreement (this Agreement and such other agreements,
instruments and documents are collectively referred to as the "Shareholder
Delivered Agreements"): (i) such Shareholder has the right, power and authority
to enter into the Shareholder Delivered Agreements executed and delivered by him
and to consummate the transactions contemplated by, and otherwise to comply with
and perform his obligations under them; and (ii) the Shareholder Delivered
Agreements will, when delivered, constitute valid and binding obligations of
such Shareholder enforceable against such Shareholder in accordance with their
terms.
5.3 Absence of Violations or Conflicts. The execution and delivery
----------------------------------
of the Shareholder Delivered Agreements and the consummation by such Shareholder
of the transactions contemplated by, or other compliance with the performance
under them do not and will not with the passing of time or giving of notice or
both: (i) constitute a violation of, be in conflict with, constitute a default
or require any payment under, permit a termination of, or result in the creation
or imposition of any Lien upon any assets of Seller or any of the Seller Common
Stock under (A) any contract, agreement, commitment, undertaking or
understanding (including rights of refusal or similar rights or other transfer
restrictions) to which such Shareholder is a party or to which he or his
properties or Seller or its properties are subject or bound, (B) any judgment,
decree or order of any Governmental Authority to which such Shareholder or his
properties are subject or bound, or (C) any applicable Laws; or (ii) create, or
cause the acceleration of the maturity of, any debt, obligation or liability of
such Shareholder that would result in any Lien or other claim upon the assets of
Seller.
22
<PAGE>
5.4 No Consents Required. Except as set forth on Shareholder
-------------------- -----------
Disclosure Schedule 5.4, no Authorization of or with any Governmental Authority
- -----------------------
or any other Authorization of or with any other third party on the part of such
Shareholder is required in connection with his execution or delivery of the
Shareholder Delivered Agreements or the consummation of the transactions
contemplated by, or other compliance with the performance under, such
Shareholder Delivered Agreements by such Shareholder.
5.5 No Claims Against Seller. Except as set forth on Shareholder
------------------------ -----------
Disclosure Schedule 5.5, such Shareholder has no claim against Seller, except
- -----------------------
for accrued compensation and benefits and expenses or similar obligations
incurred in the ordinary course of business (including reimbursement of medical
expenses pursuant to the Employee Plans disclosed pursuant to this Agreement),
and except as otherwise specifically provided in this Agreement.
5.6 Litigation Related to this Agreement. Such Shareholder is not a
------------------------------------
party to or subject to any judgment, decree or order entered in any lawsuit or
proceeding brought by any Governmental Authority or other third party seeking to
prevent the execution of this Agreement or the consummation of the transactions
contemplated hereby.
5.7 Investment Intent. Such Shareholder will acquire the Parent
-----------------
Common Stock pursuant to the liquidation of Seller for his own account, to hold
for investment and with no present intention of dividing his participation with
others or reselling or otherwise participating, directly or indirectly, in a
distribution thereof, and he will not make any sale, transfer or other
disposition of the Parent Common Stock in violation of the Securities Act of
1933 (the "1933 Act") or any applicable state securities laws (the "State
Acts"). Without limiting the foregoing, such Shareholder has no plan or
intention to sell or otherwise dispose of any of the Parent Common Stock
transferred to him in the liquidation of Seller. Such Shareholder agrees that
there will be placed on the certificate or other evidence of the Parent Common
Stock, or any substitutions therefor, a legend stating in substance:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES" HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933
(THE "1933 ACT") AND SECTION 10-5-9(13) OF THE OFFICIAL CODE
OF GEORGIA ANNOTATED (THE "GEORGIA CODE"). THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN (i)
PURSUANT TO AN EFFECTIVE REGISTRATION OR AN EXEMPTION
THEREFROM UNDER THE 1933 ACT AND THE GEORGIA CODE, AND (ii)
UPON RECEIPT BY THE ISSUER OF EVIDENCE SATISFACTORY TO IT OF
COMPLIANCE WITH THE 1933 ACT, THE GEORGIA CODE AND THE
APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE
ISSUER SHALL BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL
SATISFACTORY TO IT WITH RESPECT TO COMPLIANCE WITH THE ABOVE
LAWS.
23
<PAGE>
5.8 Access to Information; Accredited Investor Status. Such
-------------------------------------------------
Shareholder has been given access to all material and relevant information
concerning Parent, thereby enabling such Shareholder to make an informed
investment decision concerning his investment in the Parent Common Stock. Such
Shareholder has relied solely upon an independent investigation made by him and
his representatives, if any, and has, prior to the date hereof, been given
access to and the opportunity to examine data and information relating to
Parent. In making his investment decision to acquire the Parent Common Stock
pursuant to the liquidation of Seller, such Shareholder is not relying on any
oral or written representations or assurances from Parent or any other person or
any representative of Parent or any other person other than as set forth in this
Agreement. Such Shareholder has reviewed the definition of "accredited investor"
in Rule 501 of Regulation D under the 1933 Act, and such Shareholder is an
accredited investor.
5.9 Economic Risk. Such Shareholder represents that he is able to
-------------
bear the economic risk of an investment in the Parent Common Stock, which such
Shareholder acknowledges is currently illiquid, including a possible total loss
of his investment. In making this statement, such Shareholder hereby represents
and warrants to Parent that he has adequate means of providing for his current
needs and contingencies; he is able to afford to hold the Parent Common Stock
for an indefinite period and he further represents that he has such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the investment in the Parent Common Stock.
Further, such Shareholder represents that he has no present need for liquidity
in the Parent Common Stock and is willing to accept such investment risks.
5.10 Tax Advice. Such Shareholder has reviewed with his tax advisor
----------
the United States federal, state, local and foreign tax consequences of an
investment in the Parent Common Stock and the transactions contemplated by this
Agreement. Such Shareholder is relying solely on such advisors and not on any
statements or representations of Parent or any of its agents, and understands
that he (and not Parent or Purchaser) shall be responsible for his own tax
liability that will arise as a result of this investment or the transactions
contemplated by this Agreement.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to Seller and the Shareholders
as follows:
6.1 Corporate Organization.
----------------------
(a) Parent is a corporation duly organized, validly existing
and in good standing under the laws of the State of Georgia. Parent has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect on Parent.
24
<PAGE>
(b) All Subsidiaries of Parent are listed on Parent
------
Disclosure Schedule 6.1. Each Subsidiary is duly organized and validly existing
- -----------------------
and in good standing under the laws of its state or other jurisdiction of
incorporation. Each Parent Subsidiary has the corporate power and authority to
own or lease all of its properties and assets and to carry on its business as it
is now being conducted and is duly licensed or qualified to do business and is
in good standing in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and assets owned
or leased by it makes such licensing or qualification necessary, except where
the failure to be so licensed, qualified or in good standing would not have a
Material Adverse Effect on Parent. Parent Disclosure Schedule 6.1 sets forth
------------------------------
copies of the Articles of Incorporation and bylaws, if any, as in effect on the
date hereof, of Parent and each of the Parent Subsidiaries. Except as set forth
in the Parent Disclosure Schedule 6.1, Parent does not own or control, directly
------------------------------
or indirectly, any equity interest in any corporation, company, association,
partnership, joint venture or other entity.
6.2 Capitalization. As of the date hereof, the authorized capital
-------------
stock of Parent consists of 10,000,000 shares of Parent Common Stock and 500,000
shares of preferred stock, without par value ("Parent Preferred Stock"). As of
the date hereof, there were 6,000,000 shares of Parent Common Stock issued and
outstanding, no shares of Parent Preferred Stock issued and outstanding, 693,846
shares reserved for issuance upon the exercise of that certain Stock Purchase
Warrant issued by Parent to Sirrom Investments, Inc., and 244,616 shares of
Parent Common Stock reserved for issuance upon the exercise of outstanding stock
options and warrants ("Parent Stock Options"). All issued and outstanding shares
of Parent Common Stock, and all issued and outstanding shares of capital stock
of each of the Parent Subsidiaries, have been duly authorized and validly issued
and are fully paid and nonassessable. All of the outstanding shares of capital
stock of each Parent Subsidiary are owned by Parent and are free and clear of
any Liens. Except for the Parent Stock Options disclosed in Parent Disclosure
-----------------
Schedule 6.2, as of the date hereof, neither Parent nor any of the Parent
- ------------
Subsidiaries has granted nor is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
transfer, purchase, subscription or issuance of any shares of capital stock of
Parent or any of the Parent Subsidiaries or any securities representing the
right to purchase, subscribe or otherwise receive any shares of such capital
stock or any securities convertible into any such shares, and there are no
agreements or understandings with respect to voting of any such shares.
6.3 Authority; No Violation.
-----------------------
(a) No Authorization of any Governmental Authority is
necessary on behalf of Parent in connection with the execution and delivery by
Parent of this Agreement and the consummation by Parent of the Transaction and
the other transactions contemplated hereby. Subject to receipt of the Parent
Approvals, Parent has the full corporate power and authority to execute and
deliver this Agreement and to consummate the Transaction and the other
transactions contemplated hereby in accordance with the terms hereof. The
execution and delivery of this Agreement and the consummation of the Transaction
and the other transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Parent in accordance with the Articles of
Incorporation of Parent and applicable Laws. Except for the
25
<PAGE>
Parent Approvals, no other corporate proceedings on the part of Parent are
necessary to consummate the Transaction and the other transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Parent and constitutes the valid and binding obligation of Parent enforceable
against Parent in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Parent,
nor the consummation by Parent of the Transaction and the other transactions
contemplated hereby in accordance with the terms hereof, or compliance by Parent
with any of the terms or provisions hereof, will (i) assuming that the Parent
Approvals are duly obtained, violate any provision of Parent's Articles of
Incorporation or bylaws, (ii) assuming that the Parent Approvals are duly
obtained, violate any Law applicable to Parent, any of the Parent Subsidiaries,
or any of their respective properties or assets, or (iii) except as set forth in
Parent Disclosure Schedule 6.3, violate, conflict with, result in a breach of
- ------------------------------
any provisions 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
of, accelerate the performance required by, or result in the creation of any
Lien upon any of the respective properties or assets of Parent or the Parent
Subsidiaries under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Parent or any of the Parent Subsidiaries is a
party, or by which they or any of their respective properties or assets may be
bound or affected except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a Material Adverse Effect on the
Parent, and which will not prevent or delay the consummation of the Transaction
and the other transactions contemplated hereby.
(c) Subject to receipt of the Parent Approvals, Purchaser has the
full corporate power and authority to execute and deliver this Agreement and to
consummate the Transaction and the other transactions contemplated hereby in
accordance with the terms hereof. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly approved by the Board of Directors and the sole shareholder of Purchaser
in accordance with the Articles of Incorporation of Purchaser and applicable
Laws. Except for the Parent Approvals, no other corporate proceedings on the
part of Purchaser are necessary to consummate the Transaction or the other
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Purchaser and constitutes the valid and binding obligation of
Purchaser enforceable against Purchaser in accordance with its terms.
6.4 Financial Statements.
--------------------
(a) The financial statements of Parent set forth in Parent
------
Disclosure Schedule 6.4 (the "Parent Financial Statements"), as of their
- -----------------------
respective dates, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(b) Since April 30, 1998, there has not been any change,
occurrence or circumstance in the business, results of operations or financial
condition of Parent or any Parent Subsidiary having, individually or in the
aggregate, a Material Adverse Effect on
26
<PAGE>
Parent, other than changes, occurrences and circumstances disclosed by the
Parent prior to the date hereof.
6.5 Broker's and Other Fees. Neither Parent nor any of the Parent
-----------------------
Subsidiaries nor any of their directors or officers has employed any broker or
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
6.6 Parent Common Stock. At the Effective Time, the Parent Common
-------------------
Stock to be issued pursuant to the Transaction will be duly authorized and
validly issued, fully paid and nonassessable, free of preemptive rights and free
and clear of all Liens created by or through Parent (except as set forth in this
Agreement and the documents and agreements executed in connection herewith).
6.7 Disclosure. No representation, warranty, or statement made by
----------
Parent in this Agreement or in any document or certificate furnished or to be
furnished to Seller and the Shareholders pursuant to this Agreement contains or
will contain any untrue or incomplete statement or omits or will omit to state
any fact necessary to make the statements contained herein or therein not
misleading. All facts known or reasonably available to Parent that are material
to the financial condition, operation, or prospects of the business and assets
of Parent have been disclosed to Seller and the Shareholders.
ARTICLE 7 - COVENANTS AND CERTAIN ACTIONS OF THE PARTIES
7.1 Best Efforts; Further Assurances; Cooperation. Subject to the
---------------------------------------------
other provisions in this Agreement, the parties hereto shall in good faith
perform their obligations under this Agreement before, at and after the Closing,
and shall each use their reasonable best efforts to do, or cause to be done, all
things necessary, proper or advisable under applicable Laws to obtain all
Authorizations and satisfy all conditions to the obligations of the parties
under this Agreement and to cause the transactions contemplated by this
Agreement to be carried out promptly in accordance with the terms hereof and
shall cooperate fully with each other and their respective officers, directors,
employees, agents, counsel, accountants and other designees in connection with
any steps required to be taken as part of their respective obligations under
this Agreement. Upon the execution of this Agreement and thereafter, each party
shall take such actions and execute and deliver such documents as may be
reasonably requested by the other parties hereto in order to consummate the
transactions contemplated by this Agreement.
7.2 Public Announcements. Neither Seller nor any of the
--------------------
Shareholders shall make any public announcement regarding any aspect of this
Agreement without Parent's prior written consent.
7.3 Shareholders' Approval. On or before the date hereof, both of
----------------------
the Shareholders shall approve the Transaction in compliance with applicable
law.
27
<PAGE>
7.4 Shareholder Agreements. All agreements among the Shareholders
----------------------
and Seller relating to Seller or any stock or securities of Seller other than
the Seller Stock Options are hereby terminated.
7.5 Employee Matters.
----------------
(a) Employee Benefits. Parent, Purchaser and Seller shall
-----------------
take all action necessary or appropriate to permit the leased employees of
Seller at the Closing Date who shall continue to be leased to Purchaser
thereafter ("Continuing Employees") to continue such arrangement with Purchaser
through Adminstaff after the Closing; provided, however, that nothing in this
Agreement shall be deemed to require Parent to cause to be continued any
employee's employment, responsibilities or officer title for any definite
period, or to change the terms or conditions of any existing employee benefit
program.
(b) Employment Agreements. All employment agreements between
---------------------
Seller and each of the Shareholders (other than agreements relating to
confidentiality, ownership of inventions and materials and similar agreements
benefiting Seller) are hereby terminated.
(c) Insurance Benefits. Purchaser shall assume liability for
------------------
the insurance benefits of the Shareholders listed on Schedule 7.5(c) hereto,
---------------
which shall continue to be made available to the Shareholders after the Closing
(provided that if and to the extent that Seller benefits from such arrangements,
such benefits shall be amended to provide that such benefits hereafter accrue to
Purchaser).
7.6 Tax Matters; Cooperation and Exchange of Information. The
----------------------------------------------------
Shareholders, Purchaser and Parent agree to furnish, or to cause to be furnished
in good faith to each other, such cooperation and assistance as is reasonably
necessary to file any future returns, to respond to audits, to negotiate
settlements with Governmental Authorities and to prosecute and defend against
Tax claims.
7.7 Rights to Sell Shares in Public Offerings. Parent shall provide
-----------------------------------------
the Shareholders with the same rights to participate as selling shareholders in
connection with public offerings of the Common Stock of Parent as are enjoyed by
the members of Parent's senior management team.
7.8 Tax Returns. Each Shareholder agrees to file, within the time
-----------
allowed by law, all federal, state, local, and foreign tax returns with the
appropriate jurisdictions, for the period January 1, 1998 through the date of
the Closing, to include therein all information required to be contained therein
relating to Seller for such period, and to pay all Taxes with respect to Seller
for such period in a manner consistent with the allocation of the consideration
paid by Purchaser made pursuant to this Agreement.
7.9 Change of Corporate Names. Purchaser shall change its name to
-------------------------
Aberdeen Marketing Group, Inc. upon the closing, and Seller shall provide any
consents necessary for Purchaser to do so. Further, as soon as possible
after closing, Aberdeen Marketing shall change its name to a name that does not
include "Aberdeen."
28
<PAGE>
7.10 Liquidation of Seller. After the Closing and at the
---------------------
Shareholders' expense, Seller shall take all steps necessary for the prompt
distribution in liquidation of the Shares, the Excluded Assets, and the rights
of Seller under this Agreement.
ARTICLE 8 - CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement.
-----------------------------------------------------------
The respective obligations of each party under this Agreement to consummate the
Transaction shall be subject to the satisfaction, or, where permissible
under applicable Law, waiver at or prior to the Closing Date of the following
conditions:
(a) Approval of Shareholders. This Agreement, the
------------------------
Transaction and the transactions contemplated hereby shall have been approved by
the requisite vote of the Shareholders.
(b) Approvals and Regulatory Filings. All necessary
--------------------------------
Authorizations of Governmental Authorities required to consummate the
transactions contemplated hereby shall have been obtained without any term or
condition that would materially impair the value of Seller, or that would
materially impair the value of Parent and the Parent Subsidiaries, taken as a
whole. All conditions required to be satisfied prior to the Effective Time by
the terms of such approvals and consents shall have been satisfied; and all
statutory waiting periods in respect thereof shall have expired.
(c) Suits and Proceedings. The consummation of the
---------------------
transactions contemplated hereby will not violate the provisions of any
injunction, order, judgment, decree or Law applicable or effective with respect
to Parent or Seller or their officers and directors. No suit or proceeding shall
have been instituted by any person, or, to the knowledge of Parent or Seller,
shall have been threatened by any Governmental Authority, and not subsequently
withdrawn, dismissed or otherwise eliminated, which seeks (i) to prohibit,
restrict or delay consummation of the transactions contemplated hereby or to
limit in any material respect the right of Parent to control any material aspect
of the business of Parent and the Parent Subsidiaries or Seller after the
Effective Time, or (ii) to subject Purchaser or Seller or their respective
directors or officers to material liability on the ground that it or they have
breached any Law or otherwise acted improperly in relation to the transactions
contemplated by this Agreement.
8.2 Conditions to the Obligations of Parent and Purchaser Under this
----------------------------------------------------------------
Agreement. The obligations of Parent and Purchaser under this Agreement shall be
- ---------
further subject to the satisfaction or waiver, at or prior to the Closing Date
of the following conditions:
(a) Covenants and Agreements; Consents. Seller and the
----------------------------------
Shareholders shall have performed in all material respects the agreements,
covenants and obligations to be performed by it or them at or prior to the
Effective Time. All Authorizations of or with any nongovernmental third party
that are required for or in connection with the execution and
29
<PAGE>
delivery of this Agreement or the consummation of the transactions contemplated
hereby by Seller and the Shareholders shall have been obtained or made.
(b) Opinion of Counsel. Parent shall have received an opinion
------------------
of The Hishon Firm, LLC, counsel to Seller, dated the Closing Date, in form and
substance reasonably satisfactory to Parent, covering the matters set forth
on Exhibit 8.2(b).
-------------
(c) Certificates. Seller shall have furnished Parent with
------------
such certificates of its officers or others and such other documents to evidence
fulfillment of the conditions set forth in this Article 8 and otherwise to
consummate the transactions contemplated pursuant to this Agreement as Parent
may reasonably request.
(d) Employment Agreements. Each of the Shareholders shall
---------------------
have executed and delivered Employment Agreements with Parent in the form
attached hereto as Exhibit 8.2(d), with the blanks therein properly completed,
--------------
the effectiveness of which are expressly conditioned upon consummation of the
Transaction.
(e) Shareholders Agreement. Certain of the Shareholders shall
----------------------
have executed and delivered the First Amendment to Shareholders Agreement in the
form attached hereto as Exhibit 8.2(e), the effectiveness of which is expressly
-------------
conditioned upon consummation of the Transaction.
(f) Landlord and Equipment Lessor Consents. Seller shall have
--------------------------------------
furnished Parent with written consents executed by the landlords for each of the
premises occupied by Seller and by the lessors of the equipment leased by
Seller, respectively.
(g) Wachovia Financing. Wachovia Bank shall have consented in
------------------
writing to the assumption by Purchaser of Seller's obligations to such lender
pursuant to the loans disclosed on Seller Disclosure Schedule 4.3.
------------------------------
(h) Escrow Agreement. Each of the Shareholders shall have
----------------
executed and delivered the Escrow Agreement with Escrow Agent, which also shall
have executed such agreement.
(i) Sirrom Financing. Sirrom Investments, Inc. shall have
----------------
consented in writing to the transaction.
8.3 Conditions to the Obligations of Seller and the Shareholders
------------------------------------------------------------
Under this Agreement. The obligations of Seller and the Shareholders under this
- --------------------
Agreement shall be further subject to the satisfaction or waiver, at or prior to
the Closing Date of the following conditions:
(a) Covenants and Agreements; Consents. All Authorizations of
----------------------------------
or with any nongovernmental third party that are required for or in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby by Parent and the Purchaser shall have been
obtained or made, except where the failure to obtain
30
<PAGE>
any such Authorizations would not have a Material Adverse Effect on Parent or
the Parent Subsidiaries, taken as a whole.
(b) Opinion of Counsel to Parent. Seller shall have received
----------------------------
an opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to Parent,
dated the Closing Date, in form and substance reasonably satisfactory to Seller,
covering the matters set forth on Exhibit 8.3(b).
-------------
(c) Certificates. Parent and Purchaser shall have furnished
------------
Seller with such certificates of its officers or others and such other documents
to evidence fulfillment of the conditions set forth in this Article 8 and
otherwise to consummate the transactions contemplated pursuant to this Agreement
as Seller may reasonably request.
(d) Employment Agreements. Parent shall have executed and
----------------------
delivered Employment Agreements with Parent in the form attached hereto as
Exhibit 8.2(d), with the blanks therein properly completed, the effectiveness of
- --------------
which are expressly conditioned upon consummation of the Transaction.
(e) Shareholders Agreement. Parent shall have executed and
----------------------
delivered the First Amendment to Shareholders Agreement with the Shareholders in
the form attached hereto as Exhibit 8.2(e), signed by all of the parties thereto
--------------
other than the Shareholders, the effectiveness of which is expressly conditioned
upon consummation of the Transaction.
(f) Escrow Agreement. Parent shall have executed and
----------------
delivered the Escrow Agreement executed by the Shareholders and the Escrow
Agent.
(g) Stock Option Agreements. Parent shall have executed and
-----------------------
delivered to Purchaser those certain stock option agreements granting the
Shareholders the right to purchase as many as 175,000 shares of Parent Common
Stock on the terms provided therein.
31
<PAGE>
ARTICLE 9 - AMENDMENT AND WAIVER
9.1 Specific Performance. The parties acknowledge that the rights
--------------------
of each party to consummate the transactions contemplated hereby are special,
unique, and of extraordinary character, and that, in the event that any party
violates or fails or refuses to perform any covenant made by it herein, the
other party or parties will be without adequate remedy at law. Each party
agrees, therefore, that in the event that it violates, fails or refuses to
perform any covenant or agreement made by it herein, the other party or parties
so long as it or they are not in breach hereof, may, in addition to the remedies
at law, institute and prosecute an action in a court of competent jurisdiction
to enforce specific performance of such covenant or agreement or seek any other
equitable relief.
9.2 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of all the parties hereto.
9.3 Extension; Waiver. The parties may (a) extend the time for the
-----------------
performance of any of the obligations or other acts of the other parties hereto;
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant thereto; or (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of any party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party against which
the waiver is sought to be enforced and shall apply only to the specific
condition, representation or warranty identified by such writing as being
waived, extended or modified.
ARTICLE 10 - INDEMNIFICATION
10.1 Indemnification by Seller and the Shareholders. Subject to the
----------------------------------------------
terms of this Article 10, Seller and the Shareholders shall, jointly and
severally, indemnify, defend, save and hold harmless Parent and Purchaser
(collectively, the "Parent Indemnified Parties"), from and against any demands,
claims, actions, losses, damages, deficiencies, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' and accountants' fees and
expenses), together with interest and penalties, if any, awarded by court order
or otherwise agreed to (collectively, "Indemnifiable Damages", suffered by the
Parent Indemnified Parties that arise out of or result from any of the following
(whether or not a third party initiates the proceeding or claim giving rise to
such Indemnifiable Damages):
(a) any breach of any of the representations, warranties,
covenants or agreements made by Seller or the Shareholders in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Seller or the
Shareholders at the Closing;
(c) any expenses, charges, fees, or costs associated with any
audit of Seller for Taxes related to periods prior to the Closing Date, and any
Taxes imposed as a result of any such audit, even though any such audit
commences, or a party does not become aware of
32
<PAGE>
any such audit until after the Closing Date (this provision shall not, however,
be deemed to limit the indemnification obligations of Parent and Purchaser for
the Indemnified Tax Claim);
(d) any expenses, charges, fees, or costs associated with the
Transaction in excess of $23,000, not less than $11,500 of which shall be paid
to The Hishon Firm, LLC; or
(e) the Farr Liabilities.
10.2 Indemnification by Parent. Subject to the terms of this Article
-------------------------
10, Parent shall indemnify, defend, save and hold harmless Seller and the
Shareholders (collectively, the "Seller Indemnified Parties"), from and against
any Indemnifiable Damages suffered by the Seller Indemnified Parties that arise
out of or result from any of the following (whether or not a third party
initiates the proceeding or claim giving rise to such Indemnifiable Damages):
(a) any breach of any of the representations, warranties,
covenants and agreements made by Parent or Purchaser in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement in a document, certificate or affidavit delivered by Parent or
Purchaser at the Closing; or
(c) any Indemnifiable Damages suffered by the Shareholders in
connection with Purchaser's failure to pay an obligation assumed under
Section 1.1(a).
10.3 Claims for Indemnification. The representations, warranties,
--------------------------
covenants and agreements in this Agreement shall survive the Closing subject to
the limitations set forth herein and shall not be affected by any investigation
made by the parties hereto prior to the date hereof or the Effective Time. The
party seeking indemnification (the "Indemnified Party") shall give the party
from whom indemnification is sought (the "Indemnifying Party") a written notice
("Notice of Claim") within sixty (60) days of the discovery of any loss,
liability, claim or expense in respect of which the right to indemnification
contained in this Article 10 may be claimed; provided, however, that the failure
to give such notice within such sixty (60) day period shall not result in the
waiver or loss of any right to bring such claim hereunder after such period
unless, and only to the extent that, the other party is actually prejudiced by
such failure. In the event a claim is pending or threatened or the Indemnified
Party has a reasonable belief as to the validity of the basis for such claim,
the Indemnified Party may give written notice (a "Notice of Possible Claim") of
such claim to the Indemnifying Party, regardless of whether a loss has arisen
from such claim. A party shall have no liability under this Article 10 for
breach of a representation or warranty, unless a Notice of Claim or Notice of
Possible Claim therefor is delivered by the Indemnified Party prior to the
second anniversary of the Effective Time; provided, however, that as to any
liability arising pursuant to Sections 4.1, 4.2, 4.3, 4.8, 4.9, 4.13, 4.14,
Article 5 and Sections 6.1, 6.2, 6.3 and 6.6 hereof, any Notice of Claim or
Notice of Possible Claim must be delivered by the Indemnified Party not later
than ninety (90) days after the expiration of the applicable statute of
limitations (including any extensions) therefor; and provided, further, that the
limitations set forth in this Section 10.3 shall not apply to liability under
this Article 10 for any intentional breach of a representation or warranty in
this Agreement or to the Farr
33
<PAGE>
Liabilities. Any Notice of Claim or Notice of Possible Claim shall set forth the
representations, warranties, covenants and agreements with respect to which the
claim is made, the specific facts giving rise to an alleged basis for the claim
and the amount of liability asserted or anticipated to be asserted by reason of
the claim.
10.4 Defense of Claim by Third Parties. If any claim is made by a
---------------------------------
third party against a party to this Agreement that, if sustained, would give
rise to a liability of another party under this Agreement, the party against
whom the claim is made shall promptly cause notice of the claim to be delivered
to the other party and shall afford the other party and its counsel, at the
other party's sole expense, the opportunity to join in the defense and
settlement of the claim. The failure to provide such notice will not relieve the
Indemnifying Party of liability under this Agreement unless, and only to the
extent that, the Indemnifying Party is actually prejudiced by such failure;
provided that a failure to afford the Indemnifying Party and its counsel the
opportunity to join in the defense and settlement of the claim shall be an
absolute bar to a claim against the Indemnifying Party for indemnification for
such claim.
10.5 Third Party Claim Assistance. From time to time after the
----------------------------
Closing, Parent, Purchaser, and the Shareholders shall provide or cause their
appropriate employees or representatives to provide the other party with
information or data in connection with the handling and defense of any third
party claim or litigation (including counterclaims filed by the parties) in
respect to which a party may be required to indemnify another party under this
Agreement. The party receiving such information or data shall reimburse the
other party for all of its reasonable costs and expenses in providing these
services, including, without limitation, (i) all out of pocket, travel and
similar expenses incurred by its personnel in rendering these services; and (ii)
all fees and expenses for services performed by third parties engaged by or at
the request of such other party.
10.6 Settlement of Indemnification Claims. If a recipient of a
------------------------------------
Notice of Claim desires to dispute such claim, it shall, within thirty (30) days
after receipt of the Notice of Claim, give counternotice, setting forth the
basis for disputing such claim, to Parent or the Shareholders, as the case may
be. If no such counternotice is given within such thirty (30) day period, or if
Parent or the Shareholders, as the case may be, acknowledges liability for
indemnification, then the amount claimed shall be promptly satisfied as provided
in Section 10.7. If, within thirty (30) days after the receipt of counternotice
by Parent or the Shareholders, as the case may be, the Shareholders and Parent
shall not have reached agreement as to the claim in question, then the party
disputing the claim shall satisfy any undisputed amount as specified in Section
10.7 and the disputed amount of the claim of indemnification shall be submitted
to and settled by arbitration in accordance with the then prevailing commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall be held in the Atlanta, Georgia area before a panel of three (3)
arbitrators, one selected by each of the parties and the third selected by
mutual agreement of the first two, and all of whom shall be independent and
impartial under the rules of the American Arbitration Association. The decision
of the arbitrators shall be final and binding as to any matter submitted under
this Agreement. To the extent the decision of the arbitrators is that a party
shall be indemnified hereunder, the amount shall be satisfied as provided in
Section 10.7. Judgment upon any award rendered by the arbitrators may be entered
in any court of
34
<PAGE>
competent jurisdiction. The date of the arbitrator's decision or the date a
claim otherwise becomes payable pursuant to this Section 10.6 is referred to as
the "Determination Date."
10.7 Manner of Indemnification.
-------------------------
(a) Except as provided in Section 10.7(b), all
indemnification under this Article 10 shall be made by payment of cash or
delivery of a certified or cashier's check in the amount of the indemnification
liability no later than five (5) days following the Determination Date.
(b) The Shares deposited into escrow as pursuant to Article 2
shall serve as collateral for Indemnifiable Damages owed by the Shareholders to
the Parent Indemnified Parties, provided that if the Shareholders pay cash or
deliver a certified or cashier's check in the amount of the indemnification
liability not later than five (5) days following the Determination Date, then
the Shares in escrow shall not be used to satisfy the indemnification liability.
If the Shares in escrow are to be used to satisfy the indemnification liability,
the amount of liability asserted or anticipated to be asserted by reason of the
claim shall be divided by $4.17 to arrive at a number of Shares that may
potentially be cancelled in satisfaction of such claim.
10.8 Indemnification Exclusive Remedy. In the absence of fraud, and
--------------------------------
except for non-monetary equitable relief, if the Closing occurs, indemnification
pursuant to the provisions of this Article 10 shall be the sole and exclusive
remedy of the parties for any breach of any representation or warranty contained
in this Agreement.
10.9 Certain Limitations. The foregoing indemnification obligations
-------------------
are subject to the limitation that no Indemnifying Party shall have any
liability for indemnification for breaches of representations and warranties
pursuant to this Article 10 unless the total Indemnifiable Damages for which the
Indemnifying Party would be liable exceed $100,000 in the aggregate, and then
only for the excess; provided, however, that the foregoing limitation shall not
-------- -------
apply to any Indemnifiable Damages with respect to, as a result of or involving
(i) any intentional breach of a representation or warranty in this Agreement or
(ii)the Farr Liabilities. In no event shall the liability of the Shareholders
and Seller under this Article 10 exceed the total consideration paid by Parent
in the Transaction, and in no event shall an individual Shareholder's liability
under this Article 10 exceed the total consideration paid by Parent multiplied
by such Shareholder's percentage of Seller Common Stock. Parent and Purchaser
agree that they will first seek to recover damages against Administaff for a
breach of the representations and warranties in Section 4.9 before bringing a
claim against Seller and the Shareholders in that regard, provided that the time
period set forth in Section 10.3 in which such claim must be brought shall be
extended for the duration of the period in which Parent and Purchaser are
pursuing their remedies against Administaff.
ARTICLE 11 - MISCELLANEOUS
11.1 Expenses.
--------
35
<PAGE>
(a) Except as otherwise expressly stated herein, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including legal, accounting and investment banking fees and
expenses) shall be borne by the party incurring such costs and expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if either of the parties shall willfully default in its obligations
hereunder, the non-defaulting party may pursue any remedy available at law or in
equity to enforce its rights and shall be paid by the willfully defaulting party
for all damages, costs and expenses, including without limitation reasonable
legal, reasonable accounting, reasonable investment banking and reasonable
printing expenses incurred or suffered by the non-defaulting party in connection
herewith or in the enforcement of its rights hereunder.
(c) Whenever this Agreement or any agreement entered into in
connection with this Agreement refers to legal fees, attorney's fees, reasonable
attorney's fees or words of similar import, such reference shall be deemed to
refer to attorneys' fees actually and reasonably incurred for the reasonable
expenditure of hours at normal and customary hourly rates for the attorneys
involved, without reliance upon any statutes that may allow such fees to be
calculated on a percentage basis, which statutory provisions are hereby waived.
11.2 Notices. All notices or other communications which are required
-------
or permitted hereunder shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
(a) If to Parent or Purchaser, to:
MegaMarketing Corporation
c/o Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: John P. Kelly, President and Chief Executive Officer
Telefax: (404) 817-6150
Copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: Glenn W. Sturm
Telefax: (404) 817-6050
(b) If to Seller, to:
Aberdeen Marketing, Inc.
36
<PAGE>
2030 Powers Ferry Road
Suite 120
Atlanta, GA 30339
Attn: Emery Ellinger, III
Telefax: (770) 661-1550
37
<PAGE>
Copy to:
Robert H. Hishon, Esq.
The Hishon Firm, LLC
999 Peachtree Street, N.E.
Suite 1900
Atlanta, Georgia 30309
Telefax: (404) 817-2486
(c) If to the Shareholders, to their respective addresses as set
forth on the signature page to this Agreement;
or to such other addresses and telefax numbers as shall be furnished
in writing by any party, and any such notice or communications shall be deemed
to have been given as of two business days after the date actually sent via
overnight or express courier, five days after mailed and upon telefax
confirmation of receipt to addressee by the sender.
11.3 Parties in Interest. This Agreement shall be binding on and
-------------------
shall inure to the benefit of the parties hereto and their respective
successors, representatives and assigns. This Agreement (and the rights and
interests herein) may not be assigned by any party without the written consent
of the other parties. Any attempted assignment in contravention of the foregoing
shall be null and void. Nothing in this Agreement is intended to confer,
expressly or by implication, upon any other person any rights or remedies under
or by reason of this Agreement.
11.4 Entire Agreement. This Agreement, which includes the Disclosure
----------------
Schedules and the other documents, agreements and instruments executed and
delivered pursuant to or in connection with this Agreement, contain the entire
agreement between the parties hereto with respect to the transactions
contemplated by this Agreement and supersedes all prior negotiations,
arrangements or understandings, written or oral, with respect thereto.
11.5 Counterparts. This Agreement may be executed by each party upon
------------
a separate copy, and in such case one counterpart of this Agreement shall
consist of enough of such copies to reflect the signatures of all of the
parties. This Agreement may be executed in two or more counterparts, each of
which shall be an original, and each of which shall constitute one and the same
agreement. Any party may deliver an executed copy of this Agreement and of any
documents contemplated hereby by facsimile transmission to another party and
such delivery shall have the same force and effect as any other delivery of a
manually signed copy of this Agreement or of such other documents.
11.6 Governing Law.
-------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF
GEORGIA, EXCLUDING CHOICE OF LAW PRINCIPLES.
38
<PAGE>
(b) Parent, Purchaser, Seller and the Shareholders consent to
the exclusive jurisdiction and venue of the courts of any county in the State of
Georgia and the United States Federal District Courts in Georgia, in any
judicial proceeding brought to enforce this Agreement. The parties agree that
any forum other than the State of Georgia is an inconvenient forum and that a
lawsuit (or non-compulsory counterclaim) brought by one party against another
party, in a court of any jurisdiction other than the State of Georgia should be
forthwith dismissed or transferred to a court located in the State of Georgia.
11.7 Arbitration. Any dispute, controversy or claim arising out of
-----------
or relating to this Agreement or any other related documents, agreements,
certificates or other writing, or the breach, termination, construction,
validity or enforceability hereof or thereof, shall be settled by binding
arbitration in accordance with the rules of the American Arbitration Association
in force at the time and in the manner described in Section 10.6.
11.8 Invalidity of any Part. If any provision or part of this
----------------------
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provisions of this Agreement and shall be construed as if such invalid,
illegal or unenforceable provision or part thereof had never been contained
herein, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
11.9 Time of the Essence; Computation of Time. Time is of the
----------------------------------------
essence of each and every provision of this Agreement. Whenever the last day for
the exercise of any right or the discharge of any duty under this Agreement
shall fall upon Saturday, Sunday or a federal, public or legal holiday, the
party having such right or duty shall have until 5:00 p.m., Atlanta, Georgia
time on the next succeeding regular business day to exercise such right or to
discharge such duty.
39
<PAGE>
IN WITNESS WHEREOF, Parent, Purchaser, Seller and Shareholders have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
MEGAMARKETING CORPORATION
/s/ Edward J. Rutkowski
------------------------------------
By: Edward J. Rutkowski
---------------------------------
Its: Executive Vice President
---------------------------------
MEGAMARKETING ACQUISITION
THREE, INC.
/s/ Edward J. Rutkowski
------------------------------------
By: Edward J. Rutkowski
---------------------------------
Its: Executive Vice President
---------------------------------
ABERDEEN MARKETING, INC.
/s/ Emery Ellinger, III
------------------------------------
By: Emery Ellinger, III
---------------------------------
Its: Chief Executive Officer
---------------------------------
[Signatures continue on following page]
40
<PAGE>
PROMAIL, INC.
/s/ Emery Ellinger, III
------------------------------------
By: Emery Ellinger, III
---------------------------------
Its: Chief Executive Officer
---------------------------------
GLOBELTEL, INC.
/s/ Emery Ellinger, III
------------------------------------
By: Emery Ellinger, III
---------------------------------
Its: Chief Executive Officer
--------------------------------
SHAREHOLDERS:
/s/ Donald J. Muscolino
------------------------------------
Name: Donald J. Muscolino
-------------------------------
Address: 620 Telford Place
-----------------------------
Atlanta, Georgia 30342
/s/ Emery Ellinger, III
------------------------------------
Name: Emery Ellinger, III
-------------------------------
Address: 472 Peachtree Battle Avenue
----------------------------
Atlanta, Georgia 30305
41
<PAGE>
AGREEMENT AND PLAN OF MERGER
by
and
among
MEGAMARKETING CORPORATION
MEGAMARKETING ACQUISITION FOUR, INC.
UST, INC.
and
THE SHAREHOLDERS OF UST, INC.
Dated as of January 31, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 - THE MERGER.........................................................1
1.1 The Merger....................................................1
1.2 Closing.......................................................1
1.3 Effective Time of the Merger..................................1
1.4 Articles of Incorporation; Bylaws.............................2
1.5 Directors and Officers of the Surviving Corporation...........2
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES................2
2.1 Consideration.................................................2
2.2 No Fractional Shares..........................................2
2.3 Surrender and Exchange of Certificates Representing Seller
Common Stock................................................. 3
ARTICLE 3 - RULES OF CONSTRUCTION..............................................3
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS......5
4.1 Corporate Organization........................................5
4.2 Capitalization................................................6
4.3 Authority; No Violation.......................................6
4.4 Financial Statements..........................................7
4.5 Broker's and Other Fees.......................................8
4.6 Absence of Certain Changes or Events..........................8
4.7 Legal Proceedings.............................................8
4.8 Taxes and Tax Returns.........................................9
4.9 Benefit Plans................................................10
4.10 Compliance with Applicable Laws..............................13
4.11 Certain Contracts............................................13
4.12 Properties and Insurance.....................................15
4.13 Environmental Matters........................................16
4.14 Intellectual Property........................................17
4.15 No Parachute Payments........................................17
4.16 Absence of Certain Agreements and Practices..................18
4.17 Major Vendors and Customers..................................18
4.18 Accounts Receivable..........................................18
4.19 Corporate Records............................................19
4.20 Combinations Involving Seller................................19
4.21 Bank Accounts................................................19
4.22 Labor Relations..............................................19
i
<PAGE>
4.23 Disclosure...................................................19
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS................20
5.1 Ownership of Shares..........................................20
5.2 Authorization................................................20
5.3 Absence of Violations or Conflicts...........................20
5.4 No Consents Required.........................................21
5.5 No Claims Against Seller.....................................21
5.6 Litigation Related to this Agreement.........................21
5.7 Investment Intent............................................21
5.8 Access to Information; Accredited Investor Status............22
5.9 Economic Risk................................................22
5.10 Tax Advice...................................................22
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT..........................23
6.1 Corporate Organization.......................................23
6.2 Capitalization...............................................23
6.3 Authority; No Violation......................................24
6.4 Financial Statements.........................................25
6.5 Broker's and Other Fees......................................25
6.6 Parent Common Stock..........................................25
6.7 Legal Proceedings............................................26
6.8 Taxes and Tax Returns........................................26
6.9 Compliance with Applicable Laws..............................27
6.10 Disclosure...................................................27
ARTICLE 7 - COVENANTS AND CERTAIN ACTIONS OF THE PARTIES......................27
7.1 Best Efforts; Further Assurances; Cooperation................27
7.2 Public Announcements.........................................28
7.3 Affiliates...................................................28
7.4 Shareholders' Approval.......................................28
7.5 Release by the Shareholders..................................28
7.6 Employee Matters.............................................28
(a) Employee Benefits......................................28
(b) Employment Agreements..................................29
7.7 Tax Matters..................................................29
7.8 Life Insurance Premiums......................................29
7.9 Release from Guaranties......................................29
7.10 Registration Rights..........................................29
(a) Title to Vehicles......................................29
ARTICLE 8 - CLOSING CONDITIONS................................................30
8.1 Conditions of Each Party's Obligations Under this Agreement..30
(a) Approvals and Regulatory Filings.......................30
(b) Suits and Proceedings..................................30
ii
<PAGE>
(c) Escrow Agreement.......................................30
8.2 Conditions to the Obligations of Parent and Merger Sub Under
this Agreement...............................................30
(a) Covenants and Agreements; Consents.....................30
(b) Opinion of Counsel.....................................31
(c) Certificates...........................................31
(d) Employment Agreements..................................31
(e) Shareholders Agreement.................................31
(f) Consulting Agreement...................................31
(g) Resignations...........................................31
(h) Financing..............................................31
(i) Escrow Agreement.......................................31
8.3 Conditions to the Obligations of Seller and the Shareholders
Under this Agreement.........................................31
(a) Covenants and Agreements; Consents.....................31
(b) Opinion of Counsel to Parent...........................32
(c) Certificates...........................................32
(d) Employment Agreements..................................32
(e) Shareholders Agreement.................................32
(f) Consulting Agreement...................................32
(g) Escrow Agreement.......................................32
(h) Merger Consideration...................................32
--------------------
ARTICLE 9 - AMENDMENT AND WAIVER..............................................32
9.1 Specific Performance........................................32
9.2 Amendment...................................................33
9.3 Extension; Waiver...........................................33
ARTICLE 10 - INDEMNIFICATION .................................................33
10.1 Indemnification by the Shareholders.........................33
10.2 Indemnification by Parent the Surviving Corporation.........33
10.3 Claims for Indemnification..................................34
10.4 Matters Involving Third Parties.............................34
10.5 Indemnification Payment.....................................35
10.6 Arbitration.................................................35
10.7 Tax Effect and Insurance....................................36
10.8 Indemnification Exclusive Remedy............................36
10.9 Certain Limitations.........................................36
10.10 Contribution Agreement......................................37
ARTICLE 11 - MISCELLANEOUS....................................................37
11.1 Expenses....................................................37
11.2 Notices.....................................................37
11.3 Parties in Interest.........................................38
11.4 Entire Agreement............................................39
11.5 Counterparts................................................39
iii
<PAGE>
11.6 Governing Law...............................................39
11.7 Invalidity of any Part......................................39
11.8 Time of the Essence; Computation of Time....................39
ARTICLE 12 EXHIBITS AND SCHEDULES
Exhibit No. Description
- ----------------- -----------------
Exhibit 7.3 Affiliate Representation Letter
Exhibit 8.2(b) Form of Opinion of Counsel to Seller
Exhibit 8.2(d)(1) Form of Employment Agreement for Mr. DePrizio
Exhibit 8.2(d)(2) Form of Employment Agreement for Mr. Burgdorf
Exhibit 8.2(e) Form of Joinder to Shareholders Agreement
Exhibit 8.2 (f) Form of Consulting Agreement for Mr. DePrizio
Exhibit 8.3(b) Form of Opinion of Counsel to Parent
Schedule No. Description
- ----------------- -----------------
Schedule 2.1 Merger Consideration
Seller Disclosure
Schedule No. Description
- ----------------- -----------------
Schedule 4.1 Corporate Documents
Schedule 4.2 Seller's Capitalization
Schedule 4.3 Defaults; Conflicts and Liens Created
Schedule 4.4 Seller Financial Statements
Schedule 4.5 Broker's and Other Fees
Schedule 4.6 Certain Changes and Events
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Certain Contracts
Schedule 4.12 Insurance Policies
Schedule 4.14 Intellectual Property
Schedule 4.15 Parachute Payments
Schedule 4.16 Absence of Certain Agreements and Practices
Schedule 4.17 Major Vendors and Customers
Schedule 4.18 Accounts Receivable
Schedule 4.19 Corporate Records
Schedule 4.21 Bank Accounts
Schedule 4.22 Labor Relations
Schedule 7.8 Life Insurance Policies
iv
<PAGE>
Shareholder Disclosure
Schedule No. Description
- ---------------------- -----------------
Schedule 5.4 Consents
Schedule 5.5 Claims
Parent Disclosure
Schedule No. Description
- ----------------- -----------------
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.2 Parent's Capitalization
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent Financial Statements
Schedule 6.7 Legal Proceedings
Schedule 6.8 Taxes and Tax Returns
Schedule 6.9 Compliance with Applicable Laws
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 31st day of January,
1999 (the "Agreement"), is by and among MegaMarketing Corporation, a Georgia
corporation ("Parent"), MegaMarketing Acquisition Four, Inc., a Georgia
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), UST, Inc., a
Georgia corporation ("Seller"), and Thomas A. DePrizio and James Burgdorf, the
shareholders of Seller (the "Shareholders").
WHEREAS, this Agreement provides for the strategic combination of Parent
and Seller in furtherance of the parties' long-term strategic plans;
WHEREAS, the combination will be accomplished by a merger of Merger Sub
with and into Seller with Seller surviving and the Shareholders receiving the
consideration hereinafter set forth (the "Merger");
WHEREAS, the Boards of Directors of Seller, Parent and Merger Sub have
duly adopted and approved this Agreement; Merger Sub's sole shareholder has
approved the Agreement; and the Board of Directors of Seller has recommended
this Agreement to the Shareholders, who have approved it;
NOW, THEREFORE, intending to be legally bound, the parties hereto agree
as follows:
ARTICLE 1 - THE MERGER
1.1 The Merger. At the Effective Time (as defined below), Merger Sub
----------
shall be merged with and into Seller in accordance with the provisions of this
Agreement and the Georgia Business Corporation Code (the "GBCC"), and the
separate existence of Merger Sub shall thereupon cease, and Seller, as the
surviving corporation in the Merger (sometimes referred to as the "Surviving
Corporation"), shall continue its corporate existence under the laws of the
State of Georgia as a wholly-owned subsidiary of Parent. The Merger shall have
the effect provided under the GBCC including, but not limited to, Section
14-2-1106 of the GBCC.
1.2 Closing. The consummation of the transactions contemplated by this
-------
Agreement (the "Closing") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 on February 3, 1999, or such other date and time as is mutually
agreeable to the parties hereto (the "Closing Date"). At the Closing, the
parties shall execute and deliver the certificates, opinions and other
instruments and documents referred to in Article 8.
1.3 Effective Time of the Merger. Contemporaneous with or immediately
----------------------------
following the Closing, the parties shall cause a certificate of merger (the
"Certificate of Merger") to be executed, delivered and filed with the Secretary
of State of Georgia in accordance with the
<PAGE>
provisions of the GBCC. The Merger shall become effective at the close of
business on the date that the Certificate of Merger is filed with the Secretary
of State of Georgia pursuant to the GBCC (the "Effective Time"). Notwithstanding
the foregoing, the Merger shall be effective as of January 1, 1999 to the full
extent legally permissible for all accounting and financial reporting purposes,
but only if such deemed effectiveness will not result in any adverse tax
consequences to either of the Shareholders.
1.4 Articles of Incorporation; Bylaws. The Articles of Incorporation
---------------------------------
and Bylaws of Seller as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation, until
duly amended in accordance with applicable law.
1.5 Directors and Officers of the Surviving Corporation. At the
---------------------------------------------------
Effective Time, the persons who are directors and officers of Merger Sub at the
Effective Time will become the directors and officers of the Surviving
Corporation until such time as they may be replaced in accordance with the
Bylaws of the Surviving Corporation.
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES
2.1 Consideration. At the Effective Time, in consideration for the
-------------
Shareholders' entry into this Agreement and fulfillment of the obligations,
covenants, terms and conditions set forth in this Agreement, by virtue of
the Merger:
(a) Seller Common Stock. The issued and outstanding shares of
-------------------
stock of Seller without par value per share (the "Seller Common Stock") (an
aggregate of 100,000 shares, excluding any such shares held in the treasury of
Seller) shall automatically be canceled and extinguished and shall thereafter be
converted into only the right to receive (X) One Hundred Forty-nine Thousand
Eight Hundred Eighty (149,880) shares of common stock, without par value, of
Parent (the "Parent Common Stock") and (Y) Three Million Eight Hundred
Seventy-five Thousand and no/100 Dollars ($3,875,000) in cash (the "Cash"), as
described in Schedule 2.1 hereto, including the escrow arrangements described
------------
therein.
(b) Treasury Shares. Each share of Seller Common Stock held in
---------------
the treasury of Seller shall be automatically canceled and extinguished, and no
payment shall be made in respect of such shares.
(c) Merger Sub Common Stock. Each issued and outstanding share
-----------------------
of Merger Sub common stock at the Effective Time shall be converted into and
shall thereafter represent one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation, which shall then constitute
all of the issued and outstanding shares of the Surviving Corporation.
2.2 No Fractional Shares. No scrip or fractional shares of Parent
--------------------
Common Stock shall be issued in the Merger upon conversion of Seller Common
Stock as provided in Section 2.1(b).
2
<PAGE>
2.3 Surrender and Exchange of Certificates Representing Seller Common
-----------------------------------------------------------------
Stock. At the Closing, each Shareholder shall surrender to Parent an outstanding
- -----
certificate or certificates that immediately prior to the Effective Time
represented his Seller Common Stock (the "Certificates"). In exchange, such
Shareholder shall be entitled to receive at the Closing (subject to the escrow
provisions described in Schedule 2.1 if applicable), (a) the amount of Cash to
------------
which such Shareholder shall have become entitled pursuant to the provisions of
Schedule 2.1, payable by wire transfer to such Shareholder's designated account;
- ------------
and (b) one or more certificates as requested by the Shareholder (properly
issued, executed and countersigned, as appropriate) representing the number of
duly paid and nonassessable shares of Parent Common Stock to which such
Shareholder shall have become entitled pursuant to the provisions of Schedule
--------
2.1; and the Certificates so surrendered shall forthwith be canceled. The Cash
- ---
and the Parent Common Stock to be paid and issued to the Shareholders hereunder
shall sometimes be referred to collectively as the "Merger Consideration." From
the Effective Time until surrender in accordance with the provisions of this
Section, each Certificate (other than Certificates representing treasury shares)
shall represent for all purposes only the right to receive the Merger
Consideration. All payments in respect of Seller Common Stock that are made in
accordance with the terms of this Agreement shall be deemed to have been made in
full satisfaction of all rights pertaining to such securities.
ARTICLE 3 - RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided or the
context otherwise requires:
(a) The singular includes the plural and vice versa and, in particular
(but without limiting the generality of the foregoing), any word or expression
defined in the singular has the corresponding meaning used in the plural and
vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause, subclause,
paragraph, subparagraph, Schedule or recital is a reference to an Article,
Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule or
recital of this Agreement;
(d) Any reference to any agreement, instrument or other document (i)
shall include all appendices, exhibits and schedules thereto and all agreements,
documents or other writings incorporated by reference therein, and (ii) shall be
a reference to such agreement, instrument or other document as amended,
supplemented, modified, suspended, restated or novated from time to time;
(e) Any reference to any statute shall be construed as including all
statutory provisions consolidating, amending or replacing such statute and all
governmental regulations and rules promulgated thereunder;
3
<PAGE>
(f) Any reference to "writing" includes printing, typing, lithography
-------
and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
------- -
constituting legal tender for the payment of public and private debts in the
United States of America;
(i) The headings and Article, Section and paragraph numbering
contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement, nor shall such headings and numbering be
used in any manner to aid in the construction of this Agreement;
(j) References in this Agreement to the "Seller Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date of this Agreement,
which have been delivered on the date of this Agreement by Seller to Parent, and
references to a numbered Seller Disclosure Schedule shall mean that portion of
the Seller Disclosure Schedules that refers to the specific section or
subsection of Article 4 of this Agreement;
(k) References in this Agreement to the "Shareholder Disclosure
Schedules" shall mean the disclosure schedules, dated as of the date of this
Agreement, which have been delivered on the date of this Agreement by the
Shareholders to Parent, and references to a numbered Shareholder Disclosure
Schedule shall mean that portion of the Shareholder Disclosure Schedules that
refers to the specific section or subsection of Article 5 of this Agreement;
(l) References in this Agreement to the "Parent Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date of this Agreement,
which have been delivered on the date of this Agreement by Parent to Seller, and
references to a numbered Parent Disclosure Schedule shall mean that portion of
the Parent Disclosure Schedules that refers to the specific section or
subsection of Article 6 of this Agreement;
(m) The term "including" shall mean "including, without limitation";
---------
(n) The term "Governmental Authority" means any United States federal
or state or foreign, governmental, regulatory or administrative authority,
agency, department, board, investigative body or commission or any court,
tribunal, or judicial or arbitral body;
(o) The term "Material Adverse Effect" with respect to a person or
entity means any circumstance, change in, or effect on the business and affairs
of such person or entity or any Subsidiary thereof that, individually or in the
aggregate with any other circumstances, changes in, or effects on, the business
and affairs of such person or entity and its Subsidiaries: (i) is, or would
reasonably be expected to be, materially adverse to the business, operations,
assets or liabilities, prospects, results of operations or financial condition
of such person or entity and its Subsidiaries, taken as a whole, or (ii) would
reasonably be expected to materially
4
<PAGE>
adversely affect the ability of such person or entity and its Subsidiaries to
operate or conduct its or their business and affairs in the manner in which it
is currently operated or conducted or contemplated by such person or entity to
be operated or conducted;
(p) The term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity, directly or
indirectly, owns or controls the voting of at least a 50% share or other equity
interest or for which such person or entity, directly or indirectly, acts as a
general partner;
(q) The term "Parent Subsidiary" means any Subsidiary of Parent;
(r) The term "Applicable Laws" means all applicable (i) statutes,
ordinances or other legislative enactments of the United States of America or
other country or foreign government, or of any state or agency thereof, (ii)
rules, regulations, orders, permits, directives or other actions or approvals of
any Governmental Authority, and (iii) judgments, awards, orders, decrees, writs
and injunctions of any court, Governmental Authority or arbitrator.
(s) Each party and its counsel have had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore, shall be
construed without regard to any presumption or other rule requiring construction
against the party causing the Agreement to be drafted.
(t) A matter disclosed by any party on any numbered schedule included
in the disclosure schedules delivered by such party shall be deemed to also have
been disclosed on all other numbered schedules included in such disclosure
schedules to the extent applicable.
(u) The term "Knowledge" means actual knowledge.
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
Seller and the Shareholders jointly and severally by this Agreement
represent and warrant to Parent as follows:
4.1 Corporate Organization.
----------------------
(a) Seller is a corporation duly incorporated and validly existing
under the laws of the State of Georgia. Seller has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted, and, except as set forth on Seller
------
Disclosure Schedule 4.1, is duly licensed or qualified to do business and is in
- -----------------------
good standing in each jurisdiction in which the nature of the business conducted
by it or the character or location of the properties and assets owned or leased
by it makes such licensing or qualification necessary, except where the failure
to be so licensed, qualified or in good standing would not have a Material
Adverse Effect on Seller.
(b) Seller has no Subsidiaries.
5
<PAGE>
(c) Seller Disclosure Schedule 4.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws of Seller.
(d) Except as set forth in Seller Disclosure Schedule 4.1,
------------------------------
Seller does not own or control, directly or indirectly, any equity interest in
any corporation, company, association, partnership, joint venture or other
entity.
4.2 Capitalization. The authorized capital stock of Seller consists of
--------------
2,000,000 shares of common stock and no shares of preferred stock or any other
form of capital stock. Seller Disclosure Schedule 4.2 sets forth the number of
------------------------------
shares of Seller Common Stock owned by each of the Shareholders. Except as set
forth on Seller Disclosure Schedule 4.2, no shares of Seller Common Stock are
------------------------------
outstanding. All Seller Common Stock has been duly authorized and validly issued
and is fully paid and nonassessable, was not issued in violation of any
preemptive rights and was issued under available exemptions from federal and
state securities laws. Except as set forth on Seller Disclosure Schedule 4.2,
------------------------------
neither Seller nor either Shareholder has granted or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character (except for the letter of intent with Parent) calling for the
transfer, purchase, subscription or issuance of any shares of capital stock of
Seller or any securities representing the right to purchase, subscribe or
otherwise receive any shares of such capital stock or any securities convertible
into any such shares, and there are no agreements or understandings with respect
to voting of any such shares.
4.3 Authority; No Violation.
-----------------------
(a) Except for the filing of the Certificate of Merger in
accordance with the GBCC, and except as set forth on Seller Disclosure Schedule
--------------------------
4.3, (the "Seller Approvals"), no consents, approvals, authorizations,
- ---
clearances or orders of, filings or registrations with or notices to
(collectively, the "Authorizations") any third party or any Governmental
Authority are necessary on behalf of Seller or the Shareholders in connection
with (i) the execution and delivery by Seller and the Shareholders of this
Agreement and (ii) the consummation by Seller and the Shareholders of the Merger
and the other transactions contemplated by this Agreement. Subject to receipt of
the Seller Approvals, Seller has the full corporate power and authority to
execute and deliver this Agreement and to consummate the Merger and the other
transactions contemplated by this Agreement in accordance with the terms of this
Agreement. The execution and delivery of this Agreement have been duly and
validly approved by the Board of Directors of Seller and by the Shareholders in
accordance with the Articles of Incorporation and bylaws of Seller and with
Applicable Laws. Except for the Seller Approvals, no other corporate proceedings
on the part of Seller are necessary for Seller and the Shareholders to execute
and deliver this Agreement and be bound by the terms of this Agreement. This
Agreement has been duly and validly executed and delivered by Seller and the
Shareholders and constitutes the valid and binding obligation of Seller and
Shareholders enforceable against Seller and the Shareholders in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium or similar laws affecting the enforcement of creditors' rights
generally, and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought.
6
<PAGE>
(b) Neither the execution and delivery of this Agreement by Seller
or the Shareholders, nor the consummation by Seller and the Shareholders of the
Merger and the other transactions contemplated by this Agreement in accordance
with the terms of this Agreement, nor compliance by Seller and the Shareholders
with any of the terms or provisions of this Agreement, will: (i) assuming the
Seller Approvals are duly obtained, violate any provision of Seller's Articles
of Incorporation or bylaws; (ii) assuming that the Seller Approvals are duly
obtained, violate any Applicable Laws; or (iii) except as set forth in Seller
------
Disclosure Schedule 4.3, violate, conflict with, result in a breach of any
- -----------------------
provisions 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 of,
accelerate the performance required by, or result in the creation of any lien,
mortgage, security interest, pledge, charge, other right of third parties or
other encumbrance (collectively, "Liens") upon any of the respective properties
or assets of Seller or the Shareholders under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Seller or either
Shareholder is a party, or by which they or any of their respective properties
or assets may be bound or affected; in all cases except where such violation,
conflict, breach, termination, acceleration or creation would not have a
Material Adverse Effect on Seller.
4.4 Financial Statements.
--------------------
(a) Seller Disclosure Schedule 4.4 sets forth copies of: (i) the
------------------------------
balance sheet of Seller as of December 31, 1997 and the statements of income,
retained earnings and cash flow for the period ended December 31, 1997, and (ii)
internally prepared interim financial statements of Seller (balance sheet and
income statement) dated October 31, 1998 and for the ten (10) month period ended
October 31, 1998 (collectively, together with the related notes and any
additional financial statements, the "Seller Financial Statements"). The Seller
Financial Statements present fairly, in all material respects, the financial
position of Seller as of the respective dates set forth in the Seller Financial
Statements, and the results of Seller's operations and its cash flows for the
respective periods set forth in the Seller Financial Statements; except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments and lack footnote disclosures, all of which
adjustments and all of such footnote disclosures are not, in the aggregate,
except as reflected on Seller Disclosure Schedule 4.4, believed by the
------------------------------
management of Seller or by the Shareholders to be material and adverse to the
business or operations of the Seller when taken as a whole.
(b) The books and records of Seller have been maintained in
compliance with applicable legal and accounting requirements and in accordance
with generally accepted accounting principles and practices.
(c) Except as and to the extent reflected, disclosed or reserved
against in the Seller Financial Statements, or as disclosed in Seller Disclosure
-----------------
Schedule 4.4, as of October 31, 1998, Seller had no liabilities or obligations
- ------------
of any kind, whether absolute, accrued, contingent or otherwise ("Liabilities").
Except as set forth on Seller Disclosure Schedule 4.4 or Seller Disclosure
------------------------------ -----------------
Schedule 4.6, since October 31, 1998, Seller has not
- ------------
7
<PAGE>
incurred any Liabilities except in the ordinary course of business and
consistent with past practice. Further, at the Effective Time Seller shall have
no liabilities other than trade payables due and owing for periods consistent
with Seller's past practices in the ordinary course of business, capitalized
leases for equipment, and other liabilities in the ordinary course of business
consistent with past practices (such trade payables, capitalized leases, and
other liabilities are collectively referred to as "Acceptable Liabilities").
Acceptable Liabilities may include Seller's $150,000 December 30, 1998 equipment
loan from Regions Bank and Seller's line of credit with Regions Bank if and only
to the extent that the outstanding amount of the line of credit was drawn to pay
Acceptable Liabilities, the S Distribution (which shall in no event exceed
$250,000), and the 1998 Bonuses. The term "S Distribution" means the approximate
amount of unpaid federal and state taxes the Shareholders will be required to
pay, as a result of being shareholders of Seller (an S corporation), in 1998
through the Closing Date; and the term "1998 Bonuses" means the
performance-based bonuses earned by employees of Seller.
4.5 Broker's and Other Fees. Except as disclosed in Seller Disclosure
----------------------- -----------------
Schedule 4.5, neither Seller nor either Shareholder has employed any broker or
- ------------
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement. Except as disclosed in Seller Disclosure Schedule 4.5, there are no
------------------------------
fees payable to any consultants, including lawyers and accountants, in
connection with this Agreement or the transactions contemplated by this
Agreement or which would be triggered by consummation of this Agreement or the
transactions contemplated by this Agreement or the termination of the services
of such consultants by Seller or the Shareholders.
4.6 Absence of Certain Changes or Events.
------------------------------------
(a) Except as disclosed by Seller prior to the date hereof, and
except as disclosed in Seller Disclosure Schedule 4.6, there has been no
------------------------------
Material Adverse Effect on Seller since October 31, 1998 and to Seller's and the
Shareholders' Knowledge, no facts or conditions exist which will cause a
Material Adverse Effect on Seller (or the Surviving Corporation after the
Merger) in the future.
(b) Except as set forth in Seller Disclosure Schedule 4.6, and
------------------------------
except for execution of this Agreement, since October 31, 1998 Seller has
conducted its business only in the ordinary course, consistent with past
practice.
4.7 Legal Proceedings. Except as disclosed in Seller Disclosure
-----------------
Schedule 4.7, neither Seller nor either of the Shareholders is a party to any,
- ------------
and there is no pending or, to Seller's or the Shareholders' Knowledge,
threatened legal, administrative, arbitral or other proceeding, claim, action or
governmental investigation of any nature against Seller, that is reasonably
likely to have a Material Adverse Effect on Seller. Except as disclosed in
Seller Disclosure Schedule 4.7, Seller is not a party to any order, judgment or
- ------------------------------
decree entered in any lawsuit or proceeding that is reasonably likely to have a
Material Adverse Effect on Seller. Without limiting the foregoing, except as
disclosed in Seller Disclosure Schedule 4.7, no actions, suits, demands,
------------------------------
notices, claims, investigations or proceedings that are reasonably
8
<PAGE>
likely to have a Material Adverse Effect on Seller are pending or, to Seller's
or the Shareholders' knowledge, threatened against or otherwise involving,
directly or indirectly, any officer, director, employee or agent of Seller (in
connection with such officer's, director's, employee's or agent's activities on
behalf of Seller or that otherwise relate, directly or indirectly to Seller or
its properties or securities) including without limitation any notices, demand
letters or requests from any Governmental Authority relating to such potential
Liabilities, nor, to the Knowledge of Seller or the Shareholders, are there any
circumstances which could lead to such actions, suits, demands, notices, claims,
investigations or proceedings that are reasonably likely to have a Material
Adverse Effect on Seller.
4.8 Taxes and Tax Returns. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.8:
- ------------
(a) Seller has duly filed (and until the Effective Time will so
file) all returns, declarations, reports, information returns and statements
("Returns") required to be filed by it in respect of any United States federal,
state or local Taxes and has duly paid (and until the Effective Time will so
pay) all such Taxes due and payable as finally determined by the applicable
Governmental Authority, other than Taxes which are being contested in good faith
(and disclosed to Parent in writing). As used in this Agreement, "Tax" or
"Taxes" means and includes any and all taxes, fees, levies, assessments, duties,
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any Governmental Authority, including, without
limitation: foreign, domestic, central, local, state or other jurisdictional
taxes or other charges on or with respect to income, estimated income,
franchises, business, occupation, windfall or other profits, gross receipts,
property, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation, or net worth; taxes or other
charges in the nature of excise, withholding, ad valorem, stamp, transfer, value
added, or gains taxes; license, registration and documentation fees; and customs
duties, tariffs, and similar charges. Seller has established (and until the
Effective Time will establish) on its books and records reserves that are
adequate for the payment of all Taxes not yet due and payable, but that are
incurred in respect of Seller through such date.
(b) Neither Seller nor Shareholders have received any notice that
any of the Returns of Seller has been examined by the United States Internal
Revenue Service (the "IRS"), or any other United States federal or state
Governmental Authority within the past six years. To the Knowledge of Seller and
the Shareholders: there are no audits or other Governmental Authority
proceedings presently pending, nor any other disputes pending with respect to,
or claims asserted for, Taxes upon Seller; nor has Seller given any currently
outstanding waivers or comparable consents regarding the application of any
statute of limitations with respect to any Taxes or Returns. There are no Liens
for Taxes upon the assets of Seller, except for Liens for Taxes not yet due and
payable or being properly contested. Any Taxes being properly contested are
disclosed on Seller Disclosure Schedule 4.8. Seller has complied (and until the
------------------------------
Effective Time will comply) in all respects with all Applicable Laws relating to
the payment and withholding of Taxes.
(c) Seller (i) has not requested any extension of time within which
to file any Return which Return has not since been filed; (ii) is not a party to
any agreement providing for
9
<PAGE>
the indemnification, allocation or sharing of Taxes; (iii) is not required to
include in income any adjustment by reason of a voluntary change in accounting
method initiated by Seller (nor does Seller have any Knowledge that any
Governmental Authority has proposed any such adjustment or change of accounting
method); (iv) has not filed a consent with any Governmental Authority pursuant
to which Seller has agreed to recognize gain (in any manner) relating to or as a
result of this Agreement or the transactions contemplated by this Agreement; or
(v) has not been a member of an affiliated group other than one of which Seller
was the common parent.
4.9 Benefit Plans.
-------------
(a) Certain definitions used in this Section are as follows:
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"DOL" shall mean the United States Department of Labor.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall mean, with respect to a Person, any other
Person which is required to be aggregated with such Person under
Code Section 414(b), (c), (m) and/or (o) at any time prior to the
Closing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established under Title IV of ERISA.
"Person" shall include, but is not limited to, an individual, a
trust, an estate, a partnership, an association, a company, a
corporation, a sole proprietorship, a professional corporation or
a professional association.
(b) Seller Disclosure Schedule 4.9 lists (i) each pension,
------------------------------
retirement, profit-sharing, cash or deferred, deferred compensation, stock
option, phantom stock, stock appreciation rights, employee stock ownership,
severance pay, vacation, paid time off, education-reimbursement, bonus,
incentive, and other or similar plan, program or other arrangement, (ii) each
cafeteria, Section 125, medical, vision, dental, disability, death benefit, life
insurance, health and/or accident plan, program or other arrangement, (iii) each
written or unwritten employee or other or similar program, arrangement,
agreement or understanding, whether arrived at through collective bargaining or
otherwise, and (iv) each other employee benefit plan, voluntary employees'
beneficiary association, fringe benefit plan, and other or similar plan, program
or other arrangement, agreement or understanding, including, without limitation,
each "employee benefit plan," as that term is defined in Section 3(3) of ERISA,
which is currently maintained, sponsored in whole or in part, or contributed to
by Seller or any ERISA Affiliate of Seller, for the benefit of, providing any
remuneration or benefits to, or covering any current or former employee,
retiree, dependent, spouse or other family member or beneficiary of such
employee or retiree, director, independent contractor, shareholder,
10
<PAGE>
officer or consultant or other beneficiary of Seller or any ERISA Affiliate of
Seller or under (or in connection with) which Seller or an ERISA Affiliate of
Seller has any contingent or noncontingent liability of any kind, whether or not
probable of assertion (collectively, the "Benefit Plans"). Any of the Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, or an "employee welfare benefit plan" as that term is
defined in Section 3(1) of ERISA, is referred to herein as an "ERISA Plan."
(c) Seller Disclosure Schedule 4.9 also lists, with respect to
------------------------------
all Benefit Plans listed therein: (i) all trust agreements or other funding
arrangements, including insurance contracts, all annuity contracts, financial
contributions, actuarial statements or valuations, fidelity bonds, fiduciary
liability policies, investment manager or advisory contracts, corporate
resolutions or memoranda, administrative committee minutes or memoranda or
records, and all amendments (if any) thereto, (ii) where applicable, with
respect to any such plans or plan amendments, the most recent determination
letters issued by the IRS, (iii) all communications or other correspondence
issued within the last six (6) years by any Regulatory Authority, including
without limitation, the IRS, DOL and the PBGC with respect to such Benefit Plan,
(iv) annual reports or returns and audited or unaudited financial statements for
the most recent three plan years and any amendments thereto, and (v) the most
recent summary plan descriptions, any material modifications thereto, and all
material employee communications with respect to such Benefit Plans. Prior to or
contemporaneous with the delivery of Seller Disclosure Schedule 4.9, Seller has
------------------------------
delivered a true and complete copy of all such Benefit Plans, agreements,
letters, rulings, opinions, letters, reports, returns, financial statements and
summary plan descriptions described in this Section 4.9.
(d) All the Benefit Plans and any related trusts subject to
ERISA comply with and have been administered in compliance with the provisions
of ERISA, all applicable provisions of the Code relating to qualification and
tax exemption under Code Sections 401(a) and 501(a) or otherwise necessary to
secure intended tax consequences, all applicable state or federal securities
laws and all other applicable laws, rules and regulations and collective
bargaining agreements, and Seller has not received any notice from any
Regulatory Authority or instrumentality questioning or challenging such
compliance. All available governmental approvals for the Benefit Plans have been
obtained, including, but not limited to, timely determination letters on the
qualification of the ERISA Plans and tax exemption of, related trusts, as
applicable, under the Code and timely registration and disclosure under
applicable securities laws, and all such governmental approvals continue in full
force and effect. No event has occurred that will or could give rise to
disqualification of any such Benefit Plan under Sections 401(a) or 501(a) of the
Code or to a tax under Section 511 of the Code.
(e) Neither Seller nor any administrator or fiduciary of any
such Benefit Plan (or agent or delegate of any of the foregoing) has engaged in
any transaction or acted or failed to act in any manner that could subject
Seller to any direct or indirect liability (by indemnity or otherwise) for a
breach of any fiduciary, co-fiduciary or other duty under ERISA. No oral or
written representation or communication with respect to any aspect of the
Benefit Plans has been or will be made to employees of Seller prior to the
Closing that is not in accordance with the written or otherwise preexisting
terms and provisions of such Benefit Plans in effect immediately prior to the
Closing, except for any amendments or terminations required by the
11
<PAGE>
terms of this Agreement. There are no unresolved claims or disputes under the
terms of, or in connection with, the Benefit Plans and no action, legal or
otherwise, has been commenced with respect to any claim.
(f) All annual reports or returns, audited or unaudited financial
statements, actuarial valuations, summary annual reports and summary plan
descriptions issued with respect to the Benefit Plans are correct and accurate
as of the dates thereof; and there have been no amendments filed to any of such
reports, returns, statements, valuations or descriptions or required to make the
information therein true and accurate.
(g) Neither Seller nor any other "party in interest" (as defined
in Section 3(14) of ERISA) or "disqualified person" (as defined in Section
4975(e)(2) of the Code) of any Benefit Plan has engaged in any "prohibited
transaction" (within the meaning of Sections 503(b) or 4975(c) of the Code or
Section 406 of ERISA) with respect to such Benefit Plan, for which there is no
statutory, regulatory or individual or class exemption. There has been no (a)
"reportable event" (as defined in Section 4043 of ERISA), or event described in
Section 4062(f) or Section 4063(a) of ERISA or (b) termination or partial
termination, withdrawal or partial withdrawal with respect to any of the ERISA
Plans that Seller or any ERISA Affiliate of Seller maintains or contributes to
or has maintained or contributed to or was required to maintain or contribute to
for the benefit of employees of Seller or any ERISA Affiliate of Seller now or
formerly in existence.
(h) For any ERISA Plan that is an employee pension benefit plan
as defined in ERISA Section 3(2), the fair market value of such Benefit Plan's
assets equals or exceeds the present value of all benefits (whether vested or
not) accrued to date by all participants in such Benefit Plan. For this purpose
the assumptions prescribed by the Pension Benefit Guaranty Corporation for
valuing plan assets or liabilities upon plan termination shall be applied and
the term "benefits" shall include the value of any early retirement or ancillary
benefits (including shutdown benefits) provided under any Benefit Plan. As of
the Closing, full payment will have been made of all amounts which Seller is
required to have made at or prior to such time, under any Applicable Laws, as a
contribution to any Benefit Plan of Seller or of an ERISA Affiliate of Seller,
and no accumulated funding deficiency (as defined in ERISA Section 302 or Code
Section 412), whether or not waived, will exist with respect to any Benefit
Plan.
(i) Except as described on Seller Disclosure Schedule 4.9, as of
------------------------------
the Closing, Seller will have no current or future liability with respect to any
events or matters occurring, arising or accruing on or prior to such date under
any Benefit Plan (A) that was not reflected in the Seller Financial Statements
or (B) that represents contributions required to be made under written terms of
such Benefit Plan as of the Closing.
(j) Seller does not maintain any Benefit Plan providing deferred
or stock based compensation which is not reflected in the Seller Financial
Statements.
(k) Neither Seller nor any ERISA Affiliate of Seller has
maintained, and neither now maintains, a Benefit Plan providing welfare benefits
(as defined in ERISA Section 3(1)) to employees after retirement or other
separation of service except to the extent required under Part 6 of Title I of
ERISA and Code Section 4980B.
12
<PAGE>
(l) Except as set forth on Seller Disclosure Schedule 4.9, the
------------------------------
consummation of the Merger and the other transactions contemplated by this
Agreement will not (i) entitle any current or former employee (or any spouse,
dependent or other family member of such employee) of Seller or any ERISA
Affiliate of Seller to severance pay, unemployment compensation or any payment
contingent upon a change in control or ownership of Seller, or (ii) accelerate
the time of payment or vesting, or increase the amount, of any compensation due
to any such employee or former employee (or any spouse, dependent or other
family member of such employee).
(m) All Benefit Plans subject to Section 4980B of the Code, as
amended from time to time, or Part 6 of Title I of ERISA or both have been
maintained in good faith compliance with the requirements of such laws and any
regulations (proposed or otherwise) issued thereunder.
(n) No liability to the PBGC has been incurred as of the Closing
by Seller or any ERISA Affiliate of Seller, except for PBGC insurance premiums,
and all such insurance premiums incurred or accrued up to and including the
Closing have been timely paid.
(o) Neither Seller or any ERISA Affiliate of Seller maintains or
has maintained, has contributed to or has been required to contribute to, a
multi-employer plan (as defined in Section 3(37) of ERISA). No amount is due or
owing from Seller on account of a multi-employer plan (as defined in Section
3(37) of ERISA) on account of any withdrawal therefrom.
(p) All annual reports (as described in Section 103 of ERISA) and
all Forms 5500 relating to the applicable provisions of the Code required to be
filed in connection with one or more of the Benefit Plans have been timely and
properly filed in accordance with Applicable Laws.
4.10 Compliance with Applicable Laws. Except as set forth in Seller
------------------------------- ------
Disclosure Schedule 4.10, Seller holds all licenses, franchises, permits,
- ------------------------
consents and authorizations ("Licenses") necessary for the lawful conduct of its
business, except where the failure to hold any License would not have a Material
Adverse Effect on Seller. No proceeding is pending or, to the Knowledge of
Seller or the Shareholders, threatened seeking the revocation or suspension of
any License. Seller is and has been in compliance in all material respects with
all Applicable Laws, except where the failure to be in compliance would not have
a Material Adverse Effect on Seller; and neither Seller nor either Shareholder
has received any written notices from any Governmental Authority of any
allegation of any violation of any Applicable Laws or Licenses.
4.11 Certain Contracts.
-----------------
(a) Seller Disclosure Schedule 4.11 lists the following written
-------------------------------
agreements (collectively, the "Material Contracts"), to which Seller is a party
or by which Seller or any of its properties or assets is bound:
13
<PAGE>
(i) all written agreements that involve an annual commitment
or payment by any party thereto of more than $25,000 individually or $50,000 in
the aggregate or which have a fixed term extending more than 12 months from the
date of this Agreement (there being no oral agreements of this kind);
(ii) all joint venture, sales agency, sales representative or
distributorship, broker, franchise, license or similar agreements;
(iii) all leases;
(iv) all notes, bonds, mortgages, security agreements,
guarantees and other agreements and instruments for or relating to any lending
or borrowing by Seller in any amount (exclusive of advances to employees for
expenses in the ordinary course of business);
(v) all powers of attorney, guarantees, suretyships or
similar agreements; and
(vi) all other written agreements the breach of or default
under which could have a Material Adverse Effect on Seller.
Each of the Material Contracts is valid, binding and enforceable on the
parties thereto in accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium or similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought.
(b) Except as disclosed in Seller Disclosure Schedule 4.11, (i)
-------------------------------
Seller is not a party to or bound by any agreement or understanding (whether
written or oral) with respect to the employment (on any basis other than
at-will) of any officers, employees, directors or consultants, and (ii) the
consummation of the transactions contemplated by this Agreement will not (either
alone or upon the occurrence of any additional acts or events) result in any
payment (whether of severance pay or otherwise) becoming due from Seller to any
officer, employee, director or consultant thereof. Seller Disclosure Schedule
--------------------------
4.11 sets forth true and correct copies of all written severance or employment
- ---
agreements with officers, directors, employees, agents or consultants to which
Seller is a party. Except as set forth on Seller Disclosure Schedule 4.11,
-------------------------------
Seller is not a party to any oral agreements of the kind referred to in the
preceding sentence.
(c) Except as disclosed in Seller Disclosure Schedule 4.11, no
-------------------------------
agreement or understanding to which Seller is a party or by which it is bound
limits the freedom of Seller to compete in any line of business or with any
person.
(d) Except as disclosed in Seller Disclosure Schedule 4.11,
-------------------------------
neither Seller nor, to the Knowledge of Seller and the Shareholders, any other
party thereto, is in default under any of the Material Contracts or any other
agreement to which Seller is a party or to
14
<PAGE>
which it or its properties is bound; to the Knowledge of Seller and the
Shareholders, no event has occurred which (whether with or without notice, lapse
of time or the happening or occurrence of any other event) would constitute a
default thereunder entitling Seller to terminate a Material Contract or other
such agreement; no event has occurred which (whether with or without notice,
lapse of time or the happening or occurrence of any other event) would
constitute a default thereunder by Seller entitling any other party to terminate
a Material Contract or other such agreement; and the continuation, validity and
effectiveness of all such Material Contracts and agreements under the current
terms thereof and the current rights and obligations of Seller thereunder will
in no way be affected, altered or impaired by the consummation of the
transactions contemplated by this Agreement. To the Knowledge of the
Shareholders, except as disclosed in Seller Disclosure Schedule 4.11, upon
-------------------------------
consummation of the Merger, the Surviving Corporation will be entitled to enjoy
the advantages and benefits of the business arrangements, opportunities and
relationships as enjoyed by Seller prior to the date of this Agreement without
interference or interruption.
4.12 Properties and Insurance.
------------------------
(a) Except as disclosed in the Seller Financial Statements or
in Seller Disclosure Schedule 4.12, Seller has good and, as to owned real
-------------------------------
property, marketable title to all assets and properties, whether real or
personal, tangible or intangible, reflected in the Seller Financial Statements
as of December 31, 1998, or owned and acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of in the ordinary
course of business since such date), subject to no Liens except (i) statutory
liens for amounts not yet delinquent or which are being contested in good faith;
(ii) such Liens and title imperfections that do not in the aggregate have a
Material Adverse Effect on Seller; (iii) statutory liens securing the claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords, and other
like persons for labor, materials, supplies, or rentals, if any; (iv) Liens
resulting from deposits made in connection with workers' compensation,
unemployment insurance, social security and like laws; and (v) Liens of banks
and financial institutions with respect to funds on deposit therewith or other
property in possession thereof. Seller as lessee has the right under valid and
subsisting leases to occupy, use, possess and control all real property leased
by Seller as presently occupied, used, possessed and controlled by Seller or
necessary in the operation of its business as currently conducted.
(b) The business operations and all insurable properties and assets
of Seller are insured for its benefit against all risks which, in the reasonable
judgment of the Shareholders, should be insured against, in each case under
policies or bonds issued by insurers of recognized responsibility, in such
amounts with such deductibles and against such risks and losses as are in the
opinion of the Shareholders adequate for the business engaged in by Seller.
Certificates of insurance with respect to all such policies as in effect on the
date of this Agreement are attached hereto as Seller Disclosure Schedule 4.12.
-------------------------------
Neither Seller nor either of the Shareholders has received any written notice of
cancellation or written notice of a material amendment of any such insurance
policy or bond, and Seller is not in default under any such policy or bond, no
coverage thereunder is being disputed and all material claims thereunder have
been filed in a timely fashion.
15
<PAGE>
(c) No person other than Seller is currently entitled to possession
of any of the properties of Seller, whether owned or leased by Seller. To the
Knowledge of Seller and the Shareholders, the real property, buildings,
structures and improvements owned or leased by Seller conform to all Applicable
Laws, including zoning regulations, none of which would upon consummation of the
transactions contemplated by this Agreement materially and adversely interfere
with the use of such properties, buildings, structures or improvements for the
purposes for which they are now utilized. Seller has not received written
notice, nor does Seller have actual knowledge of (i) any pending or contemplated
condemnation or eminent domain proceeding affecting the properties owned or
leased by Seller, (ii) any proposal for materially increasing the assessed value
of any such properties for state, county, local or other ad valorem Taxes or
(iii) any pending or contemplated proceedings or public improvements that would
result in the levy of any special Tax or assessment against any such properties;
and there are no outstanding requirements or recommendations by Seller's
insurance providers requiring or recommending any repairs or work to be done
with reference to any such properties. The properties and assets owned or leased
by Seller are adequate for the conduct of its business as presently conducted
and are in good repair and operating condition, normal wear and tear excepted.
The properties and assets owned or leased by Seller constitute all of the
property and assets that Seller uses or may reasonably need in connection with
the operation of its business as presently conducted, and the consummation of
the transactions contemplated by this Agreement will not impair the ability of
Parent to use such properties and assets.
4.13 Environmental Matters.
---------------------
(a) The operations of Seller comply, and have complied, in all
respects with all applicable Environmental Laws (as defined below).
(b) Seller has obtained all environmental, health and safety
Licenses and other authorizations necessary for the operation of Seller's
business, all of which are valid and in good standing and are not subject to any
modification or revocation proceeding, and Seller is in compliance in all
respects with all terms and conditions thereof.
(c) Neither Seller nor either of the Shareholders has received
any written notice of any pending or threatened investigation, proceeding or
claim to the effect that Seller is or may be liable to any person or entity, or
responsible or potentially responsible for the costs of any remedial or removal
action or other cleanup costs, as a result of noncompliance with any
Environmental Laws or arising out of the presence, generation, storage or
disposal of hazardous waste, including liability under the United States
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, any state superfund law or any Environmental Law, and there is no past
or present action, activity, condition or circumstance that could be expected to
give rise to any such liability on the part of Seller to any person or entity or
for any such cleanup costs.
(d) The term "Environmental Laws" shall mean all Applicable Laws
relating to pollution or protection of the environment.
16
<PAGE>
4.14 Intellectual Property.
---------------------
(a) Seller Disclosure Schedule 4.14 (i) lists and describes all
-------------------------------
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, and all patent, trademark and
service mark licenses, (ii) describes all copyrights, computer software,
databases, and all other intellectual property that are owned by or registered
in the name of Seller or to which Seller has any rights as licensee or otherwise
(except "off-the-shelf" computer software being used in accordance with the
standard license therefor), which list specifies which items are owned and to
which items Seller has rights as a licensee or otherwise; and (iii) lists and
describes all contracts, agreements or understandings pursuant to which Seller
has authorized any person to use, or which any person otherwise has the right to
use, in any business or commercial activity, any of the items listed in clauses
(i) and (ii) above.
(b) The items listed or described in Section 4.14 or in the Seller
------
Disclosure Schedule 4.14 pursuant to the preceding subsection (a) constitute or
- ------------------------
represent all of the intellectual property necessary to the conduct of Seller's
business, and Seller's ownership and use rights with respect thereto are free
and clear of Liens other than those disclosed in Seller Disclosure Schedule
--------------------------
4.12.
- ----
(c) All federal trademark or service mark registrations, and all
applications to register any trademarks or service marks or any trademark
register maintained by the United States government or any state or provincial
government are based on truthful affidavits or declarations of use.
(d) Seller has not infringed upon, and Parent's conduct of Seller's
business after the Closing as presently conducted will not infringe upon, any
patent, service mark, trade name, trademark, copyright, trade secret or other
intellectual property belonging to any other person or entity; and Seller has
not agreed to indemnify any person or entity for or against any infringement of
or by the intellectual property set forth in the Seller Disclosure Schedule
--------------------------
4.14. To the Knowledge of Seller and the Shareholders, no person or entity is
- ----
infringing upon any of Seller's patents, patent applications, trade names,
trademarks, service marks, trademark and service mark registrations, licenses,
copyrights, computer software or other intellectual property.
(e) Seller has, and immediately after the Closing Parent will have,
all computer software and databases that are necessary to conduct Seller's
business as presently conducted by Seller and all documentation relating to all
such computer software and databases. The computer software performs
substantially in accordance with the documentation related thereto or used in
connection therewith and is adequate for the business purpose for which it is
used. Seller Disclosure Schedule 4.14 identifies each person or entity to whom
-------------------------------
Seller has sold, licensed, leased or otherwise transferred or granted any
interest in or rights to any of the computer software and databases and the date
of each such sale, license, lease or other transfer or grant.
4.15 No Parachute Payments. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.15, no officer, director, employee or agent (or former officer,
- -------------
director, employee or agent)
17
<PAGE>
of Seller is entitled now, or will or may be entitled as a consequence of this
Agreement or the Merger, to any payment or benefit from or from Parent, which if
paid or provided would constitute an "excess parachute payment," as defined in
Section 280G of the Code.
4.16 Absence of Certain Agreements and Practices.
-------------------------------------------
(a) Except as set forth in Seller Disclosure Schedule 4.16 or
-------------------------------
in connection with customary transactions in the ordinary course of business, no
present or former officer, director or shareholder of Seller:
(i) owes money to Seller;
(ii) has any claim against Seller;
(iii) has any interest in any property or assets used by Seller
in its business;
(iv) has any benefits that are contingent on the transactions
contemplated by this Agreement, other than as stated in this Agreement;
(v) has any agreement with Seller that is not terminable by
Seller without penalty or notice;
(vi) has any agreement providing severance benefits or other
benefits, which are conditioned upon a change of control after the termination
of employment of such employee regardless of the reason for such termination of
employment; or
(vii) has any agreement or plan, any of the benefits of which
will be increased, vested or accelerated by the occurrence of any of the
transactions contemplated by this Agreement.
(b) Neither Seller nor any of its directors, officers, agents,
affiliates or employees, nor any other person acting on behalf of Seller, has
(i) given or agreed to give any gift or similar benefit having a value of $1,000
or more to any customer, supplier or governmental employee or official or any
other person, for the purpose of directly or indirectly furthering the business
of Seller, (ii) used any corporate funds for contributions, payments, gifts or
entertainment, or made any expenditures, relating to political activities to
government officials or others in violation of any Applicable Laws, or (iii)
received any unlawful contributions, payments, gifts or expenditures in
connection with the business of Seller.
4.17 Major Vendors and Customers. Seller Disclosure Schedule 4.17 sets
--------------------------- -------------------------------
forth a list of each licensor, developer, remarketer, distributor and supplier
of property or services to, and each licensee, end-user or customer of, Seller,
to whom Seller paid or billed in the aggregate in excess of $25,000 from January
1, 1997 through November 30, 1998.
4.18 Accounts Receivable. Seller Disclosure Schedule 4.18 sets forth
------------------- -------------------------------
the accounts receivable of Seller as of October 31, 1998, as reflected in the
Seller Financial Statements as
18
<PAGE>
of that date, together with an aging of these accounts. These accounts
receivable, and all accounts receivable of Seller created after that date, arose
from valid transactions in the ordinary course of business, and except as
disclosed in Seller Disclosure Schedule 4.18, will be good and collectible at
-------------------------------
the recorded amounts thereof. Except as disclosed in Seller Disclosure Schedule
--------------------------
4.18, no portion of the accounts receivable is subject to counterclaim or
- ----
setoff.
4.19 Corporate Records. Except as set forth on Seller Disclosure
----------------- -----------------
Schedule 4.19, the corporate record books (including the share records) of
- -------------
Seller are complete, accurate and up to date in all material respects with all
necessary signatures and set forth all meetings and actions taken by the
shareholders and directors of Seller and all transactions involving the shares
of Seller (and contain all canceled share certificates).
4.20 Combinations Involving Seller. All mergers, consolidations or
-----------------------------
other business combinations involving Seller, and all liquidations, purchases or
other transactions by which Seller acquired any of its business and property
were conducted in accordance with applicable certificates of incorporation,
bylaws, any other applicable agreements, instruments and documents and
Applicable Laws.
4.21 Bank Accounts. Seller Disclosure Schedule 4.21 lists all bank,
------------- -------------------------------
money market, savings and similar accounts and safe deposit boxes of Seller,
specifying the account numbers and the authorized signatories or persons having
access to them.
4.22 Labor Relations. Except as disclosed on Seller Disclosure Schedule
--------------- --------------------------
4.22, Seller is in compliance with all federal and state laws respecting
- ----
employment and employment practices, terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor or unlawful employment
practice. There is no unlawful employment practice or discrimination charge
pending before the Equal Employment Opportunity Commission ("EEOC") or any EEOC
recognized state "referral agency" about which Seller or the Shareholders have
been notified. There is no unfair labor practice charge or complaint against
Seller pending before the National Labor Relations Board ("NLRB") about which
Seller or the Shareholders have been notified. There is no labor strike,
dispute, slowdown or stoppage actually pending or, to the Knowledge of Seller or
the Shareholders, threatened against or involving or affecting Seller and no
NLRB representation question exists respecting any of its employees. No
grievance or arbitration proceeding is pending and no written claim therefor
exists. There is no collective bargaining agreement that is binding on Seller.
4.23 Disclosure. No representation, warranty, or statement made by
----------
Seller or the Shareholders in this Agreement or in any document or certificate
furnished or to be furnished to Parent pursuant to this Agreement contains or
will contain any untrue or incomplete statement or omits or will omit to state
any fact necessary to make the statements contained in this Agreement or in such
document or certificate not misleading. All facts known or reasonably available
to Seller or the Shareholders that are material to the financial condition,
operation, or prospects of the business and assets of Seller have been disclosed
to Parent.
19
<PAGE>
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
Each Shareholder, severally and not jointly, represents and warrants to
Parent, with respect to himself and his ownership of Seller Common Stock, as
follows:
5.1 Ownership of Shares. The Shareholder owns of record and beneficially
all of the Seller Common Stock set forth opposite his name on Seller Disclosure
-----------------
Schedule 4.2. The Shareholder owns all right, title and interest in and to such
- ------------
Seller Common Stock, free and clear of all Liens (including those for federal or
state estate or inheritance taxes), options, rights of refusal or similar rights
or other transfer restrictions of any nature whatsoever (including any arising
from any pending or threatened litigation) other than restrictions on transfers
arising out of applicable federal and state securities laws and the agreements
identified on Seller Disclosure Schedule 4.2 (which restrictions shall be
------------------------------
terminated at or prior to the Closing). The Shareholder owns no other securities
of Seller, and no other shares of the Seller Common Stock are issued and
outstanding.
5.2 Authorization. With respect to this Agreement and any other
-------------
agreements, instruments and documents executed and delivered by the Shareholder
pursuant to this Agreement (this Agreement and such other agreements,
instruments and documents are collectively referred to as the "Shareholder
Delivered Agreements"): (i) the Shareholder has the right, power and authority
to enter into the Shareholder Delivered Agreements executed and delivered by him
and to consummate the transactions contemplated by, and otherwise to comply with
and perform his obligations under them; and (ii) the Shareholder Delivered
Agreements will, when delivered, constitute valid and binding obligations of the
Shareholder enforceable against the Shareholder in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium or similar
laws affecting the enforcement of creditors' rights generally, and except that
the availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
5.3 Absence of Violations or Conflicts. Except as set forth on
----------------------------------
Shareholder Disclosure Schedule 5.3, the execution and delivery of the
- -----------------------------------
Shareholder Delivered Agreements and the consummation by the Shareholder of the
transactions contemplated by, or other compliance with the performance under
them do not and will not with the passing of time or giving of notice or both:
(i) constitute a violation of, be in conflict with, constitute a default or
require any payment under, permit a termination of, or result in the creation or
imposition of any Lien upon any assets of Seller or any of the Seller Common
Stock under (A) any contract, agreement, commitment, undertaking or
understanding (including rights of refusal or similar rights or other transfer
restrictions) to which the Shareholder is a party or to which he or his
properties or Seller or its properties are subject or bound, (B) any judgment,
decree or order of any Governmental Authority to which the Shareholder or his
properties are subject or bound, or (C) any Applicable Laws; or (ii) create, or
cause the acceleration of the maturity of, any debt, obligation or liability of
the Shareholder that would result in any Lien or other claim upon the assets of
Seller; in all cases except where such violation, conflict, default, payment,
20
<PAGE>
termination, creation, imposition or acceleration would not have a Material
Adverse Effect on Seller or the Shareholder.
5.4 No Consents Required. Except for the filing of the Certificate of
--------------------
Merger in accordance with the GBCC, and except for the Seller Approvals, and
except as set forth on Shareholder Disclosure Schedule 5.4, no Authorization of
-----------------------------------
or with any Governmental Authority or any other Authorization of or with any
other third party on the part of the Shareholder is required in connection with
his execution or delivery of the Shareholder Delivered Agreements or the
consummation of the transactions contemplated by, or other compliance with the
performance under, such Shareholder Delivered Agreements by the Shareholder.
5.5 No Claims Against Seller. To the knowledge of the Shareholder,
------------------------
except as set forth on Shareholder Disclosure Schedule 5.5, the Shareholder has
-----------------------------------
no claim against Seller, except for accrued compensation and benefits and
expenses or similar obligations incurred in the ordinary course of business
(including reimbursement of medical expenses pursuant to the Employee Plans
disclosed pursuant to this Agreement), and except as otherwise specifically
provided in this Agreement.
5.6 Litigation Related to this Agreement. The Shareholder is not a
------------------------------------
party to or subject to any judgment, decree or order entered in any lawsuit or
proceeding brought by any Governmental Authority or other third party seeking to
prevent the execution of this Agreement or the consummation of the transactions
contemplated by this Agreement.
5.7 Investment Intent. The Shareholder will acquire the Parent Common
-----------------
Stock pursuant to this Agreement for his own account, to hold for investment and
with no present intention of dividing his participation with others or reselling
or otherwise participating, directly or indirectly, in a distribution thereof,
and he will not make any sale, transfer or other disposition of the Parent
Common Stock in violation of the Securities Act of 1933 (the "1933 Act") or any
applicable state securities laws (the "State Acts"). Without limiting the
foregoing, the Shareholder has no plan or intention to sell or otherwise dispose
of any of the Parent Common Stock issued to him pursuant to this Agreement. The
Shareholder agrees that there will be placed on the certificate or other
evidence of the Parent Common Stock, or any substitutions therefor, a legend
stating in substance:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES" HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933
(THE "1933 ACT") AND SECTION 10-5-9(13) OF THE OFFICIAL CODE
OF GEORGIA ANNOTATED (THE "GEORGIA CODE"). THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN (i)
PURSUANT TO AN EFFECTIVE REGISTRATION OR AN EXEMPTION
THEREFROM UNDER THE 1933 ACT AND THE GEORGIA CODE, AND (ii)
UPON RECEIPT BY THE ISSUER OF EVIDENCE SATISFACTORY TO IT OF
COMPLIANCE WITH THE 1933 ACT, THE GEORGIA CODE AND THE
APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE
ISSUER
21
<PAGE>
SHALL BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL
SATISFACTORY TO IT WITH RESPECT TO COMPLIANCE WITH THE ABOVE
LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFER
SET FORTH IN AN AGREEMENT AND PLAN OF MERGER (THE AGREEMENT)
DATED AS OF JANUARY 31, 1999 AMONG THE ISSUER AND THE HOLDER
OF THE SECURITIES AND OTHERS. ANY ATTEMPTED TRANSFER IN
VIOLATION OF THE AGREEMENT SHALL BE NULL AND VOID. A COPY OF
THE AGREEMENT OR A SUMMARY OF SUCH RESTRICTIONS IS AVAILABLE
FROM THE ISSUER UPON REQUEST.
5.8 Access to Information; Accredited Investor Status. The Shareholder
-------------------------------------------------
has been given access to all material and relevant information concerning
Parent, thereby enabling the Shareholder to make an informed investment decision
concerning his investment in the Parent Common Stock. The Shareholder has relied
solely upon an independent investigation made by him and his representatives, if
any, and has, prior to the date of this Agreement, been given access to and the
opportunity to examine data and information relating to Parent. In making his
investment decision to acquire the Parent Common Stock pursuant to this
Agreement, the Shareholder is not relying on any oral or written representations
or assurances from Parent or any other person or any representative of Parent or
any other person other than as set forth in the MegaMarketing Corporation
Business Plan dated November 24, 1998, as provided to the Shareholders, and this
Agreement. Mr. DePrizio has reviewed the definition of "accredited investor" in
Rule 501 of Regulation D under the 1933 Act and is an accredited investor.
5.9 Economic Risk. The Shareholder represents that he is able to bear
-------------
the economic risk of an investment in the Parent Common Stock, which the
Shareholder acknowledges is currently illiquid, including a possible total loss
of his investment. In making this statement, the Shareholder represents and
warrants to Parent that he has adequate means of providing for his current needs
and contingencies; he is able to afford to hold the Parent Common Stock for an
indefinite period and he further represents that he has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the investment in the Parent Common Stock. Further, the
Shareholder represents that he has no present need for liquidity in the Parent
Common Stock and is willing to accept such investment risks.
5.10 Tax Advice. The Shareholder has reviewed with his tax advisor the
----------
United States federal and state tax consequences of an investment in the Parent
Common Stock and the transactions contemplated by this Agreement. The
Shareholder is relying solely on such advisors and not on any statements or
representations of Parent or any of its agents, except as provided in this
Agreement, and understands that he (and not Parent) shall be responsible for his
own tax liability that will arise as a result of this investment or the
transactions contemplated by this Agreement.
22
<PAGE>
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Seller and the Shareholders as follows:
6.1 Corporate Organization.
----------------------
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia. Parent has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a Material Adverse Effect on Parent.
(b) All Subsidiaries of Parent are listed on Parent Disclosure
-----------------
Schedule 6.1. Each Subsidiary is duly organized and validly existing and in good
- ------------
standing under the laws of its state or other jurisdiction of incorporation.
Each Parent Subsidiary has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a Material Adverse
Effect on Parent. Parent Disclosure Schedule 6.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws, if any, as in effect on the date of this
Agreement, of Parent and each of the Parent Subsidiaries. Except as set forth in
the Parent Disclosure Schedule 6.1, Parent does not own or control, directly or
------------------------------
indirectly, any equity interest in any corporation, company, association,
partnership, joint venture or other entity.
6.2 Capitalization. As of the date of this Agreement, the authorized
--------------
capital stock of Parent consists of 10,000,000 shares of Parent Common Stock and
500,000 shares of preferred stock, without par value ("Parent Preferred Stock").
As of the date of this Agreement, there are 6,719,425 shares of Parent Common
Stock issued and outstanding, 141,120 shares of Parent Preferred Stock issued
and outstanding, 693,846 shares reserved for issuance upon the exercise of that
certain Stock Purchase Warrant issued by Parent to Sirrom Investments, Inc.
("Sirrom"), and 1,254,096 shares of Parent Common Stock reserved for issuance
upon the exercise of outstanding stock options and warrants ("Parent Stock
Options"). All issued and outstanding shares of Parent Common Stock, and all
issued and outstanding shares of capital stock of each of the Parent
Subsidiaries, have been duly authorized and validly issued and are fully paid
and nonassessable. All of the outstanding shares of capital stock of each Parent
Subsidiary are owned by Parent and are free and clear of any Liens other than a
pledge to Sirrom to secure the repayment of a loan from Sirrom to Parent. Except
for the Parent Stock Options disclosed in Parent Disclosure Schedule 6.2 and the
------------------------------
warrant issued to Sirrom referenced above, as of the date of this Agreement,
neither Parent nor any of the Parent Subsidiaries has granted nor is bound by
any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the transfer, purchase,
23
<PAGE>
subscription or issuance of any shares of capital stock of Parent or any of the
Parent Subsidiaries or any securities representing the right to purchase,
subscribe or otherwise receive any shares of such capital stock or any
securities convertible into any such shares, and there are no agreements or
understandings with respect to voting of any such shares.
6.3 Authority; No Violation.
-----------------------
(a) Except for the filings of the Merger documents as required by
the GBCC (the "Parent Approvals"), no Authorization of any Governmental
Authority is necessary on behalf of Parent in connection with the execution and
delivery by Parent of this Agreement and the consummation by Parent of the
Merger and the other transactions contemplated by this Agreement. Subject to
receipt of the Parent Approvals, Parent has the full corporate power and
authority to execute and deliver this Agreement and to consummate the Merger and
the other transactions contemplated by this Agreement in accordance with the
terms of this Agreement. The execution and delivery of this Agreement and the
consummation of the Merger and the other transactions contemplated by this
Agreement have been duly and validly approved by the Board of Directors of
Parent in accordance with the Articles of Incorporation of Parent and Applicable
Laws. Except for the Parent Approvals, no other corporate proceedings on the
part of Parent are necessary to consummate the Merger and the other transactions
contemplated by this Agreement. This Agreement has been duly and validly
executed and delivered by Parent and constitutes the valid and binding
obligation of Parent enforceable against Parent in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Parent
and Merger Sub, nor the consummation by Parent and Merger Sub of the Merger and
the other transactions contemplated by this Agreement in accordance with the
terms of this Agreement, or compliance by Parent and Merger Sub with any of the
terms or provisions of this Agreement, will (i) assuming that the Parent
Approvals are duly obtained, violate any provision of Parent's or Merger Sub's
Articles of Incorporation or bylaws, (ii) assuming that the Parent Approvals are
duly obtained, violate any Laws applicable to Parent, any of the Parent
Subsidiaries, or any of their respective properties or assets, or (iii) except
as set forth in Parent Disclosure Schedule 6.3, violate, conflict with, result
------------------------------
in a breach of any provisions 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 of, accelerate the performance required by, or result in the
creation of any Lien upon any of the respective properties or assets of Parent
or the Parent Subsidiaries under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Parent or any of the Parent Subsidiaries
is a party, or by which they or any of their respective properties or assets may
be bound or affected except, with respect to (ii) and (iii) above, such as
individually or in the aggregate will not have a Material Adverse Effect on the
Parent, and which will not prevent or delay the consummation of the Merger and
the other transactions contemplated by this Agreement.
(c) Subject to receipt of the Parent Approvals, Merger Sub has the
full corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and the other transactions contemplated by this Agreement
in accordance with the
24
<PAGE>
terms of this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
and validly approved by the Board of Directors and the sole shareholder of
Merger Sub in accordance with the Articles of Incorporation of Merger Sub and
Applicable Laws. Except for the Parent Approvals, no other corporate proceedings
on the part of Merger Sub are necessary to consummate the Merger or the other
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Merger Sub and constitutes the valid and binding obligation of
Merger Sub enforceable against Merger Sub in accordance with its terms.
6.4 Financial Statements.
--------------------
(a) Parent Disclosure Schedule 6.4 sets forth copies of: (i) the
------------------------------
balance sheet of Parent as of December 31, 1997 and the statements of income,
shareholders' equity and cash flows for the period ended December 31, 1997 and
(ii) internally prepared interim financial statements of Parent (balance sheet
and income statement) dated October 31, 1998 and for the ten (10) month period
ended October 31, 1998 (collectively, together with the related notes and any
additional financial statements, the "Parent Financial Statements"). The Parent
Financial Statements present fairly, in all material respects, the financial
position of Parent as of the respective dates set forth in the Parent Financial
Statements, and the results of Parent's operations and its cash flows for the
respective periods set forth in the Parent Financial Statements; except that the
unaudited interim financial statements were not subject to normal and recurring
year-end adjustments and do not contain footnote disclosures, all of which
adjustments and all of such footnote disclosures are not, in the aggregate,
believed by the management of Parent to be material to the business or
operations of Parent when taken as a whole.
(b) The Parent Financial Statements, as of their respective dates,
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such Parent Financial Statements or
necessary in order to make the statements made in such Parent Financial
Statements, in light of the circumstances under which they were made, not
misleading.
(c) Since October 31, 1998, there has not been any change,
occurrence or circumstance in the business, results of operations or financial
condition of Parent or any Parent Subsidiary having, individually or in the
aggregate, a Material Adverse Effect on Parent, other than changes, occurrences
and circumstances disclosed by the Parent prior to the date of this Agreement.
6.5 Broker's and Other Fees. Neither Parent nor any of the Parent
-----------------------
Subsidiaries nor any of their directors or officers has employed any broker or
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
6.6 Parent Common Stock. At the Effective Time, the Parent Common
-------------------
Stock to be issued pursuant to the Merger will be duly authorized and validly
issued, fully paid and nonassessable, free of preemptive rights and free and
clear of all Liens created by or through
25
<PAGE>
Parent (except as set forth in this Agreement and the documents and agreements
executed in connection herewith).
6.7 Legal Proceedings. Except as disclosed in Parent Disclosure
----------------- -----------------
Schedule 6.7, neither Parent nor Merger Sub is a party to any, and there is no
- ------------
pending or, to Parent's or Merger Sub's Knowledge, threatened legal,
administrative, arbitral or other proceeding, claim, action or governmental
investigation of any nature against Parent or Merger Sub. Except as disclosed in
Parent Disclosure Schedule 6.7, neither Parent nor Merger Sub is a party to any
- ------------------------------
order, judgment or decree entered in any lawsuit or proceeding that is likely to
have a Material Adverse Effect on Parent or Merger Sub. Without limiting the
foregoing, except as disclosed in Parent Disclosure Schedule 6.7, no actions,
------------------------------
suits, demands, notices, claims, investigations or proceedings that are likely
to have a Material Adverse Effect on Parent or Merger Sub are pending or, to
Parent's or Merger Sub's Knowledge, threatened against or otherwise involving,
directly or indirectly, any officer, director, employee or agent of Parent or
Merger Sub (in connection with such officer's, director's, employee's or agent's
activities on behalf of Parent or Merger Sub or that otherwise relate, directly
or indirectly to Parent or Merger Sub or their properties or securities)
including without limitation any notices, demand letters or requests from any
Governmental Authority relating to such potential Liabilities, nor, to the
Knowledge of Parent or Merger Sub, are there any circumstances which could lead
to such actions, suits, demands, notices, claims, investigations or proceedings.
6.8 Taxes and Tax Returns. Except as disclosed in Parent Disclosure
--------------------- -----------------
Schedule 6.8:
- ------------
(a) Each of Parent and Merger Sub has duly filed (and until the
Effective Time will so file) all Returns required to be filed by it in respect
of any United States federal, state or local Taxes and has duly paid (and until
the Effective Time will so pay) all such Taxes due and payable as finally
determined by the applicable Governmental Authority, other than Taxes which are
being contested in good faith (and disclosed to Seller in writing). Each of
Parent and Merger Sub has established (and until the Effective Time will
establish) on its books and records reserves that are adequate for the payment
of all Taxes not yet due and payable, but that are incurred in respect of Parent
and Merger Sub through such date.
(b) None of the Returns of Parent or Merger Sub has been examined
by the IRS, or any other United States federal, state or local or any foreign
Governmental Authority within the past six years. To the Knowledge of Parent and
Merger Sub: there are no audits or other Governmental Authority proceedings
presently pending, nor any other disputes pending with respect to, or claims
asserted for, Taxes upon Parent or Merger Sub; nor has Parent or Merger Sub
given any currently outstanding waivers or comparable consents regarding the
application of any statute of limitations with respect to any Taxes or Returns.
There are no Liens for Taxes upon the assets of Parent or Merger Sub, except for
Liens for Taxes not yet due and payable or being properly contested. Any Taxes
being properly contested are disclosed on Parent Disclosure Schedule 6.8. Parent
------------------------------
has complied (and until the Effective Time will comply) in all respects with all
Applicable Laws relating to the payment and withholding of Taxes.
(c) Neither Parent nor Merger Sub (i) has requested any extension
of time
26
<PAGE>
within which to file any Return which Return has not since been filed; (ii) is a
party to any agreement providing for the indemnification, allocation or sharing
of Taxes; (iii) is required to include in income any adjustment by reason of a
voluntary change in accounting method initiated by Parent or Merger Sub (nor
does Parent or Merger Sub have any Knowledge that any Governmental Authority has
proposed any such adjustment or change of accounting method); (iv) has filed a
consent with any Governmental Authority pursuant to which Parent or Merger Sub
has agreed to recognize gain (in any manner) relating to or as a result of this
Agreement or the transactions contemplated by this Agreement; or (v) has been a
member of an affiliated group other than one of which Parent or Merger Sub was
the common parent.
6.9 Compliance with Applicable Laws. Except as set forth in Parent
------------------------------- ------
Disclosure Schedule 6.9, each of Parent and Merger Sub holds all Licenses
- -----------------------
necessary for the lawful conduct of its business except where the failure to
hold any License would not have a Material Adverse Effect on Parent or Merger
Sub. No proceeding is pending or, to the Knowledge of Parent or Merger Sub,
threatened seeking the revocation or suspension of any License. Each of Parent
and Merger Sub is and has been in compliance in all material respects with all
Applicable Laws, except where the failure to be in compliance would not have a
Material Adverse Effect on Parent or Merger Sub; and neither Parent nor Merger
Sub has received any written notices from any Governmental Authority of any
allegation of any violation of any Applicable Laws or Licenses.
6.10 Disclosure. No representation, warranty, or statement made by
----------
Parent or Merger Sub in this Agreement or in any document or certificate
furnished or to be furnished to Parent or Merger Sub pursuant to this Agreement
contains or will contain any untrue or incomplete statement or omits or will
omit to state any fact necessary to make the statements contained in this
Agreement or in such document or certificate not misleading. All facts known or
reasonably available to Parent or Merger Sub that are material to the financial
condition, operation, or prospects of the business and assets of Parent and
Merger Sub have been disclosed to Seller and the Shareholders.
ARTICLE 7 - COVENANTS AND CERTAIN ACTIONS OF THE PARTIES
7.1 Best Efforts; Further Assurances; Cooperation. Subject to the
---------------------------------------------
other provisions in this Agreement, the parties hereto shall in good faith
perform their obligations under this Agreement before, at and after the
Effective Time, and shall each use their reasonable best efforts (a) to do, or
cause to be done, all things necessary, proper or advisable under Applicable
Laws to obtain all Authorizations and satisfy all conditions to the obligations
of the parties under this Agreement; (b) to cause the transactions contemplated
by this Agreement to be carried out promptly and in accordance with the terms of
this Agreement; and (c) to cooperate fully with each other and their respective
officers, directors, employees, agents, counsel, accountants and other designees
in connection with any steps required to be taken as part of their respective
obligations under this Agreement. Upon the execution of this Agreement and
thereafter, each party shall take such actions and execute and deliver such
documents as may be reasonably requested by the other parties hereto in order to
consummate the transactions contemplated by this Agreement.
27
<PAGE>
7.2 Public Announcements. Each party agrees that, without the consent
--------------------
of the other parties, it will not release or issue any reports, statements,
announcements, or releases pertaining to this Agreement and its
implementation.
7.3 Affiliates. Simultaneously with the execution and delivery of this
----------
Agreement, Seller shall deliver to Parent copies of letter agreements, each
substantially in the form of Exhibit 7.3, executed by all directors, executive
-----------
officers and by any other person who is an "affiliate" of Seller for purposes of
Rule 145 under the 1933 Act providing that such person will not sell, pledge,
transfer or otherwise dispose of any shares of Parent Common Stock to be
received by such "affiliate" in the Merger, except in compliance with the
applicable provisions of the 1933 Act and the rules and regulations thereunder.
The certificates of Parent Common Stock issued to "affiliates" of Seller will
bear an appropriate legend reflecting the foregoing.
7.4 Shareholders' Approval. On or before the date of this Agreement,
----------------------
the Shareholders have approved the Merger in compliance with applicable law.
7.5 Release by the Shareholders. Each Shareholder hereby releases
---------------------------
Seller from any and all claims, rights and causes of action that the Shareholder
may have or may have had against Seller arising out of any transactions between
the Shareholder and Seller prior to, or arising with respect to any act or
omissions occurring prior to the Effective Time; provided, however, that the
foregoing release shall not apply to (a) accrued compensation and benefits and
expenses or similar obligations incurred in the ordinary course of business
(including reimbursement of medical expenses pursuant to the Employee Plans
disclosed pursuant to this Agreement); (b) the rights of such Shareholder under
this Agreement and any agreements related hereto; (c) all rights to
indemnification enjoyed by such Shareholder, whether under the GBCC or the
Articles of Incorporation or Bylaws of Seller (as currently in effect); and (d)
rights under any current errors and omissions and directors and officers
insurance policies of Seller.
7.6 Employee Matters.
----------------
(a) Employee Benefits. Parent shall take all action necessary
-----------------
or appropriate to permit the employees of Seller at the Effective Time who shall
continue to be employed by the Surviving Corporation thereafter (the "Continuing
Employees") either (i) to participate after the Effective Time in Parent's
employee benefit programs and to cause the Surviving Corporation to take all
actions necessary or appropriate to adopt Parent's employee benefit programs
effective as of the Effective Time, or (ii) to participate after the Effective
Time in the employee benefit programs currently offered by Seller and to cause
the Surviving Corporation to take all actions necessary or appropriate to
continue Seller's employee benefit programs effective as of the Effective Time.
Upon the commencement of the Continuing Employees' participation upon or after
the Effective Time in Parent's employee benefit programs, Parent will cause the
Surviving Corporation to give each Continuing Employee full credit for service
with Seller for purposes of eligibility to participate in, vesting and payment
of benefits under, and eligibility for any subsidized benefit provided under
(but not, except as provided in the
28
<PAGE>
preceding sentence, for purposes of determining the amount of any benefit under)
any Parent employee benefit plan; provided, however, that except as otherwise
provided in the Employment Agreements described in Section 8.2(d) below or in
the Consulting Agreement described in Section 8.2(f) below, nothing in this
Agreement shall be deemed to require Parent to cause to be continued any
Continuing Employee's employment, responsibilities or officer title for any
definite period, or to change the terms or conditions of any existing employee
benefit program or to conform the terms of any employee benefit program that
Parent may offer in the future to the terms of the employee benefit program
previously offered by Seller or the Surviving Corporation.
(b) Employment Agreements. Subject to the exceptions specified
---------------------
in Section 7.5 above, all employment agreements between Seller and either
Shareholder are terminated.
7.7 Tax Matters. The Shareholders, the Surviving Corporation and
-----------
Parent agree to furnish, or to cause to be furnished, in good faith to each
other, such cooperation and assistance as is reasonably necessary to file any
future returns, to respond to audits, to negotiate settlements with Governmental
Authorities and to prosecute and defend against Tax claims.
7.8 Life Insurance Premiums. From and after the Effective Time, Parent
-----------------------
shall pay one half of all premiums on the life insurance policies insuring the
life of Mr. DePrizio which are listed on Schedule 7.8 hereto, conditioned upon
------------
Mr. DePrizio paying the other half of such payments. Parent's payments of such
premiums shall not exceed $120,000 and shall be made pro rata as and when Mr.
DePrizio makes such payments, provided that if Parent has not satisfied this
obligation upon the termination of the Consulting Agreement referenced in
Article 8 below, Parent shall place into escrow funds sufficient to satisfy the
remaining balance of the foregoing obligation. Parent hereby acknowledge that
neither Parent nor any affiliate of Parent is or shall be the beneficiary of
such policies.
7.9 Release from Guaranties. From and after the Effective Time, Parent
-----------------------
shall use good faith diligent efforts to cause each Shareholder to be released
from all personal guaranties of indebtedness and other contracts of Seller and,
to the extent that a lender is unwilling to release any Shareholder from a
guaranty despite such efforts, Parent shall indemnify such Shareholder for any
loss or expense he may suffer as a result of any claim or demand made upon him
under such guaranty. In any event, Parent shall repay in full any obligation so
guaranteed no later than December 31, 1999 (or otherwise obtain the release of
the guaranty).
7.10 Registration Rights. Parent shall provide the Shareholders with
-------------------
the same rights to participate as selling shareholders in connection with public
offerings of the Parent's common stock as are enjoyed by the members of
Parent's senior management team.
7.11 Title to Vehicles. Not later than February 15, 1999, Parent shall
-----------------
cause good and marketable title to that certain Lincoln Navigator sport utility
vehicle and that certain BMW 7-series sedan, free of all liens and encumbrances,
to be transferred to Mr. DePrizio, provided that in no event shall Parent be
required to expend more than $60,000 to arrange such transfer of titles.
29
<PAGE>
ARTICLE 8 - CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement. The
-----------------------------------------------------------
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the satisfaction, or, where permissible under
applicable Law, waiver, at or prior to the Closing Date, of the following
conditions:
(a) Approvals and Regulatory Filings. All necessary Authorizations
--------------------------------
of Governmental Authorities required to consummate the transactions contemplated
by this Agreement shall have been obtained without any term or condition that
would materially impair the value of Seller, or that would materially impair the
value of Parent and the Parent Subsidiaries, taken as a whole. All conditions
required to be satisfied prior to the Effective Time by the terms of such
Authorizations shall have been satisfied; and all statutory waiting periods in
respect thereof shall have expired.
(b) Suits and Proceedings. The consummation of the transactions
---------------------
contemplated by this Agreement will not violate the provisions of any
injunction, order, judgment, decree or Law applicable or effective with respect
to Parent or Seller or their officers and directors. No suit or proceeding shall
have been instituted by any person, or, to the Knowledge of Parent or Seller,
shall have been threatened by any Governmental Authority, and not subsequently
withdrawn, dismissed or otherwise eliminated, which seeks (i) to prohibit,
restrict or delay consummation of the transactions contemplated by this
Agreement or to limit in any material respect the right of Parent to control any
material aspect of the business of Parent and the Parent Subsidiaries or Seller
after the Effective Time, or (ii) to subject Parent or Seller or their
respective directors or officers to material liability on the ground that it or
they have breached any Law or otherwise acted improperly in relation to the
transactions contemplated by this Agreement.
(c) Escrow Agreement. First Union National Bank shall have
----------------
executed and delivered an Escrow Agreement among the Shareholders, Parent, and
First Union National Bank relating to the Cash and the shares of Parent Common
Stock to be placed in escrow pursuant to Article 2 (the "Escrow Agreement").
8.2 Conditions to the Obligations of Parent and Merger Sub Under this
-----------------------------------------------------------------
Agreement. The obligations of Parent and Merger Sub under this Agreement to
- ---------
consummate the Merger shall be further subject to the satisfaction or waiver, at
or prior to the Closing Date, of the following conditions (with the
effectiveness of all agreements listed below being expressly conditioned upon
consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Seller and the
----------------------------------
Shareholders shall have performed in all material respects the agreements,
covenants and obligations to be performed by it or them under this Agreement and
the other agreements contemplated hereby at or before the Effective Time. All
Authorizations of or with any nongovernmental third party that are required for
the execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement by Seller and the Shareholders shall
have been obtained or made, or waived by such third party, except where
30
<PAGE>
the failure to obtain any such Authorization would not have a Material Adverse
Effect on Seller.
(b) Opinion of Counsel. Parent shall have received an opinion
------------------
of Chorey, Taylor & Feil, A Professional Corporation, counsel to Seller, dated
the Closing Date, in form and substance reasonably satisfactory to Parent,
covering the matters set forth on Exhibit 8.2(b).
--------------
(c) Certificates. Seller shall have furnished Parent with such
------------
certificates of its officers or others and such other documents described herein
to evidence fulfillment of the conditions set forth in this Article 8 and
otherwise to consummate the transactions contemplated pursuant to this Agreement
as Parent may reasonably request.
(d) Employment Agreements. Each of the Shareholders shall have
---------------------
executed and delivered an Employment Agreement with Parent in the form attached
hereto as Exhibit 8.2(d)(1) and Exhibit 8.2(d)(2), as applicable.
----------------- -----------------
(e) Shareholders Agreement. The Shareholders shall have executed
----------------------
and delivered a joinder agreement with Parent in the form attached hereto as
Exhibit 8.2(e) making the Shareholders parties to that certain Second Amended
- -------------
and Restated Shareholders Agreement dated as of December 17, 1998 by and among
Parent and the current holders of common stock of Parent (the "Shareholders
Agreement").
(f) Consulting Agreement. Mr. DePrizio shall have executed and
--------------------
delivered a Consulting Agreement with Parent in the form attached hereto as
Exhibit 8.2(f).
- --------------
(g) Resignations. Seller shall have delivered to Parent, to the
------------
extent requested by Parent, the written resignations of the directors and
officers of Seller.
(h) Financing. Regions Bank shall have consented in writing to the
---------
assumption by Parent of Seller's obligations to such lender pursuant to the
$500,000 line of credit disclosed on Seller Disclosure Schedule 4.3.
------------------------------
(i) Escrow Agreement. The Shareholders shall have executed and
----------------
delivered the Escrow Agreement.
8.3 Conditions to the Obligations of Seller and the Shareholders Under
------------------------------------------------------------------
this Agreement. The obligations of Seller and the Shareholders under this
- --------------
Agreement to consummate the Merger shall be further subject to the satisfaction
or waiver, at or prior to the Closing Date, of the following conditions (with
the effectiveness of all agreements listed below being expressly conditioned
upon consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Parent and Merger
----------------------------------
Sub shall have performed in all material respects the agreements, covenants and
obligations to be performed by it under this Agreement and the other agreements
contemplated hereby at or before the Effective Time. All Authorizations of or
with any nongovernmental third party that
31
<PAGE>
are required for or in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated by this Agreement
by Parent and the Merger Sub shall have been obtained or made, except where the
failure to obtain any such Authorizations would not have a Material Adverse
Effect on Parent or the Parent Subsidiaries, taken as a whole.
(b) Opinion of Counsel to Parent. Seller shall have received an
----------------------------
opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to Parent, dated
the Closing Date, in form and substance reasonably satisfactory to Seller,
covering the matters set forth on Exhibit 8.3(b).
--------------
(c) Certificates. Each of Parent and Merger Sub shall have
------------
furnished Seller with such certificates of its officers or others and such other
documents described herein to evidence fulfillment of the conditions set forth
in this Article 8 and otherwise to consummate the transactions contemplated
pursuant to this Agreement as Seller may reasonably request.
(d) Employment Agreements. Parent shall have executed and
---------------------
delivered an Employment Agreement with each of the Shareholders in the forms
attached hereto as Exhibit 8.2(d)(1) and Exhibit 8.2(d)(2).
----------------- -----------------
(e) Shareholders Agreement. Parent shall have executed and
----------------------
delivered a joinder agreement with the Shareholders in the form attached hereto
as Exhibit 8.2(e).
-------------
(f) Consulting Agreement. Parent shall have executed and
--------------------
delivered a Consulting Agreement with Mr. DePrizio in the form attached hereto
as Exhibit 8.2(f).
--------------
(g) Escrow Agreement. Parent shall have executed and delivered
----------------
the Escrow Agreement.
(h) Merger Consideration. Parent shall have delivered to the
--------------------
Shareholders and the Escrow Agent all of the Merger Consideration.
ARTICLE 9 - AMENDMENT AND WAIVER
9.1 Specific Performance. The parties acknowledge that the rights of
--------------------
each party to consummate the transactions contemplated by this Agreement are
special, unique, and of extraordinary character, and that, in the event that any
party violates or fails or refuses to perform any covenant made by it in this
Agreement relating to nonmonetary matters, the other party or parties will be
without an adequate remedy at law. Each party agrees, therefore, that in the
event that it violates, fails or refuses to perform any covenant or agreement
made by it in this Agreement that relates to nonmonetary matters, the other
party or parties, so long as it or they are not in breach of this Agreement,
may, in addition to the remedies set forth in Article 10, institute and
prosecute an action in a court of competent jurisdiction to enforce specific
performance of such covenant or agreement or seek any other equitable relief.
32
<PAGE>
9.2 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of all the parties hereto.
9.3 Extension; Waiver. The parties may (a) extend the time for the
-----------------
performance of any of the obligations or other acts of the other parties hereto;
(b) waive any inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant thereto; or (c) waive
compliance with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party against which the waiver is sought to be enforced and shall apply only to
the specific condition, representation or warranty identified by such writing as
being waived, extended or modified.
ARTICLE 10 - INDEMNIFICATION
10.1 Indemnification by the Shareholders. Subject to the terms of this
-----------------------------------
Article 10, Schedule 2.1, and the Escrow Agreement, from and after the Effective
------------
Time, the Shareholders shall, jointly and severally, indemnify, defend, save and
hold harmless Parent, Merger Sub (and the Surviving Corporation, after the
consummation of the Merger) and any of their successors and assigns
(collectively, the "Parent Indemnified Parties"), from and against any demands,
claims, actions, losses, damages, deficiencies, liabilities, costs and expenses
(including, without limitation, reasonable attorneys' and accountants' fees and
expenses, and interest and penalties, if any, awarded by court order or
otherwise agreed to) (collectively, "Indemnifiable Damages"), suffered by the
Parent Indemnified Parties that arise out of or result from any of the following
(whether or not a third party initiates a proceeding or claim giving rise to
such Indemnifiable Damages):
(a) any breach of any of the representations, warranties, covenants
or agreements made by Seller or the Shareholders in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement made by Seller or any Shareholder in a document, certificate or
affidavit delivered by Seller or the Shareholders at the Closing; or
(c) any expenses, charges, fees, or costs associated with any audit
of Seller for Taxes related to periods prior to the Closing Date, and any Taxes
imposed as a result of any such audit, even though any such audit commences, or
a party does not become aware of any such audit, until after the Closing Date.
Any of the foregoing to the contrary notwithstanding, the Shareholders'
indemnification obligations in connection with the breach of any provision of
Article 5 or in connection with the breach of any post closing covenants of
either Shareholder shall be several and not joint.
10.2 Indemnification by Parent and the Surviving Corporation. Subject
-------------------------------------------------------
to the terms of this Article 10, from and after the Effective Time, Parent and
the Surviving Corporation shall, jointly and severally, indemnify, defend, save
and hold harmless the Shareholders, and
33
<PAGE>
any of their respective heirs, beneficiaries, successors and assigns
(collectively, the "Seller Indemnified Parties"), from and against any
Indemnifiable Damages suffered by the Seller Indemnified Parties, or any of
them, that arise out of or result from any of the following (whether or not a
third party initiates a proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties, covenants
and agreements made by Parent or Merger Sub in this Agreement; or
(b) any breach of any representation, warranty, covenant or
agreement made by Parent or by Merger Sub in a document, certificate or
affidavit delivered by Parent or Merger Sub at the Closing.
10.3 Claims for Indemnification. The representations, warranties,
--------------------------
covenants and agreements in this Agreement and in all other agreements delivered
in connection herewith (excluding the covenants in the Employment Agreements,
the Consulting Agreement, the Escrow Agreement and the Shareholders Agreement
which shall survive until the expiration of all applicable statutes of
limitation) shall survive the Closing for a period that ends on the Final Date
(as the term is defined in Schedule 2.1 hereto), and shall not be affected by
any investigation made by the parties hereto prior to the date of this Agreement
or the Effective Time. The party seeking indemnification (the "Indemnified
Party") shall give the party from whom indemnification is sought (the
"Indemnifying Party") a written notice ("Notice of Claim") within sixty (60)
days after the discovery of any loss, liability, claim or expense in respect of
which the right to indemnification contained in this Article 10 may be claimed
(and in any event within fifteen (15) days after the receipt of any Third Party
Claim); provided, however, that the failure to give such notice within either
such period shall not result in the waiver or loss of any right to bring such
claim after such period unless, and only to the extent that, the other party is
actually prejudiced by such failure. If a claim is pending or threatened or the
Indemnified Party has a reasonable good faith belief as to the validity of the
basis for such claim, the Indemnified Party may give written notice (a "Notice
of Possible Claim") of such claim to the Indemnifying Party, regardless of
whether a loss has arisen from such claim. All claims for indemnification under
this Agreement and under all other agreements delivered in connection herewith
(excluding claims for breaches of the Employment Agreements, the Consulting
Agreement, the Escrow Agreement and the Shareholders Agreement) must be made no
later than the Final Date. Any Notice of Claim or Notice of Possible Claim shall
set forth the representations, warranties, covenants and agreements with respect
to which the claim is made, the specific facts giving rise to an alleged basis
for the claim and the amount of liability asserted or anticipated to be asserted
by reason of the claim.
10.4 Matters Involving Third Parties.
-------------------------------
(a) If any third party shall notify the Indemnified Party as to
any matter in respect of which the right to indemnification contained in this
Article 10 may be claimed (a "Third Party Claim"), the Indemnified Party shall
give the Indemnifying Party notice of such Third Party Claim as provided in
Section 10.3 above; and the Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim, consent to the entry of any
34
<PAGE>
judgment with respect thereto and enter into any settlement with respect
thereto, all with counsel of its choice, so long as the Indemnifying Party
notifies the Indemnified Party in writing, within fifteen (15) days after the
Indemnified Party has given the Indemnifying Party notice of the Third Party
Claim pursuant to Section 10.3, that the Indemnifying Party will indemnify the
Indemnified Party from and against Indemnifiable Damages the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature of or
caused by the Third Party Claim.
(b) If the Indemnifying Party undertakes the defense of any Third
Party Claim pursuant to Section 10.4(a) above, the Indemnified Party may retain
separate co-counsel at its sole cost and expense (and such expenses shall not be
Indemnifiable Damages) and participate in the defense of such Third Party Claim.
The Indemnified Party will not consent to the entry of any judgment or enter
into any settlement with respect to any Third Party Claim without the prior
written consent of the Indemnifying Party (not to be withheld unreasonably). The
Indemnifying Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim that does not include a
full release by the third party of the Indemnified Party from all Indemnifiable
Damages relating to such Third Party Claim, without the prior written consent of
the Indemnified Party (not to be withheld unreasonably).
(c) The parties hereto shall provide, or cause their appropriate
employees or representatives to provide, to the other parties hereto information
or data in connection with the handling of the defense of any Third Party Claim
or litigation (including counterclaims filed by the parties), and the party
receiving such information or data shall reimburse the other party for all of
its reasonable costs and expenses in providing these services, including,
without limitation, (1) all out-of-pocket, travel and similar expenses incurred
by its personnel in rendering these services; and (2) all fees and expenses for
services performed by third parties engaged by or at the request of such other
party.
10.5 Indemnification Payments. The Indemnifying Party shall pay to the
------------------------
Indemnified Party the full amount of any and all Indemnifiable Damages (other
than Indemnifiable Damages resulting from a Third Party Claim) for which it is
required to indemnify the Indemnified Party under this Article 10, within thirty
(30) days after its receipt of notice thereof from the Indemnified Party
pursuant to Section 10.3 above; and the full amount of any and all Indemnifiable
Damages resulting from a Third Party Claim for which it is required to indemnify
the Indemnified Party under this Article 10, within thirty (30) days after final
settlement or adjudication thereof.
10.6 Arbitration. Any dispute, claim or controversy relating in any way
-----------
to this Agreement or the other agreements to be entered into in connection with
this Agreement (other than the Employment Agreements, the Consulting Agreement
and the Escrow Agreement) or the transactions contemplated hereby or thereby,
whether in contract, in tort or otherwise, except a request for equitable,
injunctive or restraining relief (as described in Section 9.1) or to enforce an
arbitration award, shall be resolved by arbitration in Atlanta, Georgia, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"), subject to the limitations of this Section 10.6. This
agreement to arbitrate will be specifically enforceable under the prevailing law
of any court having jurisdiction. Notice of a
35
<PAGE>
demand for arbitration will be filed in writing with the applicable other
signatory hereto and with AAA. The demand for arbitration shall be made within a
reasonable time after the claim, dispute or other matter in question has arisen,
and in no event shall any such demand be made after the date when institution of
legal or equitable proceedings based on such claim, dispute or other matter in
question would be barred by the applicable statute of limitations. The
signatories hereto agree that three (3) arbitrators experienced in the matters
at issue shall arbitrate all disputes. The arbitrators shall be selected by the
joint agreement of the signatories hereto, but if they do not so agree within
twenty (20) days after the date of the notice of a demand for arbitration
referred to above, the selection shall be made pursuant to the Commercial
Arbitration Rules of AAA from the panels of arbitrators maintained by AAA. The
award rendered by the arbitrators will be final, judgment may be entered upon it
in any court having jurisdiction thereof, and the award will not be subject to
vacation, modification or appeal, except to the extent permitted by Sections 10
and 11 of the Federal Arbitration Act, the terms of which Sections the
signatories hereto agree shall apply. Notwithstanding any provision of this
Article 10 to the contrary, each participant in the arbitration shall pay its
own expenses of arbitration, and the expenses of the arbitrators shall be
equally shared; provided, however, that if in the opinion of the arbitrators any
claim for indemnification, or any defense or objection thereto, was
unreasonable, the arbitrators may assess, as part of their award, all or any
part of the arbitration expenses of the other participant(s) (including
reasonable attorneys' fees) and of the arbitrators against the participant(s)
raising such unreasonable claim, defense or objection.
10.7 Tax Effect and Insurance. The liability of any Indemnifying Party
------------------------
with respect to any indemnification claim shall be reduced by the tax benefit
actually realized by and any insurance proceeds received by the
Indemnified Party as a result of any Indemnifiable Damages upon which such
indemnification claim is based.
10.8 Indemnification Exclusive Remedy. In the absence of fraud, and
-------------------------------
except for non-monetary equitable relief (for which the provisions of Section
9.1 shall provide the sole and exclusive remedy of the parties), if the Closing
occurs, indemnification pursuant to the provisions of this Article 10 shall be
the sole and exclusive remedy of the parties for any breach of any
representation, warranty or covenant contained in this Agreement and the other
agreements to be entered into in connection with this Agreement (other than the
Employment Agreements, the Consulting Agreement, the Escrow Agreement and the
Shareholders Agreement).
10.9 Certain Limitations. The foregoing indemnification obligations are
-------------------
subject to the limitation that no Indemnifying Party shall have any liability
for indemnification to any Indemnified Party pursuant to this Article 10 or
otherwise unless the total Indemnifiable Damages for which the Indemnifying
Party would be liable exceed $25,000 in the aggregate; provided that once such
threshold is met, the Indemnifying Party shall be liable for the total
Indemnifiable Damages, not just the amount in excess of such threshold. In no
event shall the aggregate liability of the Shareholders for Indemnifiable
Damages under this Agreement and the other agreements entered into in connection
with the consummation of the transactions contemplated hereby exceed Two Million
Dollars ($2,000,000).
36
<PAGE>
10.10 Contribution Agreement. Notwithstanding (and without limiting, as
----------------------
far as Parent and Merger Sub are concerned) any joint and several liability of
the Shareholders under certain provisions of this Agreement or any other
agreement entered into in connection with the consummation of the transactions
contemplated hereby, the Shareholders hereby agree between themselves that each
Shareholder's respective liability and obligation under any of said provisions
shall be proportionate to the percentage of Seller Common Stock owned by such
Shareholder immediately preceding the Effective Time. If any liability or
obligation under this Agreement or any of such other agreements is paid or
otherwise satisfied by any Shareholder in excess of his proportionate share,
such Shareholder shall have an immediate right of contribution from the other
Shareholder for such excess.
ARTICLE 11 - MISCELLANEOUS
11.1 Expenses. Except as otherwise expressly stated in this Agreement,
--------
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement (including legal, accounting and
investment banking fees and expenses) shall be borne by the party incurring such
costs and expenses. Without limiting the forgoing, the Shareholders agree that
they shall pay all fees, commissions, and disbursements owed to Croft and Bender
LLC, Chorey, Taylor & Feil, A Professional Corporation, and O'Neal Saul, L.L.C.
incurred in connection with this Agreement and the transactions contemplated by
this Agreement.
11.2 Notices. All notices or other communications which are required or
-------
permitted under this Agreement shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
37
<PAGE>
(a) If to Parent or Merger Sub, to:
MegaMarketing Corporation
4830 West Kennedy Blvd.
Suite 920
Tampa, FL 33609
Attn: John P. Kelly, President and Chief Executive Officer
Telefax: (813) 289-5336
Copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: Charles D. Vaughn, Esq.
Telefax: (404) 817-6050
(b) If to Seller, to:
UST, Inc.
5300 Oakbrook Parkway
Building 300
Suite 368
Norcross, GA 30093
Telefax: (770) 921-2363
Copy to:
David A. Flanigan, Jr.
Chorey, Taylor & Feil, A Professional Corporation
Suite 1700, The Lenox Building
3399 Peachtree Road, N.E.
Atlanta, Georgia 30326
Telefax: (404) 841-3221
(c) If to the Shareholders, to their respective addresses as set
forth on the signature page to this Agreement;
or to such other addresses and telefax numbers as shall be furnished in writing
by any party, and any such notice or communications shall be deemed to have been
given as of two business days after the date actually sent via overnight or
express courier, five days after mailed and upon telefax confirmation of receipt
to addressee by the sender.
11.3 Parties in Interest. This Agreement shall be binding on and shall
-------------------
inure to the benefit of the parties hereto, the Parent Indemnified Parties, the
Seller Indemnified Parties and their respective successors, representatives and
assigns. This Agreement (and the rights and interests in this Agreement) may not
be assigned by any party without the written consent of the other parties;
provided, however, Parent may assign its interests in this Agreement to a
purchaser or transferee of all or substantially all of the business or assets of
Parent or the
38
<PAGE>
Surviving Corporation, whether by sale of stock or assets, merger or otherwise;
provided further, however, that if Parent shall (i) sell all or substantially
all of the business or assets of Parent to a person or entity which is not an
affiliate of Parent, or (ii) merge with or into a person or entity which is not
an affiliate of Parent, and within 60 days after any such event any four of the
five Executive Officers of Parent are no longer employed by Parent, then the
Final Date (as defined in the Schedule 2.1 to this Agreement) shall, at the
option of the Shareholders, be accelerated to the date of the sale of the
business or assets under (i) above, or to the date of the termination of
employment of the fourth Executive Officer. Executive Officers as used in this
Section 11.3 means John P. Kelly, Paul B. Byrum III, Michael T. Kane, Edward J.
Rutkowski and Theresa L. Swanda. Any attempted assignment in contravention of
the foregoing shall be null and void. Nothing in this Agreement is intended to
confer, expressly or by implication, upon any other person any rights or
remedies under or by reason of this Agreement.
11.4 Entire Agreement. This Agreement, which includes the disclosure
----------------
schedules and the other documents, agreements and instruments executed and
delivered pursuant to or in connection with this Agreement, contains the entire
agreement between the parties hereto with respect to the transactions
contemplated by this Agreement, and supersedes all prior negotiations,
arrangements or understandings, written or oral, with respect thereto.
11.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original, and each of which shall
constitute one and the same agreement. Any party may deliver an executed copy of
this Agreement and of any documents contemplated by this Agreement by facsimile
transmission to another party and such delivery shall have the same force and
effect as any other delivery of a manually signed copy of this Agreement or of
such other documents.
11.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF
GEORGIA, EXCLUDING CHOICE OF LAW PRINCIPLES.
11.7 Invalidity of any Part. If any provision or part of this Agreement
----------------------
shall for any reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement and shall be construed as if such invalid, illegal
or unenforceable provision or part thereof had never been contained in this
Agreement, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
11.8 Time of the Essence; Computation of Time. Time is of the essence
----------------------------------------
of each and every provision of this Agreement. Whenever the last day for the
exercise of any right or the discharge of any duty under this Agreement shall
fall upon Saturday, Sunday or a federal, public or legal holiday, the party
having such right or duty shall have until 5:00 p.m., Atlanta,
39
<PAGE>
Georgia time on the next succeeding regular business day to exercise such right
or to discharge such duty.
40
<PAGE>
IN WITNESS WHEREOF, Parent, Merger Sub, Seller and Shareholders have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
MEGAMARKETING CORPORATION
/s/ John P. Kelly
-----------------------------------
By: John P. Kelly
---------------------------
Its: President
---------------------------
MEGAMARKETING ACQUISITION
FOUR, INC.
/s/ Edward J. Rutkowski
-----------------------------------
By: Edward J. Rutkowski
---------------------------
Its: President
---------------------------
UST, INC.
/s/ Thomas A. DePrizio
-----------------------------------
By: Thomas A. DePrizio
---------------------------
Its: Chief Executive Officer
---------------------------
THE SHAREHOLDERS:
/s/ Thomas A. DePrizio
-----------------------------------
Thomas A. DePrizio
Address: 9415 Prestwick Club Drive
---------------------------
Duluth, Georgia 30097
---------------------------
/s/ James Burgdorf
-----------------------------------
James Burgdorf
Address: 170 West Court
-----------------------------------
Duluth, Georgia 30097
-----------------------------------
41
<PAGE>
AGREEMENT AND PLAN OF MERGER
by
and
among
MEGAMARKETING CORPORATION
MEGAMARKETING ACQUISITION FIVE, INC.
DESKGATE TECHNOLOGIES, INC.
and
THE STOCKHOLDERS OF DESKGATE TECHNOLOGIES, INC.
Dated as of February 3, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 - THE MERGER.........................................................1
1.1 The Merger..................................................1
1.2 Closing.....................................................2
1.3 Effective Time of the Merger................................2
1.4 Articles of Incorporation; Bylaws...........................2
1.5 Directors and Officers of the Surviving Corporation.........2
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES................2
2.1 Consideration...............................................2
(a) Seller Common Stock..................................2
(b) Treasury Shares......................................3
(c) Merger Sub Common Stock..............................3
(d) Escrow of Certain Share..............................3
2.2 No Fractional Shares........................................3
2.3 Surrender and Exchange of Certificates Representing Seller
Common Stock................................................3
2.4 Share Calculations..........................................4
2.5 Stock Transfer Books........................................4
2.6 Seller Stock Options and Other Securities...................4
ARTICLE 3 - RULES OF CONSTRUCTION..............................................4
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE STOCKHOLDERS......7
4.1 Corporate Organization......................................7
4.2 Capitalization..............................................7
4.3 Authority; No Violation.....................................8
4.4 Financial Statements........................................9
4.5 Broker's and Other Fees.....................................9
4.6 Absence of Certain Changes or Events........................9
4.7 Legal Proceeding...........................................10
4.8 Taxes and Tax Returns......................................10
4.9 Benefit Plans..............................................11
4.10 Compliance with Applicable Laws............................11
4.11 Certain Contracts..........................................12
4.12 Properties and Insurance...................................13
4.13 Environmental Matters......................................14
4.14 Intellectual Property......................................15
4.15 No Parachute Payments......................................16
<PAGE>
4.16 Absence of Certain Agreements and Practices................16
4.17 Major Vendors and Customers................................17
4.18 Accounts Receivable........................................17
4.19 Corporate Records..........................................17
4.20 Combinations Involving Seller..............................17
4.21 Bank Accounts..............................................17
4.22 Labor Relations............................................17
4.23 Year 2000 Matters..........................................18
4.24 Change in Control Provisions...............................18
4.25 Pooling of Interests.......................................18
4.26 Disclosure.................................................18
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS................18
5.1 Ownership of Shares........................................18
5.2 Authorization..............................................19
5.3 Absence of Violations or Conflicts.........................19
5.4 No Consents Required.......................................19
5.5 No Claims Against Seller...................................20
5.6 Litigation Related to this Agreement.......................20
5.7 Investment Intent..........................................20
5.8 Access to Information; Accredited Investor Status..........20
5.9 Economic Risk..............................................21
5.10 Tax Advice.................................................21
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT..........................21
6.1 Corporate Organization.....................................21
6.2 Capitalization.............................................22
6.3 Authority; No Violation....................................22
6.4 Financial Statements.......................................24
6.5 Broker's and Other Fees....................................24
6.6 Parent Common Stock........................................24
6.7 Legal Proceedings..........................................24
6.8 Taxes and Tax Returns......................................25
6.9 Compliance with Applicable Laws............................26
6.10 Pooling of Interests.......................................26
6.11 Disclosure.................................................26
6.12 Registration Rights........................................26
ARTICLE 7 - COVENANTS AND CERTAIN ACTIONS OF THE PARTIES.....................27
7.1 Conduct of Business........................................27
7.2 Negative Covenants.........................................27
7.3 No Solicitation............................................30
7.4 Current Information........................................30
7.5 Access to Properties and Records; Confidentiality..........31
7.6 Regulatory Matters; Cooperation, etc.......................32
ii
<PAGE>
7.7 Parties' Efforts; Further Assurances; Cooperation..........32
7.8 Public Announcements.......................................33
7.9 Failure to Fulfill Conditions..............................33
7.10 Disclosure Supplements.....................................33
7.11 Affiliates.................................................33
7.12 Pooling of Interests.......................................34
7.13 Intentionally Omitted......................................34
7.14 Intentionally Omitted......................................34
7.15 Employee Matters...........................................34
(a) Employee Benefits....................................34
(b) Employment Agreements................................35
7.16 No Transfers................................................35
7.17 Special Provisions with Respect to Seller...................35
7.18 Tax Matters.................................................35
(a) Cooperation and Exchange of Information..............35
(b) Tax-Free Transaction.................................35
7.19 Registration Rights.........................................36
ARTICLE 8 - CLOSING CONDITIONS................................................36
8.1 Conditions of Each Party's Obligations Under this Agreement.36
(a) Approvals and Regulatory Filings.....................36
(b) Suits and Proceedings................................36
(c) Escrow Agreement.....................................36
(d) Tax Opinions.........................................36
(e) Assumption of Warrants...............................37
8.2 Conditions to the Obligations of Parent and Merger Sub Under
this Agreement..............................................37
(a) Covenants and Agreements; Consents...................37
(b) Opinion of Counsel...................................37
(c) Pooling Letter.......................................37
(d) Certificates.........................................37
(e) Employment Agreements................................37
(f) Stockholders Agreement...............................38
(g) Resignations.........................................38
(h) Escrow Agreement.....................................38
(i) Cancellation Agreements..............................38
(j) Noncompetition, Nonsolicitation and Confidentiality
Agreements...........................................38
(k) Outstanding Seller Common Stock......................38
(l) Completion of Due Diligence on Seller................38
(m) No Material Adverse Effect on Seller.................38
(n) Registration Rights Amendment........................39
(o) Payment to Farley....................................39
(p) Signatures of All Holders............................39
8.3 Conditions to the Obligations of Seller and the Stockholders
Under this Agreement........................................39
iii
<PAGE>
(a) Covenants and Agreements; Consents...................39
(b) Opinion of Counsel to Parent.........................39
(c) Certificates.........................................39
(d) Stockholders Agreement...............................39
(e) Escrow Agreement.....................................39
(f) Merger Consideration.................................40
(g) Option Grants........................................40
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER.................................40
9.1 Termination................................................40
9.2 Effect of Termination......................................41
9.3 Specific Performance.......................................41
9.4 Amendment..................................................41
9.5 Extension; Waiver..........................................41
ARTICLE 10 - INDEMNIFICATION..................................................42
10.1 Indemnification by Stockholders............................42
10.2 Indemnification by Parent..................................42
10.3 Claims for Indemnification.................................43
10.4 Matters Involving Third Parties............................43
10.5 Indemnification Payments Prior to Closing..................44
10.6 Settlement of Indemnification Claims After Closing.........44
10.7 Manner of Indemnification by Seller and Stockholders.......45
10.8 Indemnification Exclusive Remedy...........................45
10.9 Certain Limitations........................................45
10.10 Several Liability..........................................46
ARTICLE 11 - STOCKHOLDERS' REPRESENTATIVE.....................................46
11.1 Appointment; Acceptance....................................46
11.2 Authority..................................................46
11.3 Actions....................................................46
11.4 Successors.................................................47
11.5 Effectiveness..............................................47
ARTICLE 12 - MISCELLANEOUS....................................................47
12.1 Expenses...................................................47
12.2 Notices....................................................47
12.3 Parties in Interest........................................48
12.4 Entire Agreement...........................................49
12.5 Counterparts...............................................49
12.6 Governing Law..............................................49
12.7 Invalidity of any Part.....................................49
12.8 Time of the Essence; Computation of Time...................49
12.9 Arbitration................................................49
iv
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit No. Description
- ----------------- -----------------
Exhibit 2.1 Form of Escrow Agreement
Exhibit 7.11 Form of Affiliate Representation Letter
Exhibit 7.12 Pooling Conditions
Exhibit 7.15 Form of Employment Agreement and List of Employees
Exhibit 8.2(b) Form of Legal Opinion of Counsel to Seller
Exhibit 8.2(d) Form of Joinder to Stockholders Agreement
Exhibit 8.2(k) Form of Noncompetition, Nonsolicitation and Confidentiality
Agreement
Exhibit 8.2(n) Form of Registration Rights Agreement
Exhibit 8.3(b) Form of Legal Opinion of Counsel to Parent
Seller Disclosure
Schedule No. Description
- ----------------- -----------------
Schedule 4.1 Corporate Documents
Schedule 4.2 Seller's Capitalization
Schedule 4.3 Authority; No violation
Schedule 4.4 Seller Financial Statements
Schedule 4.5 Broker's and Other Fees
Schedule 4.6 Absence of Certain Changes and Events
Schedule 4.7 Legal Proceedings
Schedule 4.8 Taxes and Tax Returns
Schedule 4.9 Employee Benefit Plans
Schedule 4.10 Compliance with Applicable Laws
Schedule 4.11 Certain Contracts
Schedule 4.12 Insurance Policies
Schedule 4.14 Intellectual Property
Schedule 4.15 Parachute Payments
Schedule 4.16 Absence of Certain Agreements and Practices
Schedule 4.17 Major Vendors and Customers
Schedule 4.18 Accounts Receivable
Schedule 4.19 Corporate Records
Schedule 4.21 Bank Accounts
Schedule 4.22 Labor Relations
Schedule 4.24 Change of Control
<PAGE>
Stockholder Disclosure
Schedule No. Description
- ----------------- -----------------
Schedule 5.3 Absence of Violations
Schedule 5.4 Consents
Schedule 5.5 Claims
Schedule 5.6 Litigation
Schedule 5.7 Investment Intent
Parent Disclosure
Schedule No. Description
- ----------------- -----------------
Schedule 6.1 Parent's Subsidiaries; Corporate Documents
Schedule 6.2 Parent's Options and Warrants
Schedule 6.3 Defaults; Conflicts and Liens Created
Schedule 6.4 Parent Financial Statements
Schedule 6.7 Legal Proceedings
Schedule 6.8 Taxes Being Contested
Schedule 6.9 Compliance with Applicable Laws
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of the 3rd day of February,
1999 (the "Agreement"), is by and among MegaMarketing Corporation, a Georgia
corporation ("Parent"), MegaMarketing Acquisition Five, Inc., a Georgia
corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), DeskGate
Technologies, Inc., a Delaware corporation ("Seller"), and the stockholders of
Seller whose signatures appear on the signature pages hereto (the
"Stockholders").
WHEREAS, this Agreement provides for the strategic combination of Parent
and Seller in furtherance of the parties' long-term strategic plans; and
WHEREAS, Patrick E. Patterson, Carl Venters III and Karl Minor are the
principal stockholders of Seller and are employees of Seller (the "Management
Stockholders"); and
WHEREAS, the combination will be accomplished by a merger of Merger Sub
with and into Seller with Seller surviving and the Stockholders receiving the
consideration hereinafter set forth (the "Merger"); and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling of interests; and
WHEREAS, the Boards of Directors of Seller, Parent and Merger Sub have
duly adopted and approved this Agreement; Merger Sub's sole Stockholder has
approved the Agreement; and the Board of Directors of Seller has recommended
this Agreement to the Stockholders;
NOW, THEREFORE, intending to be legally bound, the parties hereto agree
as follows:
ARTICLE 1 - THE MERGER
1.1 The Merger. At the Effective Time (as defined below), Merger Sub
----------
shall be merged with and into Seller in accordance with the provisions of this
Agreement, the Georgia Business Corporation Code (the "GBCC") and the Delaware
General Corporation Law (the "DGCL"), and the separate existence of Merger Sub
shall thereupon cease, and Seller, as the surviving corporation in the Merger
(sometimes referred to as the "Surviving Corporation"), shall continue its
corporate existence under the laws of the State of Delaware as a wholly-owned
subsidiary of Parent. The Merger shall have the effect provided under applicable
laws
<PAGE>
including, but not limited to, Section 14-2-1106 of the GBCC and Subchapter IX,
Sections 251 and 259-261 of the DGCL.
1.2 Closing. The consummation of the transactions contemplated by this
-------
Agreement (the "Closing") shall take place at the offices of Nelson Mullins
Riley & Scarborough, L.L.P., 999 Peachtree Street, N.E., Suite 1400, Atlanta,
Georgia 30309 at 10:00 a.m. on the first business day after all conditions set
forth in Article 8 (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing) have been satisfied or
waived in writing or at such other place and time as Parent and Seller may agree
(the "Closing Date"). The parties agree to use all commercially reasonable
efforts to hold the Closing on or before January 31, 1999. At the Closing, the
parties shall execute and deliver the certificates, opinions and other
instruments and documents referred to in Article 8.
1.3 Effective Time of the Merger. Contemporaneous with or immediately
----------------------------
following the Closing, the parties shall cause a certificate of merger (the
"Certificate of Merger") to be executed, delivered and filed with the Secretary
of State of the State of Delaware and with the Secretary of State of the State
of Georgia in accordance with the provisions of the GBCC and DGCL. The Merger
shall become effective at the close of business on the date of such filing,
unless a different effective time is specified in the Certificate of Merger (the
"Effective Time").
1.4 Articles of Incorporation; Bylaws. The Articles of Incorporation
---------------------------------
and Bylaws of Seller as in effect immediately prior to the Effective Time shall
be the Articles of Incorporation and Bylaws of the Surviving Corporation, until
duly amended in accordance with applicable law.
1.5 Directors and Officers of the Surviving Corporation. At the
---------------------------------------------------
Effective Time, Messrs. Patterson, Sturm and Kelly will be the directors of the
Surviving Corporation until such time as they may be replaced in accordance with
the Bylaws of the Surviving Corporation, and the initial principal officers of
the Surviving Corporation will be as follows:
Chairman and CEO - Patrick E. Paterson
Vice President Sales - Karl Minor
Vice President Marketing - Carl Venters III
Vice President Corporate Development - Jay Dunn
Vice President of Business Development - Bradford Gandee
ARTICLE 2 - CONSIDERATION AND CONVERSION AND EXCHANGE OF SHARES
2.1 Consideration. At the Effective Time, in consideration for the
-------------
fulfillment of the obligations, covenants, terms and conditions set forth in
this Agreement, by virtue of the Merger and without any action on the part of
any holder thereof:
(a) Seller Common Stock. The issued and outstanding shares of
-------------------
stock of Seller without par value per share (the "Seller Common Stock") (an
aggregate of 19,811
<PAGE>
shares, excluding any such shares held in the treasury of Seller and excluding
5,353 shares issuable to Frank A. Daniels III and Farley/Ventura LLC pursuant to
outstanding warrants) shall automatically be canceled and extinguished and shall
thereafter be converted into only the right to receive 2,493,609 shares of
common stock, without par value, of Parent (the "Parent Common Stock"). The
conversion ratio is 125.87 shares of Parent Common Stock for each one issued and
outstanding share of Seller Common Stock. As provided in Section 8.1(c) hereof,
the warrants held by Mr. Daniels and Farley/Ventura LLC will be assumed by
Parent. The total number of shares of Parent Common Stock issuable in exchange
for securities of Seller, including common stock of Seller and warrants of
Seller assumed by Parent, is 3,167,391 shares of Parent Common Stock.
(b) Treasury Shares. Each share of Seller Common Stock held in
---------------
the treasury of Seller shall be automatically canceled and extinguished, and no
payment shall be made in respect of such shares.
(c) Merger Sub Common Stock. Each issued and outstanding share
-----------------------
of Merger Sub common stock at the Effective Time shall be converted into and
shall thereafter represent one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation, which shall then constitute
all of the issued and outstanding shares of the Surviving Corporation.
(d) Escrow of Certain Shares. At the Effective Time, Parent
------------------------
shall deliver (or cause to be delivered) to the escrow agent set forth in the
Escrow Agreement in the form of Exhibit 2.1 hereto ("Escrow Agreement"), one
-----------
certificate for Parent Common Stock equal to ten percent (10%) of the Parent
Common Stock to be issued to Seller Stockholders in connection with the Merger
pursuant to Section 2.1(a) (the "Escrow Shares") for the escrow established
pursuant to the Escrow Agreement. Certificates for the remaining shares of
Parent Common Stock to be delivered in connection with the Merger shall be
delivered to Seller Stockholders in accordance with Section 2.5 below.
2.2 No Fractional Shares. No scrip or fractional shares of Parent
--------------------
Common Stock shall be issued in the Merger upon conversion of Seller Common
Stock as provided in Section 2.1(a).
2.3 Surrender and Exchange of Certificates Representing Seller Common
-----------------------------------------------------------------
Stock. At the Closing, each Stockholder shall surrender to Parent an outstanding
- -----
certificate or certificates that immediately prior to the Effective Time
represented his Seller Common Stock (the "Certificates"). In exchange, such
Stockholder shall be entitled to receive at the Closing (subject to the escrow
provisions described in Exhibit 2.1), one or more certificates as requested by
-----------
the Stockholder (properly issued and executed) representing the number of duly
paid and nonassessable shares of Parent Common Stock to which such Stockholder
shall have become entitled pursuant to the provisions of Section 2.1(a); and the
Certificates so surrendered shall forthwith be canceled. The Parent Common Stock
to be paid and issued to the Stockholders hereunder shall sometimes be referred
to collectively as the "Merger Consideration."
<PAGE>
2.4 Share Calculations. Prior to the Effective Time, Seller shall
------------------
prepare and deliver to Parent (subject to the Parent's review and approval) a
complete list of the number of shares of Parent Common Stock to be issued to
each Seller Stockholder in accordance with the provisions of Section 2.1(a) in
connection with the Merger.
2.5 Stock Transfer Books. From and after the Effective Time, no
--------------------
transfer of Seller Common Stock outstanding prior to the Effective Time shall be
registered on the stock transfer books of the Surviving Corporation. If, after
the Effective Time, certificates for Seller Common Stock are presented to the
Surviving Corporation for transfer, such certificates shall be canceled and
exchanged for the consideration described in Section 2.l(a) (the "Merger
Consideration").
2.6 Seller Stock Options and Other Securities. Seller has no
-----------------------------------------
outstanding options, warrants or other securities convertible into or
exchangeable for shares of Seller Common Stock other than warrants in favor of
Frank A. Daniels III covering 1,155 shares of Seller Common Stock and in favor
of Farley/Ventura LLC covering 4,198 shares of Seller Common Stock, which
warrants for a total of 5,353 shares of Seller Common Stock at an exercise price
of $287.00 per share will be assumed by Parent as provided in Section 8.1(c)
hereof.
ARTICLE 3 - RULES OF CONSTRUCTION
In the interpretation of this Agreement, unless otherwise provided or the
context otherwise requires:
(a) The singular includes the plural and vice versa and, in particular
(but without limiting the generality of the foregoing), any word or expression
defined in the singular has the corresponding meaning used in the plural and
vice versa;
(b) Any reference to any gender includes the other genders;
(c) Any reference to an Article, Section, Exhibit, clause, subclause,
paragraph, subparagraph, Schedule or recital is a reference to an Article,
Section, Exhibit, clause, subclause, paragraph, subparagraph, Schedule or
recital of this Agreement;
<PAGE>
(d) Any reference to any agreement, instrument or other document (i)
shall include all appendices, exhibits and schedules thereto and all agreements,
documents or other writings incorporated by reference therein, and (ii) shall be
a reference to such agreement, instrument or other document as amended,
supplemented, modified, suspended, restated or novated from time to time;
(e) Any reference to any statute shall be construed as including all
statutory provisions consolidating, amending or replacing such statute and all
governmental regulations and rules promulgated thereunder;
(f) Any reference to "writing" includes printing, typing, lithography
-------
and other means of reproducing words in a visible form;
(g) Any reference to a time or date or to a local time or date is a
reference to the time and date in Atlanta, Georgia;
(h) Any reference to "dollars" and the symbol "$" means dollars
------- -
constituting legal tender for the payment of public and private debts in the
United States of America;
(i) The headings and Article, Section and paragraph numbering
contained in this Agreement are used solely for convenience and do not
constitute a part of this Agreement, nor shall such headings and numbering be
used in any manner to aid in the construction of this Agreement;
(j) References in this Agreement to the "Seller Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date of this Agreement,
which have been delivered on the date of this Agreement by Seller to Parent, and
references to a numbered Seller Disclosure Schedule shall mean that portion of
the Seller Disclosure Schedules that refers to the specific section or
subsection of Article 4 of this Agreement;
(k) References in this Agreement to the "Stockholder Disclosure
Schedules" shall mean the disclosure schedules, dated as of the date of this
Agreement, which have been delivered on the date of this Agreement by the
Stockholders to Parent, and references to a numbered Stockholder Disclosure
Schedule shall mean that portion of the Stockholder Disclosure Schedules that
refers to the specific section or subsection of Article 5 of this Agreement;
(l) References in this Agreement to the "Parent Disclosure Schedules"
shall mean the disclosure schedules, dated as of the date of this Agreement,
which have been delivered on the date of this Agreement by Parent to Seller, and
references to a numbered Parent Disclosure Schedule shall mean that portion of
the Parent Disclosure Schedules that refers to the specific section or
subsection of Article 6 of this Agreement;
(m) The term "including" shall mean "including, without limitation";
---------
<PAGE>
(n) The term "GAAP" means generally accepted accounting principles and
practices as in force in the United States from time to time;
(o) The term "Governmental Authority" means any United States federal
or state or foreign, governmental, regulatory or administrative authority,
agency, department, board, investigative body or commission or any court,
tribunal, or judicial or arbitral body;
(p) The term "Material Adverse Effect" with respect to a person or
entity means any circumstance, change in, or effect on the business and affairs
of such person or entity or any Subsidiary thereof that, individually or in the
aggregate with any other circumstances, changes in, or effects on, the business
and affairs of such person or entity and its Subsidiaries is, or would
reasonably be expected to be, materially adverse to the business, operations,
assets or liabilities, results of operations or financial condition of such
person or entity and its Subsidiaries, taken as a whole;
(q) The term "Subsidiary" means any corporation, partnership, joint
venture or other legal entity in which a specified person or entity, directly or
indirectly, owns or controls the voting of at least a 50% share or other equity
interest or for which such person or entity, directly or indirectly, acts as a
general partner;
(r) The term "Parent Subsidiary" means any Subsidiary of Parent;
(s) The term "Applicable Laws" means all applicable (i) statutes,
ordinances or other legislative enactments of the United States of America or
other country or foreign government, or of any state or agency thereof, (ii)
rules, regulations, orders, permits, directives or other actions or approvals of
any Governmental Authority, and (iii) judgments, awards, orders, decrees, writs
and injunctions of any court, Governmental Authority or arbitrator;
(t) Each party and its counsel have had the opportunity to negotiate
the terms and provisions of this Agreement. This Agreement, therefore, shall be
construed without regard to any presumption or other rule requiring construction
against the party causing the Agreement to be drafted;
(u) The term "Knowledge" means actual knowledge; and
(v) The terms "hereof," "hereby," "hereunder," herein" and similar
------ ------ --------- ------
terms shall refer to this Agreement as a whole.
<PAGE>
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE STOCKHOLDERS
Seller and the Management Stockholders jointly and severally by this
Agreement represent and warrant to Parent as follows:
4.1 Corporate Organization.
----------------------
(a) Seller is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware. Seller has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and, except as set
forth on Seller Disclosure Schedule 4.1, is duly licensed or qualified to do
------------------------------
business and is in good standing in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a Material Adverse Effect on Seller.
(b) Seller has no Subsidiaries.
(c) Seller Disclosure Schedule 4.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws of Seller.
(d) Except as set forth in Seller Disclosure Schedule 4.1,
------------------------------
Neither the Seller nor any Management Stockholder owns or controls, directly or
indirectly, any corporation, company, association, partnership, joint venture or
other entity (other than Management Stockholders' ownership and control of
Seller).
4.2 Capitalization. The authorized capital stock of Seller consists of
--------------
30,000 shares of common stock and no shares of preferred stock or any other form
of capital stock. Seller Disclosure Schedule 4.2 sets forth the number of shares
------------------------------
of Seller Common Stock owned by each of the Stockholders, together with the
correct residence address of each such Stockholder. Except as set forth on
Seller Disclosure Schedule 4.2, no shares of Seller Common Stock are
- ------------------------------
outstanding. All Seller Common Stock has been duly authorized and validly issued
and is fully paid and nonassessable, was not issued in violation of any
preemptive rights and was issued under available exemptions from federal and
state securities laws. Except as set forth on Seller Disclosure Schedule 4.2,
------------------------------
neither Seller nor any Stockholder has granted or is bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character (except for the letter of intent with Parent) calling for the
transfer, purchase, subscription or issuance of any shares of capital stock of
Seller or any securities representing the right to purchase, subscribe or
otherwise receive any shares of such capital stock or any securities convertible
into any such shares, and there are no agreements or understandings with respect
to voting of any such shares.
<PAGE>
4.3 Authority; No Violation.
-----------------------
(a) Except for the filing of the Certificate of Merger in
accordance with the GBCC and the DGCL, and except as set forth on Seller
------
Disclosure Schedule 4.3, (the "Seller Approvals"), no consents, approvals,
- -----------------------
authorizations, clearances or orders of, filings or registrations with or
notices to (collectively, the "Authorizations") any third party or any
Governmental Authority are necessary on behalf of Seller or the Stockholders in
connection with (i) the execution and delivery by Seller and the Stockholders of
this Agreement and (ii) the consummation by Seller and the Stockholders of the
Merger and the other transactions contemplated by this Agreement. Subject to
receipt of the Seller Approvals, Seller has the full corporate power and
authority to execute and deliver this Agreement and to consummate the Merger and
the other transactions contemplated by this Agreement in accordance with the
terms of this Agreement. The execution and delivery of this Agreement have been
duly and validly approved by the Board of Directors of Seller and by the
Stockholders in accordance with the Articles of Incorporation and bylaws of
Seller and with Applicable Laws. Except for the Seller Approvals, no other
corporate proceedings on the part of Seller are necessary for Seller and the
Stockholders to execute and deliver this Agreement and be bound by the terms of
this Agreement. This Agreement has been duly and validly executed and delivered
by Seller and the Stockholders and constitutes the valid and binding obligation
of Seller and Stockholders enforceable against Seller and the Stockholders in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium or similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought.
(b) Neither the execution and delivery of this Agreement by
Seller or the Stockholders, nor the consummation by Seller and the Stockholders
of the Merger and the other transactions contemplated by this Agreement in
accordance with the terms of this Agreement, nor compliance by Seller and the
Stockholders with any of the terms or provisions of this Agreement, will: (i)
assuming the Seller Approvals are duly obtained, violate any provision of
Seller's Certificate of Incorporation or bylaws; (ii) assuming that the Seller
Approvals are duly obtained, violate any Applicable Laws; or (iii) except as set
forth in Seller Disclosure Schedule 4.3, violate, conflict with, result in a
------------------------------
breach of any provisions 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 of, accelerate the performance required by, or result in the
creation of any lien, mortgage, security interest, pledge, charge, other right
of third parties or other encumbrance (collectively, "Liens") upon any of the
respective properties or assets of Seller or the Stockholders under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Seller or either Stockholder is a party, or by which they or any of their
respective properties or assets may be bound or affected.
<PAGE>
4.4 Financial Statements.
--------------------
(a) Seller Disclosure Schedule 4.4 sets forth copies of: (i)
-------------------------------
the unaudited balance sheet of Seller as of November 30, 1998 and the unaudited
statements of income, stockholders' equity and cash flows for the period ended
December 31, 1998, (collectively, the "Seller Financial Statements"). The Seller
Financial Statements [have been prepared in accordance with GAAP] and present
fairly, in all material respects, the financial position of Seller as of the
respective dates set forth in the Seller Financial Statements, and the results
of Seller's operations and its cash flows for the respective periods set forth
in the Seller Financial Statements; except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments and
lack footnote disclosures, all of which adjustments and all of such footnote
disclosures are not, in the aggregate, believed by the management of Seller or
by the Stockholders to be material and adverse to the business or operations of
the Seller when taken as a whole.
(b) The books and records of Seller have been maintained in
compliance with applicable legal and accounting requirements and in accordance
with generally accepted accounting principles and practices.
(c) Except as and to the extent reflected, disclosed or
reserved against in the Seller Financial Statements, or as disclosed in Seller
------
Disclosure Schedule 4.4, as of January 31, 1999, Seller had no liabilities or
- -----------------------
obligations of any kind, whether absolute, accrued, contingent or otherwise
("Liabilities"). Except as set forth on Seller Disclosure Schedule 4.4, since
------------------------------
January 31, 1999, Seller has not incurred any Liabilities except in the ordinary
course of business and consistent with past practice. Further, at the Effective
Time Seller shall have no liabilities other than trade payables due and owing
for periods consistent with Seller's past practices in the ordinary course of
business, capitalized leases for equipment, and other liabilities in the
ordinary course of business consistent with past practices (such trade payables,
capitalized leases, and other liabilities are collectively referred to as
"Acceptable Liabilities").
4.5 Broker's and Other Fees. Except as disclosed in Seller Disclosure
----------------------- -----------------
Schedule 4.5, neither Seller nor any Stockholder has employed any broker or
- ------------
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement. Except as disclosed in Seller Disclosure Schedule 4.5, there are no
------------------------------
fees payable to any consultants, including lawyers and accountants, in
connection with this Agreement or the transactions contemplated by this
Agreement or which would be triggered by consummation of this Agreement or the
transactions contemplated by this Agreement or the termination of the services
of such consultants by Seller or the Stockholders.
4.6 Absence of Certain Changes or Events.
------------------------------------
(a) Except as disclosed by Seller prior to the date hereof, and
except as disclosed in Seller Disclosure Schedule 4.6, there has been no
------------------------------
Material Adverse Effect on Seller since the date of the Seller Financial
Statements and to Seller's and the Stockholders'
<PAGE>
Knowledge, no facts or conditions exist which will cause a Material Adverse
Effect on Seller (or the Surviving Corporation after the Merger) in the future.
(b) Except as set forth in Seller Disclosure Schedule 4.6, and
------------------------------
except for execution of this Agreement, since the date of the Seller Financial
Statements Seller has conducted its business only in the ordinary course,
consistent with past practice.
4.7 Legal Proceedings. Except as disclosed in Seller Disclosure
----------------- -----------------
Schedule 4.7, neither Seller nor either of the Stockholders is a party to any,
- ------------
and there is no pending or, to Seller's or the Stockholders' Knowledge,
threatened legal, administrative, arbitral or other proceeding, claim, action or
governmental investigation of any nature against Seller, that is reasonably
likely to have a Material Adverse Effect on Seller. Except as disclosed in
Seller Disclosure Schedule 4.7, Seller is not a party to any order, judgment or
- ------------------------------
decree entered in any lawsuit or proceeding that is reasonably likely to have a
Material Adverse Effect on Seller. Without limiting the foregoing, except as
disclosed in Seller Disclosure Schedule 4.7, no actions, suits, demands,
------------------------------
notices, claims, investigations or proceedings that are reasonably likely to
have a Material Adverse Effect on Seller are pending or, to Seller's or the
Stockholders' knowledge, threatened against or otherwise involving, directly or
indirectly, any officer, director, employee or agent of Seller (in connection
with such officer's, director's, employee's or agent's activities on behalf of
Seller or that otherwise relate, directly or indirectly to Seller or its
properties or securities) including without limitation any notices, demand
letters or requests from any Governmental Authority relating to such potential
Liabilities, nor, to the Knowledge of Seller, are there any existing
circumstances which Seller believes will lead to such actions, suits, demands,
notices, claims, investigations or proceedings.
4.8 Taxes and Tax Returns. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.8:
- ------------
(a) Seller has duly filed (and until the Effective Time will so
file) all returns, declarations, reports, information returns and statements
("Returns") required to be filed by it in respect of any United States federal,
state or local Taxes and has duly paid (and until the Effective Time will so
pay) all such Taxes due and payable as finally determined by the applicable
Governmental Authority, other than Taxes which are being contested in good faith
(and disclosed to Parent in writing). As used in this Agreement, "Tax" or
"Taxes" means and includes any and all taxes, fees, levies, assessments, duties,
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any Governmental Authority, including, without
limitation: foreign, domestic, central, local, state or other jurisdictional
taxes or other charges on or with respect to income, estimated income,
franchises, business, occupation, windfall or other profits, gross receipts,
property, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation, or net worth; taxes or other
charges in the nature of excise, withholding, ad valorem, stamp, transfer, value
added, or gains taxes; license, registration and documentation fees; and customs
duties, tariffs, and similar charges. Seller has established (and until the
Effective Time will establish)
<PAGE>
on its books and records reserves that are adequate for the payment of all Taxes
not yet due and payable, but that are incurred in respect of Seller through such
date.
(b) Neither Seller nor Stockholders have received any notice
that any of the Returns of Seller has been examined by the United States
Internal Revenue Service (the "IRS"), or any other United States federal or
state Governmental Authority within the past six years. To the Knowledge of
Seller and the Stockholders: there are no audits or other Governmental Authority
proceedings presently pending, nor any other disputes pending with respect to,
or claims asserted for, Taxes upon Seller; nor has Seller given any currently
outstanding waivers or comparable consents regarding the application of any
statute of limitations with respect to any Taxes or Returns. There are no Liens
for Taxes upon the assets of Seller, except for Liens for Taxes not yet due and
payable or being properly contested. Any Taxes being properly contested are
disclosed on Seller Disclosure Schedule 4.8. Seller has complied (and until the
------------------------------
Effective Time will comply) in all respects with all Applicable Laws relating to
the payment and withholding of Taxes.
(c) Seller (i) has not requested any extension of time within
which to file any Return which Return has not since been filed; (ii) is not a
party to any agreement providing for the indemnification, allocation or sharing
of Taxes; (iii) is not required to include in income any adjustment by reason of
a voluntary change in accounting method initiated by Seller (nor does Seller
have any Knowledge that any Governmental Authority has proposed any such
adjustment or change of accounting method); (iv) has not filed a consent with
any Governmental Authority pursuant to which Seller has agreed to recognize gain
(in any manner) relating to or as a result of this Agreement or the transactions
contemplated by this Agreement; or (v) has not been a member of an affiliated
group other than one of which Seller was the common parent.
4.9 Benefit Plans. Seller has no, has never sponsored or contributed
-------------
to, has no liability to sponsor or contribute to or otherwise in connection
with, and will not institute prior to the Effective Time (i) any pension,
retirement, profit-sharing, cash or deferred, deferred compensation, stock
option, phantom stock, stock appreciation rights, employee stock ownership,
severance pay, vacation, paid time off, education-reimbursement, bonus,
incentive, or other or similar plan, program or other arrangement, (ii) any
cafeteria, Section 125, medical, vision, dental, disability, death benefit, life
insurance, health and/or accident plan, program or other arrangement, (iii) any
written or unwritten employee or other or similar program, arrangement,
agreement or understanding, whether arrived at through collective bargaining or
otherwise, or (iv) any other employee benefit plan, voluntary employees'
beneficiary association, fringe benefit plan, or other or similar plan, program
or other arrangement, agreement or understanding, including, without limitation,
any "employee benefit plan," as that term is defined in Section 3(3) of Employee
Retirement Income Security Act of 1974, as amended.
4.10 Compliance with Applicable Laws. Except as set forth in Seller
------------------------------- ------
Disclosure Schedule 4.10, Seller holds all licenses, franchises, permits,
- ------------------------
consents and authorizations ("Licenses") necessary for the lawful conduct of its
business, except where the failure to hold
<PAGE>
any License would not have a Material Adverse Effect on Seller. No proceeding is
pending or, to the Knowledge of Seller or the Stockholders, threatened seeking
the revocation or suspension of any License. Seller is and has been in
compliance in all material respects with all Applicable Laws, except where the
failure to be in compliance would not have a Material Adverse Effect on Seller;
and neither Seller nor either Stockholder has received any written notices from
any Governmental Authority of any allegation of any violation of any Applicable
Laws or Licenses.
4.11 Certain Contracts.
-----------------
(a) Seller Disclosure Schedule 4.11 lists the following written
-------------------------------
agreements (collectively, the "Material Contracts"), to which Seller is a party
or by which Seller or any of its properties or assets is bound:
(i) all written agreements that involve an annual
commitment or payment by any party thereto of more than $10,000 individually or
$50,000 in the aggregate or which have a fixed term extending more than 12
months from the date of this Agreement (there being no oral agreements of this
kind);
(ii) all joint venture, sales agency, sales
representative or distributorship, broker, franchise, license or similar
agreements;
(iii) all leases;
(iv) all notes, bonds, mortgages, security agreements,
guarantees and other agreements and instruments for or relating to any lending
or borrowing by Seller in any amount (exclusive of advances to employees for
expenses in the ordinary course of business);
(v) all powers of attorney, guarantees, suretyships or
similar agreements; and
(vi) all other written agreements the breach of or
default under which could have a Material Adverse Effect on Seller.
Each of the Material Contracts is valid, binding and enforceable on the
parties thereto in accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium or similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought.
(b) Except as disclosed in Seller Disclosure Schedule 4.11, (i)
-------------------------------
Seller is not a party to or bound by any agreement or understanding (whether
written or oral) with respect to the employment (on any basis other than
at-will) of any officers, employees, directors or consultants, and (ii) the
consummation of the transactions contemplated by this Agreement will
<PAGE>
not (either alone or upon the occurrence of any additional acts or events)
result in any payment (whether of severance pay or otherwise) becoming due from
Seller to any officer, employee, director or consultant thereof. Seller
------
Disclosure Schedule 4.11 sets forth true and correct copies of all written
- ------------------------
severance or employment agreements with officers, directors, employees, agents
or consultants to which Seller is a party. Except as set forth on Seller
------
Disclosure Schedule 4.11, Seller is not a party to any oral agreements of the
- ------------------------
kind referred to in the preceding sentence.
(c) Except as disclosed in Seller Disclosure Schedule 4.11, no
-------------------------------
agreement or understanding to which Seller or any Stockholder is a party or by
which it or he is bound limits the freedom of Seller or any Stockholder to
compete in any line of business or with any person.
(d) Except as disclosed in Seller Disclosure Schedule 4.11,
-------------------------------
neither Seller nor, to the Knowledge of Seller and the Stockholders, any other
party thereto, is in default under any of the Material Contracts or any other
agreement to which Seller is a party or to which it or its properties is bound;
no event has occurred which (whether with or without notice, lapse of time or
the happening or occurrence of any other event) would constitute a default
thereunder entitling any party to terminate a Material Contract or other such
agreement; and the continuation, validity and effectiveness of all such Material
Contracts and agreements under the current terms thereof and the current rights
and obligations of Seller thereunder will in no way be affected, altered or
impaired by the consummation of the transactions contemplated by this Agreement.
To the Knowledge of the Stockholders, except as disclosed in Seller Disclosure
-----------------
Schedule 4.11, upon consummation of the Merger, the Surviving Corporation will
- -------------
be entitled to enjoy the advantages and benefits of the business arrangements,
opportunities and relationships as enjoyed by Seller prior to the date of this
Agreement without interference or interruption.
4.12 Properties and Insurance.
------------------------
(a) Except as disclosed in the Seller Financial Statements or
in Seller Disclosure Schedule 4.12, Seller has good and, as to owned real
-------------------------------
property, marketable title to all assets and properties, whether real or
personal, tangible or intangible, reflected in the Seller Financial Statements
as of December 31, 1998, or owned and acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of in the ordinary
course of business since such date), subject to no Liens except (i) statutory
liens for amounts not yet delinquent or which are being contested in good faith;
(ii) such Liens and title imperfections that do not in the aggregate have a
Material Adverse Effect on Seller; (iii) statutory liens securing the claims or
demands of materialmen, mechanics, carriers, warehousemen, landlords, and other
like persons for labor, materials, supplies, or rentals, if any; (iv) Liens
resulting from deposits made in connection with workers' compensation,
unemployment insurance, social security and like laws; and (v) Liens of banks
and financial institutions with respect to funds on deposit therewith or other
property in possession thereof. Seller as lessee has the right under valid and
subsisting leases to occupy, use, possess and control all real property leased
by Seller as presently occupied, used, possessed and controlled by Seller or
necessary in the operation of its business as currently conducted.
<PAGE>
(b) The business operations and all insurable properties and
assets of Seller are insured for its benefit against all risks which, in the
reasonable judgment of the Stockholders, should be insured against, in each case
under policies or bonds issued by insurers of recognized responsibility, in such
amounts with such deductibles and against such risks and losses as are in the
opinion of the Stockholders adequate for the business engaged in by Seller.
Certificates of insurance with respect to all such policies as in effect on the
date of this Agreement are attached hereto as Seller Disclosure Schedule 4.12.
-------------------------------
Neither Seller nor either of the Stockholders has received any written notice of
cancellation or written notice of a material amendment of any such insurance
policy or bond, and Seller is not in default under any such policy or bond, no
coverage thereunder is being disputed and all material claims thereunder have
been filed in a timely fashion.
(c) No person other than Seller is currently entitled to
possession of any of the properties of Seller, whether owned or leased by
Seller. To the Knowledge of Seller and the Stockholders, the real property,
buildings, structures and improvements owned or leased by Seller conform to all
Applicable Laws, including zoning regulations, none of which would upon
consummation of the transactions contemplated by this Agreement materially and
adversely interfere with the use of such properties, buildings, structures or
improvements for the purposes for which they are now utilized. Seller has not
received written notice, nor does Seller have actual knowledge of (i) any
pending or contemplated condemnation or eminent domain proceeding affecting the
properties owned or leased by Seller, (ii) any proposal for materially
increasing the assessed value of any such properties for state, county, local or
other ad valorem Taxes or (iii) any pending or contemplated proceedings or
public improvements that would result in the levy of any special Tax or
assessment against any such properties; and there are no outstanding
requirements or recommendations by Seller's insurance providers requiring or
recommending any repairs or work to be done with reference to any such
properties. The properties and assets owned or leased by Seller are adequate for
the conduct of its business as presently conducted and are in good repair and
operating condition, normal wear and tear excepted. The properties and assets
owned or leased by Seller constitute all of the property and assets that Seller
uses or may reasonably need in connection with the operation of its business as
presently conducted, and the consummation of the transactions contemplated by
this Agreement will not impair the ability of Parent to use such properties and
assets.
4.13 Environmental Matters.
---------------------
(a) The operations of Seller comply, and have complied, in all
respects with all applicable Environmental Laws (as defined below).
(b) Seller has obtained all environmental, health and safety
Licenses and other authorizations necessary for the operation of Seller's
business, all of which are valid and in good standing and are not subject to any
modification or revocation proceeding, and Seller is in compliance in all
respects with all terms and conditions thereof.
<PAGE>
(c) Neither Seller nor any of the Stockholders has received any
written notice of any pending or threatened investigation, proceeding or claim
to the effect that Seller is or may be liable to any person or entity, or
responsible or potentially responsible for the costs of any remedial or removal
action or other cleanup costs, as a result of noncompliance with any
Environmental Laws or arising out of the presence, generation, storage or
disposal of hazardous waste, including liability under the United States
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, any state superfund law or any Environmental Law, and there is no past
or present action, activity, condition or circumstance that could be expected to
give rise to any such liability on the part of Seller to any person or entity or
for any such cleanup costs.
(d) The term "Environmental Laws" shall mean all Applicable
Laws relating to pollution or protection of the environment.
4.14 Intellectual Property.
---------------------
(a) Seller Disclosure Schedule 4.14 (i) lists and describes all
-------------------------------
patents, patent applications, trade names, trademarks, service marks, trademark
and service mark registrations and applications, and all patent, trademark and
service mark licenses, (ii) describes all copyrights, computer software,
databases, and all other intellectual property that are owned by or registered
in the name of Seller or to which Seller has any rights as licensee or otherwise
(except "off-the-shelf" computer software being used in accordance with the
standard license therefor), which list specifies which items are owned and to
which items Seller has rights as a licensee or otherwise; and (iii) lists and
describes all contracts, agreements or understandings pursuant to which Seller
has authorized any person to use, or which any person otherwise has the right to
use, in any business or commercial activity, any of the items listed in clauses
(i) and (ii) above.
(b) The items listed or described in Section 4.14 or in the
Seller Disclosure Schedule 4.14 pursuant to the preceding subsection (a)
- -------------------------------
constitute or represent all of the intellectual property necessary to the
conduct of Seller's business, and Seller's ownership and use rights with respect
thereto are free and clear of Liens other than those disclosed in Seller
------
Disclosure Schedule 4.12.
- ------------------------
(c) All federal trademark or service mark registrations, and
all applications to register any trademarks or service marks or any trademark
register maintained by the United States government or any state or provincial
government are based on truthful affidavits or declarations of use.
(d) Seller has not infringed upon, and Parent's conduct of
Seller's business after the Closing as presently conducted will not infringe
upon, any patent, service mark, trade name, trademark, copyright, trade secret
or other intellectual property belonging to any other person or entity; and
Seller has not agreed to indemnify any person or entity for or against any
infringement of or by the intellectual property set forth in the Seller
------
Disclosure Schedule 4.14. To the Knowledge of Seller and the Stockholders, no
- ------------------------
person or entity is infringing upon any of
<PAGE>
Seller's patents, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations, licenses, copyrights, computer
software or other intellectual property.
(e) Seller has, and immediately after the Closing Parent will
have, all computer software and databases that are necessary to conduct Seller's
business as presently conducted by Seller and all documentation relating to all
such computer software and databases. The computer software performs
substantially in accordance with the documentation related thereto or used in
connection therewith and is adequate for the business purpose for which it is
used. Seller Disclosure Schedule 4.14 identifies each person or entity to whom
-------------------------------
Seller has sold, licensed, leased or otherwise transferred or granted any
interest in or rights to any of the computer software and databases and the date
of each such sale, license, lease or other transfer or grant.
4.15 No Parachute Payments. Except as disclosed in Seller Disclosure
--------------------- -----------------
Schedule 4.15, no officer, director, employee or agent (or former officer,
- -------------
director, employee or agent) of Seller is entitled now, or will or may be
entitled as a consequence of this Agreement or the Merger, to any payment or
benefit from or from Parent, which if paid or provided would constitute an
"excess parachute payment," as defined in Section 280G of the Code.
4.16 Absence of Certain Agreements and Practices.
-------------------------------------------
(a) Except as set forth in Seller Disclosure Schedule 4.16 or
-------------------------------
in connection with customary transactions in the ordinary course of business, no
present or former officer, director or Stockholder of Seller:
(i) owes money to Seller;
(ii) has any claim against Seller;
(iii) has any interest in any property or assets used by
Seller in its business;
(iv) has any benefits that are contingent on the
transactions contemplated by this Agreement, other than as stated in this
Agreement;
(v) has any agreement with Seller that is not terminable
by Seller without penalty or notice;
(vi) has any agreement providing severance benefits or
other benefits, which are conditioned upon a change of control after the
termination of employment of such employee regardless of the reason for such
termination of employment; or
(vii) has any agreement or plan, any of the benefits of
which will be increased, vested or accelerated by the occurrence of any of the
transactions contemplated by this Agreement.
<PAGE>
(b) Neither Seller nor any of its directors, officers, agents,
affiliates or employees, nor any other person acting on behalf of Seller, has
(i) given or agreed to give any gift or similar benefit having a value of $5,000
or more to any customer, supplier or governmental employee or official or any
other person, for the purpose of directly or indirectly furthering the business
of Seller, (ii) used any corporate funds for contributions, payments, gifts or
entertainment, or made any expenditures, relating to political activities to
government officials or others in violation of any Applicable Laws, or (iii)
received any unlawful contributions, payments, gifts or expenditures in
connection with the business of Seller.
4.17 Major Vendors and Customers. Seller Disclosure Schedule 4.17
--------------------------- -------------------------------
sets forth a list of each licensor, developer, remarketer, distributor and
supplier of property or services to, and each licensee, end-user or customer of,
Seller, to whom Seller paid or billed in the aggregate in excess of $25,000 from
January 1, 1998 through December 30, 1998.
4.18 Accounts Receivable. Seller has no accounts receivable.
-------------------
4.19 Corporate Records. Except as set forth on Seller Disclosure
----------------- -----------------
Schedule 4.19, at the Effective Time the corporate record books (including the
- -------------
share records) of Seller will be complete, accurate and up to date in all
material respects with all necessary signatures and set forth all meetings and
actions taken by the Stockholders and directors of Seller and all transactions
involving the shares of Seller (and contain all canceled share certificates).
4.20 Combinations Involving Seller. All mergers, consolidations or
-----------------------------
other business combinations involving Seller, and all liquidations, purchases or
other transactions by which Seller acquired any of its business and property
were conducted in accordance with applicable certificates of incorporation,
bylaws, any other applicable agreements, instruments and documents and
Applicable Laws.
4.21 Bank Accounts. Seller Disclosure Schedule 4.21 lists all bank,
------------- -------------------------------
money market, savings and similar accounts and safe deposit boxes of Seller,
specifying the account numbers and the authorized signatories or persons having
access to them.
4.22 Labor Relations. Except as disclosed on Seller Disclosure Schedule
--------------- --------------------------
4.22, Seller is in compliance with all federal and state laws respecting
- ----
employment and employment practices, terms and conditions of employment, wages
and hours, and is not engaged in any unfair labor or unlawful employment
practice. There is no unlawful employment practice or discrimination charge
pending before the Equal Employment Opportunity Commission ("EEOC") or any EEOC
recognized state "referral agency." There is no unfair labor practice charge or
complaint against Seller pending before the National Labor Relations Board
("NLRB"). There is no labor strike, dispute, slowdown or stoppage actually
pending or, to the knowledge of Seller or the Stockholders, threatened against
or involving or affecting Seller and no NLRB representation question exists
respecting any of its employees. No grievance or arbitration proceeding is
pending and no written claim therefor exists. There is no collective bargaining
agreement that is binding on Seller.
<PAGE>
4.23 Year 2000 Matters. The software listed on Seller Disclosure
----------------- -----------------
Schedule 4.14 conforms to the Year 2000 compliance criteria set forth in Seller
- ------------- ------
Disclosure Schedule 4.14 and is designed to be used prior to, during, and after
- ------------------------
the calendar year 2000 AD, and such software will operate during each such time
period without error relating to date data, specifically including any error
relating to, or the product of, date data which represents or references
different centuries or more than one century or any leap year, provided,
however, that Seller makes no representation regarding the potential failure of
the software to conform to the Year 2000 compliance criteria caused by: (i)
third party hardware, firmware, software or data that interfaces with, is
manipulated by, or otherwise operates in conjunction with the Software,
including but not limited to inconsistencies between the date handling
characteristics of the Software and such third party components or data; or (ii)
modification of the Software by customers or third parties. Seller's internal
systems and software and the network connections it maintains are adequately
programmed to address the Year 2000 issue.
4.24 Change in Control Provisions. Seller Disclosure Schedule 4.24
-------------------------------
contains a true and complete copy of all agreements in effect to which the
Seller is a party and which contain any provisions which become effective upon a
change in control, merger, consolidation, sale of assets or other business
combination involving Seller or otherwise require any payment or performance by
Seller, or any officer or director thereof, now or in the future, in connection
with or as a result of any of the transactions contemplated by this Agreement.
4.25 Pooling of Interests. To the Seller's Knowledge and the Knowledge
--------------------
of the Stockholders, neither Seller nor any of its directors, officers or
stockholders has taken any action which would interfere with Parent's ability to
account for the Merger as a pooling of interests.
4.26 Disclosure. No representation, warranty, or statement made by
----------
Seller or the Stockholders in this Agreement or in any document or certificate
furnished or to be furnished to Parent pursuant to this Agreement contains or
will contain any untrue or incomplete statement of material fact or omits or
will omit to state any material fact necessary to make the statements contained
in this Agreement or in such document or certificate not misleading. All facts
known to Seller or the Stockholders that are material to the financial
condition, operation, or prospects of the business and assets of Seller have
been disclosed to Parent.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS
Each Stockholder, severally and not jointly, represents and warrants to
Parent, with respect to himself or herself and his or her ownership of Seller
Common Stock, as follows:
5.1 Ownership of Shares. The Stockholder owns of record and
-------------------
beneficially all of the Seller Common Stock set forth opposite his or her name
on Seller Disclosure Schedule 4.2. The Stockholder owns all right, title and
------------------------------
interest in and to such Seller Common Stock, free and clear of all Liens
(including those for federal or state estate or inheritance taxes), options,
<PAGE>
rights of refusal or similar rights or other transfer restrictions of any nature
whatsoever (including any arising from any pending or threatened litigation)
other than restrictions on transfers arising out of applicable federal and state
securities laws and the agreements identified on Seller Disclosure Schedule 4.2
------------------------------
which restrictions shall be terminated at or prior to the Closing). The
Stockholder owns no other securities of Seller.
5.2 Authorization. With respect to this Agreement and any other
-------------
agreements, instruments and documents executed and delivered by the Stockholder
pursuant to this Agreement (this Agreement and such other agreements,
instruments and documents are collectively referred to as the "Stockholder
Delivered Agreements"): (i) the Stockholder has the right, power and authority
to enter into the Stockholder Delivered Agreements executed and delivered by him
and to consummate the transactions contemplated by, and otherwise to comply with
and perform his obligations under them; and (ii) the Stockholder Delivered
Agreements will, when delivered, constitute valid and binding obligations of the
Stockholder enforceable against the Stockholder in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium or similar
laws affecting the enforcement of creditors' rights generally, and except that
the availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
5.3 Absence of Violations or Conflicts. Except as set forth on
---------------------------------
Stockholder Disclosure Schedule 5.3, the execution and delivery of the
- -----------------------------------
Stockholder Delivered Agreements and the consummation by the Stockholder of the
transactions contemplated by, or other compliance with the performance under
them do not and will not with the passing of time or giving of notice or both:
(i) constitute a violation of, be in conflict with, constitute a default or
require any payment under, permit a termination of, or result in the creation or
imposition of any Lien upon any assets of Seller or any of the Seller Common
Stock under (A) any contract, agreement, commitment, undertaking or
understanding (including rights of refusal or similar rights or other transfer
restrictions) to which the Stockholder is a party or to which he or his
properties or Seller or its properties are subject or bound, (B) any judgment,
decree or order of any Governmental Authority to which the Stockholder or his
properties are subject or bound, or (C) any Applicable Laws; or (ii) create, or
cause the acceleration of the maturity of, any debt, obligation or liability of
the Stockholder that would result in any Lien or other claim upon the assets of
Seller.
5.4 No Consents Required. Except for the filing of the Certificate of
--------------------
Merger in accordance with the GBCC and the DGCL, and except for the Seller
Approvals, and except as set forth on Stockholder Disclosure Schedule 5.4, no
-----------------------------------
Authorization of or with any Governmental Authority or any other Authorization
of or with any other third party on the part of the Stockholder is required in
connection with his execution or delivery of the Stockholder Delivered
Agreements or the consummation of the transactions contemplated by, or other
compliance with the performance under, such Stockholder Delivered Agreements by
the Stockholder.
<PAGE>
5.5 No Claims Against Seller. Except as set forth on Stockholder
------------------------ -----------
Disclosure Schedule 5.5, the Stockholder has no claim against Seller, except for
- -----------------------
accrued compensation and benefits and expenses or similar obligations incurred
in the ordinary course of business (including reimbursement of medical expenses
pursuant to the Employee Plans disclosed pursuant to this Agreement), and except
as otherwise specifically provided in this Agreement.
5.6 Litigation Related to this Agreement. The Stockholder is not a
------------------------------------
party to or subject to any judgment, decree or order entered in any lawsuit or
proceeding brought by any Governmental Authority or other third party seeking to
prevent the execution of this Agreement or the consummation of the transactions
contemplated by this Agreement.
5.7 Investment Intent. The Stockholder will acquire the Parent Common
-----------------
Stock pursuant to this Agreement for his own account, to hold for investment and
with no present intention of dividing his participation with others or reselling
or otherwise participating, directly or indirectly, in a distribution thereof,
and he will not make any sale, transfer or other disposition of the Parent
Common Stock in violation of the Securities Act of 1933 (the "1933 Act") or any
applicable state securities laws (the "State Acts"). Without limiting the
foregoing, the Stockholder has no plan or intention to sell or otherwise dispose
of any of the Parent Common Stock issued to him pursuant to this Agreement. The
Stockholder agrees that there will be placed on the certificate or other
evidence of the Parent Common Stock, or any substitutions therefor, a legend
stating in substance:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES" HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON
EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933
(THE "1933 ACT"), SECTION 10-5-9(13) OF THE OFFICIAL CODE OF
GEORGIA ANNOTATED (THE "GEORGIA CODE") AND OTHER APPLICABLE
BLUE SKY LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,SOLD
OR TRANSFERRED OTHER THAN (i) PURSUANT TO AN EFFECTIVE REGISTRATION
OR AN EXEMPTION THEREFROM UNDER THE 1933 ACT, THE GEORGIA CODE AND
OTHER APPLICABLE BLUE SKY LAWS, AND (ii) UPON RECEIPT BY THE ISSUER
OF EVIDENCE SATISFACTORY TO IT OF COMPLIANCE WITH THE 1933 ACT,
THE GEORGIA CODE AND THE APPLICABLE SECURITIES LAWS OF ANY OTHER
JURISDICTION. THE ISSUER SHALL BE ENTITLED TO REQUIRE AN OPINION
OF COUNSEL SATISFACTORY TO IT WITH RESPECT TO COMPLIANCE WITH
THE ABOVE LAWS.
5.8 Access to Information; Accredited Investor Status.
-------------------------------------------------
(a) The Stockholder has been given access to all material and
relevant information concerning Parent, thereby enabling the Stockholder to make
an informed investment decision concerning his investment in the Parent Common
Stock. The Stockholder has relied solely upon an independent investigation made
by him and his representatives, if
<PAGE>
any, and has, prior to the date of this Agreement, been given access to and the
opportunity to examine data and information relating to Parent. In making his
investment decision to acquire the Parent Common Stock pursuant to this
Agreement, the Stockholder is not relying on any oral or written representations
or assurances from Parent or any other person or any representative of Parent or
any other person other than as set forth in the MegaMarketing Corporation
Business Plan dated November 24, 1998, as provided to the Stockholders, and this
Agreement. Patrick E. Patterson and Carl Venters III have reviewed the
definition of "accredited investor" in Rule 501 of Regulation D under the 1933
Act and each of Patrick E. Patterson and Carl Venters III is an accredited
investor.
(b) Each other Stockholder represents and warrants to Parent
that such stockholder alone, or with such Stockholder's purchaser
representative, has such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks of the prospective
investment.
5.9 Economic Risk. The Stockholder represents that he is able to bear
-------------
the economic risk of an investment in the Parent Common Stock, which the
Stockholder acknowledges is currently illiquid, including a possible total loss
of his investment. In making this statement, the Stockholder represents and
warrants to Parent that he has adequate means of providing for his current needs
and contingencies; he is able to afford to hold the Parent Common Stock for an
indefinite period and he further represents that he has such knowledge and
experience in financial and business matters that he is capable of evaluating
the merits and risks of the investment in the Parent Common Stock. Further, the
Stockholder represents that he has no present need for liquidity in the Parent
Common Stock and is willing to accept such investment risks.
5.10 Tax Advice. The Stockholder is not relying on any statements or
----------
representations of Parent, Seller or the agent of either, regarding the United
States federal and state tax consequences of an investment in the Parent Common
Stock or the transactions contemplated by this Agreement except as provided in
this Agreement, and understands that he (and not Parent) shall be responsible
for his own tax liability that will arise as a result of this investment or the
transactions contemplated by this Agreement.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Seller and the Stockholders as follows:
6.1 Corporate Organization.
----------------------
(a) Parent is a corporation duly organized, validly existing
and in good standing under the laws of the State of Georgia. Parent has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, is duly licensed or
qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary,
<PAGE>
except where the failure to be so licensed, qualified or in good standing would
not have a Material Adverse Effect on Parent.
(b) All Subsidiaries of Parent are listed on Parent Disclosure
-----------------
Schedule 6.1. Each Subsidiary is duly organized and validly existing and in good
- ------------
standing under the laws of its state or other jurisdiction of incorporation.
Each Parent Subsidiary has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted and is duly licensed or qualified to do business and is in good
standing in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed, qualified or in good standing would not have a Material Adverse
Effect on Parent. Parent Disclosure Schedule 6.1 sets forth copies of the
------------------------------
Articles of Incorporation and bylaws, if any, as in effect on the date of this
Agreement, of Parent and each of the Parent Subsidiaries. Except as set forth in
the Parent Disclosure Schedule 6.1, Parent does not own or control, directly or
------------------------------
indirectly, any equity interest in any corporation, company, association,
partnership, joint venture or other entity.
6.2 Capitalization. As of the date of this Agreement, the authorized
--------------
capital stock of Parent consists of 10,000,000 shares of Parent Common Stock and
500,000 shares of preferred stock, without par value ("Parent Preferred Stock").
As of the date of this Agreement, there are 6,719,425 shares of Parent Common
Stock issued and outstanding (of which 479,617 shares held in escrow will be
cancelled, such that the number of shares issued and outstanding at this date,
giving effect to such cancellation, would be 6,239,808), 141,120 shares of
Parent Preferred Stock issued and outstanding, 260,192 shares reserved for
issuance upon the exercise of that certain Stock Purchase Warrant issued by
Parent to Sirrom Investments, Inc. ("Sirrom"), and 1,254,096 shares of Parent
Common Stock reserved for issuance upon the exercise of outstanding stock
options and warrants ("Parent Stock Options"). All issued and outstanding shares
of Parent Common Stock, and all issued and outstanding shares of capital stock
of each of the Parent Subsidiaries, have been duly authorized and validly issued
and are fully paid and nonassessable. All of the outstanding shares of capital
stock of each Parent Subsidiary are owned by Parent and are free and clear of
any Liens other than a pledge to Sirrom to secure the repayment of a loan from
Sirrom to Parent. Except for the Parent Stock Options disclosed in Parent
------
Disclosure Schedule 6.2 and the warrant issued to Sirrom referenced above, as of
- -----------------------
the date of this Agreement, neither Parent nor any of the Parent Subsidiaries
has granted nor is bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the transfer,
purchase, subscription or issuance of any shares of capital stock of Parent or
any of the Parent Subsidiaries or any securities representing the right to
purchase, subscribe or otherwise receive any shares of such capital stock or any
securities convertible into any such shares, and there are no agreements or
understandings with respect to voting of any such shares.
6.3 Authority; No Violation.
-----------------------
(a) Except for any applicable State Blue Sky requirements and
the filings of the Merger documents as required by the GBCC and the DGCL (the
"Parent Approvals"), no
<PAGE>
Authorization of any Governmental Authority is necessary on behalf of Parent in
connection with the execution and delivery by Parent of this Agreement and the
consummation by Parent of the Merger and the other transactions contemplated by
this Agreement. Subject to receipt of the Parent Approvals, Parent has the full
corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and the other transactions contemplated by this Agreement
in accordance with the terms of this Agreement. The execution and delivery of
this Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement have been duly and validly approved by the Board
of Directors of Parent in accordance with the Articles of Incorporation of
Parent and Applicable Laws. Except for the Parent Approvals, no other corporate
proceedings on the part of Parent are necessary to consummate the Merger and the
other transactions contemplated by this Agreement. This Agreement has been duly
and validly executed and delivered by Parent and constitutes the valid and
binding obligation of Parent enforceable against Parent in accordance with its
terms.
(b) Neither the execution and delivery of this Agreement by
Parent and Merger Sub, nor the consummation by Parent and Merger Sub of the
Merger and the other transactions contemplated by this Agreement in accordance
with the terms of this Agreement, or compliance by Parent and Merger Sub with
any of the terms or provisions of this Agreement, will (i) assuming that the
Parent Approvals are duly obtained, violate any provision of Parent's or Merger
Sub's Articles of Incorporation or bylaws, (ii) assuming that the Parent
Approvals are duly obtained, violate any Laws applicable to Parent, any of the
Parent Subsidiaries, or any of their respective properties or assets, or (iii)
except as set forth in Parent Disclosure Schedule 6.3, violate, conflict with,
------------------------------
result in a breach of any provisions 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 of, accelerate the performance required by, or result
in the creation of any Lien upon any of the respective properties or assets of
Parent or the Parent Subsidiaries under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Parent or any of the
Parent Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected except, with respect to (ii) and
(iii) above, such as individually or in the aggregate will not have a Material
Adverse Effect on the Parent, and which will not prevent or delay the
consummation of the Merger and the other transactions contemplated by this
Agreement.
(c) Subject to receipt of the Parent Approvals, Merger Sub has
the full corporate power and authority to execute and deliver this Agreement and
to consummate the Merger and the other transactions contemplated by this
Agreement in accordance with the terms of this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly and validly approved by the Board of Directors
and the sole Stockholder of Merger Sub in accordance with the Articles of
Incorporation of Merger Sub and Applicable Laws. Except for the Parent
Approvals, no other corporate proceedings on the part of Merger Sub are
necessary to consummate the Merger or the other transactions so contemplated.
This Agreement has been duly and validly executed and delivered by Merger Sub
and constitutes the valid and binding obligation of Merger Sub enforceable
against Merger Sub in accordance with its terms.
<PAGE>
6.4 Financial Statements.
--------------------
(a) Parent Disclosure Schedule 6.4 sets forth copies of: (i)
------------------------------
balance sheets of Genesis Direct Inc. and of Control Group, Ltd. at February 28,
1998 and the statements of income stockholder's equity and cash flows for the
period ended February 28, 1998, and the statements of income, Stockholders'
equity and cash flows for the period ended December 31, 1997, together with a
draft of the proposed audit report thereon of Arthur Andersen & Co. and (ii)
internally prepared interim consolidated financial statements of Parent (balance
sheet and income statement) dated November 30, 1998 and for the nine (9) month
period ended November 30, 1998 (collectively, together with the related notes
and any additional financial statements, the "Parent Financial Statements"). The
Parent Financial Statements have been prepared in accordance with GAAP and
present fairly, in all material respects, the financial position of Parent as of
the respective dates set forth in the Parent Financial Statements, and the
results of Parent's operations and its cash flows for the respective periods set
forth in the Parent Financial Statements; except that the unaudited interim
financial statements were not subject to normal and recurring year-end
adjustments and do not contain footnote disclosures, all of which adjustments
and all of such footnote disclosures are not, in the aggregate, believed by the
management of Parent to be material to the business or operations of Parent when
taken as a whole.
(b) The Parent Financial Statements, as of their respective
dates, did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated in such Parent Financial Statements or
necessary in order to make the statements made in such Parent Financial
Statements, in light of the circumstances under which they were made, not
misleading.
(c) Since November 30, 1998, there has not been any change,
occurrence or circumstance in the business, results of operations or financial
condition of Parent or any Parent Subsidiary having, individually or in the
aggregate, a Material Adverse Effect on Parent, other than changes, occurrences
and circumstances disclosed by the Parent prior to the date of this Agreement.
6.5 Broker's and Other Fees. Neither Parent nor any of the Parent
-----------------------
Subsidiaries nor any of their directors or officers has employed any broker or
finder or incurred any liability for any broker's or finder's fees or
commissions in connection with any of the transactions contemplated by this
Agreement.
6.6 Parent Common Stock. At the Effective Time, the Parent Common
-------------------
Stock to be issued pursuant to the Merger will be duly authorized and validly
issued, fully paid and nonassessable, free of preemptive rights and free and
clear of all Liens created by or through Parent (except as set forth in this
Agreement and the documents and agreements executed in connection herewith).
6.7 Legal Proceedings. Except as disclosed in Parent Disclosure
----------------- -----------------
Schedule 6.7, neither Parent nor Merger Sub is a party to any, and there is no
- ------------
pending or, to Parent's or
<PAGE>
Merger Sub's Knowledge, threatened legal, administrative, arbitral or other
proceeding, claim, action or governmental investigation of any nature against
Parent or Merger Sub. Except as disclosed in Parent Disclosure Schedule 6.7,
------------------------------
neither Parent nor Merger Sub is a party to any order, judgment or decree
entered in any lawsuit or proceeding that is likely to have a Material Adverse
Effect on Parent or Merger Sub. Without limiting the foregoing, except as
disclosed in Parent Disclosure Schedule 6.7, no actions, suits, demands,
------------------------------
notices, claims, investigations or proceedings that are likely to have a
Material Adverse Effect on Parent or Merger Sub are pending or, to Parent's or
Merger Sub's Knowledge, threatened against or otherwise involving, directly or
indirectly, any officer, director, employee or agent of Parent or Merger Sub (in
connection with such officer's, director's, employee's or agent's activities on
behalf of Parent or Merger Sub or that otherwise relate, directly or indirectly
to Parent or Merger Sub or their properties or securities) including without
limitation any notices, demand letters or requests from any Governmental
Authority relating to such potential Liabilities, nor, to the Knowledge of
Parent or Merger Sub, are there any circumstances which could lead to such
actions, suits, demands, notices, claims, investigations or proceedings.
6.8 Taxes and Tax Returns. Except as disclosed in Parent Disclosure
--------------------- -----------------
Schedule 6.8:
- ------------
(a) Each of Parent and Merger Sub has duly filed (and until the
Effective Time will so file) all Returns required to be filed by it in respect
of any United States federal, state or local Taxes and has duly paid (and until
the Effective Time will so pay) all such Taxes due and payable as finally
determined by the applicable Governmental Authority, other than Taxes which are
being contested in good faith (and disclosed to Seller in writing). Each of
Parent and Merger Sub has established (and until the Effective Time will
establish) on its books and records reserves that are adequate for the payment
of all Taxes not yet due and payable, but that are incurred in respect of Parent
and Merger Sub through such date.
(b) None of the Returns of Parent or Merger Sub has been
examined by the IRS, or any other United States federal, state or local or any
foreign Governmental Authority within the past six years. To the Knowledge of
Parent and Merger Sub: there are no audits or other Governmental Authority
proceedings presently pending, nor any other disputes pending with respect to,
or claims asserted for, Taxes upon Parent or Merger Sub; nor has Parent or
Merger Sub given any currently outstanding waivers or comparable consents
regarding the application of any statute of limitations with respect to any
Taxes or Returns. There are no Liens for Taxes upon the assets of Parent or
Merger Sub, except for Liens for Taxes not yet due and payable or being properly
contested. Any Taxes being properly contested are disclosed on Parent Disclosure
-----------------
Schedule 6.8. Parent has complied (and until the Effective Time will comply) in
- ------------
all respects with all Applicable Laws relating to the payment and withholding of
Taxes.
(c) Neither Parent nor Merger Sub (i) has requested any
extension of time within which to file any Return which Return has not since
been filed; (ii) is a party to any agreement providing for the indemnification,
allocation or sharing of Taxes; (iii) is required to include in income any
adjustment by reason of a voluntary change in accounting method initiated by
Parent or Merger Sub (nor does Parent or Merger Sub have any Knowledge that
<PAGE>
any Governmental Authority has proposed any such adjustment or change of
accounting method); (iv) has filed a consent with any Governmental Authority
pursuant to which Parent or Merger Sub has agreed to recognize gain (in any
manner) relating to or as a result of this Agreement or the transactions
contemplated by this Agreement; or (v) has been a member of an affiliated group
other than one of which Parent or Merger Sub was the common parent.
6.9 Compliance with Applicable Laws. Except as set forth in Parent
------------------------------- ------
Disclosure Schedule 6.9, each of Parent and Merger Sub holds all Licenses
- -----------------------
necessary for the lawful conduct of its business except where the failure to
hold any License would not have a Material Adverse Effect on Parent or Merger
Sub. No proceeding is pending or, to the Knowledge of Parent or Merger Sub,
threatened seeking the revocation or suspension of any License. Each of Parent
and Merger Sub is and has been in compliance in all material respects with all
Applicable Laws, except where the failure to be in compliance would not have a
Material Adverse Effect on Parent or Merger Sub; and neither Parent nor Merger
Sub has received any written notices from any Governmental Authority of any
allegation of any violation of any Applicable Laws or Licenses.
6.10 Pooling of Interests. To the Parent's knowledge, based on
--------------------
consultation with its independent accountants, neither Parent nor its
Subsidiaries nor any of its directors, officers, affiliates or shareholders has
taken any action which would interfere with Parent's ability to account for the
Merger as a pooling of interests.
6.11 Disclosure. No representation, warranty, or statement made by
----------
Parent or Merger Sub in this Agreement or in any document or certificate
furnished or to be furnished to Parent or Merger Sub pursuant to this Agreement
contains or will contain any untrue or incomplete statement or omits or will
omit to state any fact necessary to make the statements contained in this
Agreement or in such document or certificate not misleading. All facts known or
reasonably available to Parent or Merger Sub that are material to the financial
condition, operation, or prospects of the business and assets of Parent and
Merger Sub have been disclosed to Seller and the Stockholders.
6.12 Registration Rights. Parent has not entered into any registration
-------------------
rights agreement and has no plans to do so except for the registration rights
agreement to be entered into with Farley/Ventura LLC, Via Investment, LLC and
Frank A. Daniels III. However, Parent has covenanted to Messrs. Ellinger and
Muscolino, and intends to covenant to Messrs. DePrizzio and Burgdorf as follows:
"Parent shall provide [Ellinger, Muscolino, DePrizzio and Burgdorf] with the
same rights to participate as selling shareholders in connection with public
offerings of the Parent's Common Stock as are enjoyed by the members of Parent's
senior management team." To date, Parent has not granted registration rights of
any kind to members of Parent's senior management team, and has no arrangement
or understanding with any member of Parent's management team regarding
participation as selling shareholders in connection with any public offering of
Parent's Common Stock.
<PAGE>
ARTICLE 7 - COVENANTS AND CERTAIN ACTIONS OF THE PARTIES
7.1 Conduct of Business. Seller and the Stockholders agree that from
-------------------
the date hereof to the Effective Time, except as specified herein, Seller shall
conduct its business only in the ordinary course and consistent with prudent
business practice and past practice, except for transactions permitted hereunder
or with the prior written consent of Parent, which consent shall not be
unreasonably withheld, conditioned or delayed. Without limiting the generality
of the foregoing, Seller shall use all commercially reasonable efforts to:
(a) maintain its existence and status in good standing in all
jurisdictions in which it is required to be qualified or registered to conduct
its business, except where the failure to do so would not have a Material
Adverse Effect on Seller;
(b) maintain all of its tangible assets in good operating
condition and maintain the protection of all intellectual property in
substantially the same standing as exists on the date hereof;
(c) continue performance in the ordinary course of its
obligations under its contracts and agreements;
(d) preserve its business organization intact, use all
commercially reasonable efforts to keep available its present officers and
employees and preserve its present relationships with suppliers, customers and
others having business relationships with it; and
(e) maintain its existing insurance, subject to variations in
amount required by the ordinary operations of its business.
7.2 Negative Covenants.
------------------
(a) Seller and the Stockholders agree that from the date hereof
to the Effective Time, except as disclosed elsewhere herein or otherwise
approved by Parent in writing, which approval shall not be unreasonably
withheld, conditioned or delayed, or as permitted or required by this Agreement,
Seller will not:
(i) change any provision of its Certificate of
Incorporation or bylaws except for an amendment to its Certificate
of Incorporation setting the number of authorized shares at 30,000
and for no other purposes;
(ii) except pursuant to the exercise or conversion of
currently outstanding options, warrants or other securities
convertible into or exchangeable for Seller Common Stock, issue
any additional shares of Seller Common Stock or other securities
or change the number of shares of its authorized or issued capital
stock or issue or grant any option, warrant, call, commitment,
subscription, right to purchase or agreement of any character
relating to the authorized or issued capital stock of Seller or
any securities
<PAGE>
convertible into shares of such stock, or split, combine or
reclassify any shares of its capital stock, or declare, set aside
or pay any dividend or other distribution (whether in cash, stock
or property or any combination thereof) in respect of its capital
stock;
(iii) directly or indirectly redeem, purchase or otherwise
acquire any capital stock of Seller;
(iv) grant any severance or termination pay (other than
pursuant to policies or contracts in effect on the date hereof and
that were not required to be modified or terminated pursuant to
the terms hereof and that have been disclosed to Parent pursuant
hereto) to, or enter into or amend any employment or severance
agreement with, any of its directors, officers or employees; adopt
any new employee benefit plan or arrangement of any type; or award
any increase in compensation or benefits to its directors,
officers or employees except with respect to employee increases in
the ordinary course of business and consistent with past practices
and policies and, with regard to bonuses in amounts that do not
result in a material variance from the amounts reserved for such
payments through the date of the most recent balance sheet
included in the Seller Financial Statements;
(v) sell or dispose of any assets other than in the
ordinary course of business consistent with past practices;
(vi) make any capital expenditures outside the ordinary
course of business;
(vii) acquire in any manner whatsoever any business or
entity;
(viii) enter into, terminate, modify or amend any agreement
or arrangement with any officer or director of Seller or any of
the Seller Subsidiaries or any "affiliate" of any such officer or
director, as that term is defined in Regulation 14A of the 1934
Act (an "Affiliate");
(ix) make any change in its accounting methods or
practices;
(x) incur, create, assume or guarantee any Liabilities
except in the ordinary course of business and as would not have a
Material Adverse Effect on Seller;
(xi) increase, or make any change in any assumptions
underlying the method of calculating any bad debt, contingency or
other reserves from those reflected in the Audited Seller
Financial Statements set forth on Seller Disclosure Schedule 4.4;
-------------------------------
<PAGE>
(xii) make any change in the method of valuing assets
included in the Unaudited Seller Financial Statements set forth on
Seller Disclosure Schedule 4.4;
------------------------------
(xiii) pay, discharge or satisfy any Liabilities, other
than by payment, discharge or satisfaction in the ordinary course
of business;
(xiv) permit or allow any of its assets (real, personal or
mixed, tangible or intangible) to be subjected to any Lien, except
for Liens which are in existence on the date hereof and which are
disclosed on the Seller Disclosure Schedules and Liens for amounts
not yet due and payable which Liens are contested in good faith
and for which adequate reserves have been made;
(xv) write down the value of any inventory or write off
as uncollectible any notes or accounts receivable, except for
write-downs and write-offs in the ordinary course of business;
(xvi) cancel or waive any claims or rights, or sell,
transfer, distribute or otherwise dispose of any assets or
properties, except in the ordinary course of business;
(xvii) declare, file or permit to be filed any voluntary or
involuntary bankruptcy, receivership, insolvency or other similar
proceeding or petition with any Governmental Authority with
respect to Seller, any of the Seller Subsidiaries or any of the
Stockholders;
(xviii) fail to perform its obligations under any Material
Contract (except those being contested in good faith) or enter
into, assume or amend any agreement that would be a Material
Contract other than agreements to provide services entered into in
the ordinary and usual course of business;
(xix) take any action that would or could reasonably be
expected to result in (A) a Material Adverse Effect on Seller or
(B) any of its representations and warranties contained in Article
4 not being true and correct in any material respect at the
Effective Time, or that would cause any of its conditions to
Closing not to be satisfied; or
(xx) directly or indirectly agree to do any of the
foregoing.
(b) Parent agrees that from the date hereof to the Effective
Time, except as otherwise approved by Seller in writing, which approval shall
not be unreasonably withheld, conditioned or delayed, or as permitted or
required by this Agreement, it will not, nor will it permit any of the Parent
Subsidiaries to:
(i) declare, set aside or pay any dividend or other
distribution of cash or property (other than capital stock) in
respect of its capital stock, other
<PAGE>
than regular cash dividends in amounts not materially greater than
customarily paid by Parent;
(ii) make any material change in its accounting methods
or practices as shown in the Parent Financial Statements, other
than changes required by GAAP or by Governmental Authorities;
(iii) take any action that would result in any of its
representations and warranties contained in Article 6 not being
true and correct in any material respect at the Effective Time or
that would cause any of its conditions to Closing not to be
satisfied; or
(iv) directly or indirectly agree to do any of the
foregoing.
7.3 No Solicitation. From the date hereof to the Effective Time or the
---------------
earlier termination of this Agreement in accordance with its terms, Seller and
the Stockholders:
(a) shall not, and Seller shall not allow its Affiliates,
officers, directors, employees, agents and representatives (including without
limitation, the Stockholders, any investment banker, attorney or accountant
retained by it) to: directly or indirectly initiate, solicit, entertain or
encourage, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to any of the
Stockholders) with respect to a proposed or potential merger, acquisition,
consolidation, business combination, transfer or similar transaction involving,
or any purchase of all or any significant portion of the assets, equity
securities of or rights with respect to any assets or securities of, Seller (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or engage in any negotiations concerning, or provide any information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal;
(b) 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 Seller and Stockholders
will take the necessary steps to inform the individuals or entities referred to
above of the obligations undertaken in this Section 7.3; and
(c) will notify Parent immediately of the identity of any
potential acquiror and the terms of any Acquisition Proposals, whether or not
permitted by this Section 7.3.
7.4 Current Information.
-------------------
(a) During the period from the date of this Agreement to the
Effective Time or the earlier termination of this Agreement in accordance with
its terms, on a frequent basis:
<PAGE>
(i) Seller will cause one or more of its representatives
to confer with representatives of Parent regarding its business,
operations, properties, assets and financial condition;
(ii) each of Seller and Parent will cause one or more of
its representatives to confer with representatives of the other
party regarding matters relating to the completion of the
transactions contemplated herein; and
(iii) each of Seller and Parent will notify the other
party as soon as practicable after any determination or discovery
by it of any fact or circumstance relating to either party which
it has discovered through the course of investigation and which
represents, or is reasonably likely to represent, a material
breach of any representation, warranty, covenant or agreement of
either party or which has or is reasonably likely to have a
Material Adverse Effect on either party.
(b) Prior to the Effective Time, as soon as practicable after
the end of every month (but in no event later than twenty-five days thereafter)
beginning with the month in which this Agreement is signed, Seller will deliver
to Parent an unaudited balance sheet as of the end of such month, and related
statements of income and cash flows for such month, each certified by a Seller
Authorized Officer as meeting the standards for Seller Financial Statements set
forth in Section 4.4.
7.5 Access to Properties and Records; Confidentiality.
-------------------------------------------------
(a) Seller shall permit Parent and its representatives
reasonable access to its and the Seller Subsidiaries' respective properties, and
shall disclose and make available to Parent and its representatives all books,
papers and records and information relating to it and the Seller Subsidiaries,
its and their assets, stock ownership, properties, operations, obligations and
liabilities, including, but not limited to, all books of account (including the
general ledger), tax records, minute books of directors' and stockholders'
meetings, organizational documents, agreements, filings with any Governmental
Authority, accountants' work papers, litigation files, plans affecting
employees, and any other records and information in which Parent and its
representatives may have a reasonable interest; provided that such investigation
shall be reasonably related to the transactions contemplated by this Agreement
and shall not interfere unnecessarily with the normal business operations of
Seller and its Subsidiaries.
(b) All information furnished by the parties hereto previously
in connection with transactions contemplated by this Agreement or pursuant
hereto shall be used solely for the purpose of evaluating the Merger and shall
be treated as the sole property of the party delivering the information until
consummation of the Merger contemplated hereby and, if Merger shall not occur,
each party and each party's advisors shall return to the other party all
documents or other materials containing, reflecting or referring to such
information, will not retain any copies of such information, shall use all
commercially reasonable efforts to keep confidential all such information, and
shall not directly or indirectly use such information for any competitive or
other commercial purposes. In the event that the Merger does not occur,
<PAGE>
all documents, notes and other writings prepared by a party hereto or its
advisors based on information furnished by the other party shall be promptly
destroyed. The obligation to keep such information confidential shall continue
for three years from the date the Merger is abandoned but shall not apply to (i)
any information which (A) the party receiving the information can establish by
convincing evidence was already in its possession prior to the disclosure
thereof to it by the other party; (B) was then generally known to the public;
(C) became known to the public through no fault of the party receiving such
information; or (D) was disclosed to the party receiving such information by a
third party not bound by an obligation of confidentiality; or (ii) any
information that is requested or required (by interrogatories, requests for
information or documents, subpoena, civil investigative demand or similar
processes) to be disclosed by Applicable Law or Governmental Authority, to the
extent that the party subject to such request or requirement provides the other
parties hereto with prompt notice thereof so that they may seek an appropriate
protective order or waive compliance with the provisions of this Section 7.5.
If, in the absence of a protective order or the receipt of a waiver hereunder,
any party hereto is nonetheless, in the opinion of its counsel, compelled to
disclose information that is protected hereunder to any Governmental Authority
or else stand liable for contempt or suffer other censure or penalty, said party
may disclose such information to such Governmental Authority without liability
hereunder. No investigation by Parent heretofore or hereafter made shall affect
the representations and warranties of Seller and the Stockholders, and each such
representations and warranties shall survive any such investigation, subject to
Article 10.
7.6 Regulatory Matters; Consents; Cooperation, etc.
-----------------------------------------------
(a) Each of Parent and Seller will promptly furnish each other
with copies of written communications received by them or any of their
respective Subsidiaries from, or delivered by any of the foregoing to, any
Governmental Authorities in respect of the transactions contemplated hereby.
(b) As soon as practicable following the date hereof, Parent
and Seller will each use its commercially reasonable efforts to obtain all
material consents, waivers and other Approvals under any of its or its
Subsidiaries' agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
(c) At or prior to the Closing, Seller, if requested by Parent,
shall deliver to the IRS a notice that the Seller Common Stock is not a "U.S.
Real Property Interest" as defined and in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
7.7 Parties' Efforts; Further Assurances; Cooperation. Subject to the
-------------------------------------------------
other provisions in this Agreement, the parties hereto shall in good faith
perform their obligations under this Agreement before, at and after the
Effective Time, and shall each use all commercially reasonable efforts to do, or
cause to be done, all things necessary, proper or advisable under Applicable
Laws to obtain all Authorizations and satisfy all conditions to the obligations
of the parties under this Agreement and to cause the transactions contemplated
by this Agreement to be carried out promptly in accordance with the terms hereof
and shall
<PAGE>
cooperate fully with each other and their respective officers, directors,
employees, agents, counsel, accountants and other designees in connection with
any steps required to be taken as part of their respective obligations under
this Agreement. Upon the execution of this Agreement and thereafter, each party
shall take such actions and execute and deliver such documents as may be
reasonably requested by the other parties hereto in order to consummate the
transactions contemplated by this Agreement.
7.8 Public Announcements. Prior to the Effective Time or the earlier
--------------------
termination of this Agreement in accordance with its terms, Seller, the
Stockholders and Parent shall consult and cooperate with each other as to the
timing, content and form of any press release or other public disclosure related
to this Agreement or the transactions contemplated herein, and will not issue a
press release or make any such public disclosure without the prior consent of
the other party, which shall not be unreasonably withheld, conditioned or
delayed. After the Effective Time, none of the Stockholders shall make any
public announcement regarding any aspect of this Agreement without Parent's
prior written consent. Nothing in this Section 7.8 shall be deemed to prohibit
any party from making any disclosure which its outside counsel deems necessary
in order to satisfy such party's disclosure obligations imposed by Applicable
Law or Governmental Authority.
7.9 Failure to Fulfill Conditions. In the event that Parent or Seller
-----------------------------
determines that a material condition to its or the other's obligation to
consummate the transactions contemplated hereby cannot be fulfilled on or prior
to March 31, 1999 (the "Deadline Date"), it will promptly notify the other
party. Except for any acquisition or merger discussions Parent may enter into
with other parties, Seller and Parent will promptly inform the other of any
facts applicable to Seller or Parent that would be likely to prevent or
materially delay consummation of the Merger.
7.10 Disclosure Supplements. From time to time prior to the Effective
----------------------
Time, each party hereto will promptly notify the other party of any inaccuracy
in its respective Disclosure Schedules delivered pursuant hereto including,
without limitation, any matter which, if existing, occurring or known at the
date of this Agreement, would have been required to be set forth or described in
such Schedule or which is necessary to correct any information in such Schedule
that has been rendered inaccurate. Notwithstanding the foregoing, for the
purpose of determining satisfaction of the conditions set forth in Article 8, no
such notification shall be deemed to amend such Disclosure Schedules or shall be
deemed to be part hereof unless agreed to by the other party.
7.11 Affiliates. Promptly after the execution and delivery of this
----------
Agreement and prior to the Closing Date, Seller shall deliver to Parent copies
of letter agreements, each substantially in the form of Exhibit 7.11, executed
------------
by all directors, executive officers, the Stockholders and by any other person
who is an "affiliate" of Seller for purposes of Rule 145 under the 1933 Act
providing that such person will not sell, pledge, transfer or otherwise dispose
of any shares of Seller Common Stock held by such "affiliate" and the shares of
Parent Common Stock to be received by such "affiliate" in the Merger: (i) in the
case of shares of Parent Common Stock only, except in compliance with the
applicable provisions of the 1933
<PAGE>
Act and the rules and regulations thereunder; and (ii) during the periods during
which any such sale, pledge, transfer or other disposition would, under GAAP or
the rules, regulations or interpretations of the SEC, disqualify the Merger for
pooling-of-interest accounting treatment, except as permitted by Staff
Accounting Bulletin No. 76 issued by the SEC. The certificates of Parent Common
Stock issued to "affiliates" of Seller will bear an appropriate legend
reflecting the foregoing and Parent shall be entitled to issue stop orders to
the transfer agent for Parent Common Stock consistent with the terms of such
letters. The parties understand that such periods in general encompass the
period commencing 30 days prior to the Merger and ending at the time of the
publication of financial results covering at least 30 days of combined
operations of Parent and Seller within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies.
7.12 Pooling of Interests. Each party shall use all commercially
--------------------
reasonable efforts and shall in good faith attempt to cause the Merger to
qualify for pooling-of-interests accounting treatment. Each party represents and
warrants that its past transactions status conform to the conditions set forth
in Exhibit 7.12 hereto and covenants that it has no planned transactions that
------------
would be contrary to any of the conditions set forth in Exhibit 7.12.
------------
7.13 Intentionally Omitted.
7.14 Intentionally Omitted.
7.15 Employee Matters.
----------------
(a) Employee Benefits. Parent shall take all commercially
-----------------
reasonable action necessary or appropriate to permit the employees of Seller at
the Effective Time who shall continue to be employed by the Surviving
Corporation thereafter ("Continuing Employees") to participate after the
Effective Time in Parent's employee benefit programs and to cause the
<PAGE>
Surviving Corporation to take all commercially reasonable actions necessary or
appropriate to adopt Parent's employee benefit programs effective as of the
Effective Time. Parent will cause the Surviving Corporation to give each
Continuing Employee full credit for service with Seller for purposes of
eligibility to participate in, vesting and payment of benefits under, and
eligibility for any subsidized benefit provided under (but not, except as
provided in the preceding sentence, for purposes of determining the amount of
any benefit under) any Parent employee benefit plan; provided, however, that
nothing in this Agreement shall be deemed to require Parent to cause to be
continued any employee's employment, responsibilities or officer title for any
definite period, or to change the terms or conditions of any existing employee
benefit program.
(b) Employment Agreements. On or prior to the Closing Date, all
---------------------
agreements between Seller and any of its employees (other than agreements
relating to confidentiality, ownership of inventions and materials and similar
agreements benefiting Seller) shall have been canceled at no cost to Seller. On
or prior to the Closing Date, Employment Agreements substantially in the form
attached hereto as Exhibit 7.15 shall be executed and delivered to Parent by
------------
each of the individuals named on Exhibit 7.15 and any other employees of Seller
------------
deemed by the Parent to be necessary or important to the continued business of
the Surviving Corporation.
7.16 No Transfers. Except pursuant to this Agreement or with the prior
------------
written consent of Purchaser, none of the Stockholders shall transfer, assign,
convey or otherwise dispose of any of the Seller Common Stock or any rights with
respect to such Seller Common Stock (including voting and conversion or option
rights) after the date of this Agreement.
7.17 Special Provisions with Respect to Seller. If the Closing occurs
-----------------------------------------
as provided herein, then at that time all representations, warranties, covenants
and agreements to the extent made or adopted by Seller (and only to such extent)
shall expire and be of no further force and effect, and Seller's having made
representations, warranties, covenants and agreements shall in no way limit the
liability of the Seller Stockholders for those representations, warranties,
covenants and agreements pursuant to this Agreement.
7.18 Tax Matters
-----------
(a) Cooperation and Exchange of Information. The Stockholders,
---------------------------------------
the Surviving Corporation and Parent agree to furnish, or to cause to be
furnished in good faith to each other, such cooperation and assistance as is
reasonably necessary to file any future returns, to respond to audits, to
negotiate settlements with Tax authorities and to prosecute and defend against
Tax claims.
(b) Tax-Free Transaction. The parties hereto intend that the
--------------------
Merger shall be treated as a tax-free reorganization under the Code, shall
report the Merger as such for federal and state income tax purposes, and shall
take no action after the Effective Time to adversely affect the status of the
Merger as a tax-free reorganization under the Code.
<PAGE>
7.19 Registration Rights. Parent shall provide the Stockholders of
-------------------
Seller with the same rights to participate as selling shareholders in connection
with public offerings of Parent's Common Stock as are enjoyed by members of
Parent's senior management team.
ARTICLE 8 - CLOSING CONDITIONS
8.1 Conditions of Each Party's Obligations Under this Agreement. The
-----------------------------------------------------------
respective obligations of each party under this Agreement to consummate the
Merger shall be subject to the satisfaction, or, where permissible under
applicable Law, waiver, at or prior to the Closing Date, of the following
conditions:
(a) Approvals and Regulatory Filings. All necessary
--------------------------------
Authorizations of Governmental Authorities required to consummate the
transactions contemplated by this Agreement shall have been obtained without any
term or condition that would materially impair the value of Seller, or that
would materially impair the value of Parent and the Parent Subsidiaries, taken
as a whole. All conditions required to be satisfied prior to the Effective Time
by the terms of such Authorizations shall have been satisfied; and all statutory
waiting periods in respect thereof shall have expired.
(b) Suits and Proceedings. The consummation of the transactions
---------------------
contemplated by this Agreement will not violate the provisions of any
injunction, order, judgment, decree or Law applicable or effective with respect
to Parent or Seller or their officers and directors. No suit or proceeding shall
have been instituted by any person, or, to the Knowledge of Parent or Seller,
shall have been threatened by any Governmental Authority, and not subsequently
withdrawn, dismissed or otherwise eliminated, which seeks (i) to prohibit,
restrict or delay consummation of the transactions contemplated by this
Agreement or to limit in any material respect the right of Parent to control any
material aspect of the business of Parent and the Parent Subsidiaries or Seller
after the Effective Time, or (ii) to subject Parent or Seller or their
respective directors or officers to material liability on the ground that it or
they have breached any Law or otherwise acted improperly in relation to the
transactions contemplated by this Agreement.
(c) Escrow Agreement. First Union National Bank shall have
----------------
executed and delivered an Escrow Agreement among the Stockholders, Parent, and
First Union National Bank relating to the shares of Parent Common Stock to be
placed in escrow pursuant to Article 2 (the "Escrow Agreement"). All expenses
associated with the Escrow Agreement shall be borne by Parent.
(d) Tax Opinions. Parent and Seller each shall have received
------------
the opinions of their counsel, Nelson Mullins Riley & Scarborough, L.L.P. and
Hogan & Hartson LLP, dated as of the Closing Date, in form and substance
reasonably satisfactory to Parent and to Seller and their counsel, that the
Merger will qualify as a tax-free reorganization under Section 368 of the Code,
and that no gain or loss will be recognized by the holders of Seller Common
Stock generally. Parent and Seller shall have delivered to their counsel such
certificates of
<PAGE>
their respective stockholders or shareholders as may reasonably be required by
their counsel in order to render such opinions.
(e) Assumption of Warrants. Parent shall have assumed the
----------------------
obligations of Seller under certain warrants held by Frank A Daniels III
covering 1,155 shares of Seller Common Stock at an exercise price of $287.00 per
share and certain warrants held by Farley/Ventura, LLC covering 4,198 shares of
Seller Common Stock at an exercise price of $287.00 per share, such that Mr.
Daniels shall have the right to acquire 145,379 shares of Parent Common Stock at
an exercise price of $2.28 and Farley/Ventura, LLC shall have the right to
acquire 528,402 shares of Parent Common Stock at an exercise price of $2.28 per
share, for an aggregate of 673,783 shares of Parent Common Stock to be issued
pursuant to Parent's assumption of Seller's warrants.
8.2 Conditions to the Obligations of Parent and Merger Sub Under this
-----------------------------------------------------------------
Agreement. The obligations of Parent and Merger Sub under this Agreement to
- ---------
consummate the Merger shall be further subject to the satisfaction or waiver, at
or prior to the Closing Date, of the following conditions (with the
effectiveness of all agreements listed below being expressly conditioned upon
consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Seller and the
----------------------------------
Stockholders shall have performed in all material respects the agreements,
covenants and obligations to be performed by it or them under this Agreement and
the other agreements contemplated hereby at or before the Effective Time. All
Authorizations of or with any nongovernmental third party that are required for
the execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement by Seller and the Stockholders shall
have been obtained or made, or waived by such third party, except where the
failure to obtain any such Authorization would not have a Material Adverse
Effect on Seller.
(b) Opinion of Counsel. Parent shall have received an opinion
------------------
of Hogan & Hartson LLP, counsel to Seller, dated the Closing Date, in form and
substance reasonably satisfactory to Parent, covering the matters set forth
on Exhibit 8.2(b).
-------------
(c) Pooling Letter. Parent shall have received a letter dated
--------------
as of the Effective Time from Arthur Andersen & Co., its independent certified
public accountants, to the effect that the Merger will qualify for
pooling-of-interests accounting treatment, and a copy of such letter shall be
provided by Parent to Stockholders at their request.
(d) Certificates. Seller shall have furnished Parent with such
------------
certificates of its officers or others and such other documents described herein
to evidence fulfillment of the conditions set forth in this Article 8 and
otherwise to consummate the transactions contemplated pursuant to this Agreement
as Parent may reasonably request.
(e) Employment Agreements. Each of the individuals named on
---------------------
Exhibit 7.15 shall have executed and delivered an Employment Agreement with
- ------------
Parent in the form attached hereto as Exhibit 7.17.
------------
<PAGE>
(f) Stockholders Agreement. The Stockholders shall have
----------------------
executed and delivered a joinder agreement with Parent in the form attached
hereto as Exhibit 8.2(f) making the Stockholders parties to that certain Second
--------------
Amended and Restated Stockholders Agreement dated as of December 17, 1998 by and
among Parent and the current holders of common stock of Parent (the
"Stockholders Agreement").
(g) Resignations. Seller shall have delivered to Parent the
------------
written resignations of the directors of Seller other than Patrick E. Patterson.
(h) Escrow Agreement. The Stockholders shall have executed and
----------------
delivered the Escrow Agreement in the form attached hereto as Exhibit 2.1.
-----------
(i) Cancellation Agreements. At or prior to Closing, Seller
-----------------------
shall deliver to Parent any and all documents and agreements evidencing the
cancellation of all outstanding options, warrants and other securities
convertible into or exchangeable for Seller Common Stock or other capital stock
of Seller.
(j) Noncompetition, Nonsolicitation and Confidentiality
---------------------------------------------------
Agreements. Any officers, directors and key employees of Seller who are not
- ---------
Stockholders shall have executed and delivered to Parent and Surviving
Corporation Noncompetition, Nonsolicitation and Confidentiality Agreements
substantially in the form attached hereto as Exhibit 8.2(k), with the blanks
--------------
therein properly completed to the satisfaction of the Parent and Surviving
Corporation.
(k) Outstanding Seller Common Stock. There shall be no more
-------------------------------
than 25,164 shares of Seller Common Stock outstanding on the Closing Date or at
the Effective Time, taking into account and giving effect to an aggregate of
5,353 shares issuable to Frank A Daniels III and Farley/Ventura LLC. Seller and
the Stockholders acknowledge that the Merger Consideration has been agreed to by
Parent based, in large part, on there being no more than 25,164 shares of Seller
Common Stock outstanding at these times and that Parent has the right not to
proceed with the Merger in the event the Seller Common Stock outstanding exceeds
this number.
(l) Completion of Due Diligence on Seller. Parent shall have
-------------------------------------
completed its review of Seller, the results of which shall be acceptable to
Parent in its sole and absolute discretion.
(m) No Material Adverse Effect on Seller. No event shall have
------------------------------------
occurred and no fact or circumstance shall have arisen which, in the judgment of
Parent, is reasonably likely to have a Material Adverse Effect on the Seller or
materially and adversely affect the value of the Merger transaction to Parent,
since the date of the most recent Audited Seller Financial Statements except (i)
the announcement of the Merger and this Agreement, (ii) conditions effecting
global economy or regional economy in which Parent operates any part of its
business or (iii) conditions affecting the financial services software industry
as a whole.
<PAGE>
(n) Registration Rights Agreement. Parent shall have executed
-----------------------------
and delivered a Registration Rights Agreement in favor of Via Investment LLC and
Farley/Ventura LLC in the form attached hereto as Exhibit 8.2(n).
(o) Payment to Farley. Seller shall have paid to Michael Farley
-----------------
any amounts due to Farley under that certain Letter of Agreement dated January
15, 1999.
(p) Signature of All Holders. All holders of all outstanding
------------------------
shares of common stock of Seller shall have executed and delivered a counterpart
of this Agreement. Frank A. Daniels III and Farley/Ventura LLC, the holders of
warrants which will be assumed by Parent, shall have executed an agreement to be
bound by Parent's Second and Amended and Restated Shareholders Agreement dated
as of December 17, 1998 with respect to all shares of Parent to be issued to
them pursuant to such assumed warrants.
8.3 Conditions to the Obligations of Seller and the Stockholders Under
------------------------------------------------------------------
this Agreement. The obligations of Seller and the Stockholders under this
- -------------
Agreement to consummate the Merger shall be further subject to the satisfaction
or waiver, at or prior to the Closing Date, of the following conditions (with
the effectiveness of all agreements listed below being expressly conditioned
upon consummation of the Merger):
(a) Covenants and Agreements; Consents. Each of Parent and
----------------------------------
Merger Sub shall have performed in all material respects the agreements,
covenants and obligations to be performed by it under this Agreement and the
other agreements contemplated hereby at or before the Effective Time. All
Authorizations of or with any nongovernmental third party that are required for
or in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement by Parent and
the Merger Sub shall have been obtained or made, except where the failure to
obtain any such Authorizations would not have a Material Adverse Effect on
Parent or the Parent Subsidiaries, taken as a whole.
(b) Opinion of Counsel to Parent. Seller shall have received an
----------------------------
opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to Parent, dated
the Closing Date, in form and substance reasonably satisfactory to Seller,
covering the matters set forth on Exhibit 8.3(b).
-------------
(c) Certificates. Each of Parent and Merger Sub shall have
------------
furnished Seller with such certificates of its officers or others and such other
documents described herein to evidence fulfillment of the conditions set forth
in this Article 8 and otherwise to consummate the transactions contemplated
pursuant to this Agreement as Seller may reasonably request.
(d) Stockholders Agreement. Parent shall have executed and
----------------------
delivered a joinder agreement with the Stockholders in the form attached hereto
as Exhibit 8.2(f).
--------------
(e) Escrow Agreement. Parent shall have executed and delivered
----------------
the Escrow Agreement attached hereto as Exhibit 2.1.
-----------
<PAGE>
(f) Merger Consideration. Parent shall have delivered to the
--------------------
Stockholders and the Escrow Agent all of the Merger Consideration.
(g) Option Grants. Parent shall have granted to Patrick
-------------
Patterson an option to purchase 100,000 shares of Parent Common Stock at an
exercise price of equal to the fair market value per share at the Effective
Time, expiring on the tenth anniversary of grant and vesting as follows: 33,334
at the time of grant, 33,333 on the first anniversary of grant, and 33,333 on
the second anniversary of grant. In addition, Parent shall have granted options
for an additional 100,000 shares of Parent Common Stock to the persons
designated by Mr. Patterson and listed on Exhibit 8.3(g), which options shall
--------------
vest and expire on the same terms as Mr. Patterson's options. Each option
agreement for options granted pursuant to this Section 8.3(g) shall be in the
form attached hereto as Exhibit 8.3(g).
--------------
(h) The organizational meeting for an initial public offering
of Parent shall have occurred and Seller shall have received a letter from any
two of the following members of the New York Stock Exchange stating that the
initial public offering of Parent is in process: J.C. Bradford & Co., The
Robinson-Humphrey Company, Hambrecht & Quist LLC, Wheat First Union, Inc. and
ING Baring Furman Selz.
ARTICLE 9 - TERMINATION, AMENDMENT AND WAIVER
9.1 Termination. This Agreement may be terminated prior to the
-----------
Effective Time, whether before or after approval of this Agreement by the
Stockholders of Merger Sub, Parent and Seller:
(a) by mutual written consent of Parent and Seller;
(b) by Parent or Seller if the Effective Time shall not have
occurred on or prior to the Deadline Date; provided, however, that the right to
terminate this Agreement under this Section 9.1(b) shall not be available to any
party whose action or failure to act has been a principal cause of or resulted
in the failure of the Merger to occur on or before such date and such action or
failure to act constitutes a willful and material breach of this Agreement;
(c) by Parent if there has been a material breach of any
representation, warranty, covenant, agreement or obligation of Seller or any
Stockholder hereunder in each case which either is not capable of being
remedied, or, if capable of being remedied, shall not have been remedied within
20 days after receipt by Seller or Stockholder, as appropriate, of notice in
writing from Parent specifying the nature of such breach and requesting that it
be remedied;
(d) by Seller, if there has been a material breach in any
representation, warranty, covenant, agreement or obligation of Parent hereunder
in each case which either is
<PAGE>
not capable of being remedied, or, if capable of being remedied, shall not have
been remedied within 20 days after receipt by Parent of notice in writing from
Seller specifying the nature of such breach and requesting that it be remedied;
(e) by Parent if any of the conditions set forth in Section 8.1
or 8.2 is not satisfied and is no longer capable of being satisfied by the
Deadline Date;
(f) by Seller if any of the conditions set forth in Section 8.1
or 8.3 is not satisfied and is no longer capable of being satisfied by the
Deadline Date;
(g) by Parent, if Parent's Board of Directors shall not have
recommended or shall have withdrawn or modified its recommendation or approval
of the transactions contemplated by this Agreement because causing or allowing
such transactions to occur would constitute a breach of the fiduciary duty of
such Board of Directors (as determined in good faith after consultation with its
counsel); provided that in such event Parent promptly shall pay to Seller a
termination fee in the amount of $100,000 together with reimbursement of
Seller's out-of-pocket expenses incurred not to exceed $50,000.00.
9.2 Effect of Termination. If either Parent or Seller terminates and
---------------------
abandons this Agreement pursuant to Section 9.1, this Agreement, other than
Sections 7.5, 7.6, 7.14, 9.1(g), this Section 9.2, Section 9.3, Article 10 and
Section 11.1 (each of which shall survive termination) shall forthwith become
void and have no effect, without any liability on the part of any party or its
officers, directors or shareholders; provided, however, that nothing contained
in this Section 9.2, shall relieve any party from any liability for any material
breach of this Agreement.
9.3 Specific Performance. The parties acknowledge that the rights of
--------------------
each party to consummate the transactions contemplated by this Agreement are
special, unique, and of extraordinary character, and that, in the event that any
party violates or fails or refuses to perform any covenant made by it in this
Agreement relating to nonmonetary matters, the other party or parties will be
without an adequate remedy at law. Each party agrees, therefore, that in the
event that it violates, fails or refuses to perform any covenant or agreement
made by it in this Agreement that relates to nonmonetary matters, the other
party or parties, so long as it or they are not in breach of this Agreement,
may, in addition to the remedies set forth in Article 10, institute and
prosecute an action in a court of competent jurisdiction to enforce specific
performance of such covenant or agreement or seek any other equitable relief.
9.4 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of all the parties hereto.
9.5 Extension; Waiver. The parties may (a) extend the time for the
-----------------
performance of any of the obligations or other acts of the other parties hereto
(b) waive any inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant thereto; or (c) waive
compliance with any of the agreements or conditions contained in this Agreement.
Any agreement on the part of any party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party against
<PAGE>
which the waiver is sought to be enforced and shall apply only to the specific
condition, representation or warranty identified by such writing as being
waived, extended or modified.
ARTICLE 10 - INDEMNIFICATION
10.1 Indemnification by Stockholders. Subject to the terms of this
-------------------------------
Article 10, Seller and the Stockholders (but after the consummation of the
Merger, solely the Stockholders, and not the Seller) shall, severally, but not
jointly, indemnify, defend, save and hold harmless Parent, Merger Sub, Seller
(after the consummation of the Merger) and their successors and assigns
(collectively, the "Parent Indemnified Parties"), from and against any demands,
claims (as defined in Section 101 of the U.S. Bankruptcy Code), actions, losses,
damages, deficiencies, liabilities, costs and expenses (including, without
limitation, reasonable attorneys' and accountants' fees and expenses), together
with interest and penalties, if any, awarded by court order or otherwise agreed
to (collectively, "Indemnifiable Damages"), suffered by the Parent Indemnified
Parties that arise out of or result from any of the following (whether or not a
third party initiates the proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties,
covenants or agreements made by Seller or the Stockholders in this Agreement;
(b) any breach of any representation, warranty, covenant or
agreement made by Seller or any Stockholder in a document, certificate or
affidavit delivered by Seller or the Stockholders at the Closing; or
(c) any expenses, charges, fees, or costs associated with any
audit of Seller for Taxes related to periods prior to the Closing Date, and any
Taxes imposed as a result of any such audit, even though any such audit
commences, or a party does not become aware of any such audit until, after the
Closing Date.
Any of the foregoing to the contrary notwithstanding, the Stockholders'
indemnification obligations in connection with the breach of any provision of
Article 5 shall be several and not joint.
10.2 Indemnification by Parent. Subject to the terms of this Article
-------------------------
10, Parent shall indemnify, defend, save and hold harmless Seller and the
Stockholders (but after consummation of the Merger, solely the Stockholders, and
not the Seller) (collectively, the "Seller Indemnified Parties"), from and
against any Indemnifiable Damages suffered by the Seller Indemnified Parties
that arise out of or result from any of the following (whether or not a third
party initiates the proceeding or claim giving rise to such Indemnifiable
Damages):
(a) any breach of any of the representations, warranties,
covenants and agreements made by Parent or Merger Sub in this Agreement; or
<PAGE>
(b) any breach of any representation, warranty, covenant or
agreement made by Parent or by Merger Sub in a document, certificate or
affidavit delivered by Parent or Merger Sub at the Closing.
10.3 Claims for Indemnification. The representations, warranties,
--------------------------
covenants and agreements in this Agreement shall survive the Closing subject to
the limitations set forth herein and shall not be affected by any investigation
made by the parties hereto prior to the date hereof or the Effective Time. The
party seeking indemnification (the "Indemnified Party") shall give the party
from whom indemnification is sought (the "Indemnifying Party") a written notice
("Notice of Claim") within sixty (60) days of the discovery of any loss,
liability, claim or expense in respect of which the right to indemnification
contained in this Article 10 may be claimed; provided, however, that the failure
to give such notice within such sixty (60) day period shall not result in the
waiver or loss of any right to bring such claim hereunder after such period
unless, and only to the extent that, the other party is actually prejudiced by
such failure. In the event a claim is pending or threatened or the Indemnified
Party has a reasonable belief as to the validity of the basis for such claim,
the Indemnified Party may give written notice (a "Notice of Possible Claim") of
such claim to the Indemnifying Party, regardless of whether a loss has arisen
from such claim. All "general contingencies" under a "pooling of interests"
shall be settled and resolved no later than (i) the date of the first audit of
financial statements containing combined operations for those items that would
be expected to be encountered in the audit process, or (ii) one year after the
Effective Time for other items. The limitations set forth in this Section 10.3
shall not apply to liability under this Article 10 for any intentional breach of
a representation or warranty in this Agreement. Any Notice of Claim or Notice of
Possible Claim shall set forth the representations, warranties, covenants and
agreements with respect to which the claim is made, the specific facts giving
rise to an alleged basis for the claim and the amount of liability asserted or
anticipated to be asserted by reason of the claim.
10.4 Matters Involving Third Parties.
-------------------------------
(a) If any third party shall notify the Indemnified Party as to
any matter in respect of which the right to indemnification contained in this
Article 10 may be claimed (a "Third Party Claim"), the Indemnified Party shall
give the Indemnifying Party notice of such Third Party Claim as provided in
Section 10.3 above; and the Indemnifying Party will have the right to defend the
Indemnified Party against the Third Party Claim, consent to the entry of any
judgment with respect thereto and enter into any settlement with respect
thereto, all with counsel of its choice, so long as the Indemnifying Party
notifies the Indemnified Party in writing, within fifteen (15) days after the
Indemnified Party has given the Indemnifying Party
<PAGE>
notice of the Third Party Claim pursuant to Section 10.3, that the Indemnifying
Party will indemnify the Indemnified Party from and against Indemnifiable
Damages the Indemnified Party may suffer resulting from, arising out of,
relating to, in the nature of or caused by the Third Party Claim.
(b) If the Indemnifying Party undertakes the defense of any
Third Party Claim pursuant to Section 10.4(a) above, the Indemnified Party may
retain separate co-counsel at its sole cost and expense (and such expenses shall
not be Indemnifiable Damages) and participate in the defense of such Third Party
Claim. The Indemnified Party will not consent to the entry of any judgment or
enter into any settlement with respect to any Third Party Claim without the
prior written consent of the Indemnifying Party (not to be withheld
unreasonably). The Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim that
does not include a full release by the third party of the Indemnified Party from
all Indemnifiable Damages relating to such Third Party Claim, without the prior
written consent of the Indemnified Party (not to be withheld unreasonably).
(c) The parties hereto shall provide, or cause their
appropriate employees or representatives to provide, to the other parties hereto
information or data in connection with the handling of the defense of any Third
Party Claim or litigation (including counterclaims filed by the parties), and
the party receiving such information or data shall reimburse the other party for
all of its reasonable costs and expenses in providing these services, including,
without limitation, (1) all out-of-pocket, travel and similar expenses incurred
by its personnel in rendering these services; and (2) all fees and expenses for
services performed by third parties engaged by or at the request of such other
party.
10.5 Indemnification Payments Prior to Closing. If the Closing has not
-----------------------------------------
occurred, the Indemnifying Party shall pay to the Indemnified Party the full
amount of any and all Indemnifiable Damages (other than Indemnifiable Damages
resulting from a Third Party Claim) for which it is required to indemnify the
Indemnified Party under this Article 10, within thirty (30) days after its
receipt of notice thereof from the Indemnified Party pursuant to Section 10.3
above; and the full amount of any and all Indemnifiable Damages resulting from a
Third Party Claim for which it is required to indemnify the Indemnified Party
under this Article 10, within thirty (30) days after final settlement or
adjudication thereof.
10.6 Settlement of Indemnification Claims After Closing. If the Closing
--------------------------------------------------
has occurred and a recipient of a Notice of Claim desires to dispute such claim,
it shall, within thirty (30) days after receipt of the Notice of Claim, give
counternotice, setting forth the basis for disputing such claim, to Parent or
the Stockholders' Representative (as defined below), as the case may be. If no
such counternotice is given within such thirty (30) day period, or if Parent, or
the Stockholders' Representative (as defined below), as the case may be,
acknowledges liability for indemnification, then the amount claimed shall be
promptly satisfied as provided in Section 10.7. If, within thirty (30) days
after the receipt of counternotice by Parent or the Stockholders'
Representative, as the case may be, the Stockholders' Representative and Parent
shall not have reached agreement as to the claim in question, then the party
disputing the claim shall satisfy any undisputed amount as specified in Section
10.7 and the disputed amount of the
<PAGE>
claim of indemnification shall be submitted to and settled by arbitration in
accordance with the then prevailing commercial arbitration rules of the American
Arbitration Association. Such arbitration shall be held in the Atlanta, Georgia
area before a panel of three (3) arbitrators, one selected by each of the
parties and the third selected by mutual agreement of the first two, and all of
whom shall be independent and impartial under the rules of the American
Arbitration Association. The decision of the arbitrators shall be final and
binding as to any matter submitted under this Agreement. To the extent the
decision of the arbitrators is that a party shall be indemnified hereunder, the
amount shall be satisfied as provided in Section 10.7. Judgment upon any award
rendered by the arbitrators may be entered in any court of competent
jurisdiction. The date of the arbitrator's decision or the date a claim
otherwise becomes payable pursuant to this Section 10.6 is referred to as the
"Determination Date."
10.7 Manner of Indemnification by Stockholders. Where the Stockholders
-----------------------------------------
are obligated to indemnify the Parent Indemnified Parties under Section 10.1
after the Effective Time, such indemnity obligation must be satisfied pursuant
to the Escrow Agreement by the Stockholders, to the extent they then hold Shares
of Parent Common Stock, delivering to the relevant Parent Indemnified Party such
number of Shares of Parent Common Stock (as adjusted to reflect share splits,
reverse splits, dividends and consolidations with respect to the Parent Common
Stock after the execution of this Agreement), the value of which calculated at
the Value Per Share specified in the Escrow Agreement equals the amount of the
Indemnifiable Damages until such time as the aggregate amount of all indemnity
obligations satisfied in accordance with this provision equals ten percent (10%)
of such Value Per Share of all the Parent Common Stock transferred to the Seller
Stockholders pursuant to Section 2.1. Thereafter (or, if the Effective Time
fails to occur for any reason), such indemnity obligation must be satisfied by
Seller and the Stockholders, at the option of the relevant Parent Indemnified
Party, either:
(i) By paying to that Parent Indemnified Party in cash
an amount equal to the applicable Indemnified Damages; or
(ii) To the extent the Seller or Stockholders then hold
Shares of Parent Common Stock, by delivering to the Parent
Indemnified Party such number of Shares of Parent Common Stock
which, when multiplied by such Value Per Share, equals the
applicable Indemnified Damages.
10.8 Indemnification Exclusive Remedy. In the absence of fraud, and
--------------------------------
except for non-monetary equitable relief, if the Closing occurs, indemnification
pursuant to the provisions of this Article 10 shall be the sole and
exclusive remedy of the parties for any breach of any representation or warranty
contained in this Agreement.
10.9 Certain Limitations. The foregoing indemnification obligations are
-------------------
subject to the limitation that no Indemnifying Party shall have any liability
for indemnification to any Indemnified Party pursuant to this Article 10 or
otherwise unless the total Indemnifiable Damages for which the Indemnifying
Party would be liable exceed $100,000 in the aggregate; provided that once such
threshold is met, the Indemnifying Party shall be liable for the total
<PAGE>
Indemnifiable Damages, not just the amount in excess of such threshold. In no
event shall the aggregate liability of the Stockholders for Indemnifiable
Damages under this Agreement and the other agreements entered into in connection
with the consummation of the transactions contemplated hereby exceed the total
Merger Consideration paid by Parent for the Seller Common Stock.
10.10 Several Liability. Parent acknowledge that each Stockholder's
-----------------
respective liability and obligation under any of said provisions shall be
proportionate to the percentage of Seller Common Stock owned by such
Stockholder immediately preceding the Effective Time.
ARTICLE 11 -STOCKHOLDERS' REPRESENTATIVE
11.1 Appointment; Acceptance. By executing this Agreement, each of the
-----------------------
Stockholders (notwithstanding any Stockholder's current or future mental or
physical disability or incompetency) hereby irrevocably constitutes and appoints
Patrick E. Patterson and [his] successors, acting as hereinafter provided, as
his or her attorney-in-fact and agent in his or her name, place and stead in
connection with the transactions and agreements contemplated by this Agreement
with respect to (i) matters prior to the Closing Date, as specified herein, and
(ii) matters subsequent to the Closing Date (the "Stockholders'
Representative"), and acknowledges that such appointment is coupled with an
interest. By executing this Agreement under the heading "Stockholders'
Representative," Patrick E. Patterson hereby (i) accepts [his] appointment and
authorization to act as Stockholders' Representative as attorney-in-fact and
agent on behalf of the Stockholders in accordance with the terms of this
Agreement, and (ii) agrees to perform his obligations under, and otherwise
comply with, this Article 11.
11.2 Authority. Without limiting the generality of Section 11.1, each
---------
Stockholder by this Agreement fully and completely, hereby: (a) authorizes the
Stockholders' Representative (i) to dispute or to refrain from disputing any
claim made by Parent under the Stockholder Delivered Agreements, (ii) to
negotiate and compromise any dispute which may arise under, and to exercise or
refrain from exercising remedies available under the Stockholder Delivered
Agreements and to sign any release or other document with respect to such
dispute or remedy, (iii) to give such instructions and to do such other things
and refrain from doing such other things as the Stockholders' Representative
shall deem necessary or appropriate to carry out the provisions of the
Stockholder Delivered Agreements, (iv) to waive any condition to the Closing,
and (v) to agree in his discretion with the Parent to amend this Agreement from
time to time; and (b) agrees to be bound by all agreements and determinations
made by and documents executed and delivered by the Stockholders' Representative
under the Stockholder Delivered Agreements.
11.3 Actions. Each of the Stockholders hereby expressly acknowledges
-------
and agrees that the Stockholders' Representative is authorized to act on his or
her behalf, notwithstanding any dispute or disagreement between the
Stockholders, and that Parent and any other person or entity shall be entitled
to rely on any and all actions taken by the Stockholders' Representative under
the Stockholder Delivered Agreements without any liability to, or obligation to
inquire
<PAGE>
of, any of the Stockholders. Parent and any other person or entity is hereby
expressly authorized to rely on the genuineness of the signatures the
Stockholders' Representative, and upon receipt of any writing which reasonably
appears to have been signed by Stockholders' Representative, Parent and any
other person or entity may act upon the same without any further duty of inquiry
as to the genuineness of the writing.
11.4 Successors. If Patrick E. Patterson ceases to function in his
----------
capacity as the Stockholders' Representative for any reason whatsoever, then
Patrick E. Patterson shall be appointed as his successor, and if ceases to
function in such capacity for any reason whatsoever, then the Stockholders, by
action of the holders of Stockholders who formerly held a majority of the Seller
Common Stock immediately prior to the Effective Time, shall have the right to
appoint his successor; provided, however, that if for any reason no successor
has been appointed pursuant to the foregoing within thirty (30) days, then
Parent shall have the right to appoint a successor.
11.5 Effectiveness. The authorizations of the Stockholders'
-------------
Representative shall be effective until its rights and obligations under this
Agreement terminate by virtue of the termination of any and all obligations of
the Stockholders to Parent and of Parent to the Stockholders under this
Agreement.
ARTICLE 12 - MISCELLANEOUS
12.1 Expenses.
--------
(a) Except as otherwise expressly stated in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement (including legal, accounting and
investment banking fees and expenses) shall be borne by the party incurring such
costs and expenses.
(b) Notwithstanding any provision in this Agreement to the
contrary, if either of the parties shall willfully default in its obligations
hereunder, the non-defaulting party may pursue any remedy available at law or in
equity to enforce its rights and shall be paid by the willfully defaulting party
for all damages, costs and expenses, including without limitation reasonable
legal, reasonable accounting, reasonable investment banking and reasonable
printing expenses incurred or suffered by the non-defaulting party in connection
herewith or in the enforcement of its rights hereunder.
12.2 Notices. All notices or other communications which are required or
-------
permitted under this Agreement shall be in writing and sufficient if delivered
personally or by reputable overnight or express courier, sent by registered or
certified mail, postage prepaid, or by telefax (with subsequent delivery via one
of the two previous methods) as follows:
<PAGE>
(a) If to Parent or Merger Sub, to:
MegaMarketing Corporation
2030 Powers Ferry Road
Suite 120
Atlanta, GA 30339
Attn: John F. Kelly
Telecopy: (707) 644-1865
Copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Suite 1400
Atlanta, Georgia 30309
Attn: Robert D. Pannell, Esq.
Telecopy: (404) 817-6219
(b) If to Seller, to:
DeskGate Technologies, Inc.
1053 31st St., N.W.
Washington, D.C. 20007
E-mail: [email protected]
Attention: Patrick E. Patterson
with a copy (which shall not constitute notice) to:
Hogan & Hartson LLP
555 13th St., N.W.
Washington, D.C. 20004
Attention: John F. Dienelt, Esq.
Telecopy: (202) 637-5910
(c) If to the Stockholders, to their respective addresses as
set forth on the signature page to this Agreement;
or to such other addresses and telefax numbers as shall be furnished in writing
by any party, and any such notice or communications shall be deemed to have been
given as of two business days after the date actually sent via overnight or
express courier, five days after mailed and upon telefax confirmation of receipt
to addressee by the sender.
12.3 Parties in Interest. This Agreement shall be binding on and shall
-------------------
inure to the benefit of the parties hereto, the Parent Indemnified Parties, the
Seller Indemnified Parties and their respective successors, representatives and
assigns. This Agreement (and the rights and interests in this Agreement) may not
be assigned by any party without the written consent of the other parties;
provided, however, Parent may assign its interests in this Agreement to a
<PAGE>
purchaser or transferee of all or substantially all of the business or assets of
Parent or the Surviving Corporation, whether by sale of stock or assets, merger
or otherwise. Any attempted assignment in contravention of the foregoing shall
be null and void. Nothing in this Agreement is intended to confer, expressly or
by implication, upon any other person any rights or remedies under or by reason
of this Agreement.
12.4 Entire Agreement. This Agreement, which includes the disclosure
----------------
schedules and the other documents, agreements and instruments executed and
delivered pursuant to or in connection with this Agreement, contains the entire
agreement between the parties hereto with respect to the transactions
contemplated by this Agreement, and supersedes all prior negotiations,
arrangements or understandings, written or oral, with respect thereto.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original, and each of which shall
constitute one and the same agreement. Any party may deliver an executed copy of
this Agreement and of any documents contemplated by this Agreement by facsimile
transmission to another party and such delivery shall have the same force and
effect as any other delivery of a manually signed copy of this Agreement or of
such other documents.
12.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF
GEORGIA, EXCLUDING CHOICE OF LAW PRINCIPLES.
12.7 Invalidity of any Part. If any provision or part of this Agreement
----------------------
shall for any reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions of this Agreement and shall be construed as if such invalid, illegal
or unenforceable provision or part thereof had never been contained in this
Agreement, but only to the extent of its invalidity, illegality, or
unenforceability. Upon any such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated by this Agreement are consummated to the
extent possible.
12.8 Time of the Essence; Computation of Time. Time is of the essence
----------------------------------------
of each and every provision of this Agreement. Whenever the last day for the
exercise of any right or the discharge of any duty under this Agreement shall
fall upon Saturday, Sunday or a federal, public or legal holiday, the party
having such right or duty shall have until 5:00 p.m., Atlanta, Georgia time on
the next succeeding regular business day to exercise such right or to discharge
such duty.
12.9 Arbitration.
-----------
(a) Any dispute, controversy or claim arising out of or
relating to this Agreement or any other related documents, agreements,
certificates or other writing, or the breach, termination, construction,
validity or enforceability hereof or thereof, shall be settled
<PAGE>
by binding arbitration in accordance with the rules of the American Arbitration
Association in force at the time and in the manner described in Section 10.6
(except as otherwise provided in this Section 12.9).
(b) Termination or limitation of Parent's rights in any of its
software, products, or any associated intellectual property rights or documents
may not be awarded under any circumstances. The right to demand arbitration and
to receive damages and obtain other available remedies as provided hereunder
shall be the exclusive remedy in the event an arbitration demand is made, except
that Parent shall be entitled to obtain equitable relief, such as injunctive
relief, from any court of competent jurisdiction to protect its rights in any of
its software products or any associated intellectual property rights or
documents while such proceeding is pending or in support of any award made
pursuant to such arbitration.
[signatures on next page]
IN WITNESS WHEREOF, Parent, Merger Sub, Seller and Stockholders have
caused this Agreement to be executed by their duly authorized officers as of the
day and year first above written.
MEGAMARKETING CORPORATION
/s/ Edward J. Rutkowski
-----------------------------------------------
By: Edward J. Rutkowski
-----------------------------------------
Its: Executive Vice President
-----------------------------------------
MEGAMARKETING ACQUISITION
FIVE, INC.
/s/ Edward J. Rutkowski
-----------------------------------------------
By: Edward J. Rutkowski
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
DESKGATE TECHNOLOGIES, INC.
/s/ Patrick E. Patterson
-----------------------------------------------
By: Patrick E. Patterson
-----------------------------------------
Its: Chief Executive Officer
-----------------------------------------
THE STOCKHOLDERS:
<PAGE>
/s/ Patrick E. Patterson
-----------------------------------------------
Patrick E. Patterson
Address: 1027 S. 26th Street
-------------------------------------
Arlington, Virginia 22202
----------------------------------------
/s/ Jay Dunn by Power of Attorney for:
-----------------------------------------------
Carl ("Chip") Venters III
Address: 79 Pelican Drive
---------------------------------------
Wrightsville Beach, North Carolina 28480
-----------------------------------------------
/s/ Karl Minor
-----------------------------------------------
Karl Minor
Address:11312 Vale Road
---------------------------------------
Oakton, Virginia 22124
-----------------------------------------------
/s/ Debrah Whitaker
-----------------------------------------------
Debrah Whitaker
Address:1027 S. 26th Street
---------------------------------------
Arlinton, Virginia 22202
-----------------------------------------------
/s/ Jay Dunn
-----------------------------------------------
Jay Dunn
Address:709 Oronoco Street, Apt. 1
---------------------------------------
Alexandria, Virginia 22314
-----------------------------------------------
/s/ Bradford Gandee
-----------------------------------------------
Brad Gandee
Address:14307 Brookmere Drive
---------------------------------------
Centreville, Virginia 20120
-----------------------------------------------
/s/ David Patterson
-----------------------------------------------
David Patterson
Address:317 Windemere Road
---------------------------------------
Wilmington, North Carolina 28405
-----------------------------------------------
/s/ Joe Christian
-----------------------------------------------
Joe Christian
Address:5131 Oriole Road
---------------------------------------
Wilmington, North Carolina 28403
-----------------------------------------------
<PAGE>
/s/ Paul Karch
-----------------------------------------------
Paul Karch
Address:4107 Crescent Hills Drive
---------------------------------------
Haymarket, Virginia 20165
-----------------------------------------------
/s/ Jose Antonio Font
-----------------------------------------------
Jose Antonio Font
Address:9921 Coastal del Sol Boulevard
---------------------------------------
Miami, Florida 33178
-----------------------------------------------
/s/ Pat Ryan
-----------------------------------------------
Pat Ryan
Address:10009 Meyer Pointe Trace
---------------------------------------
Potomax, Maryland 20854
-----------------------------------------------
/s/ Wayne Lee
-----------------------------------------------
Wayne Lee
Address:9637 Eagle Ridge Drive
---------------------------------------
Bethesda, Maryland 20817
-----------------------------------------------
/s/ Eugene B. Phillips
-----------------------------------------------
E. Barry Phillips
Address:5745 Poolside Drive
---------------------------------------
Raleigh, North Carolina 27612
-----------------------------------------------
Adobe East
By: /s/ Gregory Greatrex
--------------------------------------------
/s/ Frank A. Daniels, III
-----------------------------------------------
Frank A. Daniels III
Address:2342 Churchill Road
---------------------------------------
Raleigh, North Carolina 27608
-----------------------------------------------
<PAGE>
Botany Bay, Ltd.
By:/s/ Gregory Greatrex
--------------------------------------------
/s/ Wesley Watson
-----------------------------------------------
Wesley Watson
Address: 1660 S. Alma School Road
---------------------------------------
Suite 213, Mesa, Arizona 85210
-----------------------------------------------
Farley/Ventura, LLC
By: Via Management LLC acting as
--------------------------------------------
Manager for Farley/Ventura LLC
--------------------------------------------
By: Michael R. Farley, Manager, Via
--------------------------------------------
Investment, LLC
--------------------------------------------
Via Investment LLC
By: Via Management II LLC acting as
--------------------------------------------
Manager for Via Investment LLC
--------------------------------------------
By: Michael R. Farley, Manager, Via
--------------------------------------------
Investment II LLC
--------------------------------------------
STOCKHOLDERS REPRESENTATIVE
/s/ Patrick E. Patterson
-----------------------------------------------
Patrick E. Patterson
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
M2DIRECT, INC.
ARTICLE ONE
NAME
----
The name of the corporation is M2Direct, Inc.
ARTICLE TWO
CAPITALIZATION
--------------
The total number of shares of all classes which the Corporation has
authority to issue is one hundred million five hundred thousand (100,500,000),
of which one hundred million (100,000,000) shares shall be designated as "Common
Stock," and five hundred thousand (500,000) shares shall be designated as
"Preferred Stock."
The designations and the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of each class of stock are as follows:
Preferred Stock
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors, and articles of amendment shall
be filed with the Georgia Secretary of State as required by law to be filed with
respect to issuance of such Preferred Stock, prior to the issuance of any shares
of such series.
The Board of Directors is expressly authorized, at any time, by (i)
adopting resolutions providing for the issuance of, or providing for a change in
the number of, shares of any particular series of Preferred Stock and, (ii) if
and to the extent from time to time required by law, by filing articles of
amendment that are effective without shareholder action to increase or decrease
the number of shares included in each series of Preferred Stock, but not below
the number of shares then issued, and to set or change in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series.
Notwithstanding the foregoing, the Board of Directors shall not be authorized to
change the right of holders of the Common Stock of the Corporation to vote one
vote per share on all matters submitted for shareholder action. The authority of
the Board of Directors with respect to each series of Preferred Stock shall
include, but not be limited to, setting or changing the following:
<PAGE>
(a) the annual dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be
accumulated, if dividends are to be cumulative;
(b) whether the shares of such series shall be redeemable and, if so,
the redemption price and the terms and conditions of such
redemption;
(c) the obligation, if any, of the Corporation to redeem shares of
such series pursuant to a sinking fund;
(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or classes,
and, if so, the terms and conditions of such conversion or
exchange, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
(e) whether the shares of such series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the
extent of such voting rights;
(f) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding-up of the
Corporation; and
(g) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such series.
The shares of Preferred Stock of any one series shall be identical with
each other in all respects except as to he dates from and after which dividends
thereon shall accumulate, if cumulative.
250,000 shares of the corporation's Preferred Stock shall be designated
"Series A Convertible Preferred Stock." The Series A Convertible Preferred Stock
shall have the rights, preferences, privileges, restrictions, and other matters
as follows:
1. Dividends. The holders of Series A Convertible Preferred
---------
rate of eight percent per share per annum (as adjusted for any combinations,
consolidations, stock distributions or stock dividends with respect to such
shares), payable out of funds legally available therefor or in Common Stock.
Such dividends shall be cumulative and shall be payable only when and as
declared by the Board of Directors.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up
of the corporation, either voluntary or involuntary, the Series A Holders shall
be entitled to receive, prior and in preference to any distribution of any of
the assets or surplus funds of the corporation to the holders of the Common
Stock by reason of their ownership thereof, the amount of $8.68 per share (as
adjusted for any combinations, consolidations, stock distributions or stock
dividends with respect to
2
<PAGE>
such shares) plus all declared or accumulated but unpaid dividends on such share
for each share of Series A Convertible Preferred Stock then held by them and no
more. If upon the occurrence of such event, the assets and funds thus
distributed among the Series A Holders shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amount, then the
entire assets and funds of the corporation legally available for distribution
shall be distributed among the Series A Holders in proportion to the shares of
Series A Convertible Preferred Stock then held by them.
(b) In the event of any liquidation, dissolution or winding up
of the corporation, either voluntary or involuntary, and subject to the payment
in full of the liquidation preferences with respect to the Series A Convertible
Preferred Stock as provided in subparagraph (a) of this Section 2, the holders
of the Common Stock shall be entitled to receive, prior and in preference to any
further distribution of any of the assets or surplus funds of the corporation to
the Series A Holders by reason of their ownership thereof, an amount equal to
the per share book value for each share of Common Stock then held by them and no
more. Subject to the payment in full of the liquidation preferences with respect
to the Series A Convertible Preferred Stock as provided in subparagraph (a) of
this Section 2, if upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Common Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amount,
then the entire remaining assets and funds of the corporation legally available
for distribution shall be distributed among the holders of the Common Stock in
proportion to the shares of Common Stock then held by them. After payment to the
Series A Holders and the holders of Common Stock of the amounts set forth in
subparagraph (a) above and this subparagraph (b), the entire remaining assets
and funds of the corporation legally available for distribution, if any, shall
be distributed among the holders of the Common Stock and the Series A
Convertible Preferred Stock in proportion to the shares of Common Stock then
held by them and the shares of Common Stock which the Series A Holders have the
right to acquire upon conversion of their shares.
(c) A consolidation or merger of the corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the corporation, shall not be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 2, but shall be
subject to the provisions of Section 5 hereof.
3. Voting Rights. Except as otherwise expressly provided
-------------
herein or as required by law, the Series A Holders shall have no voting rights
on account of the ownership of Series A Convertible Preferred Stock and shall
not be entitled to notice of any shareholders meeting.
4. Conversion. The Series A Holders shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Convertible
----------------
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing $8.68 plus
all declared or accumulated but unpaid dividends on each share of Series A
Convertible Preferred Stock by the then applicable Conversion Price, determined
as hereinafter provided (the "Conversion Price"), in effect on the date the
certificate is surrendered for conversion. The initial Conversion
3
<PAGE>
Price shall be $2.17. Such initial Conversion Price shall be adjusted as
hereinafter provided.
(b) Automatic Conversion. Each share of Series A Convertible
--------------------
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Conversion Price at the earlier of: (i) the closing of a
Qualified Public Offering (as hereinafter defined); or (ii) the affirmative vote
of the holders of at least one-half of the outstanding shares of Series A
Convertible Preferred Stock. A "Qualified Public Offering" shall mean an
offering of securities of the Corporation that is registered under the
Securities Act of 1933, as amended, and that yields gross proceeds of at least
$7,500,000.
(c) Mechanics of Conversion. Before any Series A Holder shall
-----------------------
be entitled to convert his shares of Series A Convertible Preferred Stock into
shares of Common Stock, he shall surrender the certificate or certificates
thereof, duly endorsed, at the office of the corporation or of any transfer
agent for such stock, and shall give written notice to the corporation at such
office that he elects to convert the same and shall state therein the name or
names in which he wishes the certificate or certificates for shares of Common
Stock to be issued. The corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such Series A Holder, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of surrender of the
shares of Series A Convertible Preferred Stock to be converted, and the person
or persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(d) Adjustments to Conversion Price.
-------------------------------
(i) Special Definitions. For purposes of this Section 4,
-------------------
the following definitions apply:
"Original Issue Date" shall mean the date on which a share
-------------------
of Series A Convertible Preferred Stock was first issued.
"Additional Shares of Common Stock" shall mean all shares
---------------------------------
of Common Stock issued by the corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Series A Convertible
Preferred Stock;
(B) to officers, directors or employees of, or
consultants to, the corporation, on terms approved by the
Board of Directors; or
(C) as a dividend or distribution on Series A
Convertible Preferred Stock.
(ii) Adjustments for Combinations or Subdivisions. No
--------------------------------------------
adjustment in the Conversion Price of a particular share of Series A Convertible
Preferred Stock shall be made unless this corporation at any time or from time
to time after the Original Issue Date shall declare or
4
<PAGE>
pay any dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock, or shall effect a subdivision of the outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise), or in the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, then the Conversion Price in effect
immediately prior to such event shall, concurrently with the effectiveness of
such event, be proportionately decreased or increased, as appropriate.
(e) Other Distributions. In the event the corporation
-------------------
shall at any time or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the corporation or any of its
subsidiaries other than Additional Shares of Common Stock, then in each such
event provision shall be made so that the Series A Holders shall receive the
securities of the corporation which they would have received had their stock
been converted into Common Stock on the date of such event.
(f) No Impairment. The corporation will not, by
-------------
amendment of its Amended and Restated Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the Series A Holders against impairment.
(g) Notices of Record Date. In the event of any taking
----------------------
by the corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution of: (i) any security
or right convertible into or entitling the holder thereof to receive Additional
Shares of Common Stock; (ii) any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property; or
(iii) any other similar right, the corporation shall mail to each Series A
Holder at least 20 days prior to the date specified therein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend, distribution, security or right, and the amount and character of such
dividend, distribution, security or right.
(h) Issue Taxes. The corporation shall pay any and all
-----------
issue and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of shares of Series A Convertible Preferred
Stock.
(i) Reservation of Stock Issuable Upon Conversion. The
---------------------------------------------
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Convertible Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Convertible
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Convertible Preferred Stock, the corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be
5
<PAGE>
sufficient for such purpose, including, without limitation, engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to these Articles.
(j) Fractional Shares. No fractional share shall be
-----------------
issued upon the conversion of any shares of Series A Convertible Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series A Convertible Preferred Stock by a
Series A Holder shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share of Common Stock.
In lieu of any fractional share of Common Stock to which a Series A Holder would
otherwise be entitled, the corporation shall make a cash payment equal to the
fair market value of such fractional share of Common Stock, as determined in
good faith by the Board of Directors.
(k) Adjustments. In case of any reorganization or any
-----------
reclassification of the capital stock of the corporation, any consolidation or
merger of the corporation with or into another corporation or corporations, or
the conveyance of all or substantially all of the assets of the corporation to
another corporation, each share of Series A Convertible Preferred Stock shall
thereafter be convertible into the number of shares of stock or other securities
or property (including cash) to which a holder of the number of shares of Common
Stock deliverable upon conversion of such share of Series A Convertible
Preferred Stock would have been entitled upon the record date of (or date of, if
no record date is fixed) such reorganization, reclassification, consolidation,
merger or conveyance; and, in any case, appropriate adjustment (as determined by
the Board of Directors) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
Series A Holders, to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as equivalent as is practicable, in relation
to any shares of stock or the securities or property (including cash) thereafter
deliverable upon the conversion of the shares of such Series A Convertible
Preferred Stock.
5. Merger, Consolidation.
---------------------
(a) At any time, in the event of:
(i) a consolidation or merger of the corporation
with or into any other corporation, or any other
entity or person, other than a wholly-owned
subsidiary;
(ii) any corporate reorganization in which the
corporation shall not be the continuing or surviving
entity of such reorganization;
(iii) a sale of all or substantially all of the
assets of the corporation; or
(iv) any transaction approved by the corporation
in which more than 50% of the outstanding stock of
the corporation (on an as-converted basis) is
exchanged in any three month period;
the Series A Holders shall be paid (unless such payment is waived by the holders
of a majority of the outstanding shares of Series A Convertible Preferred Stock)
in cash or in securities received
6
<PAGE>
from the acquiring corporation or in a combination thereof, at the closing of
any such transaction, an amount equal to the amount per share which would be
payable to such holders pursuant to Section 2 if all consideration received by
the corporation and its shareholders in connection with such event were being
distributed in a liquidation of the corporation.
(b) Any securities to be delivered to the Series A Holders
pursuant to Section 5(a) above shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability:
(A) If traded on a securities exchange, the value
shall be deemed to be the average of the security's
closing prices on such exchange over the 30-day
period ending three days prior to the closing;
(B) If actively traded over-the-counter, the
value shall be deemed to be the average of the
closing bid prices over the 30-day period ending
three days prior to the closing; and
(C) If there is no active public market, the
value shall be the fair market value thereof (as
determined in good faith by the Board of Directors
of the corporation).
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free
marketability shall be to make an appropriate discount from
the market value determined as above in (b)(1)(a),
(b)(1)(b) or (b)(1)(c) to reflect the approximate fair
market value thereof (as determined in good faith by the
Board of Directors of the corporation).
6. Amendment. Any term relating to the Series A Convertible Preferred
---------
Stock may be amended and the observance of any term relating to the Series A
Convertible Preferred Stock may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the vote or
written consent of holders of at least 50% of the shares of Series A Convertible
Preferred Stock then outstanding. Any amendment or waiver so effected shall be
binding upon the corporation and any Series A Holder.
7. Restrictions and Limitations. So long as at least 50% of the
----------------------------
shares of Series A Convertible Preferred Stock that are issued by the
corporation remain outstanding, the corporation shall not, without the vote or
written consent by the holders of more than 50% of the then outstanding shares
of Series A Convertible Preferred Stock:
(a) Effect any reclassification, recapitalization or other change with
respect to any outstanding shares of stock or create any new class or series of
capital stock which results in the issuance of shares of stock having any
preference or priority as to dividend or redemption rights, liquidation
preferences, conversion rights, or otherwise, superior to (but not on a parity
with) any such preference or priority of the Series A Convertible Preferred
Stock;
7
<PAGE>
(b) Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Series A Convertible Preferred Stock; or
(c) Redeem any shares of Common Stock (other than pursuant to
employment agreements).
8. Redemption. The corporation may redeem, at its option, between
----------
July 31, 2001 and July 31, 2003 (the "Redemption Period"), any or all
outstanding shares of Series A Convertible Preferred Stock by paying in cash
therefor $8.68 per redeemed share of Series A Convertible Preferred Stock (as
adjusted for any combinations, consolidations, stock distributions or stock
dividends with respect to such shares) (the "Redemption Price").
(a) During the Redemption Period, the corporation may effect a
redemption by mailing written notice, first class postage prepaid, to the Series
A Holders the corporation wishes to redeem, specifying the number of shares to
be redeemed from such holders, and calling upon the holders to deliver the
shares to be redeemed (the "Redemption Notice"). Upon receipt of a Redemption
Notice, a Series A Holder may not convert any shares that are subject to
redemption as stated in the Redemption Notice into shares of Common Stock. The
date for the closing of such redemption (a "Redemption Date") shall be stated by
the Corporation in the Redemption Notice and shall be a date no earlier than 10
days from the date of the mailing of the Redemption Notice by the corporation.
On or prior to the Redemption Date, each Series A Holder that receives a
Redemption Notice shall surrender to the corporation the certificate or
certificates representing such shares, at the principal office of the
corporation, and thereupon the Redemption Price of such shares shall be payable
to the order of the person whose name appears on such certificate or
certificates as the owner thereof and each surrendered certificate shall be
canceled. In the event less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares.
(b) From and after the Redemption Date, unless there shall have been a
default in payment of the Redemption Price, all rights of the holders of shares
of Preferred Stock designated for redemption in the Redemption Notice as holders
of Preferred Stock (except the right to receive the Redemption Price without
interest upon surrender of their certificate or certificates) shall cease with
respect to such shares, and such shares shall not thereafter be transferred on
the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
9. No Reissuance of Series A Convertible Preferred Stock. No share or
-----------------------------------------------------
shares of Series A Convertible Preferred Stock acquired by the corporation by
reason of redemption, purchase, conversion or otherwise shall be reissued, and
all such shares shall be returned to the status of undesignated shares of
Preferred Stock.
Common Stock
Subject to all of the rights of the Preferred Stock as expressly provided
herein, by law or by the Board of Directors pursuant to this Article Two, the
Common Stock of the Corporation shall possess all such rights and privileges as
are afforded to capital stock by applicable law in the
8
<PAGE>
absence of any express grant of rights or privileges in the Corporation's
Articles of Incorporation, including, but not limited to, the following rights
and privileges:
(a) dividends may be declared and paid or set apart for payment upon
the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends;
(b) the holders of Common Stock shall have the right to vote for the
election of directors and on all other matters requiring
stockholder action, each share being entitled to one vote; and
(c) upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, the net assets of the Corporation
available for distribution shall be distributed pro rata to the
holders of the common Stock in accordance with their respective
rights and interests.
ARTICLE THREE
LIMITATION ON DIRECTOR LIABILITY
--------------------------------
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(i) any appropriation, in violation of the director's duties,
of any business opportunity of the corporation;
(ii) acts or omissions that involve intentional misconduct or a
knowing violation of law;
(iii) liability under Section 14-2-832 (or any successor
provision or redesignation thereof) of the Georgia Business Corporation
Code (the "Code"); and
(iv) any transaction from which the director derived an improper
personal benefit.
If at any time the Code shall have been amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
each director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Code, as so amended, without further action by the
shareholders, unless the provisions of the Code, as amended, require further
action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article
Six shall not adversely affect the elimination or limitation of liability or
alleged liability pursuant hereto of any director of the corporation for or with
respect to any alleged act or omission of the director occurring prior to such a
repeal or modification.
9
<PAGE>
ARTICLE FOUR
SHAREHOLDER ACTION WITHOUT
MEETING BY LESS THAN UNANIMOUS CONSENT
--------------------------------------
The shareholders, without a meeting, may take any action required or
permitted to be taken at a meeting of the shareholders, if written consent
setting forth the action to be taken is signed by those persons who would be
entitled to vote at a meeting those shares having voting power to cast the
greater of (a) the minimum number (or numbers, in the case of voting classes) of
votes that would be necessary to authorize or take the action at a meeting at
which all shares entitled to vote were present and voted, or (b) two thirds
(2/3) of the number (or numbers, in the case of voting by classes) of votes
which could be cast with respect to such action at a meeting at which all shares
entitled to vote were present and voted. An action by less than unanimous
consent may not be taken with respect to any election of directors as to which
shareholders would be entitled to cumulative voting.
These Amended and Restated Articles of Incorporation were duly approved
by the Board of Directors, on April 30, 1999 in accordance with Section 14-2-
1002 and Section 14-2-1007 of the Georgia Business Corporation Code. Shareholder
action was not required.
IN WITNESS WHEREOF, the Corporation has caused these Amended and Restated
Articles of Incorporation to be executed and attested by its duly authorized
officer on April 30, 1999.
M2DIRECT, INC.
/s/ Michael T. Kane
--------------------
By: Michael T. Kane
Chief Financial Officer
10
<PAGE>
BYLAWS
OF
M2DIRECT, INC.
(formerly MegaMarketing Corporation)
<PAGE>
BYLAWS
OF
M2DIRECT, INC.
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE ONE.......................................................1
1.1 Registered Office and Agent...............................1
--------------------------
1.2 Principal Office..........................................1
----------------
1.3 Other Offices.............................................1
------------
ARTICLE TWO.......................................................1
2.1 Place of Meetings.........................................1
-----------------
2.2 Annual Meetings...........................................2
---------------
2.3 Special Meetings..........................................2
----------------
2.4 Notice of Meetings........................................2
------------------
2.5 Waiver of Notice..........................................2
----------------
2.6 Voting Group; Quorum; Vote Required to Act................2
------------------------------------------
2.7 Voting of Shares..........................................3
----------------
2.8 Proxies...................................................3
-------
2.9 Presiding Officer.........................................3
-----------------
2.10 Adjournments..............................................3
------------
2.11 Conduct of the Meeting....................................4
----------------------
2.12 Action of Shareholders Without a Meeting..................4
----------------------------------------
ARTICLE THREE.....................................................4
3.1 General Powers............................................4
--------------
3.2 Number, Election and Term of Office.......................4
-----------------------------------
i
<PAGE>
3.3 Removal of Directors......................................5
--------------------
3.4 Vacancies.................................................5
---------
3.5 Compensation..............................................5
------------
3.6 Committees of the Board of Directors......................5
------------------------------------
3.7 Qualification of Directors................................5
--------------------------
ARTICLE FOUR......................................................6
4.1 Regular Meetings..........................................6
----------------
4.2 Special Meetings..........................................6
----------------
4.3 Place of Meetings.........................................6
-----------------
4.4 Notice of Meetings........................................6
------------------
4.5 Quorum....................................................6
-------
4.6 Vote Required for Action..................................6
------------------------
4.7 Participation by Conference Telephone.....................6
-------------------------------------
4.8 Action by Directors Without a Meeting.....................7
-------------------------------------
4.9 Adjournments..............................................7
------------
4.10 Waiver of Notice..........................................7
----------------
ARTICLE FIVE......................................................7
5.1 Offices...................................................7
-------
5.2 Term......................................................7
----
5.3 Compensation..............................................8
------------
5.4 Removal...................................................8
-------
5.5 Chairman of the Board.....................................8
---------------------
5.6 President.................................................8
---------
5.7 Vice Presidents...........................................8
---------------
ii
<PAGE>
5.8 Secretary.................................................8
---------
5.9 Treasurer.................................................9
---------
ARTICLE SIX.......................................................9
ARTICLE SEVEN.....................................................9
7.1 Share Certificates........................................9
------------------
7.2 Rights of Corporation with Respect to Registered Owners...9
-------------------------------------------------------
7.3 Transfers of Shares......................................10
-------------------
7.4 Duty of Corporation to Register Transfer.................10
----------------------------------------
7.5 Lost, Stolen, or Destroyed Certificates..................10
---------------------------------------
7.6 Fixing of Record Date....................................10
---------------------
7.7 Record Date if None Fixed................................10
-------------------------
ARTICLE EIGHT....................................................11
8.1 Indemnification of Directors.............................11
----------------------------
8.2 Indemnification of Others................................11
-------------------------
8.3 Other Organizations......................................11
-------------------
8.4 Determination............................................12
-------------
8.5 Advances.................................................12
--------
8.6 Non-Exclusivity..........................................12
---------------
8.7 Insurance................................................12
---------
8.8 Notice...................................................13
------
8.9 Security.................................................13
--------
8.10 Amendment................................................13
---------
8.11 Agreements...............................................13
----------
8.12 Continuing Benefits......................................13
-------------------
iii
<PAGE>
8.13 Successors...............................................13
----------
8.14 Severability.............................................14
------------
8.15 Additional Indemnification...............................14
----------------------
ARTICLE NINE.....................................................14
9.1 Inspection of Books and Records..........................14
-------------------------------
9.2 Fiscal Year..............................................14
-----------
9.3 Corporate Seal...........................................14
--------------
9.4 Annual Statements........................................14
-----------------
9.5 Notice...................................................15
------
ARTICLE TEN......................................................15
iv
<PAGE>
BYLAWS
OF
M2DIRECT, INC.
------------------------------------------------
References in these Bylaws to "Articles of Incorporation" are to the
Articles of Incorporation of M2DIRECT, INC., a Georgia corporation (the
"Corporation"), as amended and restated from time to time (the "Articles").
All of these Bylaws are subject to contrary provisions, if any, of the
Articles (including provisions designating the preferences, limitations, and
relative rights of any class or series of shares), the Georgia Business
Corporation Code (the "Code"), and other applicable law, as in effect on and
after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
------------------------------------------------
ARTICLE ONE
Office
1.1 Registered Office and Agent. The Corporation shall maintain a
---------------------------
registered office and shall have a registered agent whose business office is the
same as the registered office.
1.2 Principal Office. The principal office of the Corporation shall be
----------------
at the place designated in the Corporation's annual registration with the
Georgia Secretary of State.
1.3 Other Offices. In addition to its registered office and principal
-------------
office, the Corporation may have offices at other locations either in or outside
the State of Georgia.
ARTICLE TWO
Shareholders' Meetings
2.1 Place of Meetings. Meetings of the Corporation's shareholders may be
-----------------
held at any location inside or outside the State of Georgia designated by the
Board of Directors or any other person or persons who properly call the meeting,
or if the Board of Directors or such other person or persons do not specify a
location, at the Corporation's principal office.
<PAGE>
2.2 Annual Meetings. The Corporation shall hold an annual meeting of
---------------
shareholders, at a time determined by the Board of Directors, to elect directors
and to transact any business that properly may come before the meeting. The
annual meeting may be combined with any other meeting of shareholders, whether
annual or special.
2.3 Special Meetings. Special meetings of shareholders of one or more
----------------
classes or series of the Corporation's shares may be called at any time by the
Board of Directors, the Chairman of the Board, or the President, and shall be
called by the Corporation upon the written request (in compliance with
applicable requirements of the Code) of the holders of shares representing
twenty-five percent (25%) or more of the votes entitled to be cast on each issue
proposed to be considered at the special meeting. The business that may be
transacted at any special meeting of shareholders shall be limited to that
proposed in the notice of the special meeting given in accordance with Section
2.4 (including related or incidental matters that may be necessary or
appropriate to effectuate the proposed business).
2.4 Notice of Meetings. In accordance with Section 9.5 and subject to
------------------
waiver by a shareholder pursuant to Section 2.5, the Corporation shall give
written notice of the date, time, and place of each annual and special
shareholders' meeting no fewer than 10 days nor more than 60 days before the
meeting date to each shareholder of record entitled to vote at the meeting. The
notice of an annual meeting need not state the purpose of the meeting unless
these Bylaws require otherwise. The notice of a special meeting shall state the
purpose for which the meeting is called. If an annual or special shareholders'
meeting is adjourned to a different date, time, or location, the Corporation
shall give shareholders notice of the new date, time, or location of the
adjourned meeting, unless a quorum of shareholders was present at the meeting
and information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
-------- -------
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are entitled
to vote at the adjourned meeting.
2.5 Waiver of Notice. A shareholder may waive any notice required by the
----------------
Code, the Articles, or these Bylaws, before or after the date and time of the
matter to which the notice relates, by delivering to the Corporation a written
waiver of notice signed by the shareholder entitled to the notice. In addition,
a shareholder's attendance at a meeting shall be (a) a waiver of objection to
lack of notice or defective notice of the meeting unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (b) a waiver of objection to consideration of a particular
matter at the meeting that is not within the purpose stated in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented. Except as otherwise required by the Code, neither the purpose of nor
the business transacted at the meeting need be specified in any waiver.
2.6 Voting Group; Quorum; Vote Required to Act. (a) Unless otherwise
------------------------------------------
required by the Code or the Articles, all classes or series of the Corporation's
shares entitled to vote generally on a matter shall for that purpose be
considered a single voting group (a "Voting Group"). If either the Articles or
the Code requires separate voting by two or more Voting Groups on a matter,
action on that matter is taken only when voted upon by each such Voting
2
<PAGE>
Group separately. At all meetings of shareholders, any Voting Group entitled to
vote on a matter may take action on the matter only if a quorum of that Voting
Group exists at the meeting, and if a quorum exists, the Voting Group may take
action on the matter notwithstanding the absence of a quorum of any other Voting
Group that may be entitled to vote separately on the matter. Unless the
Articles, these Bylaws, or the Code provides otherwise, the presence (in person
or by proxy) of shares representing a majority of votes entitled to be cast on a
matter by a Voting Group shall constitute a quorum of that Voting Group with
regard to that matter. Once a share is present at any meeting other than solely
to object to holding the meeting or transacting business at the meeting, the
share shall be deemed present for quorum purposes for the remainder of the
meeting and for any adjournments of that meeting, unless a new record date for
the adjourned meeting is or must be set pursuant to Section 7.6 of these Bylaws.
(b) Except as provided in Section 3.4, if a quorum exists, action on
a matter by a Voting Group is approved by that Voting Group if the votes cast
within the Voting Group favoring the action exceed the votes cast opposing the
action, unless the Articles, a provision of these Bylaws that has been adopted
pursuant to Section 14-2-1021 of the Code (or any successor provision), or the
Code requires a greater number of affirmative votes.
2.7 Voting Shares. Unless otherwise required by the Code or the
-------------
Articles, each outstanding share of any class or series having voting rights
shall be entitled to one vote on each matter that is submitted to a vote of
shareholders.
2.8 Proxies. A shareholder entitled to vote on a matter may vote in
-------
person or by proxy pursuant to an appointment executed in writing by the
shareholder or by his attorney-in-fact. An appointment of a proxy shall be valid
for 11 months from the date of its execution, unless a longer or shorter period
is expressly stated in the proxy.
2.9 Presiding Officer. Except as otherwise provided in this Section 2.9,
-----------------
the Chairman of the Board, and in his absence or disability the President shall
preside at every shareholders' meeting (and any adjournment thereof) as its
chairman, if either of them is present and willing to serve. If neither the
Chairman of the Board nor the President is present and willing to serve as
chairman of the meeting, and if the Chairman of the Board has not designated
another person who is present and willing to serve, then a majority of the
Corporation's directors present at the meeting shall be entitled to designate a
person to serve as chairman. If no director of the Corporation is present at the
meeting or if a majority of the directors who are present cannot be established,
then a chairman of the meeting shall be selected by a majority vote of (a) the
shares present at the meeting that would be entitled to vote in an election of
directors, or (b) if no such shares are present at the meeting, then the shares
present at the meeting comprising the Voting Group with the largest number of
shares present at the meeting and entitled to vote on a matter properly proposed
to be considered at the meeting. The chairman of the meeting may designate other
persons to assist with the meeting.
2.10 Adjournments. At any meeting of shareholders (including an
------------
adjourned meeting), a majority of shares of any Voting Group present and
entitled to vote at the meeting (whether or not those shares constitute a
quorum) may adjourn the meeting, but only with respect
3
<PAGE>
to that Voting Group, to reconvene at a specific time and place. If more than
one Voting Group is present and entitled to vote on a matter at the meeting,
then the meeting may be continued with respect to any such Voting Group that
does not vote to adjourn as provided above, and such Voting Group may proceed to
vote on any matter to which it is otherwise entitled; provided, however, that if
-------- -------
(a) more than one Voting Group is required to take action on a matter at the
meeting and (b) any one of those Voting Groups votes to adjourn the meeting (in
accordance with the preceding sentence), then the action shall not be deemed to
have been taken until the requisite vote of any adjourned Voting Group is
obtained at its reconvened meeting. The only business that may be transacted at
any reconvened meeting is business that could have been transacted at the
meeting that was adjourned, unless further notice of the adjourned meeting has
been given in compliance with the requirements for a special meeting that
specifies the additional purpose or purposes for which the meeting is called.
Nothing contained in this Section 2.10 shall be deemed or otherwise construed to
limit any lawful authority of the chairman of a meeting to adjourn the meeting.
2.11 Conduct of the Meeting. At any meeting of shareholders, the
----------------------
chairman of the meeting shall be entitled to establish the rules of order
governing the conduct of business at the meeting.
2.12 Action of Shareholders Without a Meeting. Action required or
----------------------------------------
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the action is taken by all shareholders entitled to vote on the
action or, if permitted by the Articles, by persons who would be entitled to
vote at a meeting shares having voting power to cast the requisite number of
votes (or numbers, in the case of voting by groups) that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. The action must be evidenced by one or more written
consents describing the action taken, signed by shareholders entitled to take
action without a meeting, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. Where required by Section 14-2-704
or other applicable provision of the Code, the Corporation shall provide
shareholders with written notice of actions taken without a meeting.
ARTICLE THREE
Board of Directors
3.1 General Powers. All corporate powers shall be exercised by or under
--------------
the authority of, and the business and affairs of the Corporation shall be
managed by, the Board of Directors, subject to any limitation set forth in the
Articles, in bylaws approved by the shareholders, or in agreements among all the
shareholders that are otherwise lawful.
3.2 Number, Election and Term of Office. The number of directors of the
-----------------------------------
Corporation shall be fixed by resolution of the Board of Directors or of the
shareholders from time to time and, until otherwise determined, shall be four;
provided, however, that no decrease in the number of directors (if more than one
- -------- -------
director is elected by a resolution of the Board of
4
<PAGE>
Directors or the shareholders) shall have the effect of shortening the term of
an incumbent director. Except as provided elsewhere in this Section 3.2 and in
Section 3.4, the directors shall be elected at each annual meeting of
shareholders, or at a special meeting of shareholders called for purposes that
include the election of directors, by a plurality of the votes cast by the
shares entitled to vote and present at the meeting. Except in case of death,
resignation, disqualification, or removal, the term of each director shall
expire at the next succeeding annual meeting of shareholders. Despite the
expiration of a director's term, he shall continue to serve until his successor,
if there is to be any, has been elected and has qualified.
3.3 Removal of Directors. The entire Board of Directors or any
--------------------
individual director may be removed, with or without cause, by the shareholders,
provided that directors elected by a particular Voting Group may be removed only
by the shareholders in that Voting Group. Removal action may be taken only at a
shareholders' meeting for which notice of the removal action has been given. A
removed director's successor, if any, may be elected at the same meeting to
serve the unexpired term.
3.4 Vacancies. A vacancy occurring in the Board of Directors may be
---------
filled for the unexpired term, unless the shareholders have elected a successor,
by the affirmative vote of a majority of the remaining directors, whether or not
the remaining directors constitute a quorum; provided, however, that if the
-------- -------
vacant office was held by a director elected by a particular Voting Group, only
the holders of shares of that Voting Group or the remaining directors elected by
that Voting Group shall be entitled to fill the vacancy; provided further,
-------- -------
however, that if the vacant office was held by a director elected by a
- -------
particular Voting Group and there is no remaining director elected by that
---
Voting Group, the other remaining directors or director (elected by another
Voting Group or Groups) may fill the vacancy during an interim period before the
shareholders of the vacated director's Voting Group act to fill the vacancy. A
vacancy or vacancies in the Board of Directors may result from the death,
resignation, disqualification, or removal of any director, or from an increase
in the number of directors.
3.5 Compensation. Directors may receive such compensation for their
------------
services as directors as may be fixed by the Board of Directors from time to
time. A director may also serve the Corporation in one or more capacities other
than that of director and receive compensation for services rendered in those
other capacities.
3.6 Committees of the Board of Directors. The Board of Directors may
------------------------------------
designate from among its members an executive committee or one or more other
standing or ad hoc committees, each consisting of one or more directors, who
serve at the pleasure of the Board of Directors. Subject to the limitations
imposed by the Code, each committee shall have the authority set forth in the
resolution establishing the committee or in any other resolution of the Board of
Directors specifying, enlarging, or limiting the authority of the committee.
3.7 Qualification of Directors. No person elected to serve as a director
--------------------------
of the Corporation shall assume office and begin serving unless and until duly
qualified to serve, as determined by reference to the Code, the Articles, and
any further eligibility requirements established in these Bylaws.
5
<PAGE>
ARTICLE FOUR
Meetings of the Board of Directors
4.1 Regular Meetings. A regular meeting of the Board of Directors shall
----------------
be held in conjunction with each annual meeting of shareholders. In addition,
the Board of Directors may, by prior resolution, hold regular meetings at other
times.
4.2 Special Meetings. Special meetings of the Board of Directors may be
----------------
called by or at the request of the Chairman of the Board, the President, or any
director in office at that time.
4.3 Place of Meetings. Directors may hold their meetings at any place in
-----------------
or outside the State of Georgia that the Board of Directors may establish from
time to time.
4.4 Notice of Meetings. Directors need not be provided with notice of
------------------
any regular meeting of the Board of Directors. Unless waived in accordance with
Section 4.10, the Corporation shall give at least 24 hours' notice to each
director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 Quorum. At meetings of the Board of Directors, a majority of the
------
directors then in office shall constitute a quorum for the transaction of
business.
4.6 Vote Required for Action. If a quorum is present when a vote is
------------------------
taken, the vote of a majority of the directors present at the time of the vote
will be the act of the Board of Directors, unless the vote of a greater number
is required by the Code, the Articles, or these Bylaws. A director who is
present at a meeting of the Board of Directors when corporate action is taken is
deemed to have assented to the action taken unless (a) he objects at the
beginning of the meeting (or promptly upon his arrival) to holding the meeting
or transacting business at such meeting; (b) his dissent or abstention from the
action taken is entered in the minutes of the meeting; or (c) he delivers
written notice of his dissent or abstention to the presiding officer of the
meeting before its adjournment or to the Corporation immediately after
adjournment of the meeting. The right of dissent or abstention is not available
to a director who votes in favor of the action taken.
4.7 Participation by Conference Telephone. Members of the Board of
-------------------------------------
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment through which all persons
participating may hear and speak to each other. Participation in a meeting
pursuant to this Section 4.7 shall constitute presence in person at the meeting.
6
<PAGE>
4.8 Action by Directors Without a Meeting. Any action required or
-------------------------------------
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent, describing the action taken, is signed
by each director and delivered to the Corporation for inclusion in the minutes
or filing with the corporate records. The consent may be executed in
counterpart, and shall have the same force and effect as a unanimous vote of the
Board of Directors at a duly convened meeting.
4.9 Adjournments. A meeting of the Board of Directors, whether or not a
------------
quorum is present, may be adjourned by a majority of the directors present to
reconvene at a specific time and place. It shall not be necessary to give notice
to the directors of the reconvened meeting or of the business to be transacted,
other than by announcement at the meeting that was adjourned, unless a quorum
was not present at the meeting that was adjourned, in which case notice shall be
given to directors in the same manner as for a special meeting. At any such
reconvened meeting at which a quorum is present, any business may be transacted
that could have been transacted at the meeting that was adjourned.
4.10 Waiver of Notice. A director may waive any notice required by the
----------------
Code, the Articles, or these Bylaws before or after the date and time of the
matter to which the notice relates, by a written waiver signed by the director
and delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Attendance by a director at a meeting shall constitute waiver
of notice of the meeting, except where a director at the beginning of the
meeting (or promptly upon his arrival) objects to holding the meeting or to
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
ARTICLE FIVE
Officers
5.1 Offices. The officers of the Corporation shall consist of a Chairman
-------
of the Board, a President, a Secretary, and a Treasurer, each of whom shall be
elected or appointed by the Board of Directors. The Chairman of the Board shall
be elected by the Board of Directors from among its members. The Board of
Directors from time to time may create and establish the duties of other offices
and may elect or appoint, or authorize specific senior officers to appoint, the
persons who shall hold such other offices, including one or more Vice Presidents
(including Executive Vice Presidents, Senior Vice Presidents, Assistant Vice
Presidents, and the like), one or more Assistant Secretaries, and one or more
Assistant Treasurers. Whether or not so provided by the Board of Directors, the
Chairman of the Board may appoint one or more Assistant Secretaries and one or
more Assistant Treasurers. Any two or more offices may be held by the same
person.
5.2 Term. Each officer shall serve at the pleasure of the Board of
----
Directors (or, if appointed by a senior officer pursuant to this Article Five,
at the pleasure of the Board of Directors or any senior officer authorized to
have appointed the officer) until his or her death,
7
<PAGE>
resignation, or removal, or until his replacement is elected or appointed in
accordance with this Article Five.
5.3 Compensation. The compensation of all officers of the Corporation
------------
shall be fixed by the Board of Directors or by a committee or officer appointed
by the Board of Directors. Officers may serve without compensation.
5.4 Removal. All officers (regardless of how elected or appointed) may
-------
be removed, with or without cause, by the Board of Directors, and any officer
appointed by another officer may also be removed, with or without cause, by any
senior officer authorized to have appointed the officer to be removed. Removal
will be without prejudice to the contract rights, if any, of the person removed,
but shall be effective notwithstanding any damage claim that may result from
infringement of such contract rights.
5.5 Chairman of the Board. The Chairman of the Board shall preside at
---------------------
and serve as chairman of meetings of the shareholders and of the Board of
Directors (unless another person is selected under Section 2.9 to act as
chairman). The Chairman of the Board shall be the Chief Executive Officer of the
Corporation, shall be charged with the general and active management of the
business of the Corporation, shall see that all orders and resolutions of the
Board of Directors are carried into effect, and shall have the authority to
select and appoint employees and agents of the Corporation. The Chairman of the
Board shall perform other duties and have other authority as may from time to
time be delegated by the Board of Directors.
5.6 President. Unless otherwise provided in these Bylaws or by
---------
resolution of the Board of Directors, the President shall be the Chief Operating
Officer of the Corporation, and shall, in the absence or disability of the
Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board. The President shall perform any other duties and have any
other authority as may be delegated from time to time by the Board of Directors,
and shall be subject to the limitations fixed from time to time by the Board of
Directors.
5.7 Vice Presidents. The Vice President (if there be one) shall, in the
---------------
absence or disability of the President, or at the direction of the President,
perform the duties and exercise the powers of the President, whether the duties
and powers are specified in these Bylaws or otherwise. If the Corporation has
more than one Vice President, the one designated by the Board of Directors or
the President (in that order of precedence) shall act in the event of the
absence or disability of the President. Vice Presidents shall perform any other
duties and have any other authority as from time to time may be delegated by the
Board of Directors or the President.
5.8 Secretary. The Secretary shall be responsible for preparing minutes
---------
of the meetings of shareholders, directors, and committees of directors and for
authenticating records of the Corporation. The Secretary or any Assistant
Secretary shall have authority to give all notices required by law or these
Bylaws. The Secretary shall be responsible for the custody of the corporate
books, records, contracts, and other documents. The Secretary or any Assistant
Secretary may affix the corporate seal to any lawfully executed documents
requiring it, may attest to the signature of any officer of the Corporation, and
shall sign any instrument that requires the
8
<PAGE>
Secretary's signature. The Secretary or any Assistant Secretary shall perform
any other duties and have any other authority as from time to time may be
delegated by the Board of Directors or the President.
5.9 Treasurer. Unless otherwise provided by the Board of Directors, the
---------
Treasurer shall be the Chief Financial Officer and shall be responsible for the
custody of all funds and securities belonging to the Corporation and for the
receipt, deposit, or disbursement of these funds and securities under the
direction of the Board of Directors. The Treasurer shall cause full and true
accounts of all receipts and disbursements to be maintained and shall make
reports of these receipts and disbursements to the Board of Directors and
President upon request. The Treasurer or Assistant Treasurer shall perform any
other duties and have any other authority as from time to time may be delegated
by the Board of Directors or the President.
ARTICLE SIX
Distributions and Dividends
Unless the Articles provide otherwise, the Board of Directors, from time
to time in its discretion, may authorize or declare distributions or share
dividends in accordance with the Code.
ARTICLE SEVEN
Shares
7.1 Share Certificates. The interest of each shareholder in the
------------------
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation, which shall be in such form as the Board of Directors
from time to time may adopt in accordance with the Code. Share certificates
shall be in registered form and shall indicate the date of issue, the name of
the Corporation, that the Corporation is organized under the laws of the State
of Georgia, the name of the shareholder, and the number and class of shares and
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by the President or a Vice President (or in lieu
thereof, by the Chairman of the Board or Chief Executive Officer, if there be
one) and may be signed by the Secretary or an Assistant Secretary; provided,
--------
however, that where the certificate is signed (either manually or by facsimile)
- -------
by a transfer agent, or registered by a registrar, the signatures of those
officers may be facsimiles.
7.2 Rights of Corporation with Respect to Registered Owners. Prior to
-------------------------------------------------------
due presentation for transfer of registration of its shares, the Corporation may
treat the registered owner of the shares (or the beneficial owner of the shares
to the extent of any rights granted by a nominee certificate on file with the
Corporation pursuant to any procedure that may be established by the Corporation
in accordance with the Code) as the person exclusively entitled to vote the
shares, to receive any dividend or other distribution with respect to the
shares, and for all other purposes; and the Corporation shall not be bound to
recognize any equitable or other claim to or
9
<PAGE>
interest in the shares on the part of any other person, whether or not it has
express or other notice of such a claim or interest, except as otherwise
provided by law.
7.3 Transfers of Shares. Transfers of shares shall be made upon the
-------------------
books of the Corporation kept by the Corporation or by the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen, or
destroyed, the provisions of Section 7.5 of these Bylaws shall have been
complied with.
7.4 Duty of Corporation to Register Transfer. Notwithstanding any of
----------------------------------------
the provisions of Section 7.3 of these Bylaws, the Corporation is under a duty
to register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons; (b) reasonable assurance is given
that each required endorsement is genuine and effective; (c) the Corporation has
no duty to inquire into adverse claims or has discharged any such duty; (d) any
applicable law relating to the collection of taxes has been complied with; (e)
the transfer is in fact rightful or is to a bona fide purchaser; and (f) the
transfer is in compliance with applicable provisions of any transfer
restrictions of which the Corporation shall have notice.
7.5 Lost, Stolen, or Destroyed Certificates. Any person claiming a share
---------------------------------------
certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 Fixing of Record Date. For the purpose of determining shareholders
---------------------
(a) entitled to notice of or to vote at any meeting of shareholders or, if
necessary, any adjournment thereof, (b) entitled to receive payment of any
distribution or dividend, or (c) for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. The record date may not
be more than 70 days (and, in the case of a notice to shareholders of a
shareholders' meeting, not less than 10 days) prior to the date on which the
particular action, requiring the determination of shareholders, is to be taken.
A separate record date may be established for each Voting Group entitled to vote
separately on a matter at a meeting. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting, unless the Board of Directors shall fix a new record
date for the reconvened meeting, which it must do if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
7.7 Record Date if None Fixed. If no record date is fixed as provided in
-------------------------
Section 7.6, then the record date for any determination of shareholders that may
be proper or required by law shall be, as appropriate, the date on which notice
of a shareholders' meeting is mailed, the date on which the Board of Directors
adopts a resolution declaring a dividend or authorizing a distribution, or the
date on which any other action is taken that requires a determination of
shareholders.
10
<PAGE>
ARTICLE EIGHT
Indemnification
8.1 Indemnification of Directors. The Corporation shall indemnify and
----------------------------
hold harmless any person (an "Indemnified Person") who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
whether formal or informal, including any action or suit by or in the right of
the Corporation (for purposes of this Article Eight, collectively, a
"Proceeding") because he is or was a director of the Corporation, against any
judgment, settlement, penalty, fine, or reasonable expenses (including, but not
limited to, attorneys' fees and disbursements, court costs, and expert witness
fees) incurred with respect to the Proceeding (for purposes of this Article
Eight, a "Liability"), if he acted in a manner he believed in good faith to be
in or not opposed to the best interests of the Corporation, and, in the case of
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful; provided, however, that no indemnification shall be made for any
-------- -------
Liability for which, under the Code, indemnification may not be authorized by
action of the Board of Directors, the shareholders, or otherwise, including, but
not limited to, any Liability of a director to the Corporation for: (a) any
appropriation by a director, in violation of the director's duties, of any
business opportunity of the corporation; (b) any acts or omissions of a director
that involve intentional misconduct or a knowing violation of law; (c) the types
of liability set forth in Code Section 14-2-832; or (d) any transaction from
which the director received an improper personal benefit. Indemnification in
connection with a Proceeding brought by or in the right of the Corporation is
limited to reasonable expenses incurred in connection with the Proceeding.
8.2 Indemnification of Others. The Board of Directors shall have the
-------------------------
power to cause the Corporation to provide to officers, employees, and agents of
the Corporation all or any part of the right to indemnification and other rights
of the type provided under Sections 8.1, 8.5, and 8.11 of this Article Eight
(subject to the conditions, limitations, and obligations specified in those
sections) upon a resolution to that effect identifying officers, employees, or
agents (by position or name) to be indemnified and specifying the particular
rights provided, which may be different for each of the persons identified. Each
officer, employee, or agent of the Corporation so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article Eight.
8.3 Other Organizations. The Board of Directors shall have the power to
-------------------
cause the Corporation to provide to any director, officer, employee, or agent of
the Corporation who is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
all or any part of the right to indemnification and other rights of the type
provided under Sections 8.1, 8.5, and 8.11 of this Article Eight (subject to the
conditions, limitations, and obligations specified in those sections) upon a
resolution to that effect identifying the persons to be identified and
specifying the particular rights provided, which may be different for each of
the
11
<PAGE>
persons identified. Each person so identified shall be an "Indemnified
Person" for purposes of the provisions of this Article Eight.
8.4 Determination. Notwithstanding any judgment, order, settlement,
-------------
conviction, or plea in any Proceeding, an Indemnified Person shall be entitled
to indemnification as provided in Section 8.1 if a determination that such
Indemnified Person is entitled to such indemnification shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not at the time parties to the Proceeding; (b) if a quorum cannot be
obtained under (a) above, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors who are not at the time
parties to the Proceeding; (c) in a written opinion by special legal counsel
selected as required by the Code; or (d) by the shareholders; provided, however,
-------- -------
that shares owned by or voted under the control of directors who are at the time
parties to the Proceeding may not be voted on the determination.
8.5 Advances. To the extent the Corporation has funds reasonably
--------
available to be used for this purpose, expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in defending any Proceeding of the kind
described in Section 8.1 (or in Sections 8.2 or 8.3, if the Board of Directors
has specified that advancement of expenses be made available to such Indemnified
Person) shall be paid by the Corporation in advance of the final disposition of
such Proceeding as set forth herein. The Corporation shall promptly pay the
amount of such expenses to the Indemnified Person, but in no event later than 10
days following the Indemnified Person's delivery to the Corporation of a written
request for an advance pursuant to this Section 8.5, together with a reasonable
accounting of such expenses; provided, however, that the Indemnified Person
-------- -------
shall furnish the Corporation a written affirmation of his good faith belief
that he has met the standard of conduct set forth in the Code and a written
undertaking and agreement to repay to the Corporation any advances made pursuant
to this Section 8.5 if it shall be determined that the Indemnified Person is not
entitled to be indemnified by the Corporation for such amounts. The Corporation
may make the advances contemplated by this Section 8.5 regardless of the
Indemnified Person's financial ability to make repayment. Any advances and
undertakings to repay pursuant to this Section 8.5 may be unsecured and
interest-free.
8.6 Non-Exclusivity. Subject to any applicable limitation imposed by the
---------------
Code or the Articles, the indemnification and advancement of expenses provided
by or granted pursuant to this Article Eight shall not be deemed exclusive of
any other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any provision of the Articles, or any Bylaw,
resolution, or agreement specifically or in general terms approved or ratified
by the affirmative vote of holders of a majority of the shares entitled to be
voted thereon.
8.7 Insurance. The Corporation shall have the power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while serving in such a capacity,
is also or was also serving at the request of the Corporation as a director,
officer, trustee, partner, employee, or agent of any corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
Liability
12
<PAGE>
that may be asserted against him or incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article Eight.
8.8 Notice. If the Corporation indemnifies or advances expenses to a
------
director under any of Sections 14-2-851 through 14-2-854 of the Code (or any
equivalent provision of these Bylaws) in connection with a Proceeding by or in
the right of the Corporation, the Corporation shall, to the extent required by
Section 14-2-1621 or any other applicable provision of the Code, report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
8.9 Security. The Corporation may designate certain of its assets as
--------
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
8.10 Amendment. Any amendment to this Article Eight that limits or
---------
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to Proceedings based on actions, events, or
omissions occurring after such amendment and after delivery of notice of such
amendment to the Indemnified Person so affected (collectively, "Post Amendment
Events"). Any Indemnified Person shall, as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice, be
entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.10 cannot be altered, amended, or repealed in a manner effective as to
any Indemnified Person (except as to Post Amendment Events) without the prior
written consent of such Indemnified Person.
8.11 Agreements. The provisions of this Article Eight shall be deemed to
----------
constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.12 Continuing Benefits. The rights of indemnification and advancement
-------------------
of expenses permitted or authorized by this Article Eight shall, unless
otherwise provided when such rights are granted or conferred, continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
8.13 Successors. For purposes of this Article Eight, the term
----------
"Corporation" shall include any corporation, joint venture, trust, partnership,
or unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation, or otherwise, and any such successor
shall be
13
<PAGE>
liable to the persons indemnified under this Article Eight on the same terms and
conditions and to the same extent as this Corporation.
8.14 Severability. Each of the Sections of this Article Eight, and each
------------
of the clauses set forth herein, shall be deemed separate and independent, and
should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any separate Section or clause of this Article Eight that is not
declared invalid or unenforceable.
8.15 Additional Indemnification. In addition to the specific
--------------------------
indemnification rights set forth herein, the Corporation shall indemnify each of
its directors and such of its officers as have been designated by the Board of
Directors to the full extent permitted by action of the Board of Directors
without shareholder approval under the Code or other laws of the State of
Georgia as in effect from time to time.
ARTICLE NINE
Miscellaneous
9.1 Inspection of Books and Records. The Board of Directors shall have
-------------------------------
the power to determine which accounts, books, and records of the Corporation
shall be available for shareholders to inspect or copy, except for those books
and records required by the Code to be made available upon compliance by a
shareholder with applicable requirements, and shall have the power to fix
reasonable rules and regulations (including confidentiality restrictions and
procedures) not in conflict with applicable law for the inspection and copying
of accounts, books, and records that by law or by determination of the Board of
Directors are made available. Unless required by the Code or otherwise provided
by the Board of Directors, a shareholder of the Corporation holding less than
two percent of the total shares of the Corporation then outstanding shall have
no right to inspect the books and records of the Corporation.
9.2 Fiscal Year. The Board of Directors is authorized to fix the fiscal
-----------
year of the Corporation and to change the fiscal year from time to time as it
deems appropriate.
9.3 Corporate Seal. The corporate seal will be in such form as the Board
--------------
of Directors may from time to time determine. The Board of Directors may
authorize the use of one or more facsimile forms of the corporate seal. The
corporate seal need not be used unless its use is required by law, by these
Bylaws, or by the Articles.
9.4 Annual Statements. Not later than four months after the close of
-----------------
each fiscal year, and in any case prior to the next annual meeting of
shareholders, the Corporation shall prepare (a) a balance sheet showing in
reasonable detail the financial condition of the Corporation as of the close of
its fiscal year, and (b) a profit and loss statement showing the results of its
operations during its fiscal year. Upon receipt of written request, the
Corporation promptly shall mail to any
14
<PAGE>
shareholder of record a copy of the most recent such balance sheet and profit
and loss statement, in such form and with such information as the Code may
require.
9.5 Notice. (a) Whenever these Bylaws require notice to be given to any
------
shareholder or to any director, the notice may be given by mail, in person, by
courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Whenever notice is given to a shareholder or director by mail,
the notice shall be sent by depositing the notice in a post office or letter box
in a postage-prepaid, sealed envelope addressed to the shareholder or director
at his or her address as it appears on the books of the Corporation. Any such
written notice given by mail shall be effective: (i) if given to shareholders,
at the time the same is deposited in the United States mail; and (ii) in all
other cases, at the earliest of (x) when received or when delivered, properly
addressed, to the addressee's last known principal place of business or
residence, (y) five days after its deposit in the mail, as evidenced by the
postmark, if mailed with first-class postage prepaid and correctly addressed, or
(z) on the date shown on the return receipt, if sent by registered or certified
mail, return receipt requested, and the receipt is signed by or on behalf of the
addressee. Whenever notice is given to a shareholder or director by any means
other than mail, the notice shall be deemed given when received.
(b) In calculating time periods for notice, when a period of time
measured in days, weeks, months, years, or other measurement of time is
prescribed for the exercise of any privilege or the discharge of any duty, the
first day shall not be counted but the last day shall be counted.
ARTICLE TEN
Amendments
Except as otherwise provided under the Code, the Board of Directors shall
have the power to alter, amend, or repeal these Bylaws or adopt new Bylaws. Any
Bylaws adopted by the Board of Directors may be altered, amended, or repealed,
and new Bylaws adopted, by the shareholders. The shareholders may prescribe in
adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted shall not be
altered, amended, or repealed by the Board of Directors.
15
<PAGE>
EXHIBIT 10.1
SERVICE AGREEMENT
-----------------
THIS AGREEMENT entered into by and between Applications Unlimited, Inc., a
Delaware corporation ("AUI"), Control Group, Ltd., a Delaware corporation
("Control Group") and Masterpiece Consulting Corporation, a Pennsylvania
corporation ("Masterpiece").
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I. BACKGROUND
----------
1.01. AUI conducts business through a number of divisions, one of which is
located in Bensalem, Pennsylvania (the "Bensalem Division"), another of which is
located in Milltown, New Jersey (the "Milltown Division").
1.02. Concurrently with the execution of this Agreement, the following has
occurred:
a. Michael J. Chomik ("Chomik"), William J. DeGrosky, Jr.
("DeGrosky"), Thomas R. Dunn ("Dunn"), Mitchell L. Cohen ("Cohen"), Gary K.
Mayer ("Mayer") and AUI executed a certain agreement (the "Settlement
Agreement") pursuant to which, inter alia, Cohen and Mayer resigned as officers,
----- ----
directors and employees of AUI and transferred their stock in AUI to Chomik and
DeGrosky (as a result of which Dunn, Chomik and DeGrosky [cumulatively the
"Shareholders"] are the sole shareholders, officers and directors of AUI); and
b. AUI and Masterpiece entered into a certain agreement (the
"Division Transfer Agreement") pursuant to which, inter alia, AUI transferred
----- ----
specified assets of the
<PAGE>
Bensalem Division and the Milltown Division (cumulatively the "Divisions") to
Masterpiece, along with certain contract rights and obligations pertaining to
the Divisions.
1.03. The Division Transfer Agreement, Settlement Agreement, this
Agreement and the documents being executed in connection with the foregoing have
been executed concurrently and have been executed in consideration of each
other.
1.04. Cohen and Mayor managed the Divisions, whose products and services
were sold to customers of AUI, the largest of which was and is Control Group.
1.05. DeGrosky and Chomik are the sole shareholders, officers and
directors of Control Group.
ARTICLE II. CONTRACTS TO BE OFFERED TO MASTERPIECE
--------------------------------------
2.01. AUI and Control Group shall offer (unless contractually restricted
generally by their customer to use another designated laser lettershop vendor
and another designated data processing vendor for that contract) to Masterpiece,
and Masterpiece shall have the first option to perform for AUI and Control Group
the services set forth on Schedule 2.01 (the "Designated Services") upon the
terms and conditions set forth in this Agreement.
2.02. AUI or Control Group, as the case may be, shall deliver to
Masterpiece a purchase order (the "Purchase Order") setting forth the nature and
scope of the Designated Services requested along with any special terms and
conditions in connection therewith.
2.03. Masterpiece shall, within two (2) business days following receipt of
the Purchase Order, advise Control Group or AUI, as the case may be, whether it
agrees to and can perform the Designated Services within project deadline
timeframes and within requirements as set forth in the Purchase Order. In the
event that Masterpiece declines the
2
<PAGE>
Purchase Order or fails to respond as set forth above (a "Declined Purchase
Order"), the Declined Purchase Order (without modification or amendment) may be
contracted out to any other company or person at a cost equal to or less than
the compensation that would have been payable to Masterpiece had it accepted the
purchase order. If there is a Declined Purchase Order, AUI and/or Control Group
shall, without demand, provide Masterpiece with a copy of the actual purchase
order from the successful vendor based on the same terms and conditions as in
the original Purchase Order supplied to Masterpiece for that particular
contract.
ARTICLE III. COMPENSATION FOR DESIGNATED SERVICES
------------------------------------
3.01. In connection with Purchase Orders performed by Masterpiece for
mailings, Masterpiece shall be compensated as set forth on the "Agency
Lettershop Pricing" attached as Schedule 3.01.
3.02. In connection with Purchase Orders performed by Masterpiece for
computer programming and/or processing, and related services, Masterpiece shall
be compensated pursuant to the data processing pricing program (the "Data
Processing Pricing Program"), a copy of which has been delivered to AUI and
Control Group and which is attached, in a sealed and initialled envelope, as
Schedule 3.02, and which is based upon the "Data Processing Job Billing
Worksheet", a copy of which is attached as Schedule 3.02(a).
3.03. If the compensation for Designated Services set forth on a Purchase
Order is not capable of computation based upon Agency Lettershop Pricing or the
Data Processing Pricing Program, the Purchase Order shall clearly state such
fact and shall set forth the compensation proffered.
3
<PAGE>
3.04. Invoices of Masterpiece for Purchase Orders performed shall be
payable within thirty (30) days, with a late fee of one (1%) percent per month,
or any portion thereof, in excess of thirty (30) days. Notwithstanding the
foregoing, in connection with any Purchase Order accepted by Masterpiece (an
"Accepted Purchase Order") which requires a mailing, postage as computed by
Masterpiece, shall be payable within five (5) days prior to mail drop.
ARTICLE IV. WORK IN PROCESS
---------------
4.01. As of the date hereof, the Divisions were performing Designated
Services for customers of AUI.
4.02. On this date AUI has issued Purchase Orders to Masterpiece for
completion of work in process by the Divisions and Masterpiece has accepted all
such Purchase Orders.
ARTICLE V. ADVANCES
--------
5.01. AUI and/or Control Group shall pay to Masterpiece Three Hundred
Sixty Thousand ($360,000.00) Dollars (the "Advances") which shall be applied
against sums due by AUI and/or Control Group for Accepted Purchase Orders
performed by Masterpiece.
5.02. The Advances shall be paid in the following manner:
a. $15,000.00 upon execution of this Agreement; and
b. weekly payments of $15,000.00 commencing one week from the date
of this Agreement and continuing on the same day of each
successive week for 23 weeks.
5.03. Advances shall be applied to amounts due Masterpiece by AUI and/or
Control Group regardless of who paid any or all of the Advances.
5.04. Advances shall be applied first to interest due Masterpiece and the
balance, if any, to the principal amount of Masterpiece's oldest outstanding
invoice.
4
<PAGE>
5.05. Advances shall not be considered escrow funds and may be utilized by
Masterpiece for such purposes as Masterpiece, in its sole discretion, elects.
5.06. Advances shall be made without demand and without set-off.
5.07. Advances shall be payable to Masterpiece regardless of whether AUI
and/or Control Group continue to offer Designated Services to its customers
(regardless of the reason including, but not limited to, the bankruptcy,
insolvency, or cessation of business operations of AUI and/or Control Group,
etc.).
5.08. In the event the amount due and payable Masterpiece exceeds Advances
made, AUI and Control Group shall be required to pay the entire amount due and
payable Masterpiece.
5.09. In the event AUI and/or Control Group shall fail to pay any of the
first four (4) Fifteen Thousand Dollar ($15,000) payments when due, the
principal amount of Three Hundred Sixty Thousand ($360,000.00) Dollars less
Advances previously paid, shall become immediately due and payable and interest
on the unpaid balance shall accrue at the rate of twelve (12%) per annum.
5.10. In the event AUI and/or Control Group shall fail to pay any of the
other Fifteen Thousand Dollar ($15,000) payment within seven (7) days of when
that payment is due, then the remaining principal amount of Three Hundred Sixty
Thousand ($360,000.00) Dollars less Advances previously paid, shall become
immediately due and payable and interest on the unpaid balance shall accrue at
the rate of twelve (12%) per annum.
5.11. THE FOLLOWING PARAGRAPH CONTAINS A WARRANT OF AUTHORITY FOR AN
ATTORNEY TO CONFESS JUDGMENT AGAINST AUI AND CONTROL GROUP. IN GRANTING THIS
WARRANT OF ATTORNEY TO CONFESS
5
<PAGE>
JUDGMENT AGAINST AUI AND CONTROL GROUP, AUI AND CONTROL GROUP HEREBY KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY, AND, ON THE ADVICE OF SEPARATE COUNSEL OF AUI AND
CONTROL GROUP, UNCONDITIONALLY WAIVE ANY AND ALL RIGHTS AUI AND CONTROL GROUP
HAVE OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE
RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES AND THE COMMONWEALTH OF
PENNSYLVANIA.
5.12. In the event AUI and/or Control Group shall fail to make the payments
---------------------------------------------------------------------
required to be made in Paragraphs 5.09 and 5.10 above, AUI and Control Group,
- -----------------------------------------------------------------------------
and each of them, authorize and empower any attorney of any court of record of
- ------------------------------------------------------------------------------
Pennsylvania or elsewhere to appear for and confess judgment against them, and
- ------------------------------------------------------------------------------
each of them, for the amount then outstanding under this Service Agreement, as
- ------------------------------------------------------------------------------
of any term, with or without declaration filed, with costs of suit, release of
- ------------------------------------------------------------------------------
errors, without stay of execution and with reasonable attorneys' fees, and do
- -----------------------------------------------------------------------------
hereby voluntarily agree that any real and personal property subject to such
- ----------------------------------------------------------------------------
judgment may be sold on a writ and hereby waive and release all relief from any
- -------------------------------------------------------------------------------
and all appraisement, stay or exemption laws of any state, now in force or
- --------------------------------------------------------------------------
hereafter to be enacted. The power to enter judgment against the AUI and Control
- --------------------------------------------------------------------------------
Group shall not be exhausted by any exercise of the power and shall continue
- ----------------------------------------------------------------------------
from time to time and at all times until full payment of all amounts due under
- ------------------------------------------------------------------------------
this Service Agreement. For the purpose of entering judgment, this Service
- --------------------------------------------------------------------------
Agreement or a copy hereof verified by affidavit shall be a sufficient warrant.
- -------------------------------------------------------------------------------
6
<PAGE>
ARTICLE VI. TERM OF AGREEMENT
-----------------
6.01. This Agreement shall remain in effect until Masterpiece has been paid
Four Million One Hundred Thousand ($4,100,000.00) Dollars for Accepted Purchase
Orders.
6.02. Notwithstanding the foregoing, this Agreement may be terminated upon
the mutual written agreement of all of the parties hereto.
ARTICLE VII. PAYMENTS TO CHOMIK AND DEGROSKY
PURSUANT TO THE SETTLEMENT AGREEMENT
------------------------------------
7.01. On or before the tenth day of every month commencing August 10, 1997,
Masterpiece shall pay to Chomik and DeGrosky each, five (5%) percent of the
principal amount paid (excluding postage and freight) AUI and/or Control Group
during the previous calendar month for Accepted Purchase Orders and/or as
Advances.
7.02. The payments to be made by Masterpiece to Chomik and DeGrosky as set
forth above shall continue until Chomik and DeGrosky shall each have received
$80,000.00.
7.03. After AUI and/or Control Group have paid $1,600,000 to Masterpiece
for Accepted Purchase Orders, in the aggregate, then Masterpiece's price for the
next $1,500,000 of Accepted Purchase Orders shall reflect a discount of five
percent (5%) of the standard price as shown as Schedules 3.01, 3.02 and 3.02(a)
attached hereto and incorporated herein by reference.
ARTICLE VIII. PAYMENT TO AUI PURSUANT TO
DIVISION TRANSFER AGREEMENT
---------------------------
8.01. On or before the tenth day of every month during that period of time
set forth below, Masterpiece shall pay to AUI ten (10%) percent of the principal
amount paid
7
<PAGE>
(excluding postage and freight) by AUI and/or Control Group during the previous
calendar month for Accepted Purchase Orders.
8.02. The payments to be made by Masterpiece to AUI as set forth above
shall commence after Masterpiece has received Three Million One Hundred Thousand
($3,100,000.00) Dollars (excluding postage and freight) for Accepted Purchase
Orders, and shall continue until AUI has received One Hundred Thousand
($100,000.00) Dollars.
8.03. The payments to AUI pursuant to this Article represent the amount
payable by Masterpiece in connection with the Division Transfer Agreement.
ARTICLE IX. FORCE MAJEURE
-------------
9.01. Each of the parties hereto shall be excused from the performance of
his/its obligations hereunder (other than payment of money) to the extent
performance of this Agreement is prevented by Force Majeure and such excuse
shall continue as long as the condition constituting such Force Majeure
continues. For purpose of this Agreement, Force Majeure shall mean causes beyond
the control of the parties, including, without limitation acts of God, acts,
regulations or laws of any government, civil commotion, strikes, destruction of
product facilities or material by fire, earthquake or storm, epidemics, and
failure of public utilities, common carriers or suppliers of raw materials
necessary to perform this Agreement.
ARTICLE X. RESTRICTIVE COVENANTS
---------------------
10.01. All information furnished by AUI or Control Group to Masterpiece so
as to enable Masterpiece to accept, reject or perform a Purchase Order shall be
kept confidential by Masterpiece and Masterpiece shall not make use of said
confidential information except for the purpose of accepting, rejecting or
performing a Purchase Order, nor shall Masterpiece disclose
8
<PAGE>
any of the foregoing to any person or firm unless previously authorized by
Control Group or AUI in writing. The foregoing confidential information shall
include, without limitation, product and packaging designs, production and
handling techniques, the identity of AUI's and/or Control Group's customers and
their requirements, costs, methods, sales forecasts, specifications and prices.
10.02. AUI and Control Group agree that during the term of this Agreement
they will not perform Designated Services nor contract out or offer to others
the right to perform Designated Services until and unless such Designated
Services are a Declined Purchase Order, in which event the Declined Purchase
Order (without modification or amendment) may be performed by any other company.
10.03. Pursuant to the Division Transfer Agreement, certain assets
pertaining to the Divisions were transferred by AUI and Control Group to
Masterpiece including, but not limited to, computer programs and software. Other
than the Data Processing Pricing Program, AUI and Control Group represent that
they have not copied and are not in possession of any computer programs and
software (or any printouts or information contained thereon) transferred to
Masterpiece, will not utilize or disclose and have not disclosed any such
programs, software and/or information and hereby waive any right, title or
interest in or to such computer programs, software and information.
10.04. During the term of this Agreement and for one year following its
termination, AUI and/or Control Group agree that neither they (or any of them)
nor any business or enterprise in which any of them is a shareholder or partner
shall hire or attempt to hire any person who is then or who was within one year
prior thereto employed by Masterpiece.
9
<PAGE>
10.05. The parties acknowledge that the restrictions contained herein are
reasonable and necessary to protect their legitimate interests and that any
violation of such restrictions would result in irreparable injury. The parties
acknowledge and agree that, in the event of a violation of any such
restrictions, the injured party shall be entitled to preliminary and permanent
injunctive relief; and that the injured party shall also be entitled to an
equitable accounting of all earnings, profits and other benefits arising from
such violation, which rights shall be cumulative and in addition to any other
rights or remedies to which it/he may be entitled in law or equity.
10.06. If the restrictive covenants specified in this Agreement are
adjudged unreasonable in any court proceeding, the parties agree to the
reformation of such restrictions by the court to limits which it finds to be
reasonable, and the parties will not assert that such restrictions should be
eliminated in their entirety by such court.
ARTICLE XI. PERFORMANCE OF DESIGNATED SERVICES
----------------------------------
11.01. Masterpiece shall perform all Designated Services in accordance with
the terms of each Accepted Purchase Order and all services provided shall be
done in a good and workmanlike fashion, shall meet market standards of quality
and generally shall be performed in the same manner as if the Accepted Purchase
Orders were performed by AUI through the Divisions prior to the date of this
Agreement.
ARTICLE XII. JOINT AND SEVERAL LIABILITY
---------------------------
12.01. AUI and Control Group shall be jointly and severally liable to
Masterpiece as a result of a breach of the terms and conditions of this
Agreement by any of them.
10
<PAGE>
ARTICLE XIII. MISCELLANEOUS
-------------
13.01. All riders, exhibits and schedules to this Agreement are part of
this Agreement.
13.02. In performing any act under this Agreement and pursuant to any
obligation incurred under or in connection with this Agreement, time shall be of
the essence. Forbearance of a party to exercise any right or remedy, shall not
be a waiver of any obligation or right or remedy, nor shall such forbearance
constitute a waiver of any right or remedy with respect to any default
subsequently occurring.
13.03. This Agreement shall be binding upon and inure to the benefit of the
parties, their respective successors, assigns, heirs and personal
representatives. Nothing in this Agreement is intended to nor shall it create
any rights in any persons other than the parties; specifically, there are no
third party beneficiaries of this Agreement.
13.04. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision hereof and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
13.05. The parties, to the extent that they may lawfully do so, hereby
submit to the jurisdiction of the courts of the Commonwealth of Pennsylvania and
the United States District Court for the Eastern District of Pennsylvania, as
well as to the jurisdiction of all courts from which an appeal may be taken from
the aforesaid courts, for the purpose of any suit, action or other proceeding
arising out of or with respect to this Agreement, and expressly waive any and
all objections which they may have as to venue in any of such courts.
11
<PAGE>
13.06. Each party hereto will pay the expenses incurred by him, her or it
under or in connection with this Agreement, including counsel fees and expenses
of his, hers or its representatives, whether or not the transactions
contemplated by this Agreement are consummated.
13.07. All notices given under any of the provisions of this Agreement
shall be deemed to have been duly given by Control Group and/or AUI if made by
certified mail to Masterpiece at 941B Mill Road, Bensalem, PA 19020, with a copy
to: Gary A. Rochestie, Esquire, Rudolph, Dorian, Goldstein, Rochestie,
Wisniewski & Taylor, P.C., Neshaminy Valley Commons, 2410 Bristol Road,
Bensalem, PA 19020, and shall be deemed to have been duly given by Masterpiece
if mailed by certified mail to Control Group and/or AUI at 5940 Hamilton
Boulevard, Allentown, PA 18109, with a copy to: Edward A. Fedok, Esquire,
Stevens & Lee, 1605 North Cedar Crest Boulevard, Suite 515, P.O. Box 20830,
Lehigh Valley, PA 18002-0830 or to such other address as each of the foregoing
may designate in writing by certified mail as set forth above.
13.08. The parties shall execute and deliver such other documents as shall
be reasonably necessary to complete the transactions contemplated herein.
13.09. This Agreement is being delivered and is intending to be performed
in Pennsylvania and shall be construed and enforceable in accordance with the
laws of the Commonwealth of Pennsylvania.
13.10. The captions contained herein are not a part of this Agreement. They
are only for the convenience of the parties and do not in any way modify,
amplify, or give notice of any of the terms, covenants, or conditions of this
Agreement.
12
<PAGE>
13.11. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original.
13.12. This Agreement (including any exhibits and schedules attached
hereto) contains the entire agreement between the parties concerning the subject
matter contained herein and there are no other terms, covenants, obligations, or
representations, oral or written, of any kind whatsoever. Any modification,
addition or alteration of this Agreement must be in writing and signed by all
parties.
13.13. For purposes of this Agreement, the masculine shall be deemed to
include the feminine and the neuter, and the singular shall be deemed to include
the plural, and the plural the singular, as the context may require.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have affixed their hands and seals this 15th day of July, 1997.
APPLICATIONS UNLIMITED, INC.
By: /s/ William J. DeGrosky, Jr.
-----------------------------
William J. DeGrosky, Jr.,
President
Attest: /s/ Michael J. Chomik
----------------------
Michael J. Chomik
Secretary
MASTERPIECE CONSULTING CORPORATION CONTROL GROUP, LTD.
By: /s/ Gary K. Mayer By: /s/ William J. DeGrosky, Jr.
------------------------------ ------------------------------
Gary K. Mayer, President William J. DeGrosky, Jr.,
President
Attest: /s/ Mitchell L. Cohen Attest: /s/ Michael J. Chomik
-------------------------- -------------------------
Mitchell L. Cohen, Mitchell L. Chomik,
Secretary Secretary
CORP. CORP.
SEAL SEAL
14
<PAGE>
SCHEDULE 2.01 DESIGNATED SERVICES
----------------------------------
I. Agency Lettershop - Mailings
----------------------------
All projects of 100,000 pieces or less and not larger than 8 1/2 x 14
maximum sheet-fed laser projects shall be offered to Masterpiece.
II. Computer Programming and Processing, and Related Services
---------------------------------------------------------
All of the following types of computer programming, data processing and
related services shall be offered to Masterpiece, except any contracts dealing
with the Mellon Credit Card data processing or Bank of America data processing
projects:
a. Data translation and reformatting
b. Direct mail and telemarketing processing
c. Turn-key systems
d. Analysis and data tracking
e. Communication with account processors
f. Data entry
III. Data Processing
---------------
Except as noted below, all of the following types of direct response data
processing services shall be offered to Masterpiece:
List processing services:
- Name and address hygiene services
- De-duplication and suppression
- Sorting, selecting, splitting and outputting data
- Coding and sequence numbering
- Postal processing
- Other services to support laser-personalized direct mail
Customer and prospect database services:
- Data warehousing
- Query and selection engine development
- Standard reporting
- Support of data analysis conducted by Control Group staff
- (pre-processing prior to modeling or analysis)
Communication with third party account processors:
- New account processing
- Existing account maintenance
<PAGE>
Take-one application tracking
Data Entry
Turn-Key systems
Specific Exclusions:
1. Any account where Control Group is obligated to use a data processor of
the client's choice. As of 6/30/97 this includes Mellon Bank Credit
Card projects and Bank of America projects.
2. Any project where a client requests mainframe computer support. As of
6/30/97 this includes the Barnett Bank repricing/package conversion
project.
3. Any project where Masterpiece is not equipped to execute the project
including FDR variable length record conversion, projects requiring
3480 cartridge input or output, and support of ink-jet, xerox or other
proprietary personalization schemes.
4. Data entry or systems development provided by Control Group staff
specifically to support fulfillment projects which are performed by the
Control Group Promotional Resources division.
5. Data entry and reporting services provided by AUI staff specifically to
support alternative distribution projects currently performed by AUI or
Control Group.
Notwithstanding the above, if Masterpiece acquires the necessary equipment
to perform services for 3480 Cart or FDR variable length records, then at that
time AUI and/or Control Group shall offer to Masterpiece these types of
contracts in accordance with this Agreement.
2
<PAGE>
SCHEDULE 3.01
AGENCY LETTERSHOP PRICING
SETUP CHARGES
Text Entry/side $125
Text Entry from disk/side $100
Text Entry "ready to run" $ 75
Variable Programming/cell $ 25
Signature Digitization $ 75
Logo Digitization $125
Kit Controls (assembled packages prior to run) $ 25/kit
Coupon Digitization or Programming $100
Job Production $ 75
<TABLE>
<CAPTION>
LETTERSHOP CHARGES (maximum size = 8 1/2" x 14")
<S> <C> <C> <C> <C> <C> <C>
# inserts 1-15M 16-25M 26-30M 31-50M 51-75M 76-100M
- ------------------------------------------------------------------------------------------------------
0 $40/m $35/m $30/m $25/m $22/m $21/m
- ------------------------------------------------------------------------------------------------------
1-3 $50/m $45/m $40/m $35/m $32/m $29/m
- ------------------------------------------------------------------------------------------------------
4-5 $65/m $60/m $55/m $50/m $47/m $44/m
</TABLE>
Version Change (paper, envelope, insert, etc.) $25
Postal Pre-sort (per sack/tray in lieu of cell change charge) $ 5
<TABLE>
<CAPTION>
LASER CHARGES (per side) (maximum size = 8 1/2" x 14")
<S> <C> <C> <C> <C> <C> <C>
1-15M 16-25M 26-30M 31-50M 51-75M 76-100M
- ------------------------------------------------------------------------------------------------------
11" reg $45/m $40/m $35/m $30/m $27/m $26/m
- ------------------------------------------------------------------------------------------------------
14" reg $50/m $45/m $40/m $35/m $32/m $29/m
- ------------------------------------------------------------------------------------------------------
11" micr $60/m $55/m $50/m $45/m $42/m $41/m
- ------------------------------------------------------------------------------------------------------
14" micr $65/m $60/m $55/m $50/m $47/m $44/m
</TABLE>
<PAGE>
Split/Cell Change (data splits, tactics, product types) $10/split
Minimum Laser Charge = 1 m
MISCELLANEOUS CHARGES
Hand Pulls (min 1/2 hr) $25/hr
Time Charges (min 1/2 hr) $25/hr
<PAGE>
SCHEDULE 3.02
"Data Processing Pricing Program"
---------------------------------
<PAGE>
SCHEDULE 3.02(a)
DATA PROCESSING
JOB BILLING WORKSHEET
Our Job Number - PO Number -
Job Description - Job Number -
<TABLE>
<CAPTION>
REF # Standard Data Processing Quantity No. Passes Charge Amount
<S> <C> <C> <C> <C> <C>
1 Input 0 1 1.00 -
2 Standardize 0 1 2.00 -
3 Zip Correct 0 1 1.00 -
4 Punctuation 0 1 1.00 -
5 Merge Purge 0 1 2.00 -
6 Suppress 0 1 0.75 -
7 Selects 0 1 0.75 -
8 Sort 0 1 0.25 -
9 Sequence number 0 1 0.25 -
10 Code 0 1 0.25 -
11 Output 0 1 0.25 -
12 Model Scoring run 0 1 1.50 -
Data Processing Total (Minimum $100) $100.00
14 Diskettes 0 5.00 -
15 Tape 0 20.00 -
16 Zip Cartridge 0 20.00 -
17 Jaz Cartridge 0 120.00 -
Record Length
18 Transmission per 1K 0 256 0.004 -
Media Total (Minimum $5) $0.00
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
REF # Report Generation Quantity # Records Charge Amount
<S> <C> <C> <C> <C> <C>
19 Custom Report Creation 0 75.00 0.00
20 Run Report 0 0 0.25 0.00
Report Total (Minimum $25) $0.00
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
REF # Data Entry Quantity Charge Amount
<C> <S> <C> <C> <C>
21 Data Entry Setup 0 75.00 0.00
22 Data Entry Preparation 0 0.50 0.00
23 Quality of Input Information 1 0.00
24 Records Entered 0 0.00
25 Minimum Keystrokes 0 0.00
26 Maximum Keystrokes 0 0.00 0.00
Data Entry Total $0.00
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
REF # Misc. Quantity Charge Amount
<C> <S> <C> <C> <C>
27 Trips to Post Office 0 10.00 0.00
28 Open Mail 0 0.05 0.00
29 Custom Programming 0 100.00 0.00
Description
30 System Inclusion 0 100.00 0.00
31 Seeds 0 3.00 0.00
32 Estimated Express Charge 0 15.00 0.00
33 Clerical Charges/Hr. 0 25.00 0.00
Misc. Charges $0.00
- -------------------------------------------------------------------------------------------------------------------------
$100.00
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE 3.02(a)
AUI Invoice/Cost Estimate Billing Reference Sheet
<TABLE>
<CAPTION>
Ref. # Description Explanation
<S> <C> <C>
1 Input Total number of records in from media for job processing. Files
currently available on our system are not charged for input. If the
file is part of a closed job or has, been archived, then an input
charge will be applied.
2 Standardize Fix fields of data in "floating" fields. Ex. Names & addresses.
3 Zip Correct CASS certifications & address correction.
4 Punctuation Proper Case and insertion of periods, commas in name & addresses.
5 Merge Purge Records merged where one record survives.
6 Suppress Records merged where matching records are dropped or selecting records.
7 Selects Any field selection such as adding or changing fields. Ex: lettercode
assignment. If multiple selects are needed and are done within one
`criteria', then only 1 select is charged. If there is a spec change
and another pass is needed, then it's another charge.
8 Sort Putting the file into a particular order or if the output file is in a
different order than the original file is.
9 Sequence number A unique numeric identifier, ex. Reservation number, was added to the
record.
10 Code Any custom request. Ex: the banks wants a special check number, micr,
etc.
11 Output Total number of records outputted.
12 Model Scoring run Pass records to apply client supplied model scores.
13 Minimum Charge A minimum charge is given if the invoice falls below a minimum. This
charge will either be $100 or $200 applicable at our discretion
depending on the job.
14 Diskettes If the output media was diskettes.
15 Tape If the output media was a 9-Track tape.
16 Zip Cartridge If the output media was a 100MB `Zip' removable cartridge.
17 Jaz Cartridge If the output media was a 1GB `Jaz' removable cartridge.
18 Transmission per 1K If the output file was transmitted via modem, email, etc.
Data Processing Note: Each job will include one `criteria' pass, one set of dumps and a set
of custom counts. Any additional reports or file passes will be an
additional charge.
Report Generation
19 Custom Report Creation If formal report is required with header, subdivisions, total,
subtotals, crosstabs.
20 Run Report Number of Copies of reports or subselections of data
Report Note: AUI reserves the right to do #19 w/o charge. We also reserve the right
to charge to combine records if multiple runs are needed such as
spreadsheet, report, etc. to combine the total number of records and
charge as one pass. This way, it ensures that the report charges is
done on the minimum number of records.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
Data Entry
21 Data Entry Setup Enter the number of different data entry forms if first time.
22 Data Entry Preparation The number of records per batch.
23 Quality of Data Input information 1=Excellent, 2=Average, 3=Poor
24 Records Entered Number of records entered.
25 Data Entry Part 1 - Min. keystrk Minimum number of keystrokes per record estimated.
26 Data Entry Part 2 - Max. keystrk Maximum number of keystrokes per record estimated.
Misc.
27 Trips to Post Office Estimated trips to postoffice over life of program.
28 Open Mail Estimated number of pieces of mail to be opened and processed.
29 Custom Programming If any special programming is done outside of the normal dataprocessing.
Description Contains the description of what special program was done.
30 System Inclusion A charge added for programming & testing to include a process into an
ongoing set of procedures. Ex: Queries run against a monthly file to
determine new accounts or, in the case of Regions, new banks needing
card copy in the refresh. These queries will be included into the
monthly job. This charge is the one-time setup charge and ranges from
$100 to $500, depending on complexity.
31 Seeds Number of seeds to be entered for the job.
</TABLE>
2
<PAGE>
SERVICE AGREEMENT
THIS AGREEMENT made this 30th day of June, 1997 by and between CONTROL GROUP
LTD, a Delaware corporation having its principle office located at 1401
Silverside Road, Wilmington, Delaware 19810 (hereinafter referred to as
"Company"), and The Provident Bank, an Ohio corporation having its principle
place of business at One East Fourth Street, Cincinnati, Ohio 45202 (hereinafter
referred to as "Client"), provides as follows:
WITNESSETH
WHEREAS, Company is a service organization engaged in the profession of
providing certain marketing services (hereinafter collectively referred to as
"Services") to financial institutions, and
WHEREAS, Client has requested Company to supply such Services.
NOW THEREFORE, the parties, for the consideration set forth within and intending
to be legally bound, do hereby agree, upon the following:
ARTICLE 1 - THE SERVICES
1.1 Company will perform for Client the services set forth in each Project
Memorandum that the parties, by mutual agreement, may add to this Agreement
from time to time (hereinafter referred to as "Services"). At a minimum,
each Project Memorandum will include the service description, production
schedule and pricing that pertain to the Services covered by the Project
Memorandum.
1.2 Subject to Company's confidentiality obligations under this agreement,
Company may perform similar Services for others.
ARTICLE 2 - COMPENSATION
2.1 Compensation to Company. Client agrees to compensate Company as provided in
the pricing terms set forth in each Project Memorandum attached as Appendix
(I) and as Appendix (II) and made a part hereof, as they may be amended
from time to time in writing by mutual consent of the parties.
ARTICLE 3 - TERM OF AGREEMENT
3.1 Term. The term of this Agreement shall be from the date hereof through
December 31, 1999.
3.2 Termination. Client may terminate this Agreement, with or without cause,
by giving 90 days written notice.
<PAGE>
3.3 Termination for Cause. This Agreement shall automatically terminate upon
the insolvency, liquidation, dissolution, cessation of business or the
filing of bankruptcy petition by or against either party hereto.
3.4 Obligations Upon Termination. Upon notice of termination, Company shall use
its best efforts to assist in the orderly transition of services to a new
contractor or to assist Client in the dissolution of the programs provided
for under this Agreement.
If Client terminates this Agreement for any reason except gross negligence of
Company or willful disregard of Client's interests, Client shall compensate
Company for Services following notice of termination, as specified in section
2.1. Such expenses may include, but are not limited to printing costs, customer
list purchases, creative services, telemarketing costs, shipping costs, material
destruction costs, communication expenses, travel and living expenses. In
addition, any authorized reasonable out of pocket expenses involved in the
termination, transfer or dissolution of Services rendered by Company shall be
reimbursed by Client.
Upon Client's request, Company agrees to provide Services on a day to day basis
following conclusion of the termination notice period. Such day to day services
will continue for a period not to exceed 30 days, unless otherwise agreed to, in
writing by Company. Client shall pay Company fees for such day to day services
in accordance with Section 2.1.
ARTICLE 4 - INDEMNIFICATION
4.1 Company agrees to indemnify and hold Client harmless from any and all
claims damages and liabilities arising or resulting directly from any loss
or damage to Client from the Services described herein due to the negligent
act or omission or willful misconduct of Company, its officers, agents and
employees.
4.2 Client agrees to indemnify and hold Company harmless from any and all
claims, damages and liabilities arising or resulting directly from any loss
or damage to Company from the Services described herein due to the
negligent act or omission of Client, its officers, agents and employees.
4.3 In no event shall either party be liable to the other for any special,
indirect, incidental or consequential damages relating to the subject
matter of or arising out of this Agreement.
ARTICLE 5 - REPRESENTATION AND WARRANTIES
5.1 Representations and Warranties of Company. Company represents and warrants
to Client that:
5.1.1 It is duly incorporated, validly existing and in good standing under
the laws of the State of Delaware.
5.1.2 It is duly authorized to enter into this Agreement and to perform
its obligations hereunder.
2
<PAGE>
5.1.3 To the best of its belief and knowledge, the performance of its
obligations under this Agreement is in compliance with all applicable laws
and regulations.
5.1.4 To the best of its belief and knowledge, Company has no
administrative adjudication pending or entered against it.
5.2 Representations and Warranties of Client. Client represents and warrants
to Company that:
5.2.1 It is a duly organized Ohio banking corporation validly existing and
in good standing under the laws of the State of Ohio.
5.2.2 It is duly authorized to enter into this Agreement and to perform
its obligations hereunder.
5.2.3 To the best of its knowledge, the performance of its obligations
under this agreement is in compliance with all applicable banking laws and
regulations.
ARTICLE 6 - GENERAL PROVISIONS
6.1 Relationship of the Parties. Company and its affiliates are independent
contractors and not the agents of, or co-venturers with Client, its parent
company, affiliates or subsidiaries.
6.2 Force Majeure. Neither party shall be responsible for delays or failures
in performance resulting from the acts of God, strikes, lockouts, riots,
acts of war fire and similar events beyond the reasonable control of the
parties.
6.3 Confidentiality. Company acknowledges that all material and information
regarding the business systems and practices of Client, customer lists and
financial data, which will come into the possession or knowledge of Company
in connection with this Agreement or performance thereof, consists of
confidential and proprietary data, which disclosure to or use by third
parties may be damaging, excepting only information otherwise publicly
available. Company agrees to hold such material and information in
confidence, not to make use thereof other than for the performance of the
Agreement, to release it only to its employees, officers and agents or the
officers and employees of any affiliate requiring such information, or to
vendors and other third parties with whom negotiations are under way for
the benefit of Client, and then only to the extent necessary for the
performance of Services under this Agreement.
Client acknowledges that information regarding the business systems and
practices of Company which will come into the possession of Client in
connection with this agreement or performance thereof, consists of
confidential and proprietary data, whose disclosures to or use by third
parties will be damaging, excepting only information which is otherwise
publicly available. Client agrees to hold such material and information in
confidence, not to make use thereof other than for the performance of its
obligations under this contract, to release it only to its employees,
officers or the
3
<PAGE>
officers or employees of any affiliate requiring such information, and then
only to the extent necessary for the performance of its obligations under
this agreement.
6.4 Headings Not Controlling. Headings used in this Agreement are for
reference purposes only and shall not be deemed a part of this Agreement.
6.5 Entire Agreement. This Agreement and all Project Memorandums added from
time to time to this agreement constitute the entire agreement between the
parties with respect to the subject matter hereof and all prior agreements,
representations, statements and negotiations are superseded hereby.
6.6 Partial Invalidity. If any term or provision of this Agreement shall be
found to be illegal or unenforceable then, notwithstanding, this Agreement
shall remain in full force and effect and such term or provision shall be
deemed stricken unless the illegal or unenforceable provision to be
stricken herefrom is so material that Client is thereby rendered unable to
receive and obtain the material benefits of this Agreement, in which case
this Agreement shall be terminated upon the determination by either party
that any provision hereof is illegal or unenforceable.
6.7 Non-Waiver. No term or provision of this Agreement shall be deemed waived
and no breach excused unless such waiver or consent shall be in writing and
signed by the party claimed to have waived and consented. Any consent by
any party to, or any waiver of, a breach by the other, whether express or
implied, shall not constitute a consent to, waiver of or excuse for any
other different or subsequent breach.
6.8 Amendments. No amendment of this Agreement shall be effective unless it is
in writing and signed by duly authorized representatives of both parties.
6.9 Agreement Assignable by Client. This Agreement may be assigned by Client
to another affiliate or parent corporation thereof without the consent of
the Company. Client may not assign this Agreement to other parties without
the prior written agreement of Company, which agreement shall not be
unreasonably withheld.
6.10 Agreement Not Assignable by Company. This Agreement may not be assigned
by Company without the prior written consent of Client, which agreement
shall not be unreasonably withheld.
6.11 Choice of Law. This Agreement shall be interpreted according to the laws
of the State of Ohio in connection with any dispute regarding its
interpretation between Client and Company.
6.12 Notices. All notices under this Agreement shall be in writing and deemed
duly given upon delivery, if delivered by hand (against receipt), or five
days after posting, if sent by certified mail, receipt requested, or upon
receipt, if delivered by any recognized courier service (against
confirmation of delivery) or upon receipt, if delivered by facsimile
transmission (against confirmation of transmission).
4
<PAGE>
If to Client: The Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
ATTN.: James Geeslin.
Facsimile Number: (513) 345-7137
If to Company: Control Group Ltd.
1401 Silverside Road
Wilmington, DE 19810
ATTN.: Project Manager
Facsimile Number: (302) 475-2922
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized officers as of the date set forth above.
COMPANY:
CONTROL GROUP LTD.
a Delaware corporation
/s/ William J. DeGrosky, Jr.
--------------------------------
By: William J. DeGrosky, Jr.
Title: President
CLIENT:
The Provident Bank, an Ohio
Banking Corporation
/s/ James Geeslin
--------------------------------
By: James Geeslin
Title: Vice President
5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
AGREEMENT REGARDING FLIGHTS IV AND V
This Agreement regarding Flights IV and V (the "Agreement"), is made and
entered into this 16th day of April, 1999, by and between M2Direct, Inc., a
Georgia corporation ("M2Direct") and Control Group, Ltd. ("Control"), a Delaware
corporation and a wholly owned subsidiary of M2Direct, on one hand; and The
Provident Bank, an Ohio corporation ("Provident"), on the other hand.
Recitals:
(1) Control and Provident entered into that certain Service Agreement
dated as of June 30, 1997 (the "Service Agreement"), under which Control has
provided certain direct marketing services to Provident, including services
generally referred to by Control and Provident as Flights IV and V.
(2) As described in this Agreement, the parties have agreed to
compromise and settle any issues between them regarding the compensation and
reimbursement by Provident to Control for Flights IV and V.
For and in consideration of the recitals stated above, the terms,
conditions, representations, warranties and undertakings of the parties
described in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which the parties hereby acknowledge, the parties
agree as follows:
ARTICLE 1
RESTRUCTURING OF FLIGHTS IV AND V
1.1 Subject to the terms and conditions of this Agreement, Provident
agrees to restructure the payment schedule for Flight IV as follows:
12/31/98 100% of September 1998 account acquisition
****** accounts @$***** $4,041,985
Date of this 100% of December 1998 account acquisition
Agreement ***** accounts @$***** $ 378,033
Billed revenues represent earned revenues as of 12/31/98 and are not
subject to refund. Provident shall pay M2Direct the sum of $378,033 upon the
execution and delivery of this Agreement.
1.2 M2Direct shall issue to Provident a stock purchase warrant in the
form of Exhibit A to this Agreement for the purchase of 100,000 shares of the
-------
common stock of M2Direct at an exercise price of $.01 per share.
- --------
*** Omitted pursuant to a request for confidential treatment and filed
separately with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
1.3 The parties entered into Flight V under agreements that were based
upon inaccurate performance assumptions by both parties and underwriting
criteria unacceptable to M2Direct. Those agreements included provisions for
billings on a per account basis. The parties agreed to restructure Flight V, and
Provident also agreed to reimburse M2Direct for any costs incurred under Flight
V. The parties subsequently agreed to terminate Flight V before its originally
contemplated termination date and accordingly agree to the following final
reconciliation of Flight V based upon costs incurred by M2Direct and accounts
booked by Provident:
2/28/99 100% of account acquisition
***** accounts @$***** $4,186,905
Provident has previously paid M2Direct $3,736,905, paying $2,238,274 on
December 10, 1998 and the remainder of such amount in 1999. Provident shall pay
the balance of $450,000 upon the execution and delivery of this Agreement.
Billed revenues represent earned revenues and are not subject to refund.
Provident accepts Flight V as performed and agrees that M2Direct has no
contingent liability regarding Flight V.
1.4 M2Direct agrees to issue a zero coupon promissory note payable in one
payment of One Million Dollars ($1,000,000) on the fifth anniversary of the date
of this Agreement, provided that the note shall be payable to Provident in full
upon the closing of M2Direct's initial public offering (the "IPO"), which for
this purpose means an underwritten offering of shares of its common stock, after
which its common stock is traded on the Nasdaq National Market or a national
stock exchange.
1.5 Subject to the terms and conditions of this Agreement, M2Direct
agrees to deposit with Provident not less than one half of the net proceeds of
the IPO. Provident shall pay interest to M2Direct at a commercially reasonable
rate for such a sum.
1.6 M2Direct shall pay the attorneys' fees and disbursements actually
incurred by Provident in negotiating this Agreement and the transactions related
hereto, not to exceed a total amount of $15,000.
1.8 The parties agree that the payment schedules contained in the project
memorandums for Flight IV and V attached to the Service Agreement are superseded
by this Agreement, which eliminates any possible contingent liability of
M2Direct regarding Flight IV.
ARTICLE 2
MISCELLANEOUS
2.1 Time of the Essence. Time is of the essence of this Agreement.
-------------------
- --------
*** Omitted pursuant to a request for confidential treatment and filed
separately with the Commission.
2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
2.2 Governing Law. This Agreement shall be interpreted, construed, and
-------------
enforced in accordance with the laws of the State of Ohio.
2.3 Counterparts. This Agreement may be executed simultaneously in
-------------
several counterparts, each of which shall be deemed an original; but all of
which together shall constitute one document.
2.4 Succession and Assignment. This Agreement shall be binding upon
--------------------------
and inure to the benefit of the parties named herein and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of his or its rights, interests, or obligations hereunder without the prior
written approval of M2Direct and Provident.
2.5 Entire Agreement. This Agreement contains the entire agreement of
-----------------
the parties hereto with respect to the transactions covered hereby and there are
no representations, warranties, agreements, undertakings or conditions, express
or implied, except as set forth herein. Without limiting the foregoing, the
agreement memorialized in this Agreement eliminates any possible contingent
liability of M2Direct regarding Flights IV and V.
2.6 Amendment and Waiver. This Agreement may not be amended,
---------------------
supplemented, or otherwise modified except by an instrument in writing signed by
each of the parties hereto. No waiver by any party hereto of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation or breach of warranty or covenant hereunder or affect
in any way any rights arising by virtue of any prior or subsequent such
occurrence.
2.7 Severability. Every provision of this Agreement is intended to be
-------------
severable, and if any term or provision is determined to be illegal or invalid
for any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
2.8 Construction. The parties to this Agreement have participated jointly
------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement. Any reference to any federal, state
or local statute or law shall be deemed to also refer to the rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
[Signatures begin on following page.]
3
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
The undersigned have signed this Agreement as of the date stated above.
Provident Bank M2Direct, Inc.
By: /s/ Robert M. Molter By: /s/ John P. Kelly
---------------------------- ----------------------
Name: Robert M. Molter Name: John P. Kelly
---------------------- --------------------
Title: Senior Vice President Title: President and CEO
--------------------- -------------------
Control Group, Ltd.
By: /s/ Michael T. Kane
------------------------
Name: Michael T. Kane
-----------------
Title: Vice President
----------------
4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
Exhibit 10.4
AGREEMENT REGARDING DATA-RELATED MATTERS
This Agreement regarding Data-related Matters (the "Agreement"), is made
and entered into this 16th day of April, 1999, by and between M2Direct, Inc., a
Georgia corporation ("M2Direct") and Control Group, Ltd. ("Control"), a Delaware
corporation and a wholly owned subsidiary of M2Direct, on one hand; and The
Provident Bank, an Ohio corporation ("Provident"), on the other hand.
Recitals:
(1) Control and Provident entered into that certain Service Agreement dated
as of June 30, 1997 (the "Service Agreement"), under which Control has provided
certain direct marketing services to Provident, including services generally
referred to by Control and Provident as Flights IV and V.
(2) Although Provident and M2Direct/Control intend to continue doing
business together, they desire to make certain arrangements that will apply if
their business relationship terminates.
For and in consideration of the recitals stated above, the terms,
conditions, representations, warranties and undertakings of the parties
described in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which the parties hereby acknowledge, the parties
agree as follows:
ARTICLE 1
CERTAIN DATA-RELATED MATTERS
(A) M2Direct hereby grants to Provident a non-exclusive license to use all
Provident-specific algorithms/models housed at M2Direct. M2Direct further
agrees to assist Provident in translating such models into SAS, C, or Assembler
programming code when Provident requests. For such programming assistance
Provident shall pay M2Direct its costs, as documented to the reasonable
satisfaction of Provident, plus ***%.
(B) If at any time in the future the relationship between M2Direct and
Provident ends, M2Direct shall grant to Provident access to the Master File
Database of Performance Data, a division of Trans Union, for a period of three
years, to the extent permitted under the terms of the database agreement between
Control and Trans Union. For this access Provident shall pay M2Direct its costs
(including associated data processing charges), as documented to the reasonable
satisfaction of Provident, plus ***%. During the three-year period M2Direct
shall periodically deliver lists extracted from the Master File Database in the
format requested by Provident, and with requested data sets, to the extent that
it is reasonably practicable for M2Direct to do so.
- --------------
*** Omitted pursuant to a request for confidential treatment and filed
separately with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
ARTICLE 2
MISCELLANEOUS
2.1 Time of the Essence. Time is of the essence of this Agreement.
-------------------
2.2 Governing Law. This Agreement shall be interpreted, construed, and
-------------
enforced in accordance with the laws of the State of Ohio.
2.3 Counterparts. This Agreement may be executed simultaneously in
------------
several counterparts, each of which shall be deemed an original; but all of
which together shall constitute one document.
2.4 Succession and Assignment. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the parties named herein and their respective successors
and permitted assigns. No party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of M2Direct and Provident.
2.5 Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties hereto with respect to the transactions covered hereby and there are no
representations, warranties, agreements, undertakings or conditions, express or
implied, except as set forth herein.
2.6 Amendment and Waiver. This Agreement may not be amended,
--------------------
supplemented, or otherwise modified except by an instrument in writing signed by
each of the parties hereto. No waiver by any party hereto of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation or breach of warranty or covenant hereunder or affect
in any way any rights arising by virtue of any prior or subsequent such
occurrence.
2.7 Severability. Every provision of this Agreement is intended to be
------------
severable, and if any term or provision is determined to be illegal or invalid
for any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
2.8 Construction. The parties to this Agreement have participated jointly
------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement. Any reference to any federal, state
or local statute or law shall be deemed to also refer to the rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
2
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
The undersigned have signed this Agreement as of the date stated above.
Provident Bank M2Direct, Inc.
By: /s/ Robert M. Molter By: /s/ John P. Kelly
----------------------------- ------------------------------
Name: Robert M. Molter Name: John P. Kelly
Title: Senior Vice President Title: President/CEO
Control Group, Ltd.
By: /s/ Michael T. Kane
----------------------------
Name: Michael T. Kane
Title: Vice President
3
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
M2DIRECT, INC.
2030 Powers Ferry Road
Suite 120
Atlanta, Georgia 30339
(770) 644-1850 - Telephone
(770) 644-1865 - Facsimile
April 16, 1999
Robert M. Molter
Senior Vice President
Provident Bank
309 Vine Street
Cincinnati, OH 45202
Transmitted Via Facsimile
Dear Bob:
This letter is intended to memorialize our recent discussions regarding
the relationship between M2Direct and Provident going forward. Provident agrees
that M2Direct will be its principal direct marketing firm of record for its
credit card and home equity product lines, for a three year period beginning
with the date of this letter, based on commercially reasonable terms and
conditions as are generally accepted within the direct marketing industry and as
described below. Provident agrees that Flights 6, 7 and 8 (which are estimated
to total approximately *** to *** mail pieces) and the Home Equity program will
be the first programs under our new arrangement.
Provident agrees that in each of the programs M2Direct performs for
Provident during that period, including Flights 6, 7 and 8 and the Home Equity
program, M2Direct will bill Provident in a manner that takes into account the
number of accounts actually approved. Provident agrees to create pricing
structures that guarantee that M2Direct will be paid for all costs incurred up
to the mutually agreed upon budget, plus a margin of ***%. If Provident
requests, M2Direct shall justify its costs based upon documented expenses
relative to industry standards. Nothing in this letter shall diminish or limit
Provident's right to terminate its relationship with M2Direct if M2Direct fails
to provide services in a commercially reasonable manner or otherwise breaches
the terms of its contractual obligations to Provident.
M2Direct agrees to provide appropriate support for its work for Provident.
In particular, M2Direct agrees (a) to make Bill DeGrosky available to the extent
reasonably necessary, and (b) to provide a dedicated and appropriately qualified
relationship manager.
- ----------
*** Omitted pursuant to a request for confidential treatment and filed
separately with the Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED BY M2DIRECT, INC.
Page Two
If this letter adequately describes our understanding regarding our
relationship with you, please indicate your agreement by signing on the line
provided. We look forward to a long term, mutually profitable relationship with
you.
Sincerely,
/s/ John P. Kelly
------------------------------------
John P. Kelly
Chief Executive Officer and President
M2Direct, Inc.
Agreed and acknowledged:
Provident Bank
By: /s/ Robert M. Molter
---------------------
Robert M. Molter
Senior Vice President
<PAGE>
STOCK PURCHASE WARRANT
----------------------
This STOCK PURCHASE WARRANT ("Warrant") is issued this 16th day of April,
1999, by M2Direct, Inc., a Georgia corporation (the "Company"), to The Provident
Bank, Cincinnati, Ohio ("Provident"), an Ohio corporation (Provident and any
subsequent assignee or transferee hereof are hereinafter referred to
collectively as "Holder" or "Holders").
AGREEMENT:
1. Issuance of Warrant; Term. For and in consideration of Provident's
-------------------------
entering into that certain Agreement Regarding Flights IV and V dated the date
of this Warrant, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company hereby grants to
Holder the right to purchase One Hundred Thousand (100,000) shares of the
Company's common stock (the "Common Stock"). (Provident acknowledges that the
Company offered Provident 100,000 shares of Common Stock but that Provident
elected, pursuant to its customary policy, to receive this Warrant instead.) The
shares of Common Stock issuable upon exercise of this Warrant are hereinafter
referred to as the "Shares." This Warrant shall be exercisable at any time and
from time to time from the date hereof until April 16, 2004 (the "Expiration
Date").
2. Exercise Price. The exercise price (the "Exercise Price") per share
--------------
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01), subject to adjustment as provided below.
3. Exercise.
--------
(a) This Warrant may be exercised by the Holder hereof (but only on
the conditions hereinafter set forth) in whole or in part, upon delivery
of written notice of intent to exercise to the Company in the manner and
at the address of the Company set forth below, together with this Warrant
and payment to the Company of the aggregate Exercise Price of the Shares
so purchased. The Exercise Price shall be payable, at the option of the
Holder, (i) by certified or bank check or (ii) by the surrender of a
portion of this Warrant where the Shares subject to the portion of this
Warrant that is surrendered have a fair market value equal to the
aggregate Exercise Price. In the absence of an established public market
for the Common Stock, the Company's board of directors shall establish
fair market value in a commercially reasonable manner. Upon exercise of
this Warrant as aforesaid, the Company shall as promptly as practicable,
and in any event within fifteen (15) days thereafter, execute and deliver
to the Holder of this Warrant a certificate or certificates for the total
number of whole Shares for which this Warrant is being exercised in such
names and denominations as are requested by such Holder. If this Warrant
shall be exercised with respect to fewer than all of the Shares, the
Holder shall be entitled to receive a new Warrant covering the number of
Shares in respect of which this Warrant shall not have been exercised,
which new Warrant shall in all other respects be identical to this
Warrant. The Company covenants and agrees that it
1
<PAGE>
will pay when due any and all state and federal issue taxes which may be
payable in respect of the issuance of this Warrant or the issuance of any
Shares upon exercise of this Warrant.
(b) Notwithstanding Section 3(a), in no event shall Holder be
entitled to exercise this Warrant to the extent that after such
exercise, the sum of (1) the number of shares of Common Stock
beneficially owned and through Holder (other than shares of Common Stock
which may be deemed beneficially owned through the ownership of the
unexercised portion of the Warrant), and (2) the number of shares of
Common Stock issuable upon the exercise of the Warrant, would result in
beneficial ownership by Holder of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934 (as amended), except
as otherwise provided in clause (1) of such sentence.
4. Covenants, Representations, and Conditions. The above provisions
------------------------------------------
are subject to the following:
(a) Neither this Warrant nor the Shares have been registered under
the Securities Act of 1933, as amended ("Securities Act"), or any
state securities laws ("Blue Sky Laws"). This Warrant has been acquired
for investment purposes and not with a view to distribution or resale and
may not be sold or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel, which opinion
and counsel shall be reasonably satisfactory to the Company and its
counsel, that registration is not required under the Securities Act or
under any applicable Blue Sky Laws. Transfer of the Shares shall be
restricted in the same manner and to the same extent as the Warrant and
the certificates representing such Shares shall bear substantially the
following legend:
THE SHARES OF COMMON STOCK REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR ANY
APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED UNTIL (I) A REGISTRATION
STATEMENT UNDER THE ACT AND SUCH APPLICABLE
STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (II) IN THE
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER SUCH SECURITIES ACTS AND
SUCH APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents
and instruments as counsel for the Company reasonably deems necessary to
effect the
2
<PAGE>
compliance of the issuance of this Warrant and any shares of Common Stock
issued upon exercise hereof with applicable federal and state securities
laws.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights,
if any, with respect thereto or to the issuance thereof. The Company
shall at all times reserve and keep available for issuance upon the
exercise of this Warrant such number of authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof,
-------------------
this Warrant may be transferred, in whole or in part, to any person or
business entity, by presentation of the Warrant to the Company with written
instructions for such transfer. Upon such presentation for transfer, the Company
shall promptly execute and deliver a new Warrant or Warrants in the form hereof
in the name of the assignee or assignees and in the denominations specified in
such instructions. The Company shall pay all expenses incurred by it in
connection with the preparation, issuance, and delivery of Warrants under this
Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
------------------------------------------------------------------
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company,
then all shares of Common Stock that are subject to this Warrant shall be deemed
to be outstanding and owned by the Holder and the Holder shall be entitled to
participate in such rights offering. The Company shall not grant any preemptive
rights with respect to any of its capital stock without the prior written
consent of the Holder.
7. Adjustments for Issue or Sale of Common Stock at Less Than Fair
---------------------------------------------------------------
Market Value. If the Company shall issue or sell shares of its Common Stock for
- ------------
a consideration per share less than the fair market value thereof, then and in
each such case the holder of this Warrant, upon the exercise hereof, shall be
entitled to receive, in lieu of the shares of Common Stock theretofore
receivable upon the exercise of this Warrant a number computed as follows:
Where A = the number of such additional shares of Common
Stock so issued as contemplated by this Section
and
W = the number of shares receivable upon the exercise of this
Warrant immediately prior to the issuance of the additional
shares of Common Stock
and
3
<PAGE>
C = the number of shares of Common Stock outstanding immediately
prior to the issuance of the additional shares of Common Stock
and
Y = the number of shares of Common Stock that the aggregate
consideration for the total number of such additional shares of
Common Stock so issued as contemplated by this Section would
purchase at the fair market value at the time of issuance of the
additional shares
and
X = the number of shares receivable upon the exercise of the
Warrant after the issuance of the additional shares, which shall
be computed by the following formula:
[ (C + W + ]
X = W multiplied by [ (C + W + ]
and, the Exercise Price shall be proportionally decreased so that the
---
total purchase price for X is equal to the total purchase price for W;
For the purposes of this Section, the date as of which the fair market
value for the issuance of the additional shares shall be computed shall be the
date on which the Company shall enter into a firm contract (including the
granting of stock options and the issuance of warrants and other convertible
securities) at a fixed price for the issuance of such additional shares of
outstanding Common Stock. In the absence of an established public market for the
Common Stock, the Company's board of directors shall establish fair market value
in a commercial reasonable manner.
8. Adjustment upon Changes in Stock.
--------------------------------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate Exercise Price, the aggregate number and class
of shares of Common Stock which the Holder is entitled to receive on
exercise hereof shall be adjusted in such a manner so as to protect the
Holder against the effect of such stock split, stock dividend,
recapitalization, combination of shares, or other similar event. If any
adjustment under this subsection would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be
4
<PAGE>
an adjustment pursuant to this subsection, the Company shall forthwith
notify the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common
Stock shall be changed into the same or a different number of shares of
the same or another class or classes of securities of the Company or
another entity, or the holders of Common Stock are entitled to receive
cash or other property, then the Holder exercising this Warrant shall
receive, for the aggregate Exercise Price, the aggregate number and class
of shares, cash or other property of Common Stock which the Holder is
entitled to receive on exercise hereof shall be adjusted in such a manner
so as to protect the Holder against the effect of such merger,
consolidation, exchange of shares, separation, reorganization or
liquidation, or other similar event. If any adjustment under this
subsection would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall
be disregarded and the number of shares subject to this Warrant shall be
the next higher number of shares, rounding all fractions upward. Whenever
there shall be an adjustment pursuant to this subsection, the Company
shall forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
9. Certain Notices. In case at any time the Company shall propose to:
---------------
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock
or make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common
Stock any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company,
or consolidate, merge or otherwise combine with, or sell all or
substantially all of its assets to, another corporation;
(e) voluntarily or involuntarily dissolve, liquidate or wind up
the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock or
securities convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to
the Holder of the Warrant, by certified or registered mail, (i) at least
twenty (20) days' prior written notice
5
<PAGE>
of the date on which the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, and (ii) in the case of such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, at least twenty (20) days' prior written notice of the
date when the same shall take place. Any notice required by clause (i)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall
be entitled thereto, and any notice required by clause (ii) shall specify
the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
10. Article and Section Headings. Numbered and titled article and
----------------------------
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
11. Notice. Any and all notices, elections or demands permitted or
------
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, or sent by certified mail or overnight via nationally recognized
courier service (such as Federal Express), to the other party at the address set
forth below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing. The date of personal delivery or
telecopy or two (2) business days after the date of mailing (or the next
business day after delivery to such courier service), as the case may be, shall
be the date of such notice, election or demand. For the purposes of this
Warrant:
The Address of Holder is: Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
Attn: ___________________
with a copy to:
The Address of Company is: M2Direct, Inc.
4830 West Kennedy Blvd.
Suite 920
Tampa, Florida 33609
Attention: John P. Kelly
Telecopy No.: (813) 289-5336
6
<PAGE>
with a copy to: Charles D. Vaughn, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
Atlanta, Georgia 30309
Telecopy No.: (404) 817-6050
12. Severability. If any provisions(s) of this Warrant or the
------------
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
13. Entire Agreement. This Warrant between the Company and Holder
----------------
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreements are merged herein.
14. Governing Law and Amendments. This Warrant shall be construed and
----------------------------
enforced under the laws of the State of Georgia applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
15. Counterparts. This Warrant may be executed in any number of
------------
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute the same Warrant.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
COMPANY:
-------
M2DIRECT, INC., a Georgia corporation
By: /s/ John P. Kelly
------------------------------------
Title:
-----------------------------
HOLDER:
------
THE PROVIDENT BANK, an Ohio corporation
By: /s/ Robert M. Molter
------------------------------------
Title: Senior Vice President
-----------------------------
7
<PAGE>
Exhibit 10.7
STOCK PURCHASE WARRANT
----------------------
This Warrant is issued this 6th day of March, 1998, by MegaMarketing
Corporation, a Georgia corporation (the "Company"), to SIRROM INVESTMENTS, INC.
a Tennessee corporation (SIRROM INVESTMENTS, INC. and any subsequent assignee or
transferee hereof are hereinafter referred to collectively as "Holder" or
"Holders").
AGREEMENT:
1. Issuance of Warrant; Term.
-------------------------
(a) For and in consideration of SIRROM INVESTMENTS, INC. making a loan
to the Company in an amount of Three Million and no/100ths Dollars
($3,000,000) pursuant to the terms of a secured promissory note of even
date herewith (the "Note") and related loan agreement of even date herewith
(the "Loan Agreement"), and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company
hereby grants to Holder the right to purchase 260,192 shares of the
Company's common stock (the "Common Stock"), which the Company represents
equals 4% of the capital stock of the Company on the date hereof,
calculated on a fully diluted basis ("Base Amount") including the Base
Amount, provided that in the event that the indebtedness evidenced by the
Note is outstanding on the following dates, the Base Amount shall be
increased to the corresponding number set forth below (the "Outstanding
Debt Rachets"):
Date Base Amount
---------------------------------------------
March 6, 2001 398,592 shares of Common
Stock, which the Company
represents equals 6% of the
capital stock of the Company
on the date hereof
calculated on a fully
diluted basis including the
Base Amount.
March 6, 2002 543,010 shares of Common
Stock, which the Company
represents equals 8% of the
capital stock of the Company
on the date hereof
calculated on a fully
diluted basis including the
Base Amount.
<PAGE>
Date Base Amount
---------------------------------------------------
March 6, 2003 693,846 shares of Common
Stock, which the Company
represents equals 10% of the
capital stock of the Company
on the date hereof calculated
on a fully diluted basis
including the Base Amount.
and further provided that the initial Base Amount shall be increased to the
corresponding number as set forth below based upon the Company's actual
EBITDA for 1998 as a percentage of the Company's budget for EBITDA for
1998:
Actual EBITDA as a Base Amount
Percentage of Budget
----------------------------------------------------
75% to 100% 260,192 shares of Common
Stock, which the Company
represents equals 4% of the
capital stock of the Company
on the date hereof
calculated on a fully
diluted basis including the
Base Amount.
Below 75% but 470,025 shares of Common
greater than or Stock, which the Company
equal to 50% represents equals 7% of the
capital stock of the Company
on the date hereof
calculated on a fully
diluted basis including the
Base Amount.
Below 50% 693,846 shares of Common
Stock, which the Company
represents equals 10% of the
capital stock of the Company
on the date hereof calculated
on a fully diluted basis
including the Base Amount.
If the initial Base Amount is increased as set forth above, the Outstanding
Debt Rachets shall be adjusted to increase the adjusted initial Base Amount
by 2% for each year the Note remains outstanding beyond March 6, 2001 (by
way of illustration, if the initial Base Amount is adjusted to 7%
2
<PAGE>
because the Company's actual EBITDA for 1998 is 70% of the 1998 budgeted
amount, the Outstanding Debt Rachets for 2001, 2002, and 2003 shall be 9%,
11%, and 13%, respectively, of the total capital stock of the Company.
(b) For purposes of this Agreement, the term "EBITDA" shall mean net
income plus interest expense plus income taxes plus depreciation expenses
---- ---- ----
plus amortization expenses, all determined in accordance with generally
----
accepted accounting principles.
(c) The shares of Common Stock issuable upon exercise of this Warrant
are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from the date hereof until
May 31, 2003. For purposes of this Warrant the term "fully diluted basis"
shall be determined in accordance with generally accepted accounting
principles as of the date hereof.
2. Exercise Price. The exercise price (the "Exercise Price") per share
--------------
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01).
3. Exercise. This Warrant may be exercised by the Holder hereof (but
--------
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to the
Company at the following address: 2625 Cumberland Parkway, Suite 400, Atlanta,
Georgia 30339, or such other address as the Company shall designate in a written
notice to the Holder hereof, together with this Warrant and payment to the
Company of the aggregate Exercise Price of the Shares so purchased. The
Exercise Price shall be payable, at the option of the Holder (pursuant to
documentation reasonably satisfactory to the Company), (i) by certified or bank
check, (ii) by the surrender of the Note or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price or (iii) by
the surrender of a portion of this Warrant having a fair market value equal to
the aggregate Exercise Price. Upon exercise of this Warrant as aforesaid, the
Company shall as promptly as practicable, and in any event within fifteen (15)
days thereafter, execute and deliver to the Holder of this Warrant (or instruct
its transfer agent to do so) a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such Holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the Holder shall be
entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in all
other respects be identical to
3
<PAGE>
this Warrant. The Company covenants and agrees that it will pay when due any and
all state and federal issue taxes which may be payable in respect of the
issuance of this Warrant or the issuance of any Shares upon exercise of this
Warrant.
4. Covenants and Conditions. The above provisions are subject to the
------------------------
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and may
not be pledged, hypothecated, sold, made subject to a security interest, or
otherwise transferred without (i) an effective registration statement for
such Warrant under the Securities Act and such applicable Blue Sky Laws, or
(ii) an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Company and its counsel, that registration is not
required under the Securities Act or under any applicable Blue Sky Laws
(the Company hereby acknowledges that Bass, Berry & Sims is acceptable
counsel). Transfer of the shares issued upon the exercise of this Warrant
shall be restricted in the same manner and to the same extent as the
Warrant and the certificates representing such Shares shall bear
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY, REGISTRATION UNDER SUCH SECURITIES ACTS OR SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect the
compliance of the issuance of this Warrant and any shares of Common Stock issued
upon exercise hereof with applicable federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights
imposed by the
4
<PAGE>
Company, if any, with respect thereto or to the issuance thereof. The
Company shall at all times reserve and keep available for issuance upon the
exercise of this Warrant such number of authorized but unissued shares of
Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
(c) The Company covenants and agrees that it shall not sell or issue
any shares of the Company's capital stock at a price below the fair market
value of such shares, without the prior written consent of the Holder
hereof. In the event that the Company sells shares of the Company's capital
stock in violation of this Section 4(c) (exclusive of any stock options
permitted under Section 17 hereof), the number of shares issuable upon
exercise of this Warrant shall be equal to the product obtained by
multiplying the number of shares issuable pursuant to this Warrant prior to
such sale by the quotient obtained by dividing (i) the fair market value of
the shares issued in violation of this Section 4(c) by (ii) the price at
which such shares were sold.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof,
-------------------
this Warrant may not be transferred, in whole or in part, to any person or
business entity without the prior written consent of the Company provided that
the Holder may transfer this Warrant to any affiliate of Holder, to any lender
of the Holder or any affiliate of Holder or in connection with the sale of all
or substantially all of the assets and/or stock of Holder or any affiliate of
Holder, any such transfer to be accomplished by presentation of the Warrant to
the Company with written instructions for such transfer and other documentation
reasonably required by the Company in order to comply with applicable securities
laws. Upon such presentation for transfer, the Company shall promptly execute
and deliver a new Warrant or Warrants in the form hereof in the name of the
assignee or assignees and in the denominations specified in such instructions.
The Company shall pay all expenses incurred by it in connection with the
preparation, issuance and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights;
-------------------------------------------------------------------
Preference Rights. Except as otherwise provided herein, this Warrant does not
- -----------------
confer upon the Holder, as such, any right whatsoever as a shareholder of the
Company. Notwithstanding the foregoing, if the Company should offer to all of
the Company's shareholders the right to purchase any stock of the Company (other
than options to purchase stock granted to employees of the Company or pursuant
to the Company's stock option plans) then all shares of Common Stock that are
subject to this Warrant shall be deemed to be outstanding and owned by the
Holder and the Holder shall be entitled to participate in such rights offering.
The Company shall not grant any preemptive
5
<PAGE>
rights with respect to any of its capital stock without the prior written
consent of the Holder (which consent shall not be unreasonably withheld,
conditioned or delayed). The Company shall not issue any securities which
entitle the holder thereof to obtain any preference over holders of Common Stock
upon the dissolution, liquidation, winding-up, sale, merger, or reorganization
of the Company without the prior written consent of the Holder (which consent
shall not be unreasonably withheld, conditioned or delayed), unless such rights
are also granted to Holder.
7. Observation Rights. The Holder of this Warrant shall (a) receive
------------------
notice of and be entitled to attend or may send a representative to attend all
meetings of the Company's Board of Directors in a non-voting observation
capacity and (b) receive copies of all correspondence, notices, packages and
documents and other information provided to members of the Company's Board of
Directors (including actions taken or to be taken by the Board of Directors on
written consent) from the date hereof until such time as the indebtedness
evidenced by the Note has been paid in full. Holder acknowledges that the
relationship between it and the Company places Holder in a position to learn
confidential information, both written and oral, about the Company's business
operations, financial condition, assets and affairs. For purposes of this
agreement, all such information to be provided, together with any other
information regarding the Company that has already been provided to Holder or
its representative and employees, is hereinafter collectively referred to as the
"Sensitive Material." Holder acknowledges that it is aware, and that it will
advise its officers, directors, employees, advisors and other representatives
that federal and state securities laws prohibit any person who has received from
an issuer material, non-public information about the issuer and matters which
are the subject of this Agreement from purchasing or selling securities of such
issuer or from communicating such information to any other person under
circumstances in which it is reasonably foreseeable that such person is likely
to purchase or sell such securities. Neither the Company nor its affiliates nor
their representatives, agents, employees or other related persons will have any
liability to Holder, its employees, agents or representatives or any third
parties resulting from the use of the Sensitive Material by Holder which Holder
acknowledges to be the Company's property, to itself and agrees not to use,
reveal, transfer, copy or disclose such Sensitive Material, directly or
indirectly, to any other person for any purpose without the prior written
consent of Company. Holder agrees to execute any additional confidentiality
agreement reasonably required by the Company in connection with any Sensitive
Material.
6
<PAGE>
8. Adjustment Upon Changes in Stock.
--------------------------------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which such Holder would have received if this
Warrant had been exercised immediately prior to such stock split, stock
dividend, recapitalization, combination of shares, or other similar event.
If any
adjustment under this Section 8(a) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares subject to
this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to this
Section 8(a), the Company shall forthwith notify the Holder or Holders of
this Warrant of such adjustment, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated. For purposes hereof, the granting of stock or options pursuant
to a merger, asset acquisition, option agreement or other transaction where
all of the shareholders of the Company do not participate shall not be
considered a stock split, stock dividend recapitalization, combination of
shares of the Company, or other similar event giving rise to an adjustment.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event where
all of the shareholders of the Company participate, occurring after the
date hereof, as a result of which substantially all shares of Common Stock
shall be changed into the same or a different number of shares of the same
or another class or classes of securities of the Company or another entity,
then the Holder exercising this Warrant shall receive, for the aggregate
price paid upon such exercise, the aggregate number and class of shares
which such Holder would have received if this Warrant had been exercised
immediately prior to such merger, consolidation, exchange of shares,
separation, reorganization or liquidation, or other similar event. If any
adjustment under this Section 8(b) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares subject to
this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an
7
<PAGE>
adjustment pursuant to this Section 8(b), the Company shall forthwith
notify the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
9. Put Agreement.
-------------
(a) The Company hereby irrevocably grants and issues to Holder the
right and option to sell to the Company (the "Put") this Warrant (to the
extent not previously exercised) for a period of 30 days immediately prior
to the expiration thereof, at a purchase price (the "Purchase Price") equal
to the Fair Market Value (as hereinafter defined) of the shares of Common
Stock issuable to Holder upon exercise of this Warrant.
(b) The Company shall pay to the Holder, in cash or certified or
cashier's check, the Purchase Price in exchange for the delivery to the
Company of this Warrant within thirty (30) days of the receipt of written
notice, addressed as set forth in Section 3 hereto, from the Holder of its
intention to exercise the Put and all other documentation reasonably
required by the Company in connection therewith in order for the Company to
comply with applicable securities laws.
(c) The Fair Market Value of the shares of Common Stock of the Company
issuable pursuant to this Warrant shall be determined as follows:
(i) If after an initial public offering of the Common Stock,
the average of the closing bid and ask prices for the Common Stock (as
quoted on a national exchange) shall be the fair market value. If
prior to a public offering, the Company and the Holder shall each
appoint an independent, experienced appraiser who is a member of a
recognized professional association of business appraisers. The two
appraisers shall determine the value of the shares of Common Stock
which would be issued upon the exercise of the Warrant, taking into
consideration that such shares would constitute a minority interest,
and would lack liquidity, and further assuming that the sale would be
between a willing buyer and a willing seller, both of whom have full
knowledge of the financial and other affairs of the Company, and
neither of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more than 10%
more than the lowest of the appraisals, the Fair Market Value shall be
the average of the two
8
<PAGE>
appraisals. If the highest of the two appraisals is 10% or more than
the lowest of the two appraisals, then a third appraiser shall be
appointed by the two appraisers, and if they cannot agree on a third
appraiser, the American Arbitration Association shall appoint the
third appraiser. The third appraiser, regardless of who appoints him
or her, shall have the same qualifications as the first two
appraisers.
(iii) The Fair Market Value after the appointment of the third
appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid one-
half by the Company and one-half by the Holder.
10. Registration.
------------
(a) The Company and the holders of the Shares agree that if at any
time after the date hereof the Company shall propose to file a registration
statement with respect to any of its Common Stock on a form suitable for a
public offering (excluding any registrations pursuant to forms S-4 and S-8
or any successor forms thereof), it will give notice in writing to such
effect to the registered holder(s) of the Shares at least thirty (30) days
prior to such filing, and, at the written request of any such registered
holder, made within ten (10) days after the receipt of such notice, will
include therein at the Company's cost and expense (including the reasonable
fees and expenses of one counsel to such holder(s), but excluding
underwriting discounts, commissions and filing fees attributable to the
Shares included therein) such of the Shares as such holder(s) shall
request; provided, however, that if the offering being registered by the
Company is underwritten and if the representative of the underwriters
certifies in writing that the inclusion therein of the Shares would
materially and adversely affect the sale of the securities to be sold by
the Company thereunder, then the Company shall be required to include in
the offering only that number of securities, including the Shares, which
the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro
rata among all selling shareholders according to the total amount of
securities entitled to be included therein owned by each selling
shareholder. The obligations of the Company under this Section 10 shall
terminate with respect to a Holder of Shares when such Shares become
eligible for resale in accordance with Rule 144 under the Securities Act of
1933 within a three month period without restrictions as to volume.
9
<PAGE>
(b) Whenever the Company undertakes to effect the registration of any
of the Shares, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement covering such
Shares and use its best efforts to cause such registration statement
to be declared effective by the Commission as expeditiously as
possible and to keep such registration effective until the earlier of
(A) the date when all Shares covered by the registration statement
have been sold or (B) two hundred seventy (270) days from the
effective date of the registration statement; provided, that before
filing a registration statement or prospectus or any amendment or
supplements thereto, the Company will furnish to each Holder of Shares
covered by such registration statement and the underwriters, if any,
copies of all such documents proposed to be filed (excluding exhibits,
unless any such person shall specifically request exhibits), which
documents will be subject to the review of such Holders and
underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any supplement
thereto (including any documents incorporated by reference therein)
with the Commission if (A) the underwriters, if any, shall reasonably
object to such filing or (B) if information in such registration
statement or prospectus concerning a particular selling Holder has
changed and such Holder or the underwriters, if any, shall reasonably
object. If a Holder objects to the filing of the registration
statement (which objection must be delivered to the Company in
writing), the Company may remove such Holder's Shares from the
offering and proceed to file with no further obligation to such Holder
hereunder.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the
period referred to in Section 10(b)(i) and to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement, and cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed with the Commission pursuant to
Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of copies of
such registration statement, each
10
<PAGE>
amendment thereto, the prospectus included in such registration
statement (including each preliminary prospectus), each supplement
thereto and such other documents as they may reasonably request in
order to facilitate the disposition of the Shares owned by them.
(iv) Use its best efforts to register and qualify under such
other securities laws of such jurisdictions as shall be reasonably
requested by any selling Holder and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Shares owned by
such Holder, in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as a
condition thereto to qualify to transact business or to file a general
consent to service of process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of the happening of
any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such Shares
not later than the effective date of such registration statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and
take all such other actions as the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such
Shares (including, without limitation, effecting a stock split or a
combination of shares).
(viii) Make available for inspection by any selling Holder or
any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent
retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and independent
accountants of the
11
<PAGE>
Company to supply all information reasonably requested by any such
seller, underwriter, attorney, accountant or agent in connection with
such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if requested by any
such person) confirm such notification in writing: (A) the filing of
the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective amendment thereto and,
with respect to the registration statement or any post-effective
amendment thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments or
supplements to the registration statement or the prospectus or for
additional information, (C) the issuance or threat of issuance by the
Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that
purpose, and (D) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale
in any jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered.
(xi) Cooperate with the selling Holder(s) and the underwriters,
if any, to facilitate the timely preparation and delivery of
certificates representing the Shares to be sold and not bearing any
restrictive legends, and enable such Shares to be in such lots and
registered in such names as the underwriters may request at least two
(2) business days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later than
the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering, (A) make such representations and warranties to
the selling Holder(s) and the underwriters, if any, with respect to
the Shares and the registration statement as are customarily made by
issuers to selling
12
<PAGE>
Shareholders in primary underwritten offerings; (B) use its best
efforts to obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
selling Holders and the underwriters, if any, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with primary
underwritten offerings; (C) deliver such documents and certificates as
may be reasonably requested (1) by the holders of a majority of the
Shares being sold, and (2) by the underwriters, if any, to evidence
compliance with clause (A) above and with any customary conditions
contained in the underwriting agreement or other agreement entered
into by the Company; and (D) obtain opinions of counsel to the Company
and updates thereof (which counsel and which opinions shall be
reasonably satisfactory to the underwriters, if any), covering the
matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by the
selling Holders and underwriters or their counsel. Such counsel shall
also state that no facts have come to the attention of such counsel
which cause them to believe that such registration statement, the
prospectus contained therein, or any amendment or supplement thereto,
as of their respective effective or issue dates, contains any untrue
statement of any material fact or omits to state any material fact
necessary to make the statements therein not misleading (except that
no statement need be made with respect to any financial statements,
notes thereto or other financial data or other expertized material
contained therein). If for any reason the Company's counsel is unable
to give such opinion, the Company shall so notify the Holders of the
Shares and shall use its best efforts to remove expeditiously all
impediments to the rendering of such opinion.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than
forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at
the end of any fiscal quarter in which the Shares are sold to
underwriters in a firm or best efforts underwritten offering, or (B)
if not sold to underwriters in such an offering, beginning with the
first month of the first fiscal quarter of the Company commencing
after the effective date of the registration statement, which
13
<PAGE>
statements shall cover such twelve-month periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a priority
greater than or equal to those granted to Holders pursuant to this Warrant
without the prior written consent of the Holder(s) which shall not be
unreasonably withheld or delayed.
(d) The Company's obligations under Section 10(a) above with respect
to each holder of Shares are expressly conditioned upon such holder's
furnishing to the Company in writing such information concerning such
holder and the terms of such holder's proposed offering as the Company
shall reasonably request for inclusion in the registration statement. If
any registration statement including any of the Shares is filed, then the
Company shall indemnify each holder thereof (and each underwriter for such
holder and each person, if any, who controls such underwriter within the
meaning of the Securities Act) from any loss, claim, damage or liability
arising out of, based upon or in any way relating to any untrue statement
of a material fact contained in such registration statement or any omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such
holder of the Shares expressly for use in connection with such registration
statement; and such holder shall indemnify the Company (and each of its
officers and directors who has signed such registration statement, each
director, each person, if any, who controls the Company within the meaning
of the Securities Act, each underwriter for the Company and each person, if
any, who controls such underwriter within the meaning of the Securities
Act) and each other such holder against any loss, claim, damage or
liability arising from any such statement or omission which was made in
reliance upon information furnished in writing to the Company by such
holder of the Shares expressly for use in connection with such registration
statement.
(e) For purposes of this Section 10, all of the Shares shall be deemed
to be issued and outstanding.
14
<PAGE>
11. Certain Notices. In case at any time the Company shall propose to:
---------------
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell all or substantially
all of its assets to, another corporation; or
(e) voluntarily or involuntarily dissolve, liquidate or wind up the
affairs of the Company;
then, in any one or more of said cases, the Company shall give to the
Holder of the Warrant, by certified or registered mail, (i) at least ten
(10) days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (ii) in the case
of such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least ten (10) days' prior
written notice of the date when the same shall take place. Any notice
required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and any notice required
by clause (ii) shall specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the
case may be.
12. Rights of Co-Sale. Prior to the completion of a Qualified Public
-----------------
Offering (as hereinafter defined) the following shall apply:
(a) Co-Sale Right. Neither John P. Kelly, Edward J. Rutkowski, nor
-------------
Paul B. Byrum (individually a "Selling Shareholder" and collectively the
"Selling Shareholders") shall enter into any transaction that would result
in the
15
<PAGE>
sale by him of any Common Stock now or hereafter owned by him, unless prior
to such sale the Selling Shareholder shall give notice to Holder of his
intention to effect such sale in order that Holder may exercise its rights
under this Section 12 as hereinafter described. Such notice shall set forth
(i) the number of shares to be sold by the Selling Shareholder, (ii) the
principal terms of the sale, including the price at which the shares are
intended to be sold, and (iii) an offer by the Selling Shareholder to use
his best efforts to cause to be included with the shares to be sold by him
in the sale, on a share-by-share basis and on the same terms and
conditions, the Shares issuable or issued to Holder pursuant this Warrant.
(b) Rejection of Co-Sale Offer. If Holder has not accepted such offer
--------------------------
in writing within a period of ten (10) days from the date of receipt of the
notice, then the Selling Shareholder shall thereafter be free for a period
of ninety (90) days to sell the number of shares specified in such notice,
at a price no greater than the price set forth in such notice and on
otherwise no more favorable terms to the Selling Shareholder than as set
forth in such notice, without any further obligation to Holder in
connection with such sale. In the event that the Selling Shareholder fails
to consummate such sale within such ninety-day period, the shares specified
in such notice shall continue to be subject to this Section.
(c) Acceptance of Co-Sale Offer. If Holder accepts such offer in
---------------------------
writing within ten (10) day period, such acceptance shall be irrevocable
unless the Selling Shareholder shall be unable to cause to be included in
his sale the number of Shares of stock held by Holder and set forth in the
written acceptance. In that event, the Selling Shareholder and Holder
shall participate in the sale pro rata, with the Selling Shareholder and
Holder each selling half the total number of such shares to be sold in the
sale. For purposes of this Article 12, a "Qualified Public Offering" shall
be deemed to have occurred if the Company has received net proceeds of
$15,000,000 and its shares are traded on Nasdaq or a United States
securities exchange.
13. Governing Law. This warrant shall be governed by the laws of the
-------------
State of Tennessee applicable to agreements made entirely within the State.
14. Severability. If any provision(s) of this Warrant or the application
------------
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
16
<PAGE>
15. Counterparts. This Warrant may be executed in any number of
------------
counterparts and be different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
16. Jurisdiction and Venue. The Company hereby consents to the
----------------------
jurisdiction of the courts of the State of Tennessee and the United States
District Court for the Middle District of Tennessee, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any suit, action or other proceeding arising out of any of
its obligations arising under this Agreement or with respect to the transactions
contemplated hereby, and expressly waives any and all objections it may have as
to venue in any such courts.
17. Stock Options. The Company may grant stock options to employees
--------------
representing up to 5% of the common stock of the Company, provided such options
are incentive stock options.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
MEGAMARKETING CORPORATION, a
Georgia corporation
By: /s/ John P. Kelly
---------------------------------
Title: Chairman and President
------------------------------
SIRROM INVESTMENTS, INC. a
Tennessee corporation
By: /s/ Kim Stringfield
---------------------------------
Title: Treasurer
------------------------------
The undersigned Shareholders join in the execution of this Warrant for the
purposes of acknowledging and agreeing to be bound by Section 12 hereof.
/s/ John P. Kelly
--------------------------------------
John P. Kelly
/s/ Edward J. Rutkowski
--------------------------------------
Edward J. Rutkowski
/s/ Paul B. Byrum
--------------------------------------
Paul B. Byrum
18
<PAGE>
STOCK PURCHASE WARRANT
----------------------
This STOCK PURCHASE WARRANT ("Warrant") is issued this 2nd day of
February, 1999, by MegaMarketing Corporation, a Georgia corporation (the
"Company"), to FLAG FINANCIAL CORPORATION ("Flag"), a Georgia corporation and
the sole shareholder of Citizens Bank, Vienna, Georgia (Flag and any subsequent
assignee or transferee hereof are hereinafter referred to collectively as
"Holder" or "Holders").
AGREEMENT:
1. Issuance of Warrant; Term. For and in consideration of CITIZENS BANK
-------------------------
making a loan to the Company in an amount of Two Million Five Hundred Thousand
and no/100ths Dollars ($2,500,000.00) pursuant to the terms of a promissory note
of even date herewith (the "Note"), and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Company hereby
grants to Holder the right to purchase Twenty-five Thousand (25,0000) shares of
the Company's common stock (the "Common Stock"). The shares of Common Stock
issuable upon exercise of this Warrant are hereinafter referred to as the
"Shares." This Warrant shall be exercisable at any time and from time to time
from the date hereof until February 28, 2004 (the "Expiration Date").
2. Exercise Price. The exercise price (the "Exercise Price") per share
--------------
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be Four Dollars and Seventeen Cents ($4.17), subject to
adjustment as provided below.
3. Exercise.
--------
(a) This Warrant may be exercised by the Holder hereof (but only
on the conditions hereinafter set forth) in whole or in part, upon
delivery of written notice of intent to exercise to the Company in the
manner at the address of the Company set forth below, together with this
Warrant and payment to the Company of the aggregate Exercise Price of the
Shares so purchased. The Exercise Price shall be payable, at the option of
the Holder, (i) by certified or bank check, (ii) by the surrender of the
Note or portion thereof having an outstanding principal balance equal to
the aggregate Exercise Price or (iii) by the surrender of a portion of
this Warrant where the Shares subject to the portion of this Warrant that
is surrendered have a fair market value equal to the aggregate Exercise
Price. In the absence of an established public market for the Common
Stock, the Company's board of directors shall establish fair market value
in a commercially reasonable manner. Upon exercise of this Warrant as
aforesaid, the Company shall as promptly as practicable, and in any event
within fifteen (15) days thereafter, execute and deliver to the Holder of
this Warrant a certificate or certificates for the total number of whole
Shares for which this Warrant is being exercised in such names and
denominations as are requested by such Holder. If this Warrant shall be
exercised with respect to fewer than all of the Shares, the Holder shall
be entitled to receive a new Warrant covering the number of Shares in
respect of which this Warrant
1
<PAGE>
shall not have been exercised, which new Warrant shall in all other
respects be identical to this Warrant. The Company covenants and agrees
that it will pay when due any and all state and federal issue taxes which
may be payable in respect of the issuance of this Warrant or the issuance
of any Shares upon exercise of this Warrant.
(b) Notwithstanding Section 3(a), in no event shall Holder
be entitled to exercise this Warrant to the extent that after such
exercise, the sum of (1) the number of shares of Common Stock beneficially
owned and through Holder (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unexercised portion
of the Warrant), and (2) the number of shares of Common Stock issuable
upon the exercise of the Warrant, would result in beneficial ownership by
Holder of more than 4.99% of the outstanding shares of Common Stock. For
purposes of the immediately preceding sentence, beneficial ownership shall
be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934 (as amended), except as otherwise provided in clause (1) of
such sentence.
4. Covenants, Representations, and Conditions. The above provisions
------------------------------------------
are subject to the following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended ("Securities Act"), or any
state securities laws ("Blue Sky Laws"). This Warrant has been acquired
for investment purposes and not with a view to distribution or resale and
may not be sold or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel, which opinion and
counsel shall be reasonably satisfactory to the Company and its counsel,
that registration is not required under the Securities Act or under any
applicable Blue Sky Laws (the Company hereby acknowledges that Powell,
Goldstein, Frazer & Murphy is acceptable counsel). Transfer of the Shares
shall be restricted in the same manner and to the same extent as the
Warrant and the certificates representing such Shares shall bear
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED UNTIL (I) A REGISTRATION
STATEMENT UNDER THE ACT AND SUCH APPLICABLE
STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE
WITH REGARD THERETO, OR (II) IN THE OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER SUCH SECURITIES ACTS AND SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION
WITH SUCH PROPOSED TRANSFER.
2
<PAGE>
The Holder hereof and the Company agree to execute such other documents
and instruments as counsel for the Company reasonably deems necessary to
effect the compliance of the issuance of this Warrant and any shares of
Common Stock issued upon exercise hereof with applicable federal and state
securities laws.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights,
if any, with respect thereto or to the issuance thereof. The Company shall
at all times reserve and keep available for issuance upon the exercise of
this Warrant such number of authorized but unissued shares of Common Stock
as will be sufficient to permit the exercise in full of this Warrant.
(c) The Company represents that as of the date hereof the Company
has outstanding 6,719,425 shares of Common Stock and 141,120 shares of
Series A Convertible Preferred Stock (with each share of Series A
Convertible Preferred Stock being convertible into four shares of Common
Stock). The Company has no other equity securities outstanding.
(d) The Company shall provide Holder with the same rights to
participate as a selling shareholder in connection with public offerings
of the Common Stock as are enjoyed by the members of the Company's senior
management team.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof,
-------------------
this Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer. Upon such presentation for transfer, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance, and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights.
------------------------------------------------------------------
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are subject to this Warrant shall be deemed to
be outstanding and owned by the Holder and the Holder shall be entitled to
participate in such rights offering. The Company shall not grant any preemptive
rights with respect to any of its capital stock without the prior written
consent of the Holder.
7. Adjustment upon Changes in Stock.
--------------------------------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this
3
<PAGE>
Warrant shall receive, for the aggregate Exercise Price, the aggregate
number and class of shares which such Holder would have received if this
Warrant had been exercised immediately prior to such stock split, stock
dividend, recapitalization, combination of shares, or other similar event.
If any adjustment under this subsection would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment
pursuant to this subsection, the Company shall forthwith notify the Holder
or Holders of this Warrant of such adjustment, setting forth in reasonable
detail the event requiring the adjustment and the method by which such
adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common
Stock shall be changed into the same or a different number of shares of
the same or another class or classes of securities of the Company or
another entity, or the holders of Common Stock are entitled to receive
cash or other property, then the Holder exercising this Warrant shall
receive, for the aggregate Exercise Price, the aggregate number and class
of shares, cash or other property which such Holder would have received if
this Warrant had been exercised immediately prior to such merger,
consolidation, exchange of shares, separation, reorganization or
liquidation, or other similar event. If any adjustment under this
subsection would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares subject to this Warrant shall be the
next higher number of shares, rounding all fractions upward. Whenever
there shall be an adjustment pursuant to this subsection, the Company
shall forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
8. Certain Notices. In case at any time the Company shall propose to:
---------------
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell of all or
substantially all of its assets to, another corporation;
4
<PAGE>
(e) voluntarily or involuntarily dissolve, liquidate or wind up of
the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock or securities
convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to the
Holder of the Warrant, by certified or registered mail, (i) at least
twenty (20) days' prior written notice of the date on which the books of
the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (ii) in the case
of such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least twenty (20) days' prior
written notice of the date when the same shall take place. Any notice
required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and any notice required
by clause (ii) shall specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as
the case may be.
9. Article and Section Headings. Numbered and titled article and
----------------------------
section headings are for convenience only and shall not be construed as
amplifying or limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or
------
required to be made under this Warrant shall be in writing, signed by the party
giving such notice, election or demand and shall be delivered personally,
telecopied, or sent by certified mail or overnight via nationally recognized
courier service (such as Federal Express), to the other party at the address set
forth below, or at such other address as may be supplied in writing and of which
receipt has been acknowledged in writing. The date of personal delivery or
telecopy or two (2) business days after the date of mailing (or the next
business day after delivery to such courier service), as the case may be, shall
be the date of such notice, election or demand. For the purposes of this
Warrant:
The Address of Holder is: Citizens Bank
100 Union Street
Vienna, Georgia 31092
Attention: J. Daniel Speight, Jr.
Telecopy No.: (912) 268-1370
with a copy to: David M. Armitage, Esq.
Powell, Goldstein, Frazer & Murphy
191 Peachtree Street
5
<PAGE>
Atlanta, Georgia 30303
Telecopy No.: (404) 572-6999
The Address of Company is: MegaMarketing Corporation
4830 West Kennedy Blvd.
Suite 920
Tampa, Florida 33609
Attention: John P. Kelly
Telecopy No.: (813) 289-5336
6
<PAGE>
with a copy to: Charles D. Vaughn, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
Atlanta, Georgia 30309
Telecopy No.: (404) 817-6050
11. Severability. If any provisions(s) of this Warrant or the
------------
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Holder
----------------
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
----------------------------
enforced under the laws of the State of Georgia applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Counterparts. This Warrant may be executed in any number of
------------
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
15. Usury Savings Provisions. This Warrant is issued in connection with
------------------------
the Note. It is intended that this Warrant not constitute interest on the Note.
If under any circumstances whatsoever, fulfillment of any obligation of this
Warrant, the Note, or any other agreement or document executed in connection
therewith, shall violate the lawful limit of any applicable usury statute or any
other applicable law with regard to obligations of like character and amount,
then the obligation to be fulfilled shall be reduced to such lawful limit, such
that in no event shall there occur, under this Warrant, the Note, or any other
document or instrument executed in connection with the Note, any violation of
such lawful limit, but such obligation shall be fulfilled to the lawful limit.
If any sum is collected in excess of the lawful limit, such excess shall be
applied to reduce the principal amount of the Note.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
COMPANY:
-------
MEGAMARKETING CORPORATION,
a Georgia corporation
By: /s/ Edward J. Rutkowski
-------------------------------
Title: Executive Vice President
------------------------
HOLDER:
------
FLAG FINANCIAL CORPORATION
By: /s/ Dan Speight
-------------------------------
Title: President/CEO
------------------------
8
<PAGE>
STOCK PURCHASE WARRANT
----------------------
This Warrant is issued this 3rd day of February, 1999, by MegaMarketing
Corporation, a Georgia corporation (the "Company"), to SIRROM INVESTMENTS, INC.
a Tennessee corporation (SIRROM INVESTMENTS, INC. and any subsequent assignee or
transferee hereof are hereinafter referred to collectively as "Holder" or
"Holders").
AGREEMENT:
1. Issuance of Warrant; Term.
-------------------------
(a) For and in consideration of SIRROM INVESTMENTS, INC. making an
additional loan to the Company in an amount of Two Million and no/100ths
Dollars ($2,000,000) pursuant to the terms of a secured promissory note of
even date herewith (the "Note") and related loan agreement dated March 6,
1998, as now or hereafter amended, (the "Loan Agreement"), and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company hereby grants to Holder the right to purchase
157,207 shares of the Company's common stock (the "Common Stock"), which
the Company represents equals 2% of the capital stock of the Company on the
date hereof, calculated on a fully diluted basis ("Base Amount") including
the Base Amount, provided that in the event that the indebtedness evidenced
by the Note is outstanding on the following dates, the Base Amount shall be
increased to the corresponding number set forth below (the "Outstanding
Debt Rachets"):
<TABLE>
<CAPTION>
Date Base Amount
------------------------------- ---------------------------------------------
<S> <C>
February 2, 2001 320,964 shares of Common Stock, which
the Company represents equals 4% of the
capital stock of the Company on the
date hereof calculated on a fully
diluted basis including the Base
Amount.
February 2, 2002 491,690 shares of Common Stock,
which the Company represents equals 6%
of the capital stock of the Company on
the date hereof calculated on a fully
diluted basis including the Base
Amount.
February 2, 2003 669,839 shares of Common Stock, which the
Company represents equals 8% of the
capital stock of the Company on the
date hereof calculated on a fully
diluted basis including the Base
Amount.
</TABLE>
and further provided that if the Company repays the the Notes in full by
July 31, 1999, the initial Base Amount shall be decreased to 77,810 shares
of Common Stock, which the
<PAGE>
Company represents equals 1% of the capital stock of the Company on the
date hereof calculated on a fully diluted basis including the Base Amount.
As disclosed in a schedule of shareholders provided to Holder, the
foregoing calculation is based upon the assumption that certain outstanding
shares currently in escrow will be cancelled according to a contractual
arrangement. The actual cancellation cannot occur until the Company's
audited financials for 1998 are available. If the contractual adjustment is
other than as described on the referenced schedule, the Base Amount and the
other amounts of shares of Common Stock specified above shall be adjusted
accordingly.
(b) The shares of Common Stock issuable upon exercise of this Warrant
are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from the date hereof until
April 30, 2003. For purposes of this Warrant the term "fully diluted
basis" shall be determined in accordance with generally accepted accounting
principles as of the date hereof.
2. Exercise Price. The exercise price (the "Exercise Price") per share
--------------
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01).
3. Exercise. This Warrant may be exercised by the Holder hereof (but
--------
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to the
Company at the following address: 2030 Powers Ferry Road, Suite 120, Atlanta,
Georgia 30339, or such other address as the Company shall designate in a written
notice to the Holder hereof, together with this Warrant and payment to the
Company of the aggregate Exercise Price of the Shares so purchased. The
Exercise Price shall be payable, at the option of the Holder (pursuant to
documentation reasonably satisfactory to the Company), (i) by certified or bank
check, (ii) by the surrender of the Note or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price or (iii) by
the surrender of a portion of this Warrant having a fair market value equal to
the aggregate Exercise Price. Upon exercise of this Warrant as aforesaid, the
Company shall as promptly as practicable, and in any event within fifteen (15)
days thereafter, execute and deliver to the Holder of this Warrant (or instruct
its transfer agent to do so) a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such Holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the Holder shall be
entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in all
other respects be identical to this Warrant. The Company covenants and agrees
that it will pay when due any and all state and federal issue taxes which may be
payable in respect of the issuance of this Warrant or the issuance of any Shares
upon exercise of this Warrant.
2
<PAGE>
4. Covenants and Conditions. The above provisions are subject to the
------------------------
following:
(a) Neither this Warrant nor the Shares have been registered under the
Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and may
not be pledged, hypothecated, sold, made subject to a security interest, or
otherwise transferred without (i) an effective registration statement for
such Warrant under the Securities Act and such applicable Blue Sky Laws, or
(ii) an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Company and its counsel, that registration is not
required under the Securities Act or under any applicable Blue Sky Laws
(the Company hereby acknowledges that Bass, Berry & Sims is acceptable
counsel). Transfer of the shares issued upon the exercise of this Warrant
shall be restricted in the same manner and to the same extent as the
Warrant and the certificates representing such Shares shall bear
substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE
TRANSFERRED UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH
REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY, REGISTRATION UNDER SUCH SECURITIES ACTS OR SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect the
compliance of the issuance of this Warrant and any shares of Common Stock issued
upon exercise hereof with applicable federal and state securities laws.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens, charges and preemptive rights
imposed by the Company, if any, with respect thereto or to the issuance
thereof. The Company shall at all times reserve and keep available for
issuance upon the exercise of this Warrant such number of authorized but
unissued shares of Common Stock as will be sufficient to permit the
exercise in full of this Warrant.
(c) The Company covenants and agrees that it shall not sell or issue
any shares of the Company's capital stock at a price below the fair market
value of such shares, without the prior written consent of the Holder
hereof. In the event that the Company sells shares of the Company's
capital stock in violation of this Section 4(c)
3
<PAGE>
(exclusive of any stock options permitted under Section 17 hereof), the
number of shares issuable upon exercise of this Warrant shall be equal to
the product obtained by multiplying the number of shares issuable pursuant
to this Warrant prior to such sale by the quotient obtained by dividing (i)
the fair market value of the shares issued in violation of this Section
4(c) by (ii) the price at which such shares were sold.
5. Transfer of Warrant. Subject to the provisions of Section 4 hereof,
-------------------
this Warrant may not be transferred, in whole or in part, to any person or
business entity without the prior written consent of the Company provided that
the Holder may transfer this Warrant to any affiliate of Holder, to any lender
of the Holder or any affiliate of Holder or in connection with the sale of all
or substantially all of the assets and/or stock of Holder or any affiliate of
Holder, any such transfer to be accomplished by presentation of the Warrant to
the Company with written instructions for such transfer and other documentation
reasonably required by the Company in order to comply with applicable securities
laws. Upon such presentation for transfer, the Company shall promptly execute
and deliver a new Warrant or Warrants in the form hereof in the name of the
assignee or assignees and in the denominations specified in such instructions.
The Company shall pay all expenses incurred by it in connection with the
preparation, issuance and delivery of Warrants under this Section.
6. Warrant Holder Not Shareholder; Rights Offering; Preemptive Rights;
-------------------------------------------------------------------
Preference Rights. Except as otherwise provided herein, this Warrant does not
- -----------------
confer upon the Holder, as such, any right whatsoever as a shareholder of the
Company. Notwithstanding the foregoing, if the Company should offer to all of
the Company's shareholders the right to purchase any stock of the Company (other
than options to purchase stock granted to employees of the Company or pursuant
to the Company's stock option plans) then all shares of Common Stock that are
subject to this Warrant shall be deemed to be outstanding and owned by the
Holder and the Holder shall be entitled to participate in such rights offering.
The Company shall not grant any preemptive rights with respect to any of its
capital stock without the prior written consent of the Holder (which consent
shall not be unreasonably withheld, conditioned or delayed). The Company shall
not issue any securities which entitle the holder thereof to obtain any
preference over holders of Common Stock upon the dissolution, liquidation,
winding-up, sale, merger, or reorganization of the Company without the prior
written consent of the Holder (which consent shall not be unreasonably withheld,
conditioned or delayed), unless such rights are also granted to Holder.
7. Observation Rights. The Holder of this Warrant shall (a) receive
------------------
notice of and be entitled to attend or may send a representative to attend all
meetings of the Company's Board of Directors in a non-voting observation
capacity and (b) receive copies of all correspondence, notices, packages and
documents and other information provided to members of the Company's Board of
Directors (including actions taken or to be taken by the Board of Directors on
written consent) from the date hereof until such time as the indebtedness
evidenced by the Note has been paid in full. Holder acknowledges that the
relationship between it and the Company places Holder in a position to learn
confidential information, both written and oral, about the Company's business
operations, financial condition, assets and affairs. For purposes of this
agreement, all such information to be provided, together with any other
information regarding the Company that has already been provided to Holder or
its representative and employees, is
4
<PAGE>
hereinafter collectively referred to as the "Sensitive Material." Holder
acknowledges that it is aware, and that it will advise its officers, directors,
employees, advisors and other representatives that federal and state securities
laws prohibit any person who has received from an issuer material, non-public
information about the issuer and matters which are the subject of this Agreement
from purchasing or selling securities of such issuer or from communicating such
information to any other person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities.
Neither the Company nor its affiliates nor their representatives, agents,
employees or other related persons will have any liability to Holder, its
employees, agents or representatives or any third parties resulting from the use
of the Sensitive Material by Holder which Holder acknowledges to be the
Company's property, to itself and agrees not to use, reveal, transfer, copy or
disclose such Sensitive Material, directly or indirectly, to any other person
for any purpose without the prior written consent of Company. Holder agrees to
execute any additional confidentiality agreement reasonably required by the
Company in connection with any Sensitive Material.
8. Adjustment Upon Changes in Stock.
--------------------------------
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which such Holder would have received if this
Warrant had been exercised immediately prior to such stock split, stock
dividend, recapitalization, combination of shares, or other similar event.
If any adjustment under this Section 8(a) would create a fractional share
of Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares subject
to this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to this
Section 8(a), the Company shall forthwith notify the Holder or Holders of
this Warrant of such adjustment, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated. For purposes hereof, the granting of stock or options pursuant
to a merger, asset acquisition, option agreement or other transaction where
all of the shareholders of the Company do not participate shall not be
considered a stock split, stock dividend recapitalization, combination of
shares of the Company, or other similar event giving rise to an adjustment.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event where
all of the shareholders of the Company participate, occurring after the
date hereof, as a result of which substantially all shares of Common Stock
shall be changed into the same or a different number of shares of the same
or another class or classes of securities of the Company or another entity,
then the Holder exercising this Warrant shall receive, for the aggregate
price paid upon such exercise, the aggregate number and class of shares
which such Holder would have received if this Warrant had been exercised
immediately prior to such merger, consolidation, exchange of shares,
separation, reorganization or liquidation, or other
5
<PAGE>
similar event. If any adjustment under this Section 8(b) would create a
fractional share of Common Stock or a right to acquire a fractional share
of Common Stock, such fractional share shall be disregarded and the number
of shares subject to this Warrant shall be the next higher number of
shares, rounding all fractions upward. Whenever there shall be an
adjustment pursuant to this Section 8(b), the Company shall forthwith
notify the Holder or Holders of this Warrant of such adjustment, setting
forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated.
9. Put Agreement.
-------------
(a) The Company hereby irrevocably grants and issues to Holder the
right and option to sell to the Company (the "Put") this Warrant (to the
extent not previously exercised) for a period of 30 days immediately prior
to the expiration thereof, at a purchase price (the "Purchase Price") equal
to the Fair Market Value (as hereinafter defined) of the shares of Common
Stock issuable to Holder upon exercise of this Warrant; provided, however,
that the Put shall terminate upon the closing of a Qualified Public
Offering as defined in Section 12(c).
(b) The Company shall pay to the Holder, in cash or certified or
cashier's check, the Purchase Price in exchange for the delivery to the
Company of this Warrant within thirty (30) days of the receipt of written
notice, addressed as set forth in Section 3 hereto, from the Holder of its
intention to exercise the Put and all other documentation reasonably
required by the Company in connection therewith in order for the Company to
comply with applicable securities laws.
(c) The Fair Market Value of the shares of Common Stock of the Company
issuable pursuant to this Warrant shall be determined as follows:
(i) If after an initial public offering of the Common Stock, the
average of the closing bid and ask prices for the Common Stock (as
quoted on a national exchange) shall be the fair market value. If
prior to a public offering, the Company and the Holder shall each
appoint an independent, experienced appraiser who is a member of a
recognized professional association of business appraisers. The two
appraisers shall determine the value of the shares of Common Stock
which would be issued upon the exercise of the Warrant, taking into
consideration that such shares would constitute a minority interest,
and would lack liquidity, and further assuming that the sale would be
between a willing buyer and a willing seller, both of whom have full
knowledge of the financial and other affairs of the Company, and
neither of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more than 10%
more than the lowest of the appraisals, the Fair Market Value shall be
the average of the two appraisals. If the highest of the two
appraisals is 10% or more than the lowest of the two appraisals, then
a third appraiser shall be appointed by the two appraisers, and if
they cannot agree on a third appraiser, the American Arbitration
Association shall appoint the third appraiser. The third appraiser,
regardless of
6
<PAGE>
who appoints him or her, shall have the same qualifications as the
first two appraisers.
(iii) The Fair Market Value after the appointment of the third
appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid one-
half by the Company and one-half by the Holder.
10. Registration.
------------
(a) The Company and the holders of the Shares agree that if at any
time after the date hereof the Company shall propose to file a registration
statement with respect to any of its Common Stock on a form suitable for a
public offering (excluding any registrations pursuant to forms S-4 and S-8
or any successor forms thereof), it will give notice in writing to such
effect to the registered holder(s) of the Shares at least thirty (30) days
prior to such filing, and, at the written request of any such registered
holder, made within ten (10) days after the receipt of such notice, will
include therein at the Company's cost and expense (including the reasonable
fees and expenses of one counsel to such holder(s), but excluding
underwriting discounts, commissions and filing fees attributable to the
Shares included therein) such of the Shares as such holder(s) shall
request; provided, however, that if the offering being registered by the
Company is underwritten and if the representative of the underwriters
certifies in writing that the inclusion therein of the Shares would
materially and adversely affect the sale of the securities to be sold by
the Company thereunder, then the Company shall be required to include in
the offering only that number of securities, including the Shares, which
the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro
rata among all selling shareholders according to the total amount of
securities entitled to be included therein owned by each selling
shareholder. The obligations of the Company under this Section 10 shall
terminate with respect to a Holder of Shares when such Shares become
eligible for resale in accordance with Rule 144 under the Securities Act of
1933 within a three month period without restrictions as to volume.
(b) Whenever the Company undertakes to effect the registration of any
of the Shares, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange Commission
(the "Commission") a registration statement covering such Shares and
use its best efforts to cause such registration statement to be
declared effective by the Commission as expeditiously as possible and
to keep such registration effective until the earlier of (A) the date
when all Shares covered by the registration statement have been sold
or (B) two hundred seventy (270) days from the effective date of the
registration statement; provided, that before filing a registration
statement or prospectus or any amendment or supplements thereto, the
Company will furnish to each Holder of Shares covered by such
registration
7
<PAGE>
statement and the underwriters, if any, copies of all such documents
proposed to be filed (excluding exhibits, unless any such person shall
specifically request exhibits), which documents will be subject to the
review of such Holders and underwriters, and the Company will not file
such registration statement or any amendment thereto or any prospectus
or any supplement thereto (including any documents incorporated by
reference therein) with the Commission if (A) the underwriters, if
any, shall reasonably object to such filing or (B) if information in
such registration statement or prospectus concerning a particular
selling Holder has changed and such Holder or the underwriters, if
any, shall reasonably object. If a Holder objects to the filing of the
registration statement (which objection must be delivered to the
Company in writing), the Company may remove such Holder's Shares from
the offering and proceed to file with no further obligation to such
Holder hereunder.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the
period referred to in Section 10(b)(i) and to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement, and cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed with the Commission pursuant to
Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of copies of
such registration statement, each amendment thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), each supplement thereto and such other documents as they
may reasonably request in order to facilitate the disposition of the
Shares owned by them.
(iv) Use its best efforts to register and qualify under such
other securities laws of such jurisdictions as shall be reasonably
requested by any selling Holder and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Shares owned by
such Holder, in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as a
condition thereto to qualify to transact business or to file a general
consent to service of process in any such states or jurisdictions.
8
<PAGE>
(v) Promptly notify each selling Holder of the happening of any
event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such Shares
not later than the effective date of such registration statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and
take all such other actions as the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such
Shares (including, without limitation, effecting a stock split or a
combination of shares).
(viii) Make available for inspection by any selling Holder or
any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent
retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and independent
accountants of the Company to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement.
(ix) Promptly notify the selling Holder(s) and the underwriters,
if any, of the following events and (if requested by any such person)
confirm such notification in writing: (A) the filing of the
prospectus or any prospectus supplement and the registration statement
and any amendment or post-effective amendment thereto and, with
respect to the registration statement or any post-effective amendment
thereto, the declaration of the effectiveness of such documents, (B)
any requests by the Commission for amendments or supplements to the
registration statement or the prospectus or for additional
information, (C) the issuance or threat of issuance by the Commission
of any stop order suspending the effectiveness of the registration
statement or the initiation of any proceedings for that purpose, and
(D) the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered.
9
<PAGE>
(xi) Cooperate with the selling Holder(s) and the underwriters,
if any, to facilitate the timely preparation and delivery of
certificates representing the Shares to be sold and not bearing any
restrictive legends, and enable such Shares to be in such lots and
registered in such names as the underwriters may request at least two
(2) business days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later than
the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering, (A) make such representations and warranties to
the selling Holder(s) and the underwriters, if any, with respect to
the Shares and the registration statement as are customarily made by
issuers to selling Shareholders in primary underwritten offerings; (B)
use its best efforts to obtain "cold comfort" letters and updates
thereof from the Company's independent certified public accountants
addressed to the selling Holders and the underwriters, if any, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in
connection with primary underwritten offerings; (C) deliver such
documents and certificates as may be reasonably requested (1) by the
holders of a majority of the Shares being sold, and (2) by the
underwriters, if any, to evidence compliance with clause (A) above and
with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company; and (D) obtain
opinions of counsel to the Company and updates thereof (which counsel
and which opinions shall be reasonably satisfactory to the
underwriters, if any), covering the matters customarily covered in
opinions requested in underwritten offerings and such other matters as
may be reasonably requested by the selling Holders and underwriters or
their counsel. Such counsel shall also state that no facts have come
to the attention of such counsel which cause them to believe that such
registration statement, the prospectus contained therein, or any
amendment or supplement thereto, as of their respective effective or
issue dates, contains any untrue statement of any material fact or
omits to state any material fact necessary to make the statements
therein not misleading (except that no statement need be made with
respect to any financial statements, notes thereto or other financial
data or other expertized material contained therein). If for any
reason the Company's counsel is unable to give such opinion, the
Company shall so notify the Holders of the Shares and shall use its
best efforts to remove expeditiously all impediments to the rendering
of such opinion.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than
forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at
the end of any fiscal quarter in which the Shares are sold to
underwriters in a firm or best efforts underwritten offering, or (B)
if not sold to underwriters in
10
<PAGE>
such an offering, beginning with the first month of the first fiscal
quarter of the Company commencing after the effective date of the
registration statement, which statements shall cover such twelve-month
periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a priority
greater than or equal to those granted to Holders pursuant to this Warrant
without the prior written consent of the Holder(s) which shall not be
unreasonably withheld or delayed.
(d) The Company's obligations under Section 10(a) above with respect
to each holder of Shares are expressly conditioned upon such holder's
furnishing to the Company in writing such information concerning such
holder and the terms of such holder's proposed offering as the Company
shall reasonably request for inclusion in the registration statement. If
any registration statement including any of the Shares is filed, then the
Company shall indemnify each holder thereof (and each underwriter for such
holder and each person, if any, who controls such underwriter within the
meaning of the Securities Act) from any loss, claim, damage or liability
arising out of, based upon or in any way relating to any untrue statement
of a material fact contained in such registration statement or any omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such
holder of the Shares expressly for use in connection with such registration
statement; and such holder shall indemnify the Company (and each of its
officers and directors who has signed such registration statement, each
director, each person, if any, who controls the Company within the meaning
of the Securities Act, each underwriter for the Company and each person, if
any, who controls such underwriter within the meaning of the Securities
Act) and each other such holder against any loss, claim, damage or
liability arising from any such statement or omission which was made in
reliance upon information furnished in writing to the Company by such
holder of the Shares expressly for use in connection with such registration
statement.
(e) For purposes of this Section 10, all of the Shares shall be deemed
to be issued and outstanding.
11. Certain Notices. In case at any time the Company shall propose to:
---------------
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
11
<PAGE>
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell all or substantially
all of its assets to, another corporation; or
(e) voluntarily or involuntarily dissolve, liquidate or wind up the
affairs of the Company;
then, in any one or more of said cases, the Company shall give to the
Holder of the Warrant, by certified or registered mail, (i) at least ten
(10) days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (ii) in the case
of such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least ten (10) days' prior
written notice of the date when the same shall take place. Any notice
required by clause (i) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and any notice required
by clause (ii) shall specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the
case may be.
12. Rights of Co-Sale. Prior to the completion of a Qualified Public
-----------------
Offering (as hereinafter defined) the following shall apply:
(a) Co-Sale Right. Neither John P. Kelly, Edward J. Rutkowski, nor
-------------
Paul B. Byrum (individually a "Selling Shareholder" and collectively the
"Selling Shareholders") shall enter into any transaction that would result
in the sale by him of any Common Stock now or hereafter owned by him,
unless prior to such sale the Selling Shareholder shall give notice to
Holder of his intention to effect such sale in order that Holder may
exercise its rights under this Section 12 as hereinafter described. Such
notice shall set forth (i) the number of shares to be sold by the Selling
Shareholder, (ii) the principal terms of the sale, including the price at
which the shares are intended to be sold, and (iii) an offer by the Selling
Shareholder to use his best efforts to cause to be included with the shares
to be sold by him in the sale, on a share-by-share basis and on the same
terms and conditions, the Shares issuable or issued to Holder pursuant this
Warrant.
(b) Rejection of Co-Sale Offer. If Holder has not accepted such offer
--------------------------
in writing within a period of ten (10) days from the date of receipt of the
notice, then the Selling Shareholder shall thereafter be free for a period
of ninety (90) days to sell the number of shares specified in such notice,
at a price no greater than the price set forth in such notice and on
otherwise no more favorable terms to the Selling Shareholder than as set
forth in such notice, without any further obligation to Holder in
connection with such sale. In the event that the Selling Shareholder fails
to consummate such sale within such ninety-day period, the shares specified
in such notice shall continue to be subject to this Section.
12
<PAGE>
(c) Acceptance of Co-Sale Offer. If Holder accepts such offer in
---------------------------
writing within ten (10) day period, such acceptance shall be irrevocable
unless the Selling Shareholder shall be unable to cause to be included in
his sale the number of Shares of stock held by Holder and set forth in the
written acceptance. In that event, the Selling Shareholder and Holder
shall participate in the sale pro rata, with the Selling Shareholder and
Holder each selling half the total number of such shares to be sold in the
sale. For purposes of this Article 12, a "Qualified Public Offering" shall
be deemed to have occurred if the Company has received net proceeds of
$15,000,000 and its shares are traded on Nasdaq or a United States
securities exchange.
13. Governing Law. This warrant shall be governed by the laws of the
-------------
State of Tennessee applicable to agreements made entirely within the State.
14. Severability. If any provision(s) of this Warrant or the application
------------
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
15. Counterparts. This Warrant may be executed in any number of
------------
counterparts and be different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
16. Jurisdiction and Venue. The Company hereby consents to the
----------------------
jurisdiction of the courts of the State of Tennessee and the United States
District Court for the Middle District of Tennessee, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any suit, action or other proceeding arising out of any of
its obligations arising under this Agreement or with respect to the transactions
contemplated hereby, and expressly waives any and all objections it may have as
to venue in any such courts.
17. Stock Options. The Company may grant stock options to employees
--------------
representing up to 20% of the common stock of the Company, provided such options
granted after the date hereof shall have an exercise price equal to or greater
than the fair market value of the shares issuable thereunder on the date of
issuance ("Fair Exercise Price"). Any stock options to employees granted after
the date hereof with an exercise price below the Fair Exercise Price for such
options or representing in excess of 20% of the Common Stock of the Company
shall be subject to the anti-dilution provisions in Section 4(c).
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
MEGAMARKETING CORPORATION, a
Georgia corporation
By: /s/ John P. Kelly
--------------------------------
Title: John P. Kelly
-----------------------------
SIRROM INVESTMENTS, INC. a
Tennessee corporation
By: /s/ Elizabeth Lurding
--------------------------------
Title: Vice President
-----------------------------
The undersigned Shareholders join in the execution of this Warrant for the
purposes of acknowledging and agreeing to be bound by Section 12 hereof.
/s/ John P. Kelly
------------------------------------
John P. Kelly
/s/ Edward J. Rutkowski
------------------------------------
Edward J. Rutkowski
/s/ Paul B. Byrum
------------------------------------
Paul B. Byrum
14
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and Edward J. Rutkowski, an individual
resident of Georgia (the "Executive"). References herein to the "Company" apply
to MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or
one or more of the Subsidiaries on the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and the Company,
including, without limitation, the promises and covenants of the parties set
forth herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters of such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is
----------------------------------------
hereby employed full time as the Executive Vice President, Mergers and
Acquisitions of the Company. Executive shall devote his or her full time,
energy, and skill to such office and shall do and perform all services and acts
necessary or advisable to fulfill the duties of such office. In his or her
capacity as an officer of the Company, Executive shall report to the Chief
Executive Officer (the "CEO") of the Company, and shall conduct and perform such
additional services and activities as may be determined from time to time by the
CEO. Executive's authority and
<PAGE>
responsibility in the Company shall at all times be subject to the review and
discretion of the Company's board of directors (the "Board"), which shall have
the final authority to make decisions regarding the business of the Company.
Executive acknowledges that he or she has a duty of loyalty to the Company and
its Subsidiaries and shall not engage, directly and indirectly, in any other
business or activity that could materially and adversely affect the Company's or
any Subsidiary's business or the Executive's ability to perform his or her
duties under this Agreement, provided, however, that the Executive shall be free
to participate in board, civic and charitable activities so long as such
activities do not interfere with his or her duties and responsibilities
hereunder.
Section 1.3 Compensation. For services to be rendered by Executive
------------
under this Agreement, Company shall pay Executive as follows:
(a) Base Salary. Executive shall be paid a minimum annual
-----------
compensation of $100,000.00 (the "Base Salary"). At the sole discretion of the
Board, Executive's annual gross salary may be increased from time to time
throughout the term of this Agreement. At no time during the term hereof shall
the Executive's base salary be decreased from the amount of the base salary then
in effect.
(b) Bonus. Executive shall be eligible to receive a bonus at the
-----
end of each fiscal year of the Company for which this Agreement is in effect,
upon satisfaction of the terms and conditions set forth on Schedule A. Such
----------
bonus shall be paid to Executive only upon the completion of an audit by an
independent accounting firm selected by the Company, which audit demonstrates
that the conditions set forth on Schedule A have been satisfied.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used during any calendar year shall be forfeited, except that one
week's unused vacation may be carried forward to the year following the year in
which such vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
-----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate,
---------------
at the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
(d) Other. Executive shall be entitled to the reimbursement of
-----
reasonable dues for memberships in luncheon and/or dinner clubs, which
reimbursement shall not exceed $200.00 per month.
-2-
<PAGE>
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The Company expects
Executive to attend and participate in continuing education seminars and courses
with respect to the direct mail services industry and business management
related to his or her duties, and the Company will reimburse all ordinary and
necessary expenses of such attendance and participation. Such continuing
education courses and seminars will be scheduled in conjunction with the other
officers of the Company to assure uninterrupted performance of duties during the
Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the CEO of
the Company. Under no circumstances will Executive work for any competitor or
have any financial interest in any competitor of the Company; provided, however,
Executive may invest in up to one percent (1%) of the publicly traded stock or
securities of any company whose stock or securities are traded on national
exchange.
Section 2.2 Ownership of Work Product. The Company shall own all
-------------------------
Work Product (as defined below) arising during the course of Executive's
employment (prior, present or future), including any part-time consulting or
contract programming work Executive may have performed previously or in the
future for the Company. For purposes hereof, "Work Product" shall mean all
intellectual property rights, including all Trade Secrets (as defined below),
United States and international copyrights, patentable inventions, and other
intellectual property rights in any programming, documentation, technology or
other work product that relates to the Company, its business or its customers
and that employee conceives, develops, or delivers to the Company at any time
during his or her employment, during or outside normal working hours, in or away
from the facilities of the Company, and whether or not requested by the Company.
If the Work Product contains any materials, programming or intellectual property
rights that Executive conceived or developed prior to, and independent of,
Executive's work for the Company, Executive agrees to point out the pre-existing
items to the Company and Executive grants the Company a worldwide, unrestricted,
royalty-free right, including the right to sublicense such items. Executive
agrees to take such actions and execute such further acknowledgments and
assignments as the Company may reasonably request to give effect to this
provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to
---------------------------
maintain in strict
-3-
<PAGE>
confidence and, except as necessary to perform his or her duties for the
Company, Executive agrees not to use or disclose any Trade Secrets of the
Company during or after his or her employment. As provided by Georgia statutes,
"Trade Secret" shall mean any information (including, but not limited to,
technical or non-technical data, a formula, a pattern, a compilation, a program,
a device, a method, a technique, a drawing, a process, financial data, financial
plans, product plans, or a list of actual or potential customers) that: (i)
derives economic value, actual or potential, from not being generally known to,
and not being readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
Section 2.4 Protection of Other Confidential Information. In
--------------------------------------------
addition, Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for the Company, not to use or disclose
any Confidential Business Information of the Company during his or her
employment and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
internal, non-public information (other than Trade Secrets already addressed
above) concerning the Company's financial position and results of operations
(including revenues, assets, net income, etc.); annual and long-range business
plans; product or service plans; marketing plans and methods; training,
educational and administrative manuals; customer and supplier information and
purchase histories; and employee lists. The provisions of Sections 2.3 and 2.4
above shall also apply to protect Trade Secrets and Confidential Business
Information of third parties provided to the Company under an obligation of
secrecy.
Section 2.5 Return of Materials. Executive shall surrender to
-------------------
the Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples, price lists, drawings, customer lists,
prospect data, or other material of any nature whatsoever (in tangible or
electronic form) in the Executive's possession or control, including all copies
thereof, relating to the Company, its business, or its customers. Upon the
request of the Company, Executive shall certify in writing compliance with the
foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment
----------------------------
with the Company, and for a period of one (1) year after termination of
Executive's employment with the Company for any reason, Executive shall not
solicit or attempt to solicit Customers to induce or encourage them to acquire
or obtain from anyone other than the Company, any product or service competitive
with or substitute for any Company Product, or otherwise to induce or encourage
them to reduce or discontinue the purchase or license of their requirements for
products or services available from the Company. For purposes of this Section, a
"Customer" refers to any person or group of persons with whom Executive had
direct material contact with regard to the selling, delivery or support of
Company Products, including servicing such person's or group's account, during
the period of two (2) years preceding termination of Executive's employment; and
"Company Products" refers to the products and services that the Company offered,
sold or had under consideration for
-4-
<PAGE>
development or distribution within six (6) months of the date of termination of
Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year
---------------------------
after termination of Executive's employment with the Company for any reason,
Executive shall not, alone or in concert with others, induce or attempt to
induce any employee, agent, independent contractor, or other personnel of the
Company to terminate or reduce his, her or their relationship with the Company,
or recruit or attempt to recruit such persons to accept employment or a contract
with another business that would have the effect of terminating or reducing his,
her or their relationship with the Company.
(c) Independent Provisions. The provisions in each of the above
----------------------
Sections 2.6(a) and (b) are independent, and the unenforceability of any one
provision shall not affect the enforceability of any other provision.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive
incapable of performing his or her duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement shall mean
that the Executive shall have:
(i) committed an intentional act of fraud, embezzlement or
theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
-5-
<PAGE>
(iv) been convicted of a felony or any similar crime carrying
a prison term of at least one year (regardless of whether imprisonment is
actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations,
as determined and articulated by the Board; provided, however, that in the event
of this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive
has failed to meet performance expectations, the Company shall furnish to
Executive in writing a notice of proposed termination setting forth a specific
statement of the deficiencies in his or her performance. Executive shall then
have a period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
(a) a material breach by the Company of any material provision of
this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
voting power of the voting stock of the Company; (ii) the Company consolidates
with, or merges with or into another corporation or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person or any corporation, in
-6-
<PAGE>
any such event pursuant to a transaction in which the outstanding voting stock
of the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where (A) the outstanding voting stock
of the Company is changed into or exchanged for (x) voting stock of the
surviving or transferee corporation or (y) cash, securities (whether or not
including voting stock) or other property, and (B) the holders of the voting
stock of the Company immediately prior to such transaction own, directly or
indirectly, not less than 40% of the voting power of the voting stock of the
surviving corporation immediately after such transaction; or (iii) individuals
who immediately following the Merger constitute the Board of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of two-thirds or more of the directors then still in office who were
directors immediately following the Merger or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of the Company then in office; or (iv) the Company is
liquidated or dissolved or adopts a plan of liquidation, provided, however, that
a Change in Control shall not include the Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary at his or her then current rate, to be paid in twelve
(12) monthly installments. For purposes of this Agreement, a demotion or
requirement of relocation from the Tampa, Florida area shall be deemed to be a
termination without Cause.
(b) Voluntary Termination. If Executive voluntarily resigns for a
---------------------
reason other than Good Reason, Executive shall be entitled to severance pay
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments. Executive shall provide a minimum of thirty (30)
days prior written notice of his or her resignation to the CEO or the Board, as
appropriate. In the event Executive shall provide thirty (30) days prior written
notice of his or her intent to resign, the Company may accept such resignation
effective as of any date during such thirty (30) day period as the Company deems
appropriate, provided that Executive shall receive from the Company his or her
salary and be entitled to participate at the Company's expense in any Company
sponsored benefit programs in which he or she was a participant as of the
effective date of his or her resignation for the duration of such thirty (30)
day period.
(c) Termination for Cause. Executive shall not be entitled to any
---------------------
severance pay whatsoever if his or her employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Executive shall
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay equal to six (6) months' salary at his or her then current rate,
to be paid in six (6) monthly installments.
-7-
<PAGE>
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all
------
communications including, without limitation, notices, consents, requests or
approvals provided for herein shall be in writing and shall be deemed to have
been duly given when personally delivered, or five (5) business days after
having been mailed by United States registered mail or certified mail, return
receipt requested, postage prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive office or to
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
--------
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
Section 4.4 Termination of Prior Employment Agreements; Entire
--------------------------------------------------
Agreement. This Agreement supersedes any other agreements, oral or written,
- ---------
between the parties with respect to the subject matter hereof, and contains all
of the agreements and understandings between the parties with respect to the
employment of Executive by the Company. Any waiver or modification of any term
of this Agreement shall be effective only if it is set forth in a writing signed
by both parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or delegable by the Company. "Successor" shall mean any successor in
interest, including, without limitation, any entity, individual or group of
persons acquiring directly or indirectly all
-8-
<PAGE>
or substantially all of the stock, business or assets of the Company, as the
case may be, whether by sale, merger, consolidation, reorganization or
otherwise.
(b) The Company shall require any Successor to agree at the time of
becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
--------
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this Agreement
-----------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in a writing signed by Executive and the Company. No
waiver by a party hereto at any time of any breach by another party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
Section 4.9 Construction. This Agreement is being executed and
------------
delivered, and is intended to be performed in the State of Georgia and shall be
construed and enforced in accordance with the laws of the State of Georgia in
all respects.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "Executive"
By: /s/ John P. Kelly By: /s/ Edward J. Rutkowski
----------------------------- --------------------------------
John P. Kelly Edward J. Rutkowski
- -------------------------------- -----------------------------------
Print Name Print Name
President Print Residence Address:
- --------------------------------
Print Title
-----------------------------------
-----------------------------------
-10-
<PAGE>
SCHEDULE A
PERFORMANCE BONUS
Executive's annual bonus shall be computed as follows:
Executive shall receive
If the Company achieves: the following bonus payment:
- ------------------------ ----------------------------
100% of projected Company EBITDA 25% of Base Salary
110% of projected Company EBITDA 35% of Base Salary
125% of projected Company EBITDA 50% of Base Salary
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and Terry Swanda, an individual resident of
Florida (the "Executive"). References herein to the "Company" apply to
MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or one
or more of the Subsidiaries on the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and the Company,
including, without limitation, the promises and covenants of the parties set
forth herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters of such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is hereby
----------------------------------------
employed full time as the Executive Vice President, Operations of the Company
and as a member of the senior leadership team of the Company. Executive shall
devote his or her full time, energy, and skill to such office and shall do and
perform all services and acts necessary or advisable to fulfill the duties of
such office. In his or her capacity as an officer of the Company, Executive
shall report to the Chief Executive Officer (the "CEO") of the Company, and
shall conduct and perform such additional services and activities as may be
determined from time to time by
<PAGE>
the CEO. Executive's authority and responsibility in the Company shall at all
times be subject to the review and discretion of the Company's board of
directors (the "Board"), which shall have the final authority to make decisions
regarding the business of the Company. Executive acknowledges that he or she has
a duty of loyalty to the Company and its Subsidiaries and shall not engage,
directly and indirectly, in any other business or activity that could materially
and adversely affect the Company's or any Subsidiary's business or the
Executive's ability to perform his or her duties under this Agreement, provided,
however, that the Executive shall be free to participate in board, civic and
charitable activities so long as such activities do not interfere with his or
her duties and responsibilities hereunder.
Section 1.3 Compensation. For services to be rendered by Executive under
------------
this Agreement, Company shall pay Executive as follows:
(a) Base Salary. Executive shall be paid a minimum annual
-----------
compensation of $100,000.00 (the "Base Salary"). At the sole discretion of the
Board, Executive's annual gross salary may be increased from time to time
throughout the term of this Agreement. At no time during the term hereof shall
the Executive's base salary be decreased from the amount of the base salary then
in effect.
(b) Bonus. Executive shall be eligible to receive a bonus at the
-----
end of each fiscal year of the Company for which this Agreement is in effect,
upon satisfaction of the terms and conditions set forth on Schedule A. Such
----------
bonus shall be paid to Executive only upon the completion of an audit by an
independent accounting firm selected by the Company, which audit demonstrates
that the conditions set forth on Schedule A have been satisfied.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used during any calendar year shall be forfeited, except that one
week's unused vacation may be carried forward to the year following the year in
which such vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate, at
---------------
the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The
-2-
<PAGE>
Company expects Executive to attend and participate in continuing education
seminars and courses with respect to the direct mail services industry and
business management related to his or her duties, and the Company will reimburse
all ordinary and necessary expenses of such attendance and participation. Such
continuing education courses and seminars will be scheduled in conjunction with
the other officers of the Company to assure uninterrupted performance of duties
during the Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the CEO of
the Company. Under no circumstances will Executive work for any competitor or
have any financial interest in any competitor of the Company; provided, however,
Executive may invest in up to one percent (1%) of the publicly traded stock or
securities of any company whose stock or securities are traded on national
exchange.
Section 2.2 Ownership of Work Product. The Company shall own all Work
-------------------------
Product (as defined below) arising during the course of Executive's employment
(prior, present or future), including any part-time consulting or contract
programming work Executive may have performed previously or in the future for
the Company. For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets (as defined below), United States
and international copyrights, patentable inventions, and other intellectual
property rights in any programming, documentation, technology or other work
product that relates to the Company, its business or its customers and that
employee conceives, develops, or delivers to the Company at any time during his
or her employment, during or outside normal working hours, in or away from the
facilities of the Company, and whether or not requested by the Company. If the
Work Product contains any materials, programming or intellectual property rights
that Executive conceived or developed prior to, and independent of, Executive's
work for the Company, Executive agrees to point out the pre-existing items to
the Company and Executive grants the Company a worldwide, unrestricted, royalty-
free right, including the right to sublicense such items. Executive agrees to
take such actions and execute such further acknowledgments and assignments as
the Company may reasonably request to give effect to this provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to maintain in
---------------------------
strict confidence and, except as necessary to perform his or her duties for the
Company, Executive agrees not to use or disclose any Trade Secrets of the
Company during or after his or her employment. As provided by Florida statutes,
"Trade Secret" shall mean any information, including but not limited to
technical or non-technical data, a formula, a pattern, a compilation, a program,
a device, a method, a technique, a drawing, a process, financial data, financial
plans, product plans, information on customers, or a list of actual or potential
customers or suppliers,
-3-
<PAGE>
which: (i) derives economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons
who can obtain economic value from its disclosure or use, and (ii) is the
subject of efforts that are reasonable under the circumstances to maintain its
secrecy.
Section 2.4 Protection of Other Confidential Information. In addition,
--------------------------------------------
Executive agrees to maintain in strict confidence and, except as necessary to
perform his or her duties for the Company, not to use or disclose any
Confidential Business Information of the Company during his or her employment
and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
non-public information of a competitively sensitive or personal nature, other
than Trade Secrets, acquired by the Executive, directly or indirectly, in
connection with the Executive's employment (including his employment with the
Company prior to the date of this Agreement), including (without limitation)
oral and written information concerning the Company or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net
income, etc.), annual and long-range business plans, marketing plans and
methods, account invoices, oral or written customer information, and personnel
information. Confidential Business Information also includes information
recorded in manuals, memoranda, projections, minutes, plans, computer programs,
and records, whether or not legended or otherwise identified by the Company and
its affiliates as Confidential Business Information, as well as information
which is the subject of meetings and discussions and not so recorded; provided,
--------
however, that Confidential Business Information shall not include information
- -------
that is generally available to the public, other than as a result of disclosure,
directly or indirectly, by the Executive, or was available to the Executive on a
non-confidential basis prior to its disclosure to the Executive. The provisions
of Sections 2.3 and 2.4 above shall also apply to protect Trade Secrets and
Confidential Business Information of third parties provided to the Company under
an obligation of secrecy.
Section 2.5 Return of Materials. Executive shall surrender to the
-------------------
Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples, price lists, drawings, customer lists,
prospect data, or other material of any nature whatsoever (in tangible or
electronic form) in the Executive's possession or control, including all copies
thereof, relating to the Company, its business, or its customers. Upon the
request of the Company, Executive shall certify in writing compliance with the
foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment with
----------------------------
the Company, and for a period of one (1) year after termination of Executive's
employment with the Company for any reason, Executive shall not solicit or
attempt to solicit Customers to induce or encourage them to acquire or obtain
from anyone other than the Company, any product or service competitive with or
substitute for any Company Product, or otherwise to induce or encourage them to
reduce or discontinue the purchase or license of their requirements for products
or services available from the Company. For purposes of this Section, a
"Customer" refers to any person or group of persons with whom Executive had
-4-
<PAGE>
direct material contact with regard to the selling, delivery or support of
Company Products, including servicing such person's or group's account, during
the period of two (2) years preceding termination of Executive's employment; and
"Company Products" refers to the products and services that the Company offered,
sold or had under consideration for development or distribution within six (6)
months of the date of termination of Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year after
---------------------------
termination of Executive's employment with the Company for any reason, Executive
shall not, alone or in concert with others, induce or attempt to induce any
employee, agent, independent contractor, or other personnel of the Company to
terminate or reduce his, her or their relationship with the Company, or recruit
or attempt to recruit such persons to accept employment or a contract with
another business that would have the effect of terminating or reducing his, her
or their relationship with the Company.
(c) No Competition. If Executive is terminated for Cause or if
--------------
Executive resigns for any reason other than Good Reason, then for a period of
one (1) year following the termination of Executive's employment, Executive
shall not (without the prior written consent of the Company) compete with the
Company in any way, including, but not limited to, (i) serving as an officer of,
director of, employee of, or consultant to, (ii) directly or indirectly forming,
or (iii) directly or indirectly acquiring more than a 5% investment in, a
Competing Business (as defined below) in the Territory (as defined below);
provided, however, that if Executive is terminated for any reason after a Change
- -------- -------
in Control or resigns for Good Reason, then there shall not be a non-compete
period under this Section 2.6(c).
(d) Acknowledgment; Independent Provisions; Modification. Executive
----------------------------------------------------
acknowledges and agrees that: (i) the covenants and agreements contained in this
Article 2 are the essence of this Agreement; (ii) that Executive has received
good, adequate and valuable consideration for each of these covenants; (iii)
each of these covenants is reasonable and necessary to protect and preserve the
interests and properties of the Company; (iv) the Company is and will be engaged
in and throughout the Territory in the Business; (v) a Competing Business could
be engaged in from any place in the Territory; and (vi) the Company has a
legitimate business interest in restricting Executive's activities throughout
the Territory. Executive also acknowledges and agrees that: (i) irreparable loss
and damage will be suffered by the Company should Executive breach any of these
covenants and agreements; (ii) each of these covenants and agreements in Article
2 is separate, distinct and severable not only from the other covenants and
agreements but also from the remaining provisions of this Agreement; and (iii)
the unenforceability of any covenants or agreements shall not affect the
validity or enforceability of any of the other covenants or agreements or any
other provision or provisions of this Agreement. Executive acknowledges and
agrees that if any of the provisions of Article 2 shall ever be deemed to exceed
the time, activity, or geographic limitations permitted by applicable law, then
such provisions shall be and hereby are reformed to the maximum time, activity,
or geographical limitations permitted by applicable law.
(e) Definitions for Article 2; Further Negotiation. For purposes of
----------------------------------------------
this Article 2; "Business" shall mean the provision of direct marketing
services, including design,
-5-
<PAGE>
printing and production, fulfillment services, agency services, and development
and execution of direct mail programs, and any other related business that the
Company is engaged in as of the termination of Executive's employment;
"Competing Business" shall mean any business that, in whole or in part, is the
same or substantially the same as the Business; and "Territory" shall mean the
United States of America. Executive and the Company hereby agree that they will
negotiate in good faith to amend this Agreement from time to time to modify the
terms of this Article 2, the definition of the term "Territory," and the
definition of the term "Business," to reflect changes in the Company's business
and affairs so that the scope of the limitations placed on Executive's
activities by this Article 2 accomplishes the parties' intent in relation to the
then current facts and circumstances. Any such amendment shall be effective only
when completed in writing and signed by Executive and the Company.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive incapable
of performing his or her duties for more than one hundred twenty (120) calendar
days (termination under this Section 3.1(a) shall be deemed termination without
Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement shall mean that
the Executive shall have:
(i) committed an intentional act of fraud, embezzlement or
theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime carrying a
prison term of at least one year (regardless of whether imprisonment is actually
imposed);
-6-
<PAGE>
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations, as
determined and articulated by the Board; provided, however, that in the event of
this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive has
failed to meet performance expectations, the Company shall furnish to Executive
in writing a notice of proposed termination setting forth a specific statement
of the deficiencies in his or her performance. Executive shall then have a
period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
(a) a material breach by the Company of any material provision of
this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
voting power of the voting stock of the Company; (ii) the Company consolidates
with, or merges with or into another corporation or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person or any corporation, in any such event pursuant to a
transaction in which the outstanding voting stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding voting stock of the Company is changed
into or
-7-
<PAGE>
exchanged for (x) voting stock of the surviving or transferee corporation or (y)
cash, securities (whether or not including voting stock) or other property, and
(B) the holders of the voting stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than 40% of the voting power
of the voting stock of the surviving corporation immediately after such
transaction; or (iii) individuals who immediately following the Merger
constitute the Board of the Company (together with any new directors whose
election by such Board or whose nomination for election by the shareholders of
the Company was approved by a vote of two-thirds or more of the directors then
still in office who were directors immediately following the Merger or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of the Company then in office; or
(iv) the Company is liquidated or dissolved or adopts a plan of liquidation,
provided, however, that a Change in Control shall not include the Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary at his or her then current rate, to be paid in twelve
(12) monthly installments. For purposes of this Agreement, a demotion or
requirement of relocation from the Tampa, Florida area shall be deemed to be a
termination without Cause.
(b) Voluntary Termination. If Executive voluntarily resigns for a
---------------------
reason other than Good Reason, Executive shall be entitled to severance pay
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments. Executive shall provide a minimum of thirty (30)
days prior written notice of his or her resignation to the CEO or the Board, as
appropriate. In the event Executive shall provide thirty (30) days prior written
notice of his or her intent to resign, the Company may accept such resignation
effective as of any date during such thirty (30) day period as the Company deems
appropriate, provided that Executive shall receive from the Company his or her
salary and be entitled to participate at the Company's expense in any Company
sponsored benefit programs in which he or she was a participant as of the
effective date of his or her resignation for the duration of such thirty (30)
day period.
(c) Termination for Cause. Executive shall not be entitled to any
---------------------
severance pay whatsoever if his or her employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Executive shall
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay equal to six (6) months' salary at his or her then current rate,
to be paid in six (6) monthly installments.
-8-
<PAGE>
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all communications
------
including, without limitation, notices, consents, requests or approvals provided
for herein shall be in writing and shall be deemed to have been duly given when
personally delivered, or five (5) business days after having been mailed by
United States registered mail or certified mail, return receipt requested,
postage prepaid, addressed to the Company (to the attention of the Secretary of
the Company) at its principal executive office or to Executive at his or her
principal residence, or to such other address as any party may have furnished to
the other in writing and in accordance herewith, except that notices of change
of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to violate
--------
any public policy of any jurisdiction in which this Agreement may be enforced.
If any provision of this Agreement or the application of any provision hereof to
any person or circumstances is held invalid, unenforceable or otherwise illegal,
the remainder of this Agreement and the application of such provision to any
other person or circumstances shall not be affected, and the provision so held
to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it valid, enforceable and
legal; provided, however, if the provision so held to be invalid, unenforceable
or otherwise illegal constituted a material inducement to a party's execution
and delivery of this Agreement, then such provision shall not be reformed unless
prior to any reformation that party agrees to be bound by the reformation.
Section 4.4 Termination of Prior Employment Agreements; Entire Agreement.
------------------------------------------------------------
This Agreement supersedes any other agreements, oral or written, between the
parties with respect to the subject matter hereof, and contains all of the
agreements and understandings between the parties with respect to the employment
of Executive by the Company. Any waiver or modification of any term of this
Agreement shall be effective only if it is set forth in a writing signed by both
parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or delegable by the Company. "Successor" shall mean any successor in
interest, including, without limitation, any entity, individual or group of
persons acquiring directly or indirectly all or substantially all of the stock,
business or assets of the Company, as the case may be, whether by sale, merger,
consolidation, reorganization or otherwise.
-9-
<PAGE>
(b) The Company shall require any Successor to agree at the time of
becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the parties
shall, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
--------
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this Agreement may
-----------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by Executive and the Company. No waiver by a
party hereto at any time of any breach by another party hereto or compliance
with any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same Agreement.
Section 4.9 Construction. This Agreement is being executed and delivered,
------------
and is intended to be performed in the State of Florida and shall be construed
and enforced in accordance with the laws of the State of Florida in all
respects.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "EXECUTIVE"
BY: /S/ JOHN P. KELLY BY: /S/ THERESA SWANDA
------------------ -------------------
JOHN P. KELLY THERESA SWANDA
- -------------- ---------------
PRINT NAME PRINT NAME
PRESIDENT PRINT RESIDENCE ADDRESS:
- ----------
PRINT TITLE
-----------------------------------------
-----------------------------------------
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<PAGE>
SCHEDULE A
PERFORMANCE BONUS
Executive's annual bonus shall be computed as follows:
Executive shall receive
If the Company achieves: the following bonus payment:
- ----------------------- ---------------------------
100% of projected Company EBITDA 25% of Base Salary
110% of projected Company EBITDA 35% of Base Salary
125% of projected Company EBITDA 50% of Base Salary
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and John P. Kelly, an individual resident
of Florida (the "Executive"). References herein to the "Company" apply to
MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or
one or more of the Subsidiaries on the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and the Company,
including, without limitation, the promises and covenants of the parties set
forth herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters of such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is
----------------------------------------
hereby employed full time as the Chief Executive Officer and President of the
Company and as a member of the senior leadership team of the Company. Executive
shall devote his or her full time, energy, and skill to such office and shall do
and perform all services and acts necessary or advisable to fulfill the duties
of such office. In his or her capacity as an officer of the Company, Executive
shall report to the Company's board of directors, and shall conduct and perform
such additional services and activities as may be determined from time to time
by the board of
<PAGE>
directors (the "Board"). Executive's authority and responsibility in the Company
shall at all times be subject to the review and discretion of the Board, which
shall have the final authority to make decisions regarding the business of the
Company. Executive acknowledges that he or she has a duty of loyalty to the
Company and its Subsidiaries and shall not engage, directly and indirectly, in
any other business or activity that could materially and adversely affect the
Company's or any Subsidiary's business or the Executive's ability to perform his
or her duties under this Agreement, provided, however, that the Executive shall
be free to participate in board, civic and charitable activities so long as such
activities do not interfere with his or her duties and responsibilities
hereunder.
Section 1.3 Compensation. For services to be rendered by Executive
------------
under this Agreement, Company shall pay Executive as follows:
(a) Base Salary. Executive shall be paid a minimum annual
-----------
compensation of $125,000.00 (the "Base Salary"). At the sole discretion of the
Board, Executive's annual gross salary may be increased from time to time
throughout the term of this Agreement. At no time during the term hereof shall
the Executive's base salary be decreased from the amount of the base salary then
in effect.
(b) Bonus. Executive shall be eligible to receive a bonus at the
-----
end of each fiscal year of the Company for which this Agreement is in effect,
upon satisfaction of the terms and conditions set forth on Schedule A. Such
----------
bonus shall be paid to Executive only upon the completion of an audit by an
independent accounting firm selected by the Company, which audit demonstrates
that the conditions set forth on Schedule A have been satisfied.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used during any calendar year shall be forfeited, except that one
week's unused vacation may be carried forward to the year following the year in
which such vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate, at
---------------
the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
(d) Other. Executive shall be entitled to the reimbursement of
-----
reasonable dues for memberships in luncheon and/or dinner clubs, which
reimbursement shall not exceed $200.00 per month.
-2-
<PAGE>
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The Company expects
Executive to attend and participate in continuing education seminars and courses
with respect to the direct mail services industry and business management
related to his or her duties, and the Company will reimburse all ordinary and
necessary expenses of such attendance and participation. Such continuing
education courses and seminars will be scheduled in conjunction with the other
officers of the Company to assure uninterrupted performance of duties during the
Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the Chief
Executive Officer ("CEO") of the Company. Under no circumstances will Executive
work for any competitor or, with the exception of Bullseye Target Marketing,
have any financial interest in any competitor of the Company; provided, however,
Executive may invest in up to one percent (1%) of the publicly traded stock or
securities of any company whose stock or securities are traded on national
exchange.
Section 2.2 Ownership of Work Product. The Company shall own all Work
-------------------------
Product (as defined below) arising during the course of Executive's employment
(prior, present or future), including any part-time consulting or contract
programming work Executive may have performed previously or in the future for
the Company. For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets (as defined below), United States
and international copyrights, patentable inventions, and other intellectual
property rights in any programming, documentation, technology or other work
product that relates to the Company, its business or its customers and that
employee conceives, develops, or delivers to the Company at any time during his
or her employment, during or outside normal working hours, in or away from the
facilities of the Company, and whether or not requested by the Company. If the
Work Product contains any materials, programming or intellectual property rights
that Executive conceived or developed prior to, and independent of, Executive's
work for the Company, Executive agrees to point out the pre-existing items to
the Company and Executive grants the Company a worldwide, unrestricted,
royalty-free right, including the right to sublicense such items. Executive
agrees to take such actions and execute such further acknowledgments and
assignments as the Company may reasonably request to give effect to this
provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to maintain
---------------------------
in strict
-3-
<PAGE>
confidence and, except as necessary to perform his or her duties for the
Company, Executive agrees not to use or disclose any Trade Secrets of the
Company during or after his or her employment. As provided by Florida statutes,
"Trade Secret" shall mean any information, including but not limited to
technical or non-technical data, a formula, a pattern, a compilation, a program,
a device, a method, a technique, a drawing, a process, financial data, financial
plans, product plans, information on customers, or a list of actual or potential
customers or suppliers, which: (i) derives economic value, actual or potential,
from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
Section 2.4 Protection of Other Confidential Information. In
--------------------------------------------
addition, Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for the Company, not to use or disclose
any Confidential Business Information of the Company during his or her
employment and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
non-public information of a competitively sensitive or personal nature, other
than Trade Secrets, acquired by the Executive, directly or indirectly, in
connection with the Executive's employment (including his employment with the
Company prior to the date of this Agreement), including (without limitation)
oral and written information concerning the Company or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net
income, etc.), annual and long-range business plans, marketing plans and
methods, account invoices, oral or written customer information, and personnel
information. Confidential Business Information also includes information
recorded in manuals, memoranda, projections, minutes, plans, computer programs,
and records, whether or not legended or otherwise identified by the Company and
its affiliates as Confidential Business Information, as well as information
which is the subject of meetings and discussions and not so recorded; provided,
--------
however, that Confidential Business Information shall not include information
- -------
that is generally available to the public, other than as a result of disclosure,
directly or indirectly, by the Executive, or was available to the Executive on a
non-confidential basis prior to its disclosure to the Executive. The provisions
of Sections 2.3 and 2.4 above shall also apply to protect Trade Secrets and
Confidential Business Information of third parties provided to the Company under
an obligation of secrecy.
Section 2.5 Return of Materials. Executive shall surrender to the
-------------------
Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples, price lists, drawings, customer lists,
prospect data, or other material of any nature whatsoever (in tangible or
electronic form) in the Executive's possession or control, including all copies
thereof, relating to the Company, its business, or its customers. Upon the
request of the Company, Executive shall certify in writing compliance with the
foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment
----------------------------
with the Company, and for a period of one (1) year after termination of
Executive's employment with
-4-
<PAGE>
the Company for any reason, Executive shall not solicit or attempt to solicit
Customers to induce or encourage them to acquire or obtain from anyone other
than the Company, any product or service competitive with or substitute for any
Company Product, or otherwise to induce or encourage them to reduce or
discontinue the purchase or license of their requirements for products or
services available from the Company. For purposes of this Section, a "Customer"
refers to any person or group of persons with whom Executive had direct material
contact with regard to the selling, delivery or support of Company Products,
including servicing such person's or group's account, during the period of two
(2) years preceding termination of Executive's employment; and "Company
Products" refers to the products and services that the Company offered, sold or
had under consideration for development or distribution within six (6) months of
the date of termination of Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year
---------------------------
after termination of Executive's employment with the Company for any reason,
Executive shall not, alone or in concert with others, induce or attempt to
induce any employee, agent, independent contractor, or other personnel of the
Company to terminate or reduce his, her or their relationship with the Company,
or recruit or attempt to recruit such persons to accept employment or a contract
with another business that would have the effect of terminating or reducing his,
her or their relationship with the Company.
(c) No Competition. If Executive is terminated for Cause or if
--------------
Executive resigns for any reason other than Good Reason, then for a period of
one (1) year following the termination of Executive's employment, Executive
shall not (without the prior written consent of the Company) compete with the
Company in any way, including, but not limited to, (i) serving as an officer of,
director of, employee of, or consultant to, (ii) directly or indirectly forming,
or (iii) directly or indirectly acquiring more than a 5% investment in, a
Competing Business (as defined below) in the Territory (as defined below);
provided, however, that if Executive is terminated for any reason after a Change
- -------- -------
in Control or resigns for Good Reason, then there shall not be a non-compete
period under this Section 2.6(c).
(d) Acknowledgment; Independent Provisions; Modification.
------------------------------------------------------
Executive acknowledges and agrees that: (i) the covenants and agreements
contained in this Article 2 are the essence of this Agreement; (ii) that
Executive has received good, adequate and valuable consideration for each of
these covenants; (iii) each of these covenants is reasonable and necessary to
protect and preserve the interests and properties of the Company; (iv) the
Company is and will be engaged in and throughout the Territory in the Business;
(v) a Competing Business could be engaged in from any place in the Territory;
and (vi) the Company has a legitimate business interest in restricting
Executive's activities throughout the Territory. Executive also acknowledges and
agrees that: (i) irreparable loss and damage will be suffered by the Company
should Executive breach any of these covenants and agreements; (ii) each of
these covenants and agreements in Article 2 is separate, distinct and severable
not only from the other covenants and agreements but also from the remaining
provisions of this Agreement; and (iii) the unenforceability of any covenants or
agreements shall not affect the validity or enforceability of any of the other
covenants or agreements or any other provision or provisions of this Agreement.
Executive acknowledges and agrees that if any of the provisions
-5-
<PAGE>
of Article 2 shall ever be deemed to exceed the time, activity, or geographic
limitations permitted by applicable law, then such provisions shall be and
hereby are reformed to the maximum time, activity, or geographical limitations
permitted by applicable law.
(e) Definitions for Article 2; Further Negotiation. For purposes of
----------------------------------------------
this Article 2; "Business" shall mean the provision of direct marketing
services, including design, printing and production, fulfillment services,
agency services, and development and execution of direct mail programs, and any
other related business that the Company is engaged in as of the termination of
Executive's employment; "Competing Business" shall mean any business that, in
whole or in part, is the same or substantially the same as the Business; and
"Territory" shall mean the United States of America. Executive and the Company
hereby agree that they will negotiate in good faith to amend this Agreement from
time to time to modify the terms of this Article 2, the definition of the term
"Territory," and the definition of the term "Business," to reflect changes in
the Company's business and affairs so that the scope of the limitations placed
on Executive's activities by this Article 2 accomplishes the parties' intent in
relation to the then current facts and circumstances. Any such amendment shall
be effective only when completed in writing and signed by Executive and the
Company.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive
incapable of performing his or her duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement shall mean
that the Executive shall have:
(i) committed an intentional act of fraud, embezzlement or
theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
-6-
<PAGE>
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime
carrying a prison term of at least one year (regardless of whether imprisonment
is actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations,
as determined and articulated by the Board; provided, however, that in the event
of this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive has
failed to meet performance expectations, the Company shall furnish to Executive
in writing a notice of proposed termination setting forth a specific statement
of the deficiencies in his or her performance. Executive shall then have a
period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
(a) a material breach by the Company of any material provision of
this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the
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<PAGE>
total voting power of the voting stock of the Company; (ii) the Company
consolidates with, or merges with or into another corporation or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any person or any corporation, in any such event pursuant to a
transaction in which the outstanding voting stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding voting stock of the Company is changed
into or exchanged for (x) voting stock of the surviving or transferee
corporation or (y) cash, securities (whether or not including voting stock) or
other property, and (B) the holders of the voting stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
40% of the voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) individuals who immediately
following the Merger constitute the Board of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of two-thirds or more of the
directors then still in office who were directors immediately following the
Merger or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of the Company then
in office; or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation, provided, however, that a Change in Control shall not include the
Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary at his or her then current rate, to be paid in twelve
(12) monthly installments. For purposes of this Agreement, a demotion or
requirement of relocation from the Tampa, Florida area shall be deemed to be a
termination without Cause.
(b) Voluntary Termination. If Executive voluntarily resigns for a
---------------------
reason other than Good Reason, Executive shall be entitled to severance pay
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments. Executive shall provide a minimum of thirty (30)
days prior written notice of his or her resignation to the CEO or the Board, as
appropriate. In the event Executive shall provide thirty (30) days prior written
notice of his or her intent to resign, the Company may accept such resignation
effective as of any date during such thirty (30) day period as the Company deems
appropriate, provided that Executive shall receive from the Company his or her
salary and be entitled to participate at the Company's expense in any Company
sponsored benefit programs in which he or she was a participant as of the
effective date of his or her resignation for the duration of such thirty (30)
day period.
(c) Termination for Cause. Executive shall not be entitled to any
---------------------
severance pay whatsoever if his or her employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Executive shall
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay
-8-
<PAGE>
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments.
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes
and withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all
------
communications including, without limitation, notices, consents, requests or
approvals provided for herein shall be in writing and shall be deemed to have
been duly given when personally delivered, or five (5) business days after
having been mailed by United States registered mail or certified mail, return
receipt requested, postage prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive office or to
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
--------
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
Section 4.4 Termination of Prior Employment Agreements; Entire
--------------------------------------------------
Agreement. This Agreement supersedes any other agreements, oral or written,
- ---------
between the parties with respect to the subject matter hereof, and contains all
of the agreements and understandings between the parties with respect to the
employment of Executive by the Company. Any waiver or modification of any term
of this Agreement shall be effective only if it is set forth in a writing signed
by both parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or
-9-
<PAGE>
delegable by the Company. "Successor" shall mean any successor in interest,
including, without limitation, any entity, individual or group of persons
acquiring directly or indirectly all or substantially all of the stock, business
or assets of the Company, as the case may be, whether by sale, merger,
consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the time
of becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
--------
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this
-----------------------
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in a writing signed by Executive and the Company. No
waiver by a party hereto at any time of any breach by another party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
Section 4.9 Construction. This Agreement is being executed and
------------
delivered, and is intended to be performed in the State of Florida and shall be
construed and enforced in accordance with the laws of the State of Florida in
all respects.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "Executive"
By: /s/ Paul B. Byrum, III By: /s/ John P. Kelly
----------------------- -----------------------
Paul B. Byrum, III John P. Kelly
- --------------------------- ---------------------------
Print Name Print Name
Executive Vice President Print Residence Address:
- ---------------------------
Print Title
---------------------------
---------------------------
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<PAGE>
SCHEDULE A
PERFORMANCE BONUS
Executive's annual bonus shall be computed as follows:
Executive shall receive
If the Company achieves: the following bonus payment:
- ------------------------ ----------------------------
100% of projected Company EBITDA 35% of Base Salary
110% of projected Company EBITDA 50% of Base Salary
125% of projected Company EBITDA 75% of Base Salary
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and Paul B. Byrum, III, an individual
resident of Florida (the "Executive"). References herein to the "Company" apply
to MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or
one or more of the Subsidiaries on the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and the Company,
including, without limitation, the promises and covenants of the parties set
forth herein, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters of such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is
----------------------------------------
hereby employed full time as the Executive Vice President, Sales of the Company
and as a member of the senior leadership team of the Company. Executive shall
devote his or her full time, energy, and skill to such office and shall do and
perform all services and acts necessary or advisable to fulfill the duties of
such office. In his or her capacity as an officer of the Company, Executive
shall report to the Chief Executive Officer (the "CEO") of the Company, and
shall conduct and perform such additional services and activities as may be
determined from time to time by the
<PAGE>
CEO. Executive's authority and responsibility in the Company shall at all times
be subject to the review and discretion of the Company's board of directors (the
"Board"), which shall have the final authority to make decisions regarding the
business of the Company. Executive acknowledges that he or she has a duty of
loyalty to the Company and its Subsidiaries and shall not engage, directly and
indirectly, in any other business or activity that could materially and
adversely affect the Company's or any Subsidiary's business or the Executive's
ability to perform his or her duties under this Agreement, provided, however,
that the Executive shall be free to participate in board, civic and charitable
activities so long as such activities do not interfere with his or her duties
and responsibilities hereunder.
Section 1.3 Compensation. For services to be rendered by Executive
------------
under this Agreement, Company shall pay Executive as follows:
(a) Base Salary. Executive shall be paid a minimum annual
-----------
compensation of $100,000.00 (the "Base Salary"). At the sole discretion of the
Board, Executive's annual gross salary may be increased from time to time
throughout the term of this Agreement. At no time during the term hereof shall
the Executive's base salary be decreased from the amount of the base salary then
in effect.
(b) Bonus. Executive shall be eligible to receive a bonus, upon
-----
satisfaction of the terms and conditions set forth on Schedule A. Such bonus
----------
shall be paid to Executive monthly, subject to annual adjustment following the
completion of an audit by an independent accounting firm selected by the
Company, which audit demonstrates that the conditions set forth on Schedule A
have been satisfied.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used during any calendar year shall be forfeited, except that one
week's unused vacation may be carried forward to the year following the year in
which such vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
-----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate, at
---------------
the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
(d) Other. Executive shall be entitled to the reimbursement of
-----
reasonable dues for memberships in luncheon and/or dinner clubs, which
reimbursement shall not exceed $200.00 per month.
-2-
<PAGE>
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The Company expects
Executive to attend and participate in continuing education seminars and courses
with respect to the direct mail services industry and business management
related to his or her duties, and the Company will reimburse all ordinary and
necessary expenses of such attendance and participation. Such continuing
education courses and seminars will be scheduled in conjunction with the other
officers of the Company to assure uninterrupted performance of duties during the
Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the CEO of
the Company. Under no circumstances will Executive work for any competitor or,
with the exception of Bullseye Target Marketing, have any financial interest in
any competitor of the Company; provided, however, Executive may invest in up to
one percent (1%) of the publicly traded stock or securities of any company whose
stock or securities are traded on national exchange.
Section 2.2 Ownership of Work Product. The Company shall own all Work
-------------------------
Product (as defined below) arising during the course of Executive's employment
(prior, present or future), including any part-time consulting or contract
programming work Executive may have performed previously or in the future for
the Company. For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets (as defined below), United States
and international copyrights, patentable inventions, and other intellectual
property rights in any programming, documentation, technology or other work
product that relates to the Company, its business or its customers and that
employee conceives, develops, or delivers to the Company at any time during his
or her employment, during or outside normal working hours, in or away from the
facilities of the Company, and whether or not requested by the Company. If the
Work Product contains any materials, programming or intellectual property rights
that Executive conceived or developed prior to, and independent of, Executive's
work for the Company, Executive agrees to point out the pre-existing items to
the Company and Executive grants the Company a worldwide, unrestricted,
royalty-free right, including the right to sublicense such items. Executive
agrees to take such actions and execute such further acknowledgments and
assignments as the Company may reasonably request to give effect to this
provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to maintain
---------------------------
in strict confidence and, except as necessary to perform his or her duties for
the Company, Executive
-3-
<PAGE>
agrees not to use or disclose any Trade Secrets of the Company during or after
his or her employment. As provided by Florida statutes, "Trade Secret" shall
mean any information, including but not limited to technical or non-technical
data, a formula, a pattern, a compilation, a program, a device, a method, a
technique, a drawing, a process, financial data, financial plans, product plans,
information on customers, or a list of actual or potential customers or
suppliers, which: (i) derives economic value, actual or potential, from not
being generally known to, and not being readily ascertainable by proper means
by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to
maintain its secrecy.
Section 2.4 Protection of Other Confidential Information. In
--------------------------------------------
addition, Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for the Company, not to use or disclose
any Confidential Business Information of the Company during his or her
employment and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
non-public information of a competitively sensitive or personal nature, other
than Trade Secrets, acquired by the Executive, directly or indirectly, in
connection with the Executive's employment (including his employment with the
Company prior to the date of this Agreement), including (without limitation)
oral and written information concerning the Company or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net
income, etc.), annual and long-range business plans, marketing plans and
methods, account invoices, oral or written customer information, and personnel
information. Confidential Business Information also includes information
recorded in manuals, memoranda, projections, minutes, plans, computer programs,
and records, whether or not legended or otherwise identified by the Company and
its affiliates as Confidential Business Information, as well as information
which is the subject of meetings and discussions and not so recorded; provided,
--------
however, that Confidential Business Information shall not include information
- -------
that is generally available to the public, other than as a result of disclosure,
directly or indirectly, by the Executive, or was available to the Executive on a
non-confidential basis prior to its disclosure to the Executive. The provisions
of Sections 2.3 and 2.4 above shall also apply to protect Trade Secrets and
Confidential Business Information of third parties provided to the Company under
an obligation of secrecy.
Section 2.5 Return of Materials. Executive shall surrender to the
-------------------
Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples, price lists, drawings, customer lists,
prospect data, or other material of any nature whatsoever (in tangible or
electronic form) in the Executive's possession or control, including all copies
thereof, relating to the Company, its business, or its customers. Upon the
request of the Company, Executive shall certify in writing compliance with the
foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment
----------------------------
with the Company, and for a period of one (1) year after termination of
Executive's employment with the Company for any reason, Executive shall not
solicit or attempt to solicit Customers to
-4-
<PAGE>
induce or encourage them to acquire or obtain from anyone other than the
Company, any product or service competitive with or substitute for any Company
Product, or otherwise to induce or encourage them to reduce or discontinue the
purchase or license of their requirements for products or services available
from the Company. For purposes of this Section, a "Customer" refers to any
person or group of persons with whom Executive had direct material contact with
regard to the selling, delivery or support of Company Products, including
servicing such person's or group's account, during the period of two (2) years
preceding termination of Executive's employment; and "Company Products" refers
to the products and services that the Company offered, sold or had under
consideration for development or distribution within six (6) months of the date
of termination of Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year after
---------------------------
termination of Executive's employment with the Company for any reason, Executive
shall not, alone or in concert with others, induce or attempt to induce any
employee, agent, independent contractor, or other personnel of the Company to
terminate or reduce his, her or their relationship with the Company, or recruit
or attempt to recruit such persons to accept employment or a contract with
another business that would have the effect of terminating or reducing his, her
or their relationship with the Company.
(c) No Competition. If Executive is terminated for Cause or if
--------------
Executive resigns for any reason other than Good Reason, then for a period of
one (1) year following the termination of Executive's employment, Executive
shall not (without the prior written consent of the Company) compete with the
Company in any way, including, but not limited to, (i) serving as an officer of,
director of, employee of, or consultant to, (ii) directly or indirectly forming,
or (iii) directly or indirectly acquiring more than a 5% investment in, a
Competing Business (as defined below) in the Territory (as defined below);
provided, however, that if Executive is terminated for any reason after a Change
- -------- -------
in Control or resigns for Good Reason, then there shall not be a non-compete
period under this Section 2.6(c).
(d) Acknowledgment; Independent Provisions; Modification. Executive
----------------------------------------------------
acknowledges and agrees that: (i) the covenants and agreements contained in this
Article 2 are the essence of this Agreement; (ii) that Executive has received
good, adequate and valuable consideration for each of these covenants; (iii)
each of these covenants is reasonable and necessary to protect and preserve the
interests and properties of the Company; (iv) the Company is and will be engaged
in and throughout the Territory in the Business; (v) a Competing Business could
be engaged in from any place in the Territory; and (vi) the Company has a
legitimate business interest in restricting Executive's activities throughout
the Territory. Executive also acknowledges and agrees that: (i) irreparable loss
and damage will be suffered by the Company should Executive breach any of these
covenants and agreements; (ii) each of these covenants and agreements in Article
2 is separate, distinct and severable not only from the other covenants and
agreements but also from the remaining provisions of this Agreement; and (iii)
the unenforceability of any covenants or agreements shall not affect the
validity or enforceability of any of the other covenants or agreements or any
other provision or provisions of this Agreement. Executive acknowledges and
agrees that if any of the provisions of Article 2 shall ever be deemed to exceed
the time, activity, or geographic limitations
-5-
<PAGE>
permitted by applicable law, then such provisions shall be and hereby are
reformed to the maximum time, activity, or geographical limitations permitted by
applicable law.
(e) Definitions for Article 2; Further Negotiation. For purposes
----------------------------------------------
of this Article 2; "Business" shall mean the provision of direct marketing
services, including design, printing and production, fulfillment services,
agency services, and development and execution of direct mail programs, and any
other related business that the Company is engaged in as of the termination of
Executive's employment; "Competing Business" shall mean any business that, in
whole or in part, is the same or substantially the same as the Business; and
"Territory" shall mean the United States of America. Executive and the Company
hereby agree that they will negotiate in good faith to amend this Agreement from
time to time to modify the terms of this Article 2, the definition of the term
"Territory," and the definition of the term "Business," to reflect changes in
the Company's business and affairs so that the scope of the limitations placed
on Executive's activities by this Article 2 accomplishes the parties' intent in
relation to the then current facts and circumstances. Any such amendment shall
be effective only when completed in writing and signed by Executive and the
Company.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive
incapable of performing his or her duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement shall mean
that the Executive shall have:
(i) committed an intentional act of fraud, embezzlement or
theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
-6-
<PAGE>
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime carrying
a prison term of at least one year (regardless of whether imprisonment is
actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations,
as determined and articulated by the Board; provided, however, that in the event
of this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive
has failed to meet performance expectations, the Company shall furnish to
Executive in writing a notice of proposed termination setting forth a specific
statement of the deficiencies in his or her performance. Executive shall then
have a period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
(a) a material breach by the Company of any material provision
of this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the
-7-
<PAGE>
total voting power of the voting stock of the Company; (ii) the Company
consolidates with, or merges with or into another corporation or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any person or any corporation, in any such event pursuant to a
transaction in which the outstanding voting stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding voting stock of the Company is changed
into or exchanged for (x) voting stock of the surviving or transferee
corporation or (y) cash, securities (whether or not including voting stock) or
other property, and (B) the holders of the voting stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
40% of the voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) individuals who immediately
following the Merger constitute the Board of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of two-thirds or more of the
directors then still in office who were directors immediately following the
Merger or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of the Company then
in office; or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation, provided, however, that a Change in Control shall not include the
Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary at his or her then current rate, to be paid in twelve
(12) monthly installments. For purposes of this Agreement, a demotion or
requirement of relocation from the Tampa, Florida area shall be deemed to be a
termination without Cause.
(b) Voluntary Termination. If Executive voluntarily resigns for a
---------------------
reason other than Good Reason, Executive shall be entitled to severance pay
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments. Executive shall provide a minimum of thirty (30)
days prior written notice of his or her resignation to the CEO or the Board, as
appropriate. In the event Executive shall provide thirty (30) days prior written
notice of his or her intent to resign, the Company may accept such resignation
effective as of any date during such thirty (30) day period as the Company deems
appropriate, provided that Executive shall receive from the Company his or her
salary and be entitled to participate at the Company's expense in any Company
sponsored benefit programs in which he or she was a participant as of the
effective date of his or her resignation for the duration of such thirty (30)
day period.
(c) Termination for Cause. Executive shall not be entitled to any
---------------------
severance pay whatsoever if his or her employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Executive shall
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay
-8-
<PAGE>
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments.
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all
------
communications including, without limitation, notices, consents, requests or
approvals provided for herein shall be in writing and shall be deemed to have
been duly given when personally delivered, or five (5) business days after
having been mailed by United States registered mail or certified mail, return
receipt requested, postage prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive office or to
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
--------
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
Section 4.4 Termination of Prior Employment Agreements; Entire
--------------------------------------------------
Agreement. This Agreement supersedes any other agreements, oral or written,
- ---------
between the parties with respect to the subject matter hereof, and contains all
of the agreements and understandings between the parties with respect to the
employment of Executive by the Company. Any waiver or modification of any term
of this Agreement shall be effective only if it is set forth in a writing signed
by both parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or
-9-
<PAGE>
delegable by the Company. "Successor" shall mean any successor in interest,
including, without limitation, any entity, individual or group of persons
acquiring directly or indirectly all or substantially all of the stock, business
or assets of the Company, as the case may be, whether by sale, merger,
consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the time of
becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
--------
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this Agreement
----------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in a writing signed by Executive and the Company. No
waiver by a party hereto at any time of any breach by another party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
Section 4.9 Construction. This Agreement is being executed and
------------
delivered, and is intended to be performed in the State of Florida and shall be
construed and enforced in accordance with the laws of the State of Florida in
all respects.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "Executive"
By: /s/ John P. Kelly By: /s/ Paul B. Byrum, III
----------------------------- -----------------------------
John P. Kelly Paul B. Byrum, III
- -------------------------------- --------------------------------
Print Name Print Name
President Print Residence Address:
- -------------------------------
Print Title
4921 Lyford Cay Road
--------------------------------
Tampa, Florida 33629
--------------------------------
-11-
<PAGE>
SCHEDULE A
PERFORMANCE BONUS
Executive's annual bonus shall be computed as follows:
Executive shall receive six percent (6%) of the Company's revenues
from new direct mail business (i.e., new name accounts), exclusive
of postage and shipping charges.
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and Michael J. Chomik, an individual
resident of Pennsylvania (the "Executive"). References herein to the "Company"
apply to MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is an executive officer and shareholder of Control
Group Ltd., a Delaware corporation ("Control" or the "Seller"), which is to be
merged with MegaMarketing Acquisition One, Inc., a Georgia corporation and a
wholly owned subsidiary of the Company ("Merger Sub"), pursuant to that certain
Agreement and Plan of Merger by and among the Company, Merger Sub, Seller, and
the shareholders of Seller dated as of March 6, 1998 (the "Merger Agreement"),
to form the business of the Company (all such transactions referred to herein as
the "Merger"); and
WHEREAS, the Company recognizes the contributions of Executive in such
capacity; and
WHEREAS, it is a condition of the obligation of the Company and Merger
Sub to close the Merger Agreement that Executive enter into this Agreement; and
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or
one or more of the Subsidiaries on the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, to induce the Company to enter into the Merger Agreement,
and for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by Executive and the Company, including, without limitation,
the promises and covenants of the parties set forth herein, the parties hereto,
intending to be legally bound, agree as follows:
<PAGE>
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters for such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is
----------------------------------------
hereby employed full time as a Principal of Control and as a member of the
senior leadership team of the Company. Executive shall devote his or her full
time, energy, and skill to such office and shall do and perform all services and
acts necessary or advisable to fulfill the duties of such office. In his or her
capacity as an officer of Control , Executive shall report to the Chief
Executive Officer (the "CEO") of the Company, and shall conduct and perform such
additional services and activities as may be determined from time to time by the
CEO. Executive's authority and responsibility in the Company shall at all times
be subject to the review and discretion of the Company's board of directors (the
"Board"), which shall have the final authority to make decisions regarding the
business of the Company. Executive acknowledges that he or she has a duty of
loyalty to the Company and its Subsidiaries and shall not engage, directly and
indirectly, in any other business or activity that could materially and
adversely affect the Company's or any Subsidiary's business or the Executive's
ability to perform his or her duties under this Agreement, provided, however,
that the Executive shall be free to participate in board, civic and charitable
activities so long as such activities do not interfere with his or her duties
and responsibilities hereunder.
Section 1.3 Compensation. For services to be rendered by Executive
------------
under this Agreement, Company shall pay Executive as follows:
Base Salary. Executive shall be paid a minimum annual compensation of
-----------
$200,000.00 (the "Base Salary"). At the sole discretion of the Board,
Executive's annual gross salary may be increased from time to time throughout
the term of this Agreement. At no time during the term hereof shall the
Executive's base salary be decreased from the amount of the base salary then in
effect.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used
<PAGE>
during any calendar year shall be forfeited, except that one week's unused
vacation may be carried forward to the year following the year in which such
vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
-----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate,
---------------
at the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The Company expects
Executive to attend and participate in continuing education seminars and courses
with respect to the direct mail services industry and business management
related to his or her duties, and the Company will reimburse all ordinary and
necessary expenses of such attendance and participation. Such continuing
education courses and seminars will be scheduled in conjunction with the other
officers of the Company to assure uninterrupted performance of duties during the
Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the CEO of
the Company. Under no circumstances will Executive work for any competitor or
have any financial interest in any competitor of the Company; provided, however,
Executive may invest in up to one percent (1%) of the publicly traded stock or
securities of any company whose stock or securities are traded on national
exchange.
Section 2.2 Ownership of Work Product. The Company shall own all Work
-------------------------
Product (as defined below) arising during the course of Executive's employment
(prior, present or future), including any part-time consulting or contract
programming work Executive may have performed previously or in the future for
the Company. For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets (as defined below), United States
and international copyrights, patentable inventions, and other intellectual
property rights in any programming, documentation, technology or other work
product that relates to the Company, its business or its customers and that
employee conceives, develops, or
<PAGE>
delivers to the Company at any time during his or her employment, during or
outside normal working hours, in or away from the facilities of the Company, and
whether or not requested by the Company. If the Work Product contains any
materials, programming or intellectual property rights that Executive conceived
or developed prior to, and independent of, Executive's work for the Company,
Executive agrees to point out the pre-existing items to the Company and
Executive grants the Company a worldwide, unrestricted, royalty-free right,
including the right to sublicense such items. Executive agrees to take such
actions and execute such further acknowledgments and assignments as the Company
may reasonably request to give effect to this provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to maintain
---------------------------
in strict confidence and, except as necessary to perform his or her duties for
the Company, Executive agrees not to use or disclose any Trade Secrets of the
Company during or after his or her employment. "Trade Secret" shall mean any
information, including a formula, pattern, compilation, program, device, method,
technique or process that: (i) derives independent economic value, actual or
potential, from not being known to, and not being readily ascertainable by
proper means by, other persons who can obtain economic value from its disclosure
or use, and (ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
Section 2.4 Protection of Other Confidential Information. In
--------------------------------------------
addition, Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for the Company, not to use or disclose
any Confidential Business Information of the Company during his or her
employment and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
non-public information of a competitively sensitive or personal nature, other
than Trade Secrets, acquired by the Executive, directly or indirectly, in
connection with the Executive's employment (including his employment with the
Company prior to the date of this Agreement), including (without limitation)
oral and written information concerning the Company or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net
income, etc.), annual and long-range business plans, marketing plans and
methods, account invoices, oral or written customer information, and personnel
information. Confidential Business Information also includes information
recorded in manuals, memoranda, projections, minutes, plans, computer programs,
and records, whether or not legended or otherwise identified by the Company and
its affiliates as Confidential Business Information, as well as information
which is the subject of meetings and discussions and not so recorded; provided,
--------
however, that Confidential Business Information shall not include information
- -------
that is generally available to the public, other than as a result of disclosure,
directly or indirectly, by the Executive, or was available to the Executive on a
non-confidential basis prior to its disclosure to the Executive. The provisions
of Sections 2.3 and 2.4 above shall also apply to protect Trade Secrets and
Confidential Business Information of third parties provided to the Company under
an obligation of secrecy.
Section 2.5 Return of Materials. Executive shall surrender to the
-------------------
Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples, price lists, drawings, customer lists,
prospect data, or other material of any nature whatsoever
<PAGE>
(in tangible or electronic form) in the Executive's possession or control,
including all copies thereof, relating to the Company, its business, or its
customers. Upon the request of the Company, Executive shall certify in writing
compliance with the foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment
----------------------------
with the Company, and for a period of one (1) year after termination of
Executive's employment with the Company for any reason, Executive shall not
solicit or attempt to solicit Customers to induce or encourage them to acquire
or obtain from anyone other than the Company, any product or service competitive
with or substitute for any Company Product, or otherwise to induce or encourage
them to reduce or discontinue the purchase or license of their requirements for
products or services available from the Company. For purposes of this Section, a
"Customer" refers to any person or group of persons with whom Executive had
direct material contact with regard to the selling, delivery or support of
Company Products, including servicing such person's or group's account, during
the period of two (2) years preceding termination of Executive's employment; and
"Company Products" refers to the products and services that the Company offered,
sold or had under consideration for development or distribution within six (6)
months of the date of termination of Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year after
---------------------------
termination of Executive's employment with the Company for any reason, Executive
shall not, alone or in concert with others, induce or attempt to induce any
employee, agent, independent contractor, or other personnel of the Company to
terminate or reduce his, her or their relationship with the Company, or recruit
or attempt to recruit such persons to accept employment or a contract with
another business that would have the effect of terminating or reducing his, her
or their relationship with the Company.
(c) No Competition. If Executive is terminated for Cause or if
--------------
Executive resigns for any reason other than Good Reason, then for a period of
one (1) year following the termination of Executive's employment, Executive
shall not (without the prior written consent of the Company) compete with the
Company in any way, including, but not limited to, (i) serving as an officer of,
director of, employee of, or consultant to, (ii) directly or indirectly forming,
or (iii) directly or indirectly acquiring more than a 5% investment in, a
Competing Business (as defined below) in the Territory (as defined below);
provided, however, that if Executive is terminated for any reason after a Change
- -------- -------
in Control or resigns for Good Reason, then there shall not be a non-compete
period under this Section 2.6(c).
(d) Acknowledgment; Independent Provisions; Modification. Executive
----------------------------------------------------
acknowledges and agrees that: (i) the covenants and agreements contained in this
Article 2 are the essence of this Agreement; (ii) that Executive has received
good, adequate and valuable consideration for each of these covenants; (iii)
each of these covenants is reasonable and necessary to protect and preserve the
interests and properties of the Company; (iv) the Company is and will be engaged
in and throughout the Territory in the Business; (v) a Competing Business could
be engaged in from any place in the Territory; and (vi) the
<PAGE>
Company has a legitimate business interest in restricting Executive's activities
throughout the Territory. Executive also acknowledges and agrees that: (i)
irreparable loss and damage will be suffered by the Company should Executive
breach any of these covenants and agreements; (ii) each of these covenants and
agreements in Article 2 is separate, distinct and severable not only from the
other covenants and agreements but also from the remaining provisions of this
Agreement; and (iii) the unenforceability of any covenants or agreements shall
not affect the validity or enforceability of any of the other covenants or
agreements or any other provision or provisions of this Agreement. Executive
acknowledges and agrees that if any of the provisions of Article 2 shall ever be
deemed to exceed the time, activity, or geographic limitations permitted by
applicable law, then such provisions shall be and hereby are reformed to the
maximum time, activity, or geographical limitations permitted by applicable law.
(e) Definitions for Article 2; Further Negotiation. For purposes of
----------------------------------------------
this Article 2; "Business" shall mean the provision of direct marketing
services, including design, printing and production, fulfillment services,
agency services, and development and execution of direct mail programs, and any
other related business that the Company is engaged in as of the termination of
Executive's employment; "Competing Business" shall mean any business that, in
whole or in part, is the same or substantially the same as the Business; and
"Territory" shall mean the United States of America. Executive and the Company
hereby agree that they will negotiate in good faith to amend this Agreement from
time to time to modify the terms of this Article 2, the definition of the term
"Territory," and the definition of the term "Business," to reflect changes in
the Company's business and affairs so that the scope of the limitations placed
on Executive's activities by this Article 2 accomplishes the parties' intent in
relation to the then current facts and circumstances. Any such amendment shall
be effective only when completed in writing and signed by Executive and the
Company.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive
incapable of performing his or her duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement shall mean
that the Executive shall have:
<PAGE>
(i) committed an intentional act of fraud, embezzlement
or theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime carrying
a prison term of at least one year (regardless of whether imprisonment is
actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations, as
determined and articulated by the Board; provided, however, that in the event of
this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive has
failed to meet performance expectations, the Company shall furnish to Executive
in writing a notice of proposed termination setting forth a specific statement
of the deficiencies in his or her performance. Executive shall then have a
period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
(a) a material breach by the Company of any material provision of
this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
<PAGE>
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
voting power of the voting stock of the Company; (ii) the Company consolidates
with, or merges with or into another corporation or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person or any corporation, in any such event pursuant to a
transaction in which the outstanding voting stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding voting stock of the Company is changed
into or exchanged for (x) voting stock of the surviving or transferee
corporation or (y) cash, securities (whether or not including voting stock) or
other property, and (B) the holders of the voting stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
40% of the voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) individuals who immediately
following the Merger constitute the Board of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of two-thirds or more of the
directors then still in office who were directors immediately following the
Merger or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of the Company then
in office; or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation, provided, however, that a Change in Control shall not include the
Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary (calculated as the annualized average of the
Executive's rate for the three calendar months immediately preceding termination
under this section), to be paid in twelve (12) monthly installments.
(b) Voluntary Termination. If Executive voluntarily resigns
---------------------
for a reason other than Good Reason, Executive shall be entitled to severance
pay equal to six (6) months' salary at his or her then current rate, to be paid
in six (6) monthly installments. Executive shall provide a minimum of thirty
(30) days prior written notice of his or her resignation to the CEO or the
Board, as appropriate. In the event Executive shall provide thirty (30) days
prior written notice of his or her intent to resign, the Company may accept such
resignation effective as of any date during such thirty (30) day period as the
Company deems appropriate, provided that Executive shall receive from the
Company his or her salary and be entitled to participate at the Company's
expense in any Company sponsored benefit programs in which he or she was a
<PAGE>
participant as of the effective date of his or her resignation for the duration
of such thirty (30) day period.
(c) Termination for Cause. Executive shall not be entitled
---------------------
to any severance pay whatsoever if his or her employment is terminated "for
Cause" pursuant to Section 3.1(c) of this Agreement, unless severance pay is
approved by the Board in its sole discretion; provided, however, that Executive
shall receive such annual salary that is accrued but unpaid up to the date of
such termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay equal to six (6) months' salary at his or her then current rate,
to be paid in six (6) monthly installments.
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all
------
communications including, without limitation, notices, consents, requests or
approvals provided for herein shall be in writing and shall be deemed to have
been duly given when personally delivered, or five (5) business days after
having been mailed by United States registered mail or certified mail, return
receipt requested, postage prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive office or to
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
--------
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
Section 4.4 Termination of Prior Employment Agreements; Entire
--------------------------------------------------
Agreement. This Agreement terminates any and all prior employment agreements
- ---------
between Executive and either
<PAGE>
the Company or Seller. This Agreement supersedes any other agreements, oral or
written, between the parties with respect to the subject matter hereof, and
contains all of the agreements and understandings between the parties with
respect to the employment of Executive by the Company. Any waiver or
modification of any term of this Agreement shall be effective only if it is set
forth in a writing signed by both parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or delegable by the Company. "Successor" shall mean any successor in
interest, including, without limitation, any entity, individual or group of
persons acquiring directly or indirectly all or substantially all of the stock,
business or assets of the Company, as the case may be, whether by sale, merger,
consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the time of
becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely
--------
for convenience of reference and shall not be given any effect in the
construction or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this
-----------------------
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in a writing signed by Executive and the Company. No
waiver by a party hereto at any time of any breach by another party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
Section 4.9 Construction. This Agreement is being executed and
------------
delivered, and is intended to be performed in the State of Pennsylvania and
shall be construed and enforced in accordance with the laws of the State of
Pennsylvania in all respects.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "Executive"
By: /s/ John P. Kelly By: /s/ Michael J. Chomik
------------------------ ------------------------
John P. Kelly Michael J. Chomik
- ----------------------------- ------------------------------
Print Name Print Name
President Print Residence Address:
- -----------------------------
Print Title
3520 Briarwood Lane
------------------------------
Allentown, Pennsylvania 18103
------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of March 6, 1998
(the "Effective Date"), by and between MegaMarketing Corporation, Inc., a
Georgia corporation (the "Company"), and William J. DeGrosky, an individual
resident of Delaware (the "Executive"). References herein to the "Company" apply
to MegaMarketing Corporation and any direct or indirect subsidiary, parent
corporation or affiliate of MegaMarketing Corporation, including its and their
successors-in-interest with whom Executive deals.
WHEREAS, Executive is an executive officer and shareholder of Control
Group Ltd., a Delaware corporation ("Control" or the "Seller"), which is to be
merged with MegaMarketing Acquisition One, Inc., a Georgia corporation and a
wholly owned subsidiary of the Company ("Merger Sub"), pursuant to that certain
Agreement and Plan of Merger by and among the Company, Merger Sub, Seller, and
the shareholders of Seller dated as of March 6, 1998 (the "Merger Agreement"),
to form the business of the Company (all such transactions referred to herein as
the "Merger"); and
WHEREAS, the Company recognizes the contributions of Executive in such
capacity; and
WHEREAS, it is a condition of the obligation of the Company and Merger
Sub to close the Merger Agreement that Executive enter into this Agreement; and
WHEREAS, Executive is expected to make a significant contribution to the
success and development of the Company and/or one or more of its subsidiaries,
Control Group Ltd. and Genesis Direct, Inc. (collectively, the "Subsidiaries");
and
WHEREAS, Executive is willing to render services to the Company and/or
one or more of the Subsidiaries on the terms and subject to the conditions set
forth herein.
NOW, THEREFORE, to induce the Company to enter into the Merger Agreement,
and for good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by Executive and the Company, including, without limitation,
the promises and covenants of the parties set forth herein, the parties hereto,
intending to be legally bound, agree as follows:
<PAGE>
ARTICLE 1
---------
EMPLOYMENT
----------
Section 1.1 Term of Employment. The term of Executive's employment
------------------
hereunder shall commence on the Effective Date hereof and continue until the
third anniversary of the date hereof, unless earlier terminated as provided in
this Agreement. Notwithstanding the foregoing, however, the parties agree that,
in the event of the consummation of an initial public offering of the Company's
Common Stock, the terms of this Agreement shall be amended upon the reasonable
request of the managing underwriters for such initial public offering and the
consent of the Executive, which consent shall not be unreasonably withheld. At
the end of the initial three year term, this Agreement shall automatically renew
for consecutive one year terms unless either party hereto gives written notice
to the other of its intent to terminate sixty (60) days prior to the end of any
term.
Section 1.2 Duties and Responsibilities of Executive. Executive is
----------------------------------------
hereby employed full time as a Principal of Control and as a member of the
senior leadership team of the Company. Executive shall devote his or her full
time, energy, and skill to such office and shall do and perform all services and
acts necessary or advisable to fulfill the duties of such office. In his or her
capacity as an officer of Control, Executive shall report to the Chief Executive
Officer (the "CEO") of the Company, and shall conduct and perform such
additional services and activities as may be determined from time to time by the
CEO. Executive's authority and responsibility in the Company shall at all times
be subject to the review and discretion of the Company's board of directors (the
"Board"), which shall have the final authority to make decisions regarding the
business of the Company. Executive acknowledges that he or she has a duty of
loyalty to the Company and its Subsidiaries and shall not engage, directly and
indirectly, in any other business or activity that could materially and
adversely affect the Company's or any Subsidiary's business or the Executive's
ability to perform his or her duties under this Agreement, provided, however,
that the Executive shall be free to participate in board, civic and charitable
activities so long as such activities do not interfere with his or her duties
and responsibilities hereunder.
Section 1.3 Compensation. For services to be rendered by Executive
------------
under this Agreement, Company shall pay Executive as follows:
Base Salary. Executive shall be paid a minimum annual compensation of
-----------
$200,000.00 (the "Base Salary"). At the sole discretion of the Board,
Executive's annual gross salary may be increased from time to time throughout
the term of this Agreement. At no time during the term hereof shall the
Executive's base salary be decreased from the amount of the base salary then in
effect.
Section 1.4 Benefits.
--------
(a) Vacation. Executive shall be entitled to four (4) weeks paid
--------
vacation annually during his or her employment by the Company hereunder. Any
vacation not used
<PAGE>
during any calendar year shall be forfeited, except that one week's unused
vacation may be carried forward to the year following the year in which such
vacation entitlement accrued.
(b) Life, Disability and Retirement Programs. Executive shall be
----------------------------------------
entitled to participate in any life, disability and retirement programs that are
generally offered to or provided for the senior management personnel of the
Company and its subsidiaries.
(c) Group Insurance. Executive shall be entitled to participate,
---------------
at the Company's expense, in such group health and dental insurance programs
(including spouse coverage) as may from time to time be offered generally to all
of the other members of the senior management personnel of the Company and its
subsidiaries.
Section 1.5 Business Expenses. Executive shall be entitled to
-----------------
reimbursement of all ordinary and necessary business expenses reasonably
incurred for business travel, communications (including cellular phone and
pager), business entertainment and meals in connection with the performance of
Executive's duties under this Agreement, in accordance with the Company's
established policies for reimbursement of business expenses. The Company expects
Executive to attend and participate in continuing education seminars and courses
with respect to the direct mail services industry and business management
related to his or her duties, and the Company will reimburse all ordinary and
necessary expenses of such attendance and participation. Such continuing
education courses and seminars will be scheduled in conjunction with the other
officers of the Company to assure uninterrupted performance of duties during the
Executive's absence.
ARTICLE 2
---------
COVENANTS OF EXECUTIVE
----------------------
Section 2.1 Avoidance of Conflict of Interest. While employed by the
---------------------------------
Company, Executive will not engage in any business activity that conflicts with
his or her duties to the Company without the prior written consent of the CEO of
the Company. Under no circumstances will Executive work for any competitor or
have any financial interest in any competitor of the Company; provided, however,
Executive may invest in up to one percent (1%) of the publicly traded stock or
securities of any company whose stock or securities are traded on national
exchange.
Section 2.2 Ownership of Work Product. The Company shall own all Work
-------------------------
Product (as defined below) arising during the course of Executive's employment
(prior, present or future), including any part-time consulting or contract
programming work Executive may have performed previously or in the future for
the Company. For purposes hereof, "Work Product" shall mean all intellectual
property rights, including all Trade Secrets (as defined below), United States
and international copyrights, patentable inventions, and other intellectual
property rights in any programming, documentation, technology or other work
product that relates to the Company, its business or its customers and that
employee conceives, develops, or
<PAGE>
delivers to the Company at any time during his or her employment, during or
outside normal working hours, in or away from the facilities of the Company, and
whether or not requested by the Company. If the Work Product contains any
materials, programming or intellectual property rights that Executive conceived
or developed prior to, and independent of, Executive's work for the Company,
Executive agrees to point out the pre-existing items to the Company and
Executive grants the Company a worldwide, unrestricted, royalty-free right,
including the right to sublicense such items. Executive agrees to take such
actions and execute such further acknowledgments and assignments as the Company
may reasonably request to give effect to this provision.
Section 2.3 Protection of Trade Secrets. Executive agrees to maintain
---------------------------
in strict confidence and, except as necessary to perform his or her duties for
the Company, Executive agrees not to use or disclose any Trade Secrets of the
Company during or after his or her employment. As provided by Delaware statutes,
"Trade Secret" shall mean any information, including a formula, pattern,
compilation, program, device, method, technique or process that: (i) derives
independent economic value, actual or potential, from not being known to, and
not being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and (ii) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy.
Section 2.4 Protection of Other Confidential Information. In
--------------------------------------------
addition, Executive agrees to maintain in strict confidence and, except as
necessary to perform his or her duties for the Company, not to use or disclose
any Confidential Business Information of the Company during his or her
employment and for a period of one (1) year following termination of Executive's
employment. As used herein, "Confidential Business Information" shall mean any
non-public information of a competitively sensitive or personal nature, other
than Trade Secrets, acquired by the Executive, directly or indirectly, in
connection with the Executive's employment (including his employment with the
Company prior to the date of this Agreement), including (without limitation)
oral and written information concerning the Company or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net
income, etc.), annual and long-range business plans, marketing plans and
methods, account invoices, oral or written customer information, and personnel
information. Confidential Business Information also includes information
recorded in manuals, memoranda, projections, minutes, plans, computer programs,
and records, whether or not legended or otherwise identified by the Company and
its affiliates as Confidential Business Information, as well as information
which is the subject of meetings and discussions and not so recorded; provided,
--------
however, that Confidential Business Information shall not include information
- -------
that is generally available to the public, other than as a result of disclosure,
directly or indirectly, by the Executive, or was available to the Executive on a
non-confidential basis prior to its disclosure to the Executive. The provisions
of Sections 2.3 and 2.4 above shall also apply to protect Trade Secrets and
Confidential Business Information of third parties provided to the Company under
an obligation of secrecy.
Section 2.5 Return of Materials. Executive shall surrender to the
-------------------
Company, promptly upon its request and in any event upon termination of
Executive's employment, all media, documents, notebooks, computer programs,
handbooks, data files, models, samples,
<PAGE>
price lists, drawings, customer lists, prospect data, or other material of any
nature whatsoever (in tangible or electronic form) in the Executive's possession
or control, including all copies thereof, relating to the Company, its business,
or its customers. Upon the request of the Company, Executive shall certify in
writing compliance with the foregoing requirement.
Section 2.6 Restrictive Covenants.
---------------------
(a) No Solicitation of Customers. During Executive's employment
----------------------------
with the Company, and for a period of one (1) year after termination of
Executive's employment with the Company for any reason, Executive shall not
solicit or attempt to solicit Customers to induce or encourage them to acquire
or obtain from anyone other than the Company, any product or service competitive
with or substitute for any Company Product, or otherwise to induce or encourage
them to reduce or discontinue the purchase or license of their requirements for
products or services available from the Company. For purposes of this Section, a
"Customer" refers to any person or group of persons with whom Executive had
direct material contact with regard to the selling, delivery or support of
Company Products, including servicing such person's or group's account, during
the period of two (2) years preceding termination of Executive's employment; and
"Company Products" refers to the products and services that the Company offered,
sold or had under consideration for development or distribution within six (6)
months of the date of termination of Executive's employment.
(b) No Recruitment of Personnel. For a period of one (1) year after
---------------------------
termination of Executive's employment with the Company for any reason, Executive
shall not, alone or in concert with others, induce or attempt to induce any
employee, agent, independent contractor, or other personnel of the Company to
terminate or reduce his, her or their relationship with the Company, or recruit
or attempt to recruit such persons to accept employment or a contract with
another business that would have the effect of terminating or reducing his, her
or their relationship with the Company.
(c) No Competition. If Executive is terminated for Cause or if
--------------
Executive resigns for any reason other than Good Reason, then for a period of
one (1) year following the termination of Executive's employment, Executive
shall not (without the prior written consent of the Company) compete with the
Company in any way, including, but not limited to, (i) serving as an officer of,
director of, employee of, or consultant to, (ii) directly or indirectly forming,
or (iii) directly or indirectly acquiring more than a 5% investment in, a
Competing Business (as defined below) in the Territory (as defined below);
provided, however, that if Executive is terminated for any reason after a Change
- -------- -------
in Control or resigns for Good Reason, then there shall not be a non-compete
period under this Section 2.6(c).
(d) Acknowledgment; Independent Provisions; Modification. Executive
----------------------------------------------------
acknowledges and agrees that: (i) the covenants and agreements contained in this
Article 2 are the essence of this Agreement; (ii) that Executive has received
good, adequate and valuable consideration for each of these covenants; (iii)
each of these covenants is reasonable and necessary to protect and preserve the
interests and properties of the Company; (iv) the Company is and will be engaged
in and throughout the Territory in the Business; (v) a
<PAGE>
Competing Business could be engaged in from any place in the Territory; and (vi)
the Company has a legitimate business interest in restricting Executive's
activities throughout the Territory. Executive also acknowledges and agrees
that: (i) irreparable loss and damage will be suffered by the Company should
Executive breach any of these covenants and agreements; (ii) each of these
covenants and agreements in Article 2 is separate, distinct and severable not
only from the other covenants and agreements but also from the remaining
provisions of this Agreement; and (iii) the unenforceability of any covenants or
agreements shall not affect the validity or enforceability of any of the other
covenants or agreements or any other provision or provisions of this Agreement.
Executive acknowledges and agrees that if any of the provisions of Article 2
shall ever be deemed to exceed the time, activity, or geographic limitations
permitted by applicable law, then such provisions shall be and hereby are
reformed to the maximum time, activity, or geographical limitations permitted by
applicable law.
(e) Definitions for Article 2; Further Negotiation. For purposes
----------------------------------------------
of this Article 2; "Business" shall mean the provision of direct marketing
services, including design, printing and production, fulfillment services,
agency services, and development and execution of direct mail programs, and any
other related business that the Company is engaged in as of the termination of
Executive's employment; "Competing Business" shall mean any business that, in
whole or in part, is the same or substantially the same as the Business; and
"Territory" shall mean the United States of America. Executive and the Company
hereby agree that they will negotiate in good faith to amend this Agreement from
time to time to modify the terms of this Article 2, the definition of the term
"Territory," and the definition of the term "Business," to reflect changes in
the Company's business and affairs so that the scope of the limitations placed
on Executive's activities by this Article 2 accomplishes the parties' intent in
relation to the then current facts and circumstances. Any such amendment shall
be effective only when completed in writing and signed by Executive and the
Company.
ARTICLE 3
---------
TERMINATION OF EMPLOYMENT
-------------------------
Section 3.1 Termination by Company. Executive's employment may be
----------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
(a) Executive's death, or disability that renders Executive
incapable of performing his or her duties for more than one hundred twenty (120)
calendar days (termination under this Section 3.1(a) shall be deemed termination
without Cause);
(b) for any reason following a determination by the Board to
terminate Executive's employment (termination under this Section 3.1(b) shall be
deemed termination without Cause); or
<PAGE>
(c) "for Cause," which for purposes of this Agreement shall mean
that the Executive shall have:
(i) committed an intentional act of fraud, embezzlement or
theft in connection with his or her duties or in the course of his or her
employment with the Company, which act has a material adverse effect upon the
Company;
(ii) inflicted intentional wrongful material damage to the
Company or to any material asset of the Company;
(iii) intentionally and wrongfully violated Article 2 of this
Agreement, which violation has a material adverse effect upon the Company;
(iv) been convicted of a felony or any similar crime carrying
a prison term of at least one year (regardless of whether imprisonment is
actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations,
as determined and articulated by the Board; provided, however, that in the event
of this subsection (vi) being the sole reason for a termination for Cause,
Executive shall have the opportunity to cure and related rights set forth in
Section 3.1(d) hereof.
(d) In the event of a determination by the Board that Executive has
failed to meet performance expectations, the Company shall furnish to Executive
in writing a notice of proposed termination setting forth a specific statement
of the deficiencies in his or her performance. Executive shall then have a
period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Executive's employment as of the end of such ninety (90) day period. The Company
shall be obligated to provide to Executive only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Executive is determined by the Board to have again failed to meet the same
performance expectations, then his or her employment may be terminated
immediately upon the Company's giving of notice of termination to Executive
specifying his or her deficiencies in performance.
Section 3.2 Termination by Executive. Executive's employment may be
------------------------
terminated by Executive by giving notice during the term of this Agreement for
"Good Reason" or for any reason. For purposes of this Agreement, "Good Reason"
shall mean the occurrence of any of the following events without the express
written consent of Executive, unless such events are fully corrected within
thirty (30) days following written notification by Executive to the Company that
he or she intends to terminate his or her employment hereunder for one of the
reasons set forth below:
<PAGE>
(a) a material breach by the Company of any material provision of
this Agreement, or a material adverse alteration in the nature or status of
Executive's responsibilities; or
(b) the occurrence of a "Change in Control." For purposes of this
Agreement, a "Change in Control" shall mean an event as a result of which: (i)
any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 40% of the total
voting power of the voting stock of the Company; (ii) the Company consolidates
with, or merges with or into another corporation or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any person or any corporation, in any such event pursuant to a
transaction in which the outstanding voting stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where (A) the outstanding voting stock of the Company is changed
into or exchanged for (x) voting stock of the surviving or transferee
corporation or (y) cash, securities (whether or not including voting stock) or
other property, and (B) the holders of the voting stock of the Company
immediately prior to such transaction own, directly or indirectly, not less than
40% of the voting power of the voting stock of the surviving corporation
immediately after such transaction; or (iii) individuals who immediately
following the Merger constitute the Board of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company was approved by a vote of two-thirds or more of the
directors then still in office who were directors immediately following the
Merger or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of the Company then
in office; or (iv) the Company is liquidated or dissolved or adopts a plan of
liquidation, provided, however, that a Change in Control shall not include the
Merger.
Section 3.3 Severance. For purposes of this Agreement, Executive's
---------
entitlement to any severance payments upon termination of his or her employment
shall be as set forth below:
(a) Termination Without Cause. If Executive is terminated without
-------------------------
Cause or resigns for Good Reason, Executive shall be entitled to severance pay
equal to one year's salary (calculated as the annualized average of the
Executive's rate for the three calendar months immediately preceding termination
under this section), to be paid in twelve (12) monthly installments.
(b) Voluntary Termination. If Executive voluntarily resigns for a
---------------------
reason other than Good Reason, Executive shall be entitled to severance pay
equal to six (6) months' salary at his or her then current rate, to be paid in
six (6) monthly installments. Executive shall provide a minimum of thirty (30)
days prior written notice of his or her resignation to the CEO or the Board, as
appropriate. In the event Executive shall provide thirty (30) days prior written
notice of his or her intent to resign, the Company may accept such resignation
effective as of any date during such thirty (30) day period as the Company deems
appropriate, provided
<PAGE>
that Executive shall receive from the Company his or her salary and be entitled
to participate at the Company's expense in any Company sponsored benefit
programs in which he or she was a participant as of the effective date of his or
her resignation for the duration of such thirty (30) day period.
(c) Termination for Cause. Executive shall not be entitled to any
---------------------
severance pay whatsoever if his or her employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Executive shall
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Executive shall be entitled to
severance pay equal to six (6) months' salary at his or her then current rate,
to be paid in six (6) monthly installments.
ARTICLE 4
---------
GENERAL PROVISIONS
------------------
Section 4.1 Withholding of Taxes. The Company may withhold from any
--------------------
amounts payable under this Agreement all federal, state, city or other taxes and
withholdings as shall be required by any applicable law, rule or regulation.
Section 4.2 Notice. For purposes of this Agreement, all
------
communications including, without limitation, notices, consents, requests or
approvals provided for herein shall be in writing and shall be deemed to have
been duly given when personally delivered, or five (5) business days after
having been mailed by United States registered mail or certified mail, return
receipt requested, postage prepaid, addressed to the Company (to the attention
of the Secretary of the Company) at its principal executive office or to
Executive at his or her principal residence, or to such other address as any
party may have furnished to the other in writing and in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
Section 4.3 Validity. It is not the intent of any party hereto to
--------
violate any public policy of any jurisdiction in which this Agreement may be
enforced. If any provision of this Agreement or the application of any provision
hereof to any person or circumstances is held invalid, unenforceable or
otherwise illegal, the remainder of this Agreement and the application of such
provision to any other person or circumstances shall not be affected, and the
provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it valid,
enforceable and legal; provided, however, if the provision so held to be
invalid, unenforceable or otherwise illegal constituted a material inducement to
a party's execution and delivery of this Agreement, then such provision shall
not be reformed unless prior to any reformation that party agrees to be bound by
the reformation.
<PAGE>
Section 4.4 Termination of Prior Employment Agreements; Entire Agreement.
------------------------------------------------------------
This Agreement terminates any and all prior employment agreements between
Executive and either the Company or Seller. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Executive by the Company. Any waiver
or modification of any term of this Agreement shall be effective only if it is
set forth in a writing signed by both parties hereto.
Section 4.5 Successors and Binding Agreement.
--------------------------------
(a) This Agreement shall be binding on and inure to the benefit of
the Company and any Successor of or to the Company, but shall not otherwise be
assignable or delegable by the Company. "Successor" shall mean any successor in
interest, including, without limitation, any entity, individual or group of
persons acquiring directly or indirectly all or substantially all of the stock,
business or assets of the Company, as the case may be, whether by sale, merger,
consolidation, reorganization or otherwise.
(b) The Company shall require any Successor to agree at the time of
becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
(c) This Agreement shall inure to the benefit of and be enforceable
by Executive's personal or legal representatives, executors, administrators,
heirs, distributees and legatees.
(d) This Agreement is personal in nature and neither of the
parties shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in this Section 4.5.
Section 4.6 Captions. The captions in this Agreement are solely for
--------
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 4.7 Modification and Waiver. No provisions of this Agreement
-----------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in a writing signed by Executive and the Company. No
waiver by a party hereto at any time of any breach by another party hereto or
compliance with any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 4.8 Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
<PAGE>
Section 4.9 Construction. This Agreement is being executed and
------------
delivered, and is intended to be performed in the State of Delaware and shall be
construed and enforced in accordance with the laws of the State of Delaware in
all respects.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
MEGAMARKETING CORPORATION "Executive"
By: /s/ John P. Kelly By: /s/ William J. DeGrosky
------------------------- --------------------------
John P. Kelly William J. DeGrosky
- ----------------------------- ------------------------------
Print Name Print Name
President Print Residence Address:
- -----------------------------
Print Title
------------------------------
------------------------------
<PAGE>
M2DIRECT, INC.
DIRECTOR'S AND OFFICER'S
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of _______________________ 1999, between
M2Direct, Inc., a Georgia corporation (the "Corporation"), and the member of the
Board of Directors and/or the officer of the Corporation named on the signature
page hereof (the "Executive").
WHEREAS, the Executive is a member of the Board of Directors and/or an
officer of the Corporation and in such capacity is performing a valuable service
to the Corporation; and
WHEREAS, the Corporation's Bylaws (the "Bylaws") and Sections 14-2-850
through 14-2-859 of the Georgia Business Corporation Code, as amended to date
(the "State Statute") provide for the indemnification of the directors and
officers of the Corporation; and
WHEREAS, the Bylaws and State Statute specifically contemplate that
contracts may be entered into between the Corporation and the members of its
Board of Directors and officers with respect to indemnification of such
directors and officers; and
WHEREAS, in order to provide to the Executive assurances with respect to
the protection provided against liabilities that he may incur in the performance
of his duties to the Corporation, and to thereby induce the Executive to serve
as a member of its Board of Directors and/or as an officer of the Corporation,
the Corporation has determined and agreed to enter into this contract with the
Executive.
NOW, THEREFORE, in consideration of the premises and the Executive's
continued service as a director and/or an officer after the date hereof, the
parties agree as follows:
1. Indemnification. Subject only to the exclusions set forth in Section
2 hereof, and in addition to any other indemnity to which the Executive may be
entitled under the State Statute or any bylaw, resolution or agreement (but
without duplication of payments with respect to indemnified amounts), the
Corporation hereby further agrees to hold harmless and indemnify the Executive,
to the fullest extent permitted by law, including, but not limited to, holding
harmless and indemnifying the Executive against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Executive in connection with any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation), to which the Executive is, was, or at any time becomes a party, or
is threatened to be made a party, by reason of the fact that the Executive is,
was, or at any time becomes a director, officer, employee or agent of the
Corporation, or a predecessor corporation, or is or was serving or at any time
serves at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, employee
benefit plan, joint
<PAGE>
venture, trust, or other enterprise.
2. Limitations on Indemnity. No indemnity pursuant to Section 1 hereof
shall be paid by the Corporation:
(a) with respect to any proceeding in which the Executive
is adjudged, by final judgment not subject to further appeal,
liable to the Corporation or is subjected to injunctive relief in
favor of the Corporation:
(i) for any appropriation, in violation of his duties, of any
business opportunity of the Corporation;
(ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law;
(iii) for the types of liability set forth in Section 14-2-832
of the Georgia Business Corporation Code; or
(iv) for any transaction from which the Executive received an
improper personal benefit;
(b) with respect to any suit in which final judgment is rendered
against the Executive for an accounting of profits, made from the
purchase or sale by the Executive of securities of the
Corporation, pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 or similar provisions of any
federal, state, or local statutory law, or on account of any
payment by the Executive to the Corporation in respect of any
claim for such an accounting; or
(c) if a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
3. Contribution. If the indemnification provided in Section 1 is
unavailable, then in respect of any threatened, pending, or completed action,
suit, or proceeding in which the Corporation is jointly liable with the
Executive (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute, to the extent it is not lawfully prevented from
doing so, to the amount of expenses, judgments, fines, and settlements paid or
payable by the Executive in such proportion as is appropriate to reflect (i) the
relative benefits received by the Corporation on the one hand and the Executive
on the other hand from the transaction from which such action, suit, or
proceeding arose, and (ii) the relative fault of the Corporation on the one hand
and of the Executive on the other in connection with the events which resulted
in such expenses, judgments, fines, or settlement amounts, as well as any other
relevant equitable considerations. The relative fault of the Corporation on the
one hand and of the Executive on the other shall be determined by reference to,
among other things, the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent the circumstances resulting
in such expenses, judgments, fines, or settlement amounts. The Corporation
agrees that it would not be just and equitable if
<PAGE>
contribution pursuant to this Section 3 were determined by pro rata allocation
or any other method of allocation that does not take account of the foregoing
equitable considerations.
4. Continuation of Obligations. All agreements and obligations of the
Corporation contained herein shall continue during the period the Executive is a
director, officer, employee, or agent of the Corporation (or is serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise) and shall
continue thereafter for so long as the Executive shall be subject to any
possible claim or threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, or investigative, by reason of the fact that the
Executive was a director of the Corporation or serving in any other capacity
referred to herein.
5. Notification and Defense of Claim. Promptly after receipt by the
Executive of notice of the commencement of any action, suit, or proceeding, the
Executive will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation in writing of the
commencement thereof, but the omission to so notify the Corporation will not
relieve the Corporation from any liability which it may have to the Executive
otherwise than under this Agreement. With respect to any such action, suit, or
proceeding as to which the Executive so notifies the Corporation:
(a) the Corporation will be entitled to participate therein at its
own expense; and
(b) subject to Section 6 hereof, and if the Executive shall have
provided his written affirmation of his good faith belief that
his conduct did not constitute behavior of the kind described in
paragraph 2(a) hereof and that he is entitled to indemnification
hereunder, the Corporation may assume the defense thereof.
After notice from the Corporation to the Executive of its election so to
assume such defense, the Corporation will not be liable to the Executive under
this Agreement for any legal or other expenses subsequently incurred by the
Executive in connection with the defense thereof, other than reasonable costs of
investigation or as otherwise provided below. The Executive shall have the right
to employ his separate counsel in such action, suit, or proceeding, but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Executive
unless (i) the employment of counsel by the Executive has been authorized by the
Corporation, (ii) counsel designated by the Corporation to conduct such defense
shall not be reasonably satisfactory to the Executive, or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of such counsel shall be at the
expense of the Corporation. For the purposes of clause (ii) above, the Executive
shall be entitled to determine that counsel designated by the Corporation is not
reasonably satisfactory if, among other reasons, the Executive shall have been
advised by qualified counsel that, because of actual or potential conflicts of
interest in the matter between the Executive, other officers or directors
similarly indemnified by the Corporation, and/or the Corporation, representation
of the Executive by counsel designated by the Corporation is likely to
materially and adversely affect the Executive's
<PAGE>
interest or would not be permissible under applicable canons of legal ethics.
The Corporation shall not be liable to indemnify the Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without the Corporation's written consent. The Corporation shall not settle any
action or claim in any manner which would impose any penalty or limitation on
the Executive without the Executive's written consent. Neither the Corporation
nor the Executive will unreasonably withhold consent to any proposed settlement.
6. Advancement and Repayment of Expenses. Upon request therefor
accompanied by reasonably itemized evidence of expenses incurred, and by the
Executive's written affirmation of his good faith belief that his conduct met
the standard applicable to indemnification pursuant to Section 1 hereof and did
not constitute behavior of the kind described in Section 2(a) hereof and that he
is entitled to indemnification hereunder, the Corporation shall advance to the
Executive the reasonable expenses (including attorneys' fees and costs of
investigation and defense (including the fees of expert witnesses, other
professional advisors, and private investigators)) incurred by him in defending
any civil or criminal suit, action, or proceeding for which the Executive is
entitled (assuming an applicable standard of conduct is met) to indemnification
pursuant to this Agreement. The Executive agrees to reimburse the Corporation
for all reasonable expenses paid by the Corporation, whether pursuant to this
Section or Section 5 hereof, in defending any action, suit, or proceeding
against the Executive in the event and to the extent that it shall ultimately be
determined that the Executive is not entitled to be indemnified by the
Corporation for such expenses under this Agreement. Any advances and the
Executive's agreement to repay shall be unsecured and interest-free.
7. Enforcement.
(a) The Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on
it hereby in order to induce the Executive to serve as a director
of the Corporation and acknowledges that the Executive will in the
future be relying upon this Agreement in continuing to serve in
such capacity.
(b) In the event the Executive is required to bring any action to
enforce rights or to collect moneys due under this Agreement and
is successful in such action, the Corporation shall reimburse the
Executive for all of the Executive's reasonable fees and expenses
in bringing and pursuing such action.
8. Separability. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable in whole or in part for any
reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof.
<PAGE>
9. Governing Law; Successors; Amendment and Termination.
(a) This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Georgia, without regard to its
conflict of law principles.
(b) This Agreement shall be binding upon the Executive and the
Corporation and its successors and assigns (including any
transferee of all or substantially all of its assets and any
successor by merger or otherwise by operation of law), and shall
inure to the benefit of the Executive, his heirs, personal
representatives, and assigns and to the benefit of the Corporation
and its successors and assigns.
(c) No amendment, modification, termination, or cancellation of
this Agreement shall be effective unless in writing signed by both
parties hereto.
(d) References to the male gender shall include the female gender,
and vice versa.
[Signatures appear on following page.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
counterparts or otherwise, as of the day and year first above written.
EXECUTIVE M2DIRECT, INC.
By:
- ----------------------------------- ----------------------------------
Name: Name (Print):
------------------------
Title:
-------------------------------
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "ACT") OR THE SECURITIES ACT OF ANY OTHER STATE. THESE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR RESALE IN CONNECTION
WITH THE DISTRIBUTION THEREOF. NO DISPOSITION OF THESE SECURITIES MAY BE MADE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO
THIS CORPORATION TO THE EFFECT THAT SUCH DISPOSITION IS IN COMPLIANCE WITH THE
ACT AND ALL APPLICABLE STATE SECURITIES LAWS.
MEGAMARKETING CORPORATION
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is entered into as of this
___ day of ______________, ____ by and between MegaMarketing Corporation, a
Georgia corporation ("Company"), and the undersigned optionee ("Optionee").
Recitals
(1) Optionee is a director of the Company.
(2) The Company has adopted an agreement and policy to grant options to
its outside directors and in accordance with the agreement the Company and
Optionee desire to enter into a written agreement with respect to the grant of
options to the Optionee.
To encourage stock ownership, and also in consideration of the mutual
covenants contained in this Agreement, the parties to this Agreement agree as
follows.
1. Grant of Option. Subject to the terms, restrictions, limitations and
---------------
conditions stated in this Agreement, Company grants to Optionee, not in lieu of
salary or other compensation, the right and option (the "Option") to purchase
all or any part of the number of shares of Company's Common Stock, without par
value (the "Stock"), described on Schedule A attached to this Agreement and
----------
incorporated into this Agreement by reference ("Schedule A"). The Option shall
----------
be exercisable in the amounts and at the times specified on Schedule A. The
----------
Option shall expire and shall not be exercisable on or after the date specified
on Schedule A or on such earlier date as determined pursuant to Section 7 or 8
----------
of this Agreement.
2. Purchase Price. The price per share to be paid by Optionee for the
--------------
shares subject to this Option (the "Exercise Price") shall be as specified on
Schedule A.
3. Exercise Terms. Optionee must exercise the Option for
--------------
at least the lesser of 10,000 shares or the number of shares of the Stock as to
which the Option remains unexercised.
<PAGE>
If this Option is not exercised with respect to all or any part of the shares
subject to this Option prior to its expiration, the shares with respect to which
this Option was not exercised shall no longer be subject to this Option.
4. Option Non-Transferable. No Option shall be transferable by Optionee
-----------------------
other than by will or the laws of descent and distribution or pursuant to a
Qualified Domestic Relations Order (as defined in the Internal Revenue Code or
in the Employee Retirement Income Security Act of 1974, or the rules and
regulations promulgated under such Code or such Act). During the lifetime of
Optionee, Options shall be exercisable only by such Optionee (or by such
Optionee's guardian or legal representative, should one be appointed).
5. Notice of Exercise of Option. This Option may be exercised by
----------------------------
Optionee, or by Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the Notice of
Exercise attached to this Agreement as Schedule B) signed by Optionee, or by
such administrators, executors or personal representatives, and delivered or
mailed to Company as specified in Section 11 of this Agreement to the attention
of the President or such other officer as Company may designate. Any such notice
shall (a) specify the number of shares of Stock which Optionee or Optionee's
administrators, executors or personal representatives, as the case may be, then
elects to purchase under this Agreement, (b) contain such information as may be
reasonably required pursuant to Section 10 of this Agreement, and (c) be
accompanied by a certified or cashier's check payable to Company in payment of
the total Exercise Price applicable to such shares as provided in this
Agreement. Upon receipt of any such notice and accompanying payment, and subject
to the terms of this Agreement, Company agrees to issue to Optionee or
Optionee's administrators, executors or personal representatives, as the case
may be, stock certificates for the number of shares specified in such notice
registered in the name of the person exercising this Option.
6. Adjustment in Option.
--------------------
(a) If (1) the outstanding shares of Stock are changed into or exchanged
for a different number or kind of shares or other securities of Company by
reason of merger, consolidation, reorganization, recapitalization,
reclassification, combination or exchange of shares, or stock split or stock
dividend, or (2) any spin-off, spin-out or other distribution of assets
materially affects the price of Company's stock, then Company shall
proportionately adjust the rights of Optionee concerning the number of shares
subject to the Option and the Exercise Price.
(b) Upon the adoption of a plan of dissolution or liquidation of Company,
the Option shall terminate to the extent not exercised prior to the adoption of
the plan of dissolution or liquidation by the shareholders, provided that
Company may declare the Option to be exercisable at any time on or before the
fifth business day following such adoption notwithstanding the provisions of
this Agreement regarding exercisability.
(c) The adjustments described in paragraphs (a) and (b) above, and the
manner of their application, shall be determined solely by the Board of
Directors of Company, and any such adjustment may provide for the elimination of
fractional share interests. The adjustments required
<PAGE>
under this Section 6 shall apply to any successors of Company and shall be made
regardless of the number or type of successive events requiring such
adjustments.
7. Disabled Optionee. Except as otherwise set forth in Schedule A, in
----------------- ----------
the event of Optionee's disability that renders Optionee incapable of performing
Optionee's duties as a director for more than one hundred twenty (120) calendar
days, Optionee (or his or her personal representative) may exercise this Option,
within a period ending on the earlier of (a) the last day of the one year period
following Optionee's disability or (b) the expiration date of this Option, to
the extent of the number of shares which were purchasable under this Agreement
at the date of such termination.
8. Death of Optionee. In the event of Optionee's death, this option may
-----------------
be exercised by the appropriate persons described in Section 5 of this Agreement
or persons to whom all or a portion of this Option is transferred in accordance
with Section 5 of this Agreement only to the extent of the number of shares
covered by this Option which were purchasable under this Agreement at the date
of such termination.
9. Date of Grant. This Option was granted by the Board of Directors of
-------------
Company on the date set forth in Schedule A (the "Date of Grant").
----------
10. Compliance with Regulatory Matters. Optionee acknowledges that the
----------------------------------
issuance of capital stock of Company is subject to limitations imposed by
federal and state law, and Optionee hereby agrees that Company shall not be
obligated to issue any shares of Stock upon exercise of this Option that would
cause Company to violate law or any rule, regulation, order or consent decree of
any regulatory authority (including without limitation the Securities and
Exchange Commission) having jurisdiction over the affairs of Company. Optionee
agrees that Optionee will provide Company with such information as is reasonably
requested by Company or its counsel to determine whether the issuance of Stock
complies with the provisions described by this Section 10.
11. Miscellaneous.
-------------
(a) This Agreement shall be binding upon the parties to this Agreement
and their representatives, successors and assigns.
(b) This Agreement is executed and delivered in, and shall be governed
by the laws of, the State of Georgia, without regard to its conflict of law
principles.
(c) Any requests or notices to be given under this Agreement shall be
deemed given, and any elections or exercises to be made or accomplished shall be
deemed made or accomplished, upon actual delivery thereof to the designated
recipient, or five days after deposit thereof in the United States mail,
registered, return receipt requested and postage prepaid, addressed, if to
Optionee, at the address set forth below and, if to Company, to the executive
offices of Company.
<PAGE>
(d) This Agreement may not be modified except in a writing executed by
each of the parties to this Agreement.
(e) Nothing in this Agreement confers on Optionee any right to continue
as a director of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the Board of Directors of Company has caused this
Stock Option Agreement to be executed on behalf of Company and Optionee has
executed this Stock Option Agreement all as of the day and year first above
written.
MEGAMARKETING CORPORATION OPTIONEE
By:
------------------------------------ ------------------------------
John P. Kelly Name:
President and Chief Executive Officer ------------------------
Address:
---------------------
---------------------
<PAGE>
SCHEDULE A
----------
TO
STOCK OPTION AGREEMENT
BETWEEN
MEGAMARKETING CORPORATION
AND
_______________________
Dated:
1. Number of Shares Subject to Option: 40,000 shares of MegaMarketing
----------------------------------
Corporation common stock.
2. Option Exercise Price:
---------------------
3. Date of Grant:
-------------
4. Option Vesting Schedule:
-----------------------
Options for 20,000 shares became vested on the Date of Grant specified
in paragraph 3.
Options for 10,000 shares shall become vested on the first anniversary of
such Date of Grant.
Options for 10,000 shares shall become vested on the second anniversary
of such Date of Grant.
5. Option Exercise Period:
----------------------
All options vest as described in paragraph 4 above and expire and are
void unless exercised on or before the 10th anniversary of the Date of
Grant specified in paragraph 3.
<PAGE>
SCHEDULE B
----------
TO
STOCK OPTION AGREEMENT
BETWEEN
MEGAMARKETING CORPORATION.
AND
___________________
Dated:
NOTICE OF EXERCISE
The undersigned hereby notifies MegaMarketing Corporation (the "Company")
of this election to exercise the undersigned's stock option to purchase________
shares of Company's common stock (the "Common Stock"), pursuant to the Stock
Option Agreement (the "Agreement") between the undersigned and Company dated the
date noted above. Accompanying this Notice is a certified or a cashier's check
in the amount of $______________ payable to Company such amount being equal
to the purchase price per share set forth in Section 2 of the Agreement
multiplied by the number of shares being purchased by this notice (in each
instance subject to appropriate adjustment pursuant to Section 6 of the
Agreement).
IN WITNESS WHEREOF, the undersigned has set his hand and seal, this ____
day of ________________, __________.
OPTIONEE [OR OPTIONEE'S
ADMINISTRATOR,
EXECUTOR OR PERSONAL
REPRESENTATIVE]
------------------------------------------
Signature
------------------------------------------
Name and Position (if other than Optionee)
<PAGE>
MEGAMARKETING CORPORATION
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is entered into as of
_____________, 1998 (the "Execution Date") by and between MegaMarketing
Corporation, a Georgia corporation (the "Company"), and the investors listed on
Exhibit A hereto (the "Purchasers"), as such Exhibit may be amended from time to
time to reflect the additional acceptance of Subscription Agreements (as defined
below).
RECITALS:
--------
A. The Purchasers are the purchasers of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock") and Stock Purchase
Warrants pursuant to Subscription Agreements between the Purchasers and the
Company (the "Subscription Agreements").
B. It is anticipated that future sales of securities of a similar nature
may occur.
C. The Company and the Purchasers desire to set forth the
registration and other rights to be granted to the Purchasers.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants, and conditions set forth herein and in the Subscription
Agreement pursuant to which the Purchasers acquired their securities in the
Company, the parties mutually agree as follows:
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute promulgated in replacement thereof, and the rules
and regulations of the Commission thereunder, all as the same shall be in effect
at the time.
"Restricted Securities" shall mean the securities of the Company required
---------------------
to bear the legend set forth in Section 2.2 hereof.
"Shares" shall mean the Series A Preferred Stock of the Company purchased
------
pursuant to the Subscription Agreements.
"Stock Purchase Warrants" shall mean the Stock Purchase Warrants
----------------------
purchased pursuant to the Subscription Agreements.
"Registrable Securities" means shares of the Company's Common Stock (i)
----------------------
issued pursuant to the conversion or exercise, as the case may be, of the Shares
and Stock Purchase Warrants, or (ii) issued as a dividend or other distribution
with respect to, or in exchange or in replacement of, the Shares, the Stock
Purchase Warrants or such Common Stock, excluding in all cases, however
(including exclusion from the calculation of the number of outstanding
Registrable Securities), any Registrable Securities sold by a person in a
transaction, including a transaction pursuant to a registration statement under
Section 3 or a transaction pursuant to Rule 144.
The terms "register", "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing
<PAGE>
a registration statement in compliance with the Securities Act, and the
declaration or ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
---------------------
in complying with Sections 3.1 and 3.2 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).
"Selling Expenses" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale.
"Securities" shall mean the Shares, the Stock Purchase Warrants and any
----------
securities issued in respect thereof or upon conversion or exercise thereof.
"Holder" shall mean any holder of outstanding Registrable Securities,
-----
Shares or Stock Purchase Warrants.
"Initiating Holders" shall mean any Holder or Holders of not less than
------------------
50% of the then outstanding Registrable Securities.
2. Transferability.
---------------
2.1 Restrictions on Transferability. The Securities shall not be
-------------------------------
transferable except upon the conditions specified in this Agreement, which
conditions are intended to insure compliance with the provisions of the
Securities Act. Each Holder agrees to cause any proposed transferee of the
Securities held by such Holder to agree to take and hold such Securities subject
to the provisions and upon the conditions specified in this Agreement.
2.2 Restrictive Legend. Each certificate representing Securities shall
------------------
(unless otherwise permitted by the provisions of Section 2.3 below) be stamped
or otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SAID ACT OR AS PROVIDED IN
AGREEMENTS ENTERED INTO IN CONNECTION WITH THE PURCHASE OF
THESE SECURITIES AND RESTRICTING THEIR TRANSFER. COPIES OF
SUCH AGREEMENTS MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE
TO THE SECRETARY OF THE CORPORATION AT ITS PRINCIPAL
OFFICE.
2.3 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 2.3. Prior to any proposed transfer
of any Restricted Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, the holder thereof
shall give written notice to the Company of such holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances of
the proposed transfer in sufficient detail, and shall be accompanied by either
(i) an unqualified written opinion of legal counsel which counsel shall be
reasonably satisfactory to the Company addressed to the Company and which such
opinion shall be reasonably satisfactory in form and substance to the Company's
counsel, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, (ii) a "no
action" letter from the Commission to the effect that the distribution of such
securities without registration will not result in a recommendation by the staff
of the Commission that action be taken with respect thereto, or (iii) such other
showing that may be satisfactory to the Company's legal counsel in such
counsel's sole discretion, whereupon the holder of such Restricted Securities
shall be entitled to transfer such Restricted Securities in accordance with the
terms of the notice delivered by the holder to the
2
<PAGE>
Company. Each certificate evidencing the Restricted Securities transferred as
above provided shall bear the appropriate restrictive legend set forth in
Section 2.2 above, except that such certificate shall not bear such restrictive
legend if in the opinion of the Company's counsel such legend is not required in
order to establish compliance with any provisions of the Securities Act.
2.4 Company Right of First Refusal on Transfers of Securities.
----------------------------------------------------------
In addition to complying with the provisions of Section 2.3 above, in the
event that Holder proposes to sell or otherwise transfer any of the Securities,
whether voluntarily or by operation of law, the Company shall first be given the
right to purchase the Securities that such Holder proposes to transfer. The
Company's right of first refusal shall be subject to the following provisions:
(a) In the event that a Holder proposes to transfer any of its
Securities, such Holder shall give the Company written notice of its intention,
identifying the transferee and describing the price and the specific terms upon
which the transfer is proposed. The Company shall have 20 days from the date of
receipt of any such notice to agree to purchase any or all such Securities for
the price and upon the general terms specified in the notice by giving written
notice to the Holder and stating therein the quantity of Securities to be
purchased.
(b) In the event that the Company fails to exercise the right
of first refusal within said 20 day period, the transferring Holder shall have
90 days thereafter to sell the Securities respecting which the Company's rights
were not exercised, at a price and upon terms no more favorable to the
purchasers thereon than specified in the Company's notice. In the event the
transferring Holder has not sold the Securities within such 90 day period, the
transferring Holder shall not thereafter issue or sell any Securities, without
first offering such Securities to the Company in the manner provided above.
(c) The right of first refusal granted to the Company under
this Section 2.4 shall not apply to and shall expire upon the effective date of
the first firmly underwritten public offering of Common Stock of the Company
that is made pursuant to a registration statement filed with, and declared
effective by, the Commission under the Securities Act (an "IPO").
3. Registration Rights.
-------------------
3.1 Company Registration.
--------------------
(a) If at any time or from time to time, the Company shall
determine to register any of its Common Stock, for its own account or for the
account of others (other than the Holders), other than a registration relating
solely to employee benefit plans or securities issued or issuable to employees
or consultants (including a registration on Form S-8), a registration relating
solely to a Commission Rule 145 transaction, an IPO, a registration on Form S-4
in connection with a merger, acquisition, divestiture, reorganization or similar
event or a registration on any registration form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities, the Company
will:
(i) Promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 10 days after receipt of such written notice from the
Company, by any Holder or Holders.
(b) Underwriting. If the registration of which the Company
------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 3.1(a)(i). In such event the right of any Holder to
registration pursuant to Section 3.1 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
3
<PAGE>
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 3.1, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may exclude some or all
Registrable Securities from such registration and underwriting. The Company
shall so advise all Holders (except those Holders who have indicated to the
Company their decision not to distribute any of their Registrable Securities
through such underwriting), and the number of shares of Registrable Securities
that may be included in the registration and underwriting, if any, shall be
allocated among such Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities owned by such Holders at the time
of filing the registration statement. No Registrable Securities excluded from
the underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. If any Holder disapproves of the terms of any
such underwriting, such person may elect to withdraw therefrom by written notice
to the Company and the underwriter. The Registrable Securities and/or other
securities so withdrawn from such underwriting shall also be withdrawn from such
registration.
3.2 Expenses of Registration. All Registration Expenses (exclusive of
------------------------
underwriting discounts and commissions) incurred in connection with any
registration, qualification or compliance pursuant to Section 3.1 shall be borne
by the Company; and all Selling Expenses shall be borne by the holders of the
securities so registered pro rata on the basis of the number of shares so
registered.
3.3 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 3,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense, the Company will:
(a) Keep such registration, qualification or compliance
effective for a period of 90 days or until the Holder or Holders have completed
the distribution described in the registration statement relating thereto,
whichever first occurs; and
(b) Furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request.
3.4 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its
officers, directors, partners and legal counsel, and each person controlling
such Holder, with respect to which registration, qualification or compliance has
been effected pursuant to this Section 3, and each underwriter, if any, and each
person who controls any underwriter against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on (i) any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other similar document (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, or (ii) any violation by the Company
of any federal, state or common law rule or regulation applicable to the Company
in connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors, partners and legal
counsel, and each person controlling such Holder, each such underwriter and each
person who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, as incurred, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission based upon written information furnished to the Company by an
instrument duly executed by such Holder or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the
4
<PAGE>
securities as to which such registration, qualification or compliance is being
effected, indemnify the Company, each of its directors and officers, each legal
counsel and independent accountant of the Company, each underwriter, if any, of
the Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter within the meaning of the
Securities Act, and each other such Holder, each of its officers, directors, and
partners and each person controlling such Holder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other similar document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made, and will reimburse the Company, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, as incurred, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
(c) Each party entitled to indemnification under this Section
3.4 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such defense
at such party's expense; provided, however, that the Indemnifying Party shall
bear the expense of such defense of the Indemnified Party if representation of
both parties by the same counsel would be inappropriate due to actual or
potential conflicts of interest. The failure of any Indemnified Party to give
notice as provided herein shall relieve the Indemnifying Party of its
obligations under this Section 3 only to the extent that such failure to give
notice shall materially adversely prejudice the Indemnifying Party in the
defense of any such claim or any such litigation. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation.
3.5 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 3.
3.6 Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
an IPO and following such time as a public market exists for the Common Stock of
the Company, the Company agrees to:
(a) Use its best efforts to facilitate the sale of the
Restricted Securities to the public, without registration under the Securities
Act, pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act and the Exchange
Act at anytime prior to the Company's being otherwise required to file such
reports;
(b) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act at all times
after 90 days after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to the
general public;
(c) Use its best efforts to then file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act, as amended (at any
5
<PAGE>
time after it has become subject to such reporting requirements); and
(d) So long as a Purchaser owns any Restricted Securities to
furnish to the Purchaser forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days following an IPO), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as a
Purchaser may reasonably request in availing itself of any rule or regulation of
the Commission allowing a Purchaser to sell any such securities without
registration.
3.7 "Market Stand-off" Agreement. Each Holder of more than 1% of the
---------------------------
Company's outstanding voting stock agrees not to sell or otherwise transfer or
dispose of any Common Stock (or other securities) of the Company held by it
during the 180 day period following the effective date of the Company's IPO if
so requested by the Company and underwriter of Common Stock (or other
securities) of the Company. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of such period.
4. Certain Rights
--------------
4.1 Information Rights. Prior to an IPO, the Company shall furnish to
------------------
each Purchaser, and each Purchaser agrees to maintain the confidentiality of,
the following reports:
(a) As soon as practicable after the end of each fiscal year of
the Company, an audited consolidated balance sheet of the Company as of the end
of such fiscal year, and audited consolidated statements of income and cash
flows of the Company for such year, prepared in accordance with generally
accepted accounting principles.
(b) As soon as practicable after the end of the first, second
and third quarterly accounting periods in each fiscal year of the Company, an
unaudited consolidated balance sheet of the Company as of the end of such
quarterly period, and unaudited consolidated statements of income and cash flows
of the Company for such quarterly period, subject to changes resulting from
normal year-end audit adjustments, all in reasonable detail, except that such
financial statements need not contain the notes required by generally accepted
accounting principles.
4.2 Inspection and Visitation Rights. Prior to an IPO, the Company
--------------------------------
shall permit any Holder who requests to inspect and visit any of the properties
of the Company, including its books of account and other records, and to discuss
its affairs, finances and accounts with the Company's officers at such times as
such person may reasonably request as long as such requests do not interfere
with the Company's operation of its business.
5. Miscellaneous
-------------
5.1 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Georgia applicable to contracts
between Georgia residents entered into and to be performed entirely within the
State of Georgia.
5.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
5.3 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subjects
hereof.
5.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be effective 5 days after
mailed by first-class mail, postage prepaid, or otherwise delivered by hand
6
<PAGE>
or by messenger, addressed (a) if to a Purchaser, at such address as such
Purchaser shall have furnished to the Company in writing, or (b) if to any other
holder of Registrable Securities, at such address as such holder shall have
furnished the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Registrable Securities who has so furnished an address to the Company, or (c) if
to the Company, at such address as the Company shall have furnished to each
Purchaser and each such other holder in writing.
5.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
5.6 Severability. In the case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
5.7 Amendments. The provisions of this Agreement may be amended at any
----------
time and from time to time, and particular provisions of this Agreement may be
waived, with and only with an agreement or consent in writing signed by the
Company and by the holders of a majority of the number of shares of Registrable
Securities (or securities convertible into Registrable Securities) outstanding
as of the date of such amendment or waiver; provided, however, that without
obtaining the consent of any other party to this Agreement, the Company may
amend this Agreement to add hereto as parties each person or entity who
purchases Shares and Stock Purchase Warrants pursuant to Subscription
Agreements, such Amendment to be effected by obtaining the signature of each
such party and the Company as a counterpart to this Agreement. Each Purchaser
acknowledges that by the operation of this Section, the holders of a majority of
the outstanding Registrable Securities may have the right and power to diminish
or eliminate all rights of such Purchaser under this Agreement.
7
<PAGE>
This Investor Rights Agreement is hereby executed as of the date first
above written.
MEGAMARKETING CORPORATION PURCHASER
By: By:
--------------------------- ----------------------------
8
<PAGE>
EXHIBIT A
Units consisting of Series A Convertible
Preferred Stock and Warrants
Purchaser to Purchase Common Stock
- --------- ------------------------
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement"), made and entered
into as of the 29th day of July, 1998 (the "Effective Date"), by and between
Michael T. Kane (hereinafter referred to as "Employee"), and MegaMarketing
Corporation, a corporation organized under the laws of the State of Georgia
(hereinafter referred to as the "Company").
In consideration of the premises and the mutual promises and agreements
contained in this Agreement, the parties to this Agreement, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
---------
SCOPE OF EMPLOYMENT
-------------------
Section 1.1 Employment. Subject to the terms of this Agreement, the Company
----------
hereby agrees to employ Employee, and Employee hereby accepts such employment.
Employee shall hold the title of Chief Financial Officer of the Company, and in
that capacity Employee shall have such authority and responsibilities as are
consistent with his position and which may be set forth in this Agreement, in
the Bylaws or assigned by the Board of Directors or the Company's Chief
Executive Officer from time to time (the "Services"). At the request and in the
discretion of the Company, Employee shall serve as an officer or director of any
subsidiary or affiliate of the Company, and shall perform services for any such
subsidiary or affiliate as are appropriate to and consistent with the Services
being performed by Employee for the Company. Employee shall devote substantially
all of Employee's productive business time, energy and skill (except on vacation
days and holidays) to performing his obligations under this Agreement and shall
perform his obligations under this Agreement diligently, faithfully and to the
best of Employee's abilities.
Section 1.2 Place of Performance. During the term of his employment under
--------------------
this Agreement (the "Term"), Employee shall be based at the offices of the
Company in Atlanta, Georgia except for reasonably required travel on business.
Section 1.3 Compliance with Policies. Subject to the terms of this
------------------------
Agreement, during the Term, Employee shall comply in all material respects with
all policies and procedures applicable to similarly situated employees of the
Company generally and to Employee specifically.
ARTICLE 2
---------
TERM
----
The Term shall be for a period of three (3) years, from July 29, 1998
through July 28, 2001, subject, however, to prior termination as provided for in
this Agreement.
ARTICLE 3
---------
COMPENSATION; EXPENSES
----------------------
Section 3.1 Base Salary. Employee shall be paid a base salary (the "Base
-----------
Salary") during the Term at the rate of One Hundred Thousand Dollars
($100,000.00) per annum. The Base Salary and all other payments made pursuant
to Section 3 shall be (a) payable on the schedule that the Company may implement
from time to time for such payments, and (b) subject to any withholdings and
deductions required by applicable law. Employee will be eligible to receive
annual raises in the Base Salary and participate in the bonus program offered by
the Company to the Company's senior executives, in each case as determined
<PAGE>
by the Company's Board of Directors in its sole discretion.
Section 3.2 Stock Options.
-------------
(a) Effective as of the Effective Date, Employee shall receive an
option to purchase one hundred fifty thousand (150,000) shares of Company's
Common Stock at an exercise price of $1.00/share. Of these options, 100,000
shall be immediately vested, and 50,000 shall vest upon the effective date of
the Company's initial public offering of the Company's Common Stock pursuant to
a registration statement to be filed under the Securities Act of 1933 (the
"IPO"). Such option shall have the additional terms and be governed by that
certain Stock Option Agreement between the Company and Employee dated the
Effective Date.
(b) During the Term, Employee shall also be eligible to be
considered for participation in other stock-based employee incentive or equity-
based award plans that the Company may implement from time to time. For purposes
of Employee's participation for possible grants of stock options under any such
plan, he will be reviewed and considered for a grant at the same time as, and on
a basis and subject to terms that are consistent with, the basis and terms that
govern grants to other officers of the Company, taking into account Employee's
position and responsibilities.
Section 3.3 Expense Reimbursement. The Company shall pay or reimburse
---------------------
Employee for all reasonable business expenses incurred or paid by Employee in
the course of performing his duties under this Agreement and in accordance with
Company policy. As a condition to such payment or reimbursement, however,
Employee shall maintain and provide to the Company, upon the Company's request,
reasonable documentation and receipts for such expenses.
ARTICLE 4
---------
EMPLOYEE BENEFITS
-----------------
Section 4.1 Benefit Plans. During the Term, Employee shall be entitled to
-------------
participate in such of the Company's retirement, supplemental retirement, life,
health, disability and other insurance programs, as well as other benefit
programs, which are generally available to other similarly situated employees of
the Company, subject to the Company's policies with respect to all such benefits
or insurance programs or plans. The Company shall not, by virtue of this
provision, be under any obligation to Employee to continue to maintain any
particular plan or program or any particular benefit level under any plan or
program.
Section 4.2 Vacation. During the Term, Employee shall be entitled to four
--------
(4) weeks of vacation.
ARTICLE 5
---------
TERMINATION
-----------
Section 5.1 Termination by the Company. Employee's employment may be
--------------------------
terminated by the Company by giving notice during the term of this Agreement
upon the occurrence of one or more of the following events:
2
<PAGE>
(a) Employee's death, or disability that renders Employee incapable
of performing Employee's duties for more than one hundred twenty (120) calendar
days (termination under this Section 5.1(a) will be deemed termination without
Cause);
(b) for any reason following a determination by the Board to
terminate Employee's employment (termination under this Section 5.1(b) will be
deemed termination without Cause); or
(c) "for Cause," which for purposes of this Agreement will mean
that Employee will have:
(i) committed an intentional act of fraud, personal
dishonesty, breach of fiduciary duty, embezzlement or theft in connection with
Employee's duties or in the course of Employee's employment with the Company;
(ii) inflicted intentional, wrongful, material damage to
the Company or to any material asset of the Company;
(iii) intentionally and wrongfully violated Article 1 of
this Agreement;
(iv) been convicted of a felony or any similar crime
carrying a prison term of at least one year (regardless of whether imprisonment
is actually imposed);
(v) used alcohol or drugs in a habitual and debilitating
manner; or
(vi) failed to meet reasonable performance expectations, as
determined and articulated by the Board; provided, however, that in the event of
this subsection (vi) being the sole reason for a termination for Cause, Employee
will have the opportunity to cure and related rights set forth in Section 5.1(d)
of this Agreement;
and further provided, that single or occasional acts of poor business judgment
(unless such act or actions involve personal profit or have a Material Adverse
Effect on Purchaser), business conduct which is consistent with prior business
conduct known to and acquiesced in by the Board, or business conduct which is
consistent with a business plan or arrangement described in advance to the Board
and conducted with the acquiescence of the Board shall not be grounds for
dismissal under subsection (i) or subsection (ii).
(d) In the event of a determination by the Board that Employee
has failed to meet performance expectations, the Company will furnish to
Employee in writing a notice of proposed termination setting forth a specific
statement of the deficiencies in Employee's performance. Employee will then have
a period of ninety (90) days after the giving of such written notice by the
Company to effect a cure of the specified deficiencies. If, at the end of such
ninety (90) day period, no such cure has been effected to the reasonable
satisfaction of the Board, the Board may, in its sole discretion, terminate
Employee's employment as of the end of such ninety (90) day period. The Company
will be obligated to provide to Employee only one such notice of proposed
termination, and if subsequent to effecting a cure of specified deficiencies
Employee is determined by the Board to have again failed to meet the same
performance expectations, then Employee's employment may be terminated
immediately upon the Company's giving of notice of termination to Employee
specifying Employee's deficiencies in performance.
(e) Termination by Employee. Employee's employment may be terminated by
-----------------------
Employee by giving notice during the term of this Agreement for "Good Reason" or
for any reason.
3
<PAGE>
For purposes of this Agreement, "Good Reason" will mean a material breach by the
Company of any material provision of this Agreement, or a material adverse
alteration in the nature or status of Employee's responsibilities (including,
without limitation, a change in title or compensation, or a material change in
benefits), in any such case without the express written consent of Employee,
unless such event is fully corrected within thirty (30) days following written
notification by Employee to the Company that Employee intends to terminate
Employee's employment under this Agreement because of such breach or alteration.
Section 5.2 Severance. For purposes of this Agreement, Employee's
---------
entitlement to any severance payments upon termination of Employee's employment
will be as set forth below:
(a) Termination Without Cause. If Employee is terminated
-------------------------
without Cause or resigns for Good Reason, Employee will be entitled to severance
pay equal to one year's salary, to be paid in twelve (12) monthly installments
equal to Employee's then-current monthly salary. For purposes of this Agreement,
a demotion or a requirement of relocation from the Atlanta, Georgia area will be
deemed to be a termination without cause.
(b) Voluntary Termination. If prior to July 29, 1999 Employee
---------------------
voluntarily resigns for a reason other than Good Reason, Employee will not be
entitled to receive any severance pay. If after July 28, 1999 Employee
voluntarily resigns for a reason other than Good Reason, Employee will be
entitled to severance pay equal to six (6) months' salary at Employee's then
current rate, to be paid in six (6) monthly installments. Employee will provide
a minimum of thirty (30) days prior written notice of Employee's resignation to
the CEO or the Board, as appropriate. In the event Employee will provide thirty
(30) days prior written notice of Employee's intent to resign, the Company may
accept such resignation effective as of any date during such thirty (30) day
period as the Company deems appropriate, provided that Employee will receive
from the Company Employee's salary and be entitled to participate at the
Company's expense in any Company sponsored benefit programs in which Employee
was a participant as of the effective date of Employee's resignation for the
duration of such thirty (30) day period.
(c) Termination for Cause. Employee will not be entitled to any
---------------------
severance pay whatsoever if Employee's employment is terminated "for Cause"
pursuant to Section 3.1(c) of this Agreement, unless severance pay is approved
by the Board in its sole discretion; provided, however, that Employee will
receive such annual salary that is accrued but unpaid up to the date of such
termination for Cause. Notwithstanding the foregoing, if termination is for
Cause pursuant to Section 3.1(c)(vi), then Employee will be entitled to
severance pay equal to three (3) months' salary at Employee's then current rate,
to be paid in three (3) monthly installments.
ARTICLE 6
---------
REPRESENTATIONS
---------------
Section 6.1 Of Employee. Employee represents and warrants to the Company
-----------
that (a) his execution, delivery and performance of this Agreement do not and
will not conflict with, violate, or constitute a breach of or default under any
provision of law or regulation applicable to him or any provision of any
agreement, contract or other instrument to which he is a party or otherwise
bound; (b) this Agreement constitutes the legal, valid and binding obligation of
Employee, enforceable against Employee in accordance with its terms; and (c) he
has not received any legal advice contrary to his representations or warranties
set forth in this Section 6.1.
Section 6.2 Of the Company. The Company represents and warrants to Employee
--------------
that (a) this Agreement has been duly executed and delivered by the Company; (b)
the execution, delivery and
4
<PAGE>
performance of this Agreement by the Company have been duly authorized by all
necessary corporate action; (c) this Agreement constitutes the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms; (d) the execution, delivery and performance of this Agreement by
the Company do not and will not conflict with, violate, or constitute a breach
of the Articles of Incorporation or Bylaws of the Company or any of its
subsidiaries or any law or regulation applicable to the Company or any of its
subsidiaries; and (e) the Company has not received any legal advice contrary to
the Company's representations and warranties set forth in this Section 6.2.
ARTICLE 7
---------
RIGHTS TO WORK PRODUCT
----------------------
Except as expressly provided in this Agreement, the Company alone shall be
entitled to all benefits, profits and results arising from or incidental to
Employee's performance of the Services. To the greatest extent possible, any
work product, property, data, documentation or information or materials
prepared, conceived, discovered, developed or created by Employee in connection
with performing the Services or any other of his employment responsibilities
during the Term ("Work Product") shall be deemed to be "work made for hire" as
defined in the Copyright Act, 17 U.S.C.A. (S) 101 et seq, as amended, and owned
exclusively and perpetually by the Company. Employee hereby unconditionally and
irrevocably transfers and assigns to the Company all intellectual property or
other rights, title and interest Employee may currently have (or in the future
may have) by operation of law or otherwise in or to any Work Product. Employee
agrees to execute and deliver to the Company any transfers, assignments,
documents or other instruments which the Company may deem necessary or
appropriate to vest complete and perpetual title and ownership of any Work
Product and all associated rights exclusively in the Company. The Company shall
have the right to adapt, change, revise, delete from, add to and/or rearrange
the Work Product or any part thereof written or created by Employee, and to
combine the same with other works to any extent, and to change or substitute the
title thereof, and in this connection Employee hereby waives the "moral rights"
of authors as that term is commonly understood throughout the world including,
without limitation, any similar rights or principles of law which Employee may
now or later have by virtue of the law of any locality, state, nation, treaty,
convention or other source. Unless otherwise specifically agreed, Employee
shall not be entitled to any compensation in addition to that provided for in
Section 3 of this Agreement for any exercise by the Company of its rights set
forth in the preceding sentence.
ARTICLE 8
---------
NONDISCLOSURE COVENANT
----------------------
Through exercise of his rights and performance of his obligations under
this Agreement, Employee will be exposed to "Trade Secrets" and "Confidential
Information" (as those terms are defined in the next sentences). "Trade Secrets"
shall mean information or data of or about the Company or any affiliated entity,
including, but not limited to, technical or nontechnical data, formulas,
patterns, compilations, programs, devices, methods, techniques, drawings,
processes, financial data, financial plans, product plans, or lists of actual or
potential customers, clients, distributors, or licensees, that: (i) derive
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from their disclosure or use; and (ii) are the subject of efforts
that are reasonable under the circumstances to maintain their secrecy. To the
extent that the foregoing definition is inconsistent with a definition of "trade
secret" mandated under applicable law, the latter definition shall govern for
purposes of interpreting Employee's obligations under this Agreement.
"Confidential Information" shall mean valuable, non-public, competitively
sensitive data and information relating to the business of the Company or any
affiliated entity, other than Trade Secrets Employee acknowledges and agrees
that any unauthorized disclosure or use of any of the Trade Secrets or
Confidential Information would be wrongful and would likely result in immediate
and irreparable injury to the Company.
5
<PAGE>
Except as required to perform his obligations under this Agreement or except
with Company's prior written permission, Employee shall not, without the express
prior written consent of the Company, redistribute, market, publish, disclose or
divulge to any other person or entity, or use or modify for use, directly or
indirectly in any way for any person or entity: (i) any Trade Secrets at any
time (during or after the Term) during which such information or data shall
continue to constitute a "trade secret" under applicable law; and (ii) any
Confidential Information during Employee's employment with the Company and for a
period of twelve (12) months after termination. Employee agrees to cooperate
with any reasonable confidentiality requirements of the Company. Employee shall
immediately notify the Company of any unauthorized disclosure or use of any
Trade Secrets or Confidential Information of which Employee becomes aware.
ARTICLE 9
---------
RETURN OF MATERIALS
-------------------
At any point during the Term at the specific request of the Company, or,
in any event, as promptly as practicable after Employee's employment under this
Agreement has been terminated, Employee will return to the Company all Work
Product (including any copies or reproductions thereof and any materials
constituting or containing Trade Secrets or Confidential Information of the
Company) that are in Employee's possession or control.
ARTICLE 10
----------
ACKNOWLEDGEMENT
---------------
The parties acknowledge and agree that the covenants of Employee in
Sections 7, 8,and 9 (collectively, the "Protective Covenants") are reasonable as
to time, scope and territory given the Company's need to protect its substantial
investment in its Confidential Information, Trade Secrets and customer
relationships, and particularly given (a) the generous compensation and benefits
that are to be provided Employee, (b) the Company's investment of time, effort
and capital in enhancing Employee's business skills and opportunities, (c) the
complexity and competitive nature of the Company, and (d) that Employee has
sufficient skills to find alternative, commensurate employment or consulting
work in Employee's field of expertise that would not entail a violation of the
Protective Covenants. Notwithstanding Section 11 below, the parties further
acknowledge that any breach or threatened breach of a Protective Covenant by
Employee is likely to result in irreparable injury to the Company, and
therefore, in addition to all remedies provided at law or in equity (which
remedies shall be cumulative and not mutually exclusive), Employee agrees that
the Company shall be entitled to file suit in a court of competent jurisdiction
to seek a temporary restraining order and a permanent injunction to prevent a
breach or contemplated breach of the Protective Covenant.
ARTICLE 11
----------
ARBITRATION
-----------
(a) Any controversy or claim against the Company or any of its officers,
directors, employees or agents arising from, out of or relating to this
Agreement, the breach thereof (other than controversies or claims arising from,
out of or relating to the provisions in Sections 7, 8, and 9, with respect to
which either party may seek injunctive and/or other equitable relief in a court
of competent jurisdiction as set forth in Section 12.2), or the employment or
termination thereof of Employee by the Company which would give rise to a claim
under federal, state or local law (including but not limited to claims based in
tort or contract, claims for discrimination under state or federal law, and/or
claims for violation of any federal, state or local law, statute or regulation)
("Claims"), shall be submitted to an impartial mediator ("Mediator") selected
jointly by the parties. Both parties shall attend a mediation conference and
attempt to resolve any and all Claims. If they are not able to resolve all
Claims, any unresolved Claims, including any dispute as to whether a matter
6
<PAGE>
constitutes a Claim which must be submitted to arbitration, shall be determined
by final and binding arbitration in Georgia in accordance with the Model
Employment Dispute Resolution Rules ("Rules") of the American Arbitration
Association, by an experienced employment arbitrator licensed to practice law in
the State of Georgia in accordance with the Rules, except as specified in this
Agreement. The arbitrator shall be selected by alternate striking from a list of
six arbitrators, half of which shall be supplied by the Company and half by
Employee. The party not initiating the arbitration shall strike first. The
process shall be repeated twice until an arbitrator is selected. If an
arbitrator is still not selected, the Mediator shall provide a list of three
names which will be alternately struck, with the party initiating the
arbitration striking first, until a selection is made.
(b) A demand for arbitration shall be made within a reasonable time
after the Claim has arisen. In no event shall the demand for arbitration be made
after the date when institution of legal and/or equitable proceedings based on
such Claim would be barred by the applicable statute of limitations. Each party
to the arbitration will be entitled to be represented by counsel and will have
the opportunity to take one deposition of an opposing party or witness before
the arbitration hearing. By mutual agreement of the parties, additional
depositions may be taken. The arbitrator shall have the authority to hear and
grant a motion to dismiss and/or for summary judgment, applying the standards
governing such motions under the Federal Rules of Civil Procedure. Each party
shall have the right to subpoena witnesses and documents for the arbitration
hearing. A court reporter shall record all arbitration proceedings.
(c) With respect to any Claim brought to arbitration under this Agreement,
either party may be entitled to recover whatever damages would otherwise be
available to that party in any legal proceeding based upon the federal and/or
state law applicable to the matter and as specified by Section 12.2. The
decision of the arbitrator may be entered and enforced in any court of competent
jurisdiction by either the Company or Employee. Each party shall pay the fees of
their respective attorneys (except as otherwise awarded by the arbitrator), the
expenses of their witnesses and any other expenses connected with presenting
their Claim or defense. Other costs of the arbitration, including the fees of
the Mediator, the arbitrator, the cost of any record or transcript of the
arbitration, administrative fees, and other fees and costs, shall be borne
equally by the parties, one-half by Employee, on the one hand, and one-half by
the Company, on the other hand. Should Employee or the Company pursue any
dispute or matter covered by this Section by any method other than said
arbitration, the responding party shall be entitled to recover from the other
party all damages, costs, expenses, and attorneys' fees incurred as a result of
such action. The provisions contained in this Section 12 shall survive the
termination and/or expiration of this Agreement.
The parties indicate their acceptance of the foregoing arbitration
requirement by initialing below:
------------------------- -----------------------------
For the Company Employee
ARTICLE 12
----------
MISCELLANEOUS
-------------
Section 12.1 Binding Effect. This Agreement shall inure to the benefit of
--------------
and shall be binding upon Employee and his executor, administrator, heirs,
personal representative and assigns, and the Company and its successors and
assigns; provided, however, neither party to this Agreement shall be entitled to
assign any of its rights, or delegate any of its duties (except, in the case of
Employee, customary delegation of authority not inconsistent with this
Agreement; and except, in the case of the Company, to any person or entity
acquiring all or substantially all of the assets of the Company or to any entity
controlling, controlled by or under common control with the Company), under this
Agreement without the prior written consent of the other party.
7
<PAGE>
Section 12.2 Governing Law. This Agreement shall be deemed to be made in,
-------------
and in all respects shall be interpreted, construed and governed by and in
accordance with, the laws of the State of Georgia. The parties to this
Agreement agree that the state or federal courts in the State of Georgia shall
have personal jurisdiction over them with respect to, and shall be the exclusive
forum for the resolution of, any matter or controversy arising from or with
respect to Sections 7, 8, or 9 of this Agreement. Service of a summons and
complaint concerning any such matter or controversy may, in addition to any
other lawful means, be effected by sending a copy of such summons and complaint
by certified mail to the party to be served as specified in Section 12.4 of this
Agreement.
Section 12.3 Headings. The section and subsection headings contained in
--------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
Section 12.4 Notices. Unless otherwise agreed to in writing by the
-------
parties to this Agreement, all communications provided for under this Agreement
shall be in writing and shall be deemed to be given when delivered if delivered
in person or by telecopy or five (5) business days after being sent by first-
class mail, registered or certified, return receipt requested, with proper
postage prepaid, and
(a) If to the Employee, addressed to;
Mr. Michael T. Kane
Chief Financial Officer
MegaMarketing Corporation
c/o Aberdeen Marketing Group, Inc.
2030 Powers Ferry Road, Suite 120
Atlanta, Georgia 30339
(b) If to the Company, addressed to:
John P. Kelly
Chief Executive Officer
MegaMarketing Corporation
4830 West Kennedy Blvd.
Suite 920
Tampa, FL 33609
with a copy to:
Charles D. Vaughn, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.W.
Atlanta, Georgia 30309
or to such other person or address as shall be furnished in writing by any party
to the other prior to the giving of the applicable notice or communication. The
copy to Mr. Vaughn, however, shall not constitute notice.
Section 12.5 Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
Section 12.6 Entire Agreement. This Agreement is intended by the
----------------
parties to be the final expression of their agreement with respect to the
subject matter of this Agreement and is the complete and
8
<PAGE>
exclusive statement of the terms thereof, notwithstanding any representations,
statements or agreements to the contrary heretofore made. This Agreement may be
modified only by a written instrument signed by each of the parties to this
Agreement.
Section 12.7 Severability. All provisions of this Agreement are severable
------------
from one another, and the unenforceability or invalidity of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement; provided, however, that should any judicial body
interpreting this Agreement deem any provision to be unreasonably broad in time,
territory, scope or otherwise, the Company and Employee intend for the judicial
body, to the greatest extent possible, to reduce the breadth of the provision to
the maximum legally allowable parameters rather than deeming such provision
totally unenforceable or invalid.
Section 12.8 Waiver. The waiver by either the Company or Employee of a
------
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any prior or subsequent breach of the same provision by the other
party or a waiver of a breach of another provision of this Agreement by the
other party. No waiver or modification of any provision of this Agreement shall
be valid unless in writing and duly executed by the party to be charged with the
waiver or modification.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
MEGAMARKETING CORPORATION
By: /s/ Edward J. Rutkowski
--------------------------------
Name: Edward J. Rutkowski
Title: Executive Vice President
EMPLOYEE
/s/ Michael T. Kane
-------------------------------------
MICHAEL T. KANE
9
<PAGE>
LOAN AGREEMENT
First Union National Bank
999 Peachtree Street - GA9104
Atlanta, Georgia 30309
(Hereinafter referred to as the "Bank")
M2Direct, Inc.
2030 Powers Ferry Road, Suite 120
Atlanta, Georgia 30339
(Hereinafter referred to as the "Borrower")
This Loan Agreement ("Agreement") is entered into as of March 30, 1999, by and
between Bank and Borrower, a corporation (for profit) organized under the laws
of Georgia.
Borrower has applied to Bank for a loan or loans (individually and collectively,
the "Loan") evidenced by one or more promissory notes as follows:
Line of Credit - from the date hereof until written notice form the Bank that
the Sweep Plus arrangement is available, in the principal amount of
$3,000,000.00 (the "Commitment") which is evidenced by the Promissory Note dated
March 30, 1999 (the "Note"), under which Borrower may borrow, repay, and
reborrow, from time to time, so long as the total indebtedness outstanding at
any one time does not exceed the principal amount. The proceeds of advances
under the Line of Credit are to be used by Borrower solely for the refinancing
of existing indebtedness and for general corporate purposes.
Sweep Plus Revolving Line of Credit - following receipt of written notice from
the bank that the Sweep Plus arrangement is available, in the principal amount
of up to the Commitment which is evidenced by the Note, under and in accordance
with which loan advances and repayments will be made automatically to the
Borrower's bank account utilizing the Bank's Sweep Plus services. The proceeds
of advances under the Sweep Plus Revolving Line of Credit are to be used by
Borrower solely for general corporate purposes.
Bank's obligation to advance or readvance under the Note shall terminate if
there shall occur a Default and as otherwise provided in the Note.
This Agreement applies to the Loan and all Loan Documents. The terms "Loan
Documents" and "Obligations," as used in this Agreement, are defined in the
Note. The term "Loan Parties" shall mean the Borrower and its Subsidiaries, as
well as any other guarantors of the Obligations. As used in this Agreement as to
Borrower, "Subsidiary" shall mean any corporation of which more than 50% of the
issued and outstanding voting stock is owned directly or indirectly by Borrower.
<PAGE>
Relying upon the covenants, agreements, representations and warranties contained
in this Agreement, Bank is willing to extend credit to Borrower upon the terms
and subject to the conditions set forth herein, and Bank and Borrower agree as
follows:
REPRESENTATIONS. Borrower represents that from the date of this Agreement and
until final payment in full of the Obligations, and except as set forth on the
disclosure schedule attached hereto: Accurate Information. All information now
and hereafter furnished to Bank is and will be true, correct and complete. Any
such information relating to Loan Parties' financial condition will accurately
reflect Loan Parties' financial condition as of the date(s) thereof, (including
all contingent liabilities of every type), and Borrower further represents that
the financial condition of the Loan Parties has not changed materially or
adversely since December 31, 1998 (as such condition is represented on the draft
audited financial statements delivered to the Bank at closing). Authorization;
Non-Contravention. The execution, delivery and performance by each Loan Party of
this Agreement and other Loan Documents to which it is a party are within its
power, have been duly authorized by all necessary action taken by the duly
authorized officers of such Loan Party, and, if necessary, by making appropriate
filings with any governmental agency or unit and are the legal, binding, valid
and enforceable obligations of such Loan Party; and do not (i) contravene, or
constitute (with or without the giving of notice or lapse of time or both) a
violation of any provision of applicable law, a violation of the organizational
documents of such Loan Party, or a default under any agreement, judgment,
injunction, order, decree or other instrument binding upon or affecting such
Loan Party, (ii) result in the creation or imposition of any lien (other than
the lien(s) created by the Loan Documents) on any of such Loan Parties assets,
or (iii) give cause for the acceleration of any obligations of such Loan Party
to any other creditor. Asset Ownership. Each Loan Party has good and marketable
title to all of the properties and assets reflected on the balance sheets and
financial statements supplied Bank by Borrower, and all such properties and
assets are free and clear of mortgages, security deeds, pledges, liens, charges,
and all other encumbrances, except as otherwise disclosed to Bank by Borrower on
the disclosure schedule attached hereto ("Permitted Liens"). No default has
occurred under any Permitted Liens and no claims or interests adverse to any
Loan Party's present rights in its properties and assets have arisen. Discharge
of Liens and Taxes. Each Loan Party has duly filed, paid and/or discharged all
taxes or other claims which may become a lien on any of its property or assets,
except to the extent that such items are being appropriately contested in good
faith and an adequate reserve for the payment thereof is being maintained.
Indebtedness. The disclosure schedule attached hereto contains a true and
correct list, as of the date of this Agreement, of all indebtedness of the Loan
Parties. Investments. The disclosure schedule attached hereto contains a true
and correct list, as of the date of this Agreement, of all Subsidiaries of each
Loan Party, all deposits with, or loans or other advances to any other party.
Sufficiency of Capital. None of the Loan Parties is, and after consummation of
this Agreement and after giving effect to all indebtedness incurred and liens
created by such Loan Parties in connection with the Loan, will be, insolvent
within the meaning of 11 U.S.C. Section 101(32). Compliance with Laws. Each Loan
Party is in compliance in all material respects with all federal, state and
local laws, rules and regulations applicable to its properties, operations,
business, and finances, including, without limitation, any federal or state laws
relating to liquor (including 18 U.S.C. Section 3617, et seq.) or narcotics
------
(including 21 U.S.C. Section 801, et seq.) and/or any commercial crimes; all
------
applicable federal, state and local laws and regulations intended to protect
2
<PAGE>
the environment; and the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), if applicable. Organization and Authority. Each Loan Party is
duly organized, validly existing and in good standing under the laws of the
state of its organization, and has all powers, governmental licenses,
authorizations, consents and approvals required to operate its business as now
conducted. Each Loan Party is duly qualified, licensed and in good standing in
each jurisdiction where qualification or licensing is required by the nature of
its business or the character and location of its property, business or
customers, and in which the failure to so qualify or be licensed, as the case
may be, in the aggregate, could have a material adverse effect on the business,
financial position, results of operations, properties or prospects of such Loan
Party. No Litigation. There are no pending or threatened suits, claims or
demands against any Loan Party. Regulation U. None of the proceeds of the Loan
made pursuant to the Note or this Agreement shall be used directly or indirectly
for the purpose of purchasing or carrying any margin stock in violation of any
of the provisions of Regulation U of the Board of Governors of the Federal
Reserve System ("Regulation U"), or for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry margin stock or
for any other purchase which might render the Loan a "Purpose Credit" within the
meaning of Regulation U. ERISA. Each employee pension benefit plan, as defined
in ERISA, maintained by any Loan Party meets, as of the date hereof, the minimum
funding standards of ERISA and all applicable regulations thereto and
requirements thereof, and of the Internal Revenue Code of 1954, as amended. No
"Prohibited Transaction" or "Reportable Event" (as both terms are defined by
ERISA) has occurred with respect to any such plan. No Default. None of the Loan
Parties is presently in breach of any of its obligations under any material
agreement with any third party.
AFFIRMATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing, Borrower will, and will cause each of the other Loan Parties
to: Business Continuity. Conduct its business in exclusively in the fields of
direct marketing, electronic commerce and technology that is reasonably related
thereto. Maintain Properties. Maintain, preserve and keep its property in good
repair, working order and condition, making all needed replacements, additions
and improvements thereto, to the extent allowed by this Agreement. Access to
Books & Records. Allow Bank, or its agents, during normal business hours, access
to the books, records and such other documents of the Loan Parties as Bank shall
reasonably require, and allow Bank to make copies thereof. Insurance. Maintain
adequate insurance coverage with respect to its properties and business against
loss or damage of the kinds and in the amounts customarily insured against by
companies of established reputation engaged in the same or similar businesses
including, without limitation, commercial general liability insurance, workers
compensation insurance, and business interruption insurance; all acquired in
such amounts and from such companies as Bank may reasonably require. Notice of
Default and Other Notices. (a) Notice of Default. Furnish to Bank immediately
upon becoming aware of the existence of any condition or event which constitutes
a Default (as defined in the Loan Documents) or any event which, upon the giving
of notice or lapse of time or both, may become a Default, written notice
specifying the nature and period of existence thereof and the action which the
applicable Loan Party is taking or proposes to take with respect thereto. (b)
Other Notices. Promptly notify Bank in writing of (i) any material adverse
change in its financial condition or its business; (ii) any default under any
material agreement, contract or other instrument to which it is a party or by
3
<PAGE>
which any of its properties are bound, or any acceleration of the maturity of
any secured indebtedness owing by any Loan Party; (iii) any material adverse
claim against or affecting any Loan Party or any part of its properties; (iv)
the commencement of, and any material determination in, any litigation with any
third party or any proceeding before any governmental agency or unit affecting
any Loan Party; and (v) at least 30 days prior thereto, any change in any Loan
Party's name or address as shown above, and/or any change in any Loan Party's
structure. Compliance with Other Agreements. Comply with all terms and
conditions contained in this Agreement, and any other Loan Documents, and swap
agreements, if applicable, as defined in the Note. Payment of Debts. Pay and
discharge when due, and before subject to penalty or further charge, and
otherwise satisfy before maturity or delinquency, all obligations, debts, taxes,
and liabilities of whatever nature or amount, except those which the Borrower or
such other Loan Party, as applicable, in good faith disputes. Reports and
Proxies. Deliver to Bank, promptly, a copy of all financial statements, reports,
notices, and proxy statements, sent by Borrower to stockholders, and all regular
or periodic reports required to be filed by Borrower with any governmental
agency or authority. Other Financial Information. Deliver promptly such other
information regarding the operation, business affairs, and financial condition
of Borrower and the other Loan Parties which Bank may reasonably request. Non-
Default Certificate From Borrower. Deliver to Bank, with the Financial
Statements required herein, a certificate signed by a principal financial
officer of Borrower warranting that no "Default" as specified in the Loan
Documents nor any event which, upon the giving of notice or lapse of time or
both, would constitute such a Default, has occurred. Estoppel Certificate.
Furnish, within 15 days after request by Bank, a written statement duly
acknowledged of the amount due under the Loan and whether offsets or defenses
exist against the Obligations. Year 2000 Compliance. Cause, on or prior to
September 30, 1999 and at all times thereafter, all software and other
processing capabilities of the Loan Parties to have the ability to correctly
interpret and manipulate all data, in whatever form, including, but not limited
to, printed form, screen displays, financial records, calculations and loan-
related data, so as to avoid errors in processing that may otherwise occur
because of the inability of the software or other processing capabilities to
recognize accurately the year 2000 or subsequent dates. New Subsidiaries. Cause
each entity that hereafter becomes a new Subsidiary of the Borrower or any other
Loan Party, whether as a result of such entity being newly formed or acquired,
promptly following the formation or acquisition thereof (but in any event,
within fifteen (15) days of such formation or acquisition) (i) to execute a
joinder agreement, in form and substance satisfactory to the Bank, pursuant to
which such new Subsidiary shall become a party to the guaranty and the security
agreement executed by the existing Subsidiaries, pursuant to which, among other
things, such new Subsidiary shall guaranty the obligations of the Borrower
hereunder and shall grant to the Bank a perfected, first priority security
interest in all of its assets, subject only to Permitted Liens, and (ii) to
execute such UCC-1 financing statements as may be necessary or desirable to
ensure that the Bank has a first priority security interest in such new
Subsidiary' s assets, subject only to Permitted Liens, and (iii) to execute and
deliver such other agreements, documents and instruments and the Bank may
reasonably require to ensure that the Bank has a perfected, first priority
security interest in the assets of such new Subsidiary, subject only to
Permitted Liens.
NEGATIVE COVENANTS. Borrower agrees that from the date of this Agreement and
until final payment in full of the Obligations, unless Bank shall otherwise
consent in writing,
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<PAGE>
Borrower will not, nor will it cause or permit any other Loan Party to: Default
on Other Contracts or Obligations. Default on any material contract with or
obligation when due to a third party or default in the performance of any
obligation to a third party incurred for money borrowed in an amount in excess
of $25,000.00. Judgment Entered. Permit the entry of any monetary judgment or
the assessment against, the filing of any tax lien against, or the issuance of
any writ of garnishment or attachment against any property of or debts due
Borrower in an amount in excess of $25,000.00 and that is not discharged or
execution is not stayed within thirty (30) days of entry. Government
Intervention. Permit the assertion or making of any seizure, vesting or
intervention by or under authority of any government by which the management of
any Loan Party is displaced of its authority in the conduct of its respective
business or such business is curtailed or materially impaired. Prepayment of
Other Debt. Prepay any debt owing to Sirrom Investments, Inc., a Tennessee
corporation ("Sirrom"), or any other debt, in advance of its legal obligation to
do so, other than, so long as there shall not then exist a Default, out of the
proceeds of the issuance of equity securities of the Borrower. Retire or
Repurchase Capital Stock. Retire or otherwise acquire any of its capital stock.
Change of Control. With respect to Borrower only, suffer to occur a change in
the composition of the board of directors of Borrower as a result of which fewer
than one-half of the incumbent directors are directors who either (a) had been
directors of Borrower 24 months prior to such change; or (b) were elected, or
nominated for election, to the board with the affirmative votes of at least a
majority of the directors who had been directors of the Borrower 24 months prior
to such change and who were still in office at the time of the election or
nomination. Guarantees. Guaranty or otherwise become responsible for obligations
of any other person or entity, other than the endorsement of checks and drafts
for collection in the ordinary course of business. Encumbrances. Create, assume,
or permit to exist any mortgage, security deed, deed of trust, pledge, lien,
charge or other encumbrance on any of its assets, whether now owned or hereafter
acquired, other than: (i) security interests required by the Loan Documents;
(ii) liens for taxes contested in good faith; (iii) liens accruing by law for
employee benefits; (iv) liens securing indebtedness owing by the Loan Parties to
Sirrom, which have been subordinated to the liens securing the obligations of
the Loan Parties under the Loan Documents on terms and conditions satisfactory
to the Bank, or (iv) Permitted Liens. Investments. Purchase any stock,
securities, or evidence of indebtedness of any other person or entity except
investments in direct obligations of the United States Government and
certificates of deposit of United States commercial banks having a tier 1
capital ratio of not less than 6% and then in an amount not exceeding 10% of the
issuing bank's unimpaired capital and surplus, or except as otherwise expressly
permitted herein.
PERMITTED ACQUISITIONS. So long as no Default has occurred and is continuing
hereunder or would result therefrom, the Borrower may acquire all or
substantially all of the assets or all of the capital stock of another entity,
so long as (i) the Borrower provides written notice of its intent to acquire
such capital stock or assets at least five (5) business days prior to such
acquisition, (ii) the Borrower complies with the provision relating to new
Subsidiaries hereunder, (iii) immediately after giving effect to such
acquisition, the Borrower is in compliance with all covenants contained in this
Agreement and the other Loan Documents (including all relevant provisions in
this Agreement and the other Loan Documents to ensure that the Bank has a
perfected, first priority security interest in any new assets and capital stock
acquired or created in connection with such acquisition, except for Permitted
Liens), and (iv) the consideration
5
<PAGE>
payable in respect of any one acquisition (other than consideration payable in
the form of capital stock of the Borrower)does not exceed $5,000,000, or the
consideration payable in respect of all acquisitions (other than consideration
payable in the form of capital stock of the Borrower) occurring after the date
hereof does not exceed $7,000,000.
FINANCIAL COVENANTS. Borrower agrees to the following provisions from the date
hereof until final payment in full of the Obligations, unless Bank shall
otherwise consent in writing, and all financial covenants shall be calculated on
a consolidated basis, using the consolidated, and consolidating (to the extent
required below), financial information for Borrower, its subsidiaries,
affiliates and its holding or parent company, as applicable, in each case
calculated in accordance with generally accepted accounting principles as in
effect on the date hereof: Effective Tangible Net Worth. Borrower and its
consolidated Subsidiaries shall, from closing until December 30, 1999, maintain
an Effective Tangible Net Worth of not less than $750,000. From fiscal-year end
December 31, 1999, through the maturity of the facility, the minimum required
Effective Tangible Net Worth shall increase by not less than 50% of net income.
"Effective Tangible Net Worth" shall mean total assets minus Total Liabilities.
For purposes of this computation, the aggregate amount of any intangible assets
of Borrower and its consolidated Subsidiaries including without limitation,
goodwill, franchises, licenses, patents, trademarks, trade names, copyrights,
service marks, and brand names, shall be subtracted from total assets. "Total
Liabilities" shall mean all liabilities of Borrower and its consolidated
Subsidiaries, excluding debt fully subordinated to Bank on terms and conditions
acceptable to Bank, and including capitalized leases and all reserves for
deferred taxes and other deferred sums appearing on the liabilities side of a
balance sheet, in accordance with generally accepted accounting principles
applied on a consistent basis. Senior Funded Debt to EBITDA Ratio. Borrower and
its consolidated Subsidiaries shall at all times maintain a ratio of Senior
Funded Debt to EBITDA Ratio of not more than 2.80 to 1.00. "Senior Funded Debt
to EBITDA" shall mean the sum of all Senior Funded Debt divided by the sum of
earnings before interest, taxes, depreciation and amortization, calculated for
the previous four quarter period. "Senior Funded Debt" shall mean, as applied to
any person or entity, the sum of all indebtedness for borrowed money, including,
without limitation, capital lease obligations and unreimbursed drawings under
letters of credit, whether any such indebtedness for borrowed money is evidenced
by a note, bond, debenture or other agreement of that person or entity,
excluding any debt fully subordinated to Bank on terms and conditions acceptable
to Bank. Capital Expenditures. Borrower shall not during any fiscal year expend
on gross fixed assets (including gross leases to be capitalized under generally
accepted accounting principles and leasehold improvements) an amount exceeding
$200,000.00 in the aggregate. Leases. Borrower shall not, during any fiscal
year, incur, create, or assume any direct or indirect liability for the payment
of rent or otherwise, under any lease or rental arrangement (excluding
capitalized leases) if immediately thereafter the sum of such lease or rental
payments to be made by Borrower during any 12-month period, when combined with
all other direct or indirect liabilities for the payment of rent or otherwise
under any lease or rental arrangement incurred, created or assumed during such
fiscal year, is increased by $200,000.00 in the aggregate. Limitation on Debt.
Borrower shall not, nor shall it permit any Loan Party to, directly or
indirectly, create, incur, assume or become liable for, any debt, contingent or
direct, if, giving effect to such additional debt on a pro forma basis, causes
the aggregate amount of the Loan Parties' debt, excluding obligations to Bank,
to exceed $8,500,000. Loans and Advances.
6
<PAGE>
Borrower shall not, nor shall it permit any Loan Party to, during any fiscal
year, make loans or advances, excepting ordinary course of business travel and
expense advances, to any person or entity, which total more than $50,000 in the
aggregate amount outstanding at any one time for all Loan Parties. Dividends.
Borrower shall not, during any fiscal year, declare or pay dividends.
ANNUAL FINANCIAL STATEMENTS. Borrower shall deliver to Bank, within 90 days
after the close of each fiscal year, audited financial statements reflecting the
operations of the Borrower and its consolidated subsidiaries during such fiscal
year, including, without limitation, a balance sheet, profit and loss statement
and statement of cash flows, with supporting schedules; all on a consolidated
and, to the extent otherwise prepared by the Borrower in the ordinary course of
its business, consolidating basis and in reasonable detail, prepared in
conformity with generally accepted accounting principles, applied on a basis
consistent with that of the preceding year. All such statements shall be
examined by an independent certified public accountant acceptable to Bank. The
opinion of such independent certified public accountant shall not be acceptable
to Bank if qualified due to any limitations in scope imposed by Borrower or its
Subsidiaries, if any. Any other qualification of the opinion by the accountant
shall render the acceptability of the financial statements subject to Bank's
approval.
PERIODIC FINANCIAL STATEMENTS. Borrower shall deliver to Bank unaudited
quarterly financial statements, including, without limitation, a balance sheet,
profit and loss statement and statement of cash flows, with supporting
schedules, as soon as available and in any event within 30 days after the close
of each such period; all in reasonable detail and prepared in conformity with
generally accepted accounting principles, applied on a basis consistent with
that of the preceding year, and subject to customary audit and year-end
adjustments and without notes. Such statements shall be certified as to their
correctness by a principal financial officer of Borrower.
COMPLIANCE CERTIFICATE. Together with the audited and unaudited financial
statements required to be delivered hereunder, the Borrower shall deliver to the
Bank a certificate of the chief financial officer of the Borrower, evidencing
whether the Borrower is in compliance with the financial covenants contained
herein, such certificate to be in the form attached hereto as Exhibit A.
FINANCIAL AND OTHER INFORMATION. Borrower shall deliver to Bank such information
as Bank may reasonably request from time to time, including without limitation,
financial statements and information pertaining to Borrower's financial
condition. Such information shall be true, complete, and accurate.
CONDITIONS PRECEDENT. The obligations of Bank to make the Loan and any advances
pursuant to this Agreement are subject to the following conditions precedent:
Additional Documents. Receipt by Bank of such additional supporting documents as
Bank or its counsel may reasonably request. Financial Statements. Receipt and
review by the Bank of a draft of the unqualified, audited consolidated and
consolidating financial statements for the Borrower and its Subsidiaries for the
Borrower's fiscal year ending December 31, 1998, such financial statements to be
in form and substance satisfactory to the Bank in its sole discretion. No
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<PAGE>
Default. Neither any Default nor any occurrence or condition which, with the
giving of notice or passage of time or both, would result in a Default shall
exist at the time of the making of such advance, or would result from the making
of such advance. Representations and Warranties. All of the representations and
warranties contained in this Agreement and the other Loan Documents shall be
true and correct as of the date of such advance. No Material Adverse Change.
Since December 31, 1998, (as represented by the draft financial statements
delivered by the Borrower at closing) there shall not have occurred any material
adverse change in the assets, liabilities, business, operations or condition
(financial or otherwise) of any Loan Party, or any event, condition or state of
facts which would be expected materially and adversely to affect the prospects
of any Loan Party subsequent to the making of such advance. Commitment Fee.
Receipt by the Bank in immediately available funds of the Commitment Fee
referred to in the Note, which fee shall be fully earned upon receipt by the
Bank and not subject to refund or rebate.
DEFAULT. If any of the following occurs, a default ("Default") under this
Agreement shall exist: Nonpayment; Nonperformance. The failure of timely payment
or performance of the Obligations or Default under the Note or any other Loan
Documents. False Warranty. A warranty or representation made or deemed made in
this Agreement or any of the other Loan Documents or furnished Bank in
connection with the loan evidenced by the Note proves materially false, or if of
a continuing nature, becomes materially false. Cross Default. Any default in
payment or performance of any obligation under any other loans of any Loan Party
in a principal amount equal to or greater than $50,000, including, without
limitation, any indebtedness or other obligations owing by any Loan Party to
Sirrom. Loan Documents. Any of the Loan Documents shall for any reason terminate
or otherwise fail to be in full force and effect, or any security granted
thereunder shall fail, or any Loan Party or any other person or entity shall
contest the enforceability or validity of any such Loan Document or any security
interest or lien purported to be granted to the Bank thereby. Cessation;
Bankruptcy. The dissolution of, termination of existence of, loss of good
standing status by, appointment of a receiver for, assignment for the benefit of
creditors of, or commencement of any bankruptcy or insolvency proceeding by or
against any Loan Party. Material Capital Structure or Business Alteration.
Without prior written consent of Bank, any of the following shall occur: (i) a
material alteration in the kind or type of Borrower's business or that of any
other Loan Party, other than as permitted hereunder; (ii) the sale of all or
substantially all of the business or assets of Borrower or any other Loan Party
or a material portion (10% or more) of such business or assets if such a sale is
outside the ordinary course of business of Borrower or such other Loan Party,
(iii) the sale of any of the outstanding capital stock or voting power of any of
Borrower's Subsidiaries; (iv) the acquisition of substantially all of the
business or assets or more than 50% of the outstanding stock or voting power of
any Loan Party; or (v) should Borrower or any other Loan Party enter into any
merger or consolidation, other than as expressly permitted hereunder.
REMEDIES UPON DEFAULT. If a Default occurs under this Agreement, either of the
Note or any other Loan Documents, Bank may at any time thereafter, take the
following actions: Acceleration Upon Default. Accelerate the maturity of the
Note and all other Obligations, and all of the Obligations shall be immediately
due and payable. Cumulative. Exercise any rights
8
<PAGE>
and remedies as provided under the Note and other Loan Documents, or as provided
by law or equity.
INDEMNIFICATION OF BANK AND OTHERS.
From and at all times after the date of this Agreement, and in addition to
all of Bank's other rights and remedies against the Borrower, the Borrower
hereby defends, indemnifies and holds harmless Bank and each director, officer,
employee, agent, attorney and affiliate of Bank (all of whom are for purposes of
this Section collectively called the "Indemnified Parties") against and from any
and all claims, losses, damages, liabilities, costs and expenses of any kind or
nature whatsoever (including without limitation reasonable attorneys' fees,
costs and expenses actually incurred at both the trial and appellate levels)
incurred by any and all of the Indemnified Parties, from and after the date
hereof, whether direct, indirect or consequential, whether threatened or
initiated, as a result of or arising from or in any way relating to any suit,
action, claim, demand, or proceeding (including any inquiry or investigation)
(all of which suits, etc. are for purposes of this Section collectively called
"Claims") by any person or entity other than the Loan Parties asserting a claim
for any legal or equitable remedy against any person or entity under any statute
or regulation, including, but not limited to, any federal or state securities
laws, or under any common law or equitable cause or otherwise, arising from the
acts or omissions of the Loan Parties or any affiliate in connection with the
negotiation, preparation, execution or performance of this Agreement or the
other Loan Documents, or any transactions contemplated herein or therein,
whether or not such Indemnified Party is a party to any such claim.
The obligation of the Bank to indemnify the Indemnified Parties for a
Claim pursuant to this Section shall apply whether or not the Claim is
foreseeable, and such obligation includes the Indemnified Parties' reasonable
attorneys' and consultants' fees and court costs, in each case actually
incurred. Notwithstanding the foregoing, no Indemnified Party shall have the
right to be indemnified hereunder for any liability resulting from the gross
negligence, bad faith or willful misconduct of any Indemnified Party or the
breach or non-performance of any obligation of Bank hereunder or under any other
Loan Document. All of the foregoing losses, damages, costs and expenses of an
Indemnified Party shall be payable by the Borrower upon demand by Bank and shall
be additional Obligations hereunder. The Borrower's obligations under this
provision shall survive any termination of this Agreement or any other Loan
Document.
9
<PAGE>
IN WITNESS WHEREOF, Borrower and Bank, on the day and year first written above,
have caused this Agreement to be executed under seal.
M2Direct, Inc.
CORPORATE By:/s/ Michael T. Kane
SEAL ------------------------
Name:
Title:
First Union National Bank
By:/s/ Joe Padgett
------------------------
Joe Padgett, Vice President
10
<PAGE>
PROMISSORY NOTE
$3,000,000.00 March 30, 1999
M2Direct, Inc.
2030 Powers Ferry Road, Suite 120
Atlanta, Georgia 30339
(Hereinafter referred to as the "Borrower")
First Union National Bank
999 Peachtree Street
Atlanta, Georgia 30309
(Hereinafter referred to as the "Bank")
Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, at its office indicated above or wherever else Bank may
specify, the sum of Three Million and 00/100 Dollars ($3,000,000.00) or such sum
as may be advanced and outstanding from time to time with interest on the unpaid
principal balance at the rate and on the terms provided in this Promissory Note
(including all renewals, extensions or modifications hereof, this "Note").
CERTAIN DEFINITIONS. The following capitalized terms shall have the
respective meanings set forth below:
"Advances" shall mean Line of Credit Advances and/or Sweep Plus Advances
--------
(each as hereinafter defined), and "Advance" shall mean any such advance.
-------
"Business Day" shall mean a day on which banks are not required or authorized to
------------
close in Atlanta, Georgia.
"Maturity Date" shall mean June 30, 2000, as the same may be extended from time
-------------
to time in writing by the Bank, in its sole discretion.
<PAGE>
"Obligations" shall mean any and all indebtedness and other obligations under
-----------
this Note, all other obligations under any other Loan Documents, and all
obligations under any swap agreements as defined in 11 U.S.C. Section 101
between Borrower and Bank whenever executed.
"Prime Interest Rate" shall mean that rate announced by the Bank from time to
-------------------
time as its prime rate. The Prime Interest Rate is one of several interest rates
used by the Bank. The Bank lends at rates both above and below the Prime
Interest Rate, and Borrower acknowledges that the Prime Interest Rate is not
represented or intended to be the lowest or most favorable rate of interest
offered by the Bank.
LINE OF CREDIT ADVANCES. Subject to the other provisions contained herein or in
the Loan Agreement, from the date hereof until the Borrower receives notice from
the Bank that Sweep Plus Advances (as hereinafter defined) are available as
hereinafter set forth, Bank may make revolving credit advances under this Note
from time to time ("Line of Credit Advances"), so long as the aggregate
-----------------------
principal amount of all Line of Credit Advances outstanding at any one time
(either before or after the making of any such Line of Credit Advance) does not
exceed the principal amount stated on the face of this Note, as the same may be
reduced from time to time upon the written request of the Borrower (the
"Commitment") then in effect. No Line of Credit Advance will be made in an
----------
amount less than $100,000.
SWEEP PLUS ADVANCES. Subject to the other provisions contained herein or in the
Loan Agreement, and following written confirmation from the Bank to the Borrower
that Sweep Plus Advances are available, Bank may make advances under this Note
from time to time under the Bank's Sweep Plus product ("Sweep Plus Advances"),
-------------------
so long as the aggregate principal amount of all Sweep Plus Advances outstanding
at any one time does not exceed the Commitment. Upon receipt of such notice, all
outstanding Line of Credit Advances shall automatically be converted to Sweep
Plus Advances. Sweep Plus. Sweep Plus Advances will be made from time to time,
into the specified account with Bank pursuant to the Bank's practices,
procedures and policies relating to its Sweep Plus product (individually or
collectively, the "Services Agreement") between Bank and Borrower and any
modifications thereto. No Sweep Plus Advance(s) will be made (i) in an amount
less than $1,000.00, and each Sweep Plus Advance will be made in increments of
$1,000.00, or (ii) if the Sweep Plus arrangement has been breached or
terminated.
ADVANCES GENERALLY. Borrower may borrow Line of Credit Advances and Sweep Plus
Advances as provided above. Advances of either type may be repaid under this
Note, and Borrower may again borrow Line of Credit Advances and Sweep Plus
Advances as provided above. Bank's obligation to make Advances under this Note
shall terminate if Borrower is in "Default" (as defined in the Loan Agreement)
or a representation in any of the Loan Documents is false or has become false.
Bank has no obligation to make any Advance if, as a result of such Advance, a
Default would occur.
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<PAGE>
INTEREST RATE. The outstanding principal amount of each Advance shall bear
interest at a fluctuating rate per annum equal to the Prime Interest Rate,
calculated daily.
NOTICES OF LINE OF CREDIT ADVANCES AND PREPAYMENT. All notices given by Borrower
to the Bank in respect of Line of Credit Advances and prepayments hereunder
shall either be oral, with prompt written confirmation by telecopy, or in
writing; shall be irrevocable; and shall be effective on a Business Day which is
not later than one (1) Business Day prior to the date any such Line of Credit
Advance is to be made, or the date of prepayment of any Line of Credit Advance.
Any such notice received prior to 10:00 a.m. (Eastern time) on a Business Day
shall be deemed to have been received by the Bank on such Business Day and, if
received after 10:00 a.m., shall be deemed to have been received by the Bank on
the next Business Day immediately following actual receipt of such notice. Each
such notice of borrowing which is in writing and each written confirmation of an
oral notice permitted hereunder, shall specify: (i) the amount of such
borrowing, (which shall be in a minimum of $500,000) or such prepayment; and
(ii) the date such Line of Credit Advance or prepayment is to be made (which
shall be a Business Day). All Sweep Plus Advances shall be made automatically in
accordance with the Services Agreement.
DEFAULT RATE. In addition to all other rights contained in this Note, if a
Default (defined herein) occurs and as long as a Default continues, all
outstanding Obligations shall bear interest at the Prime Interest Rate plus 2%
("Default Rate"). The Default Rate shall also apply from acceleration until the
Obligations or any judgment thereon is paid in full.
COMMITMENT FEE. Borrower shall pay to the Bank a commitment fee equal to one
percent (1.00%) of the amount of the Commitment, payable at closing.
INTEREST AND FEE(S) COMPUTATION. (Actual/360). Interest and fees, if any, shall
be computed on the basis of a 360-day year for the actual number of days in the
applicable period ("Actual/360 Computation"). The Actual/360 Computation
determines the annual effective yield by taking the stated (nominal) rate for a
year's period and then dividing said rate by 360 to determine the daily periodic
rate to be applied for each day in the applicable period. Application of the
Actual/360 Computation produces an annualized effective rate exceeding that of
the nominal rate.
REPAYMENT TERMS. All outstanding principal in respect of Sweep Plus Advances
shall be repaid in accordance with the Bank's policies, practices and procedures
in effect from time to time related to its Sweep Plus product, and accrued
interest in respect of Sweep Plus Advances shall be repaid monthly. In addition,
all accrued and unpaid interest on Line of Credit Advances shall be payable
monthly on the 28th day of each month commencing April 28, 1999, and all
outstanding principal and accrued interest in respect of all Advances hereunder,
and all other amounts owing under this Note or any other Loan Document, shall be
due and payable on the
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<PAGE>
earlier to occur of (a) the Maturity Date, and (b) the date on which the bank
accelerates the maturity of the Advances under this Note upon Default as
permitted under the Loan Agreement, as defined below.
ANNUAL PAYDOWN PROVISION. The Borrower shall be required to maintain an
aggregate outstanding principal balance under this Note of zero for a period of
thirty (30) consecutive days prior to the Maturity Date.
APPLICATION OF PAYMENTS. Monies received by Bank from any source for application
toward payment of the Obligations shall be applied to accrued interest and then
to principal. If a Default occurs, monies may be applied to the Obligations in
any manner or order deemed appropriate by Bank.
If any payment received by Bank under this Note or other Loan Documents is
rescinded, avoided or for any reason returned by Bank because of any adverse
claim or threatened action, the returned payment shall remain payable as an
obligation of all persons liable under this Note or other Loan Documents as
though such payment had not been made.
LOAN DOCUMENTS. The term "Loan Documents" used in this Note and other Loan
Documents refers to all documents executed in connection with the loan evidenced
by this Note and shall include, without limitation, the Loan Agreement (as
hereinafter defined), this Note, and the guaranty agreements, security
agreements, security instruments, financing statements, mortgage instruments,
letters of credit and any renewals or modifications, whenever any of the
foregoing are executed, but does not include swap agreements (as defined in 11
U.S.C. Section 101).
LATE CHARGE. If any payments are not timely made, Borrower shall also pay to
Bank a late charge equal to 5% of each payment past due for 15 or more days.
Acceptance by Bank of any late payment without an accompanying late charge shall
not be deemed a waiver of Bank's right to collect such late charge or to collect
a late charge for any subsequent late payment received.
ATTORNEYS' FEES AND OTHER COLLECTION COSTS. Borrower shall pay all of Bank's
reasonable expenses incurred to enforce or collect any of the Obligations,
including, without limitation, reasonable arbitration, paralegals', attorneys'
and experts' fees and expenses actually incurred, whether incurred without the
commencement of a suit, in any trial, arbitration, or administrative proceeding,
or in any appellate or bankruptcy proceeding.
4
<PAGE>
USURY. Regardless of any other provision of this Note or other Loan Documents,
if for any reason the effective interest should exceed the maximum lawful
interest, the effective interest shall be deemed reduced to, and shall be, such
maximum lawful interest, and (i) the amount which would be excessive interest
shall be deemed applied to the reduction of the principal balance of this Note
and not to the payment of interest, and (ii) if the loan evidenced by this Note
has been or is thereby paid in full, the excess shall be returned to the party
paying same, such application to the principal balance of this Note or the
refunding of excess to be a complete settlement and acquittance thereof.
LOAN AGREEMENT. This Note is subject to the provisions of that certain Loan
Agreement between Bank and Borrower dated as of the date of this Note, as
amended or otherwise modified from time to time (the "Loan Agreement"),
including provisions relating to Defaults and remedies of the Bank.
WAIVERS AND AMENDMENTS. No waivers, amendments or modifications of this Note and
other Loan Documents shall be valid unless in writing and signed by an officer
of Bank. No waiver by Bank of any Default shall operate as a waiver of any other
Default or the same Default on a future occasion. Neither the failure nor any
delay on the part of Bank in exercising any right, power, or remedy under this
Note and other Loan Documents shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or remedy.
Each Borrower or any person liable under this Note waives presentment, protest,
notice of dishonor, demand for payment, notice of intention to accelerate
maturity, notice of acceleration of maturity, notice of sale and all other
notices of any kind. Further, each agrees that Bank may extend, modify or renew
this Note or make a novation of the loan evidenced by this Note for any period
and grant any releases, compromises or indulgences with respect to any
collateral securing this Note, or with respect to any other Borrower or any
other person liable under this Note or other Loan Documents, all without notice
to or consent of each Borrower or each person who may be liable under this Note
or other Loan Documents and without affecting the liability of Borrower or any
person who may be liable under this Note or other Loan Documents.
MISCELLANEOUS PROVISIONS. Assignment. This Note and other Loan Documents shall
inure to the benefit of and be binding upon the parties and their respective
heirs, legal representatives, successors and permitted assigns. Bank's interests
in and rights under this Note and other Loan Documents are assignable to any of
its affiliates, or to any third parties that are reasonably acceptable to the
Borrower, in whole or in part, by Bank. In addition, nothing in this Note or any
of the Loan Documents shall prohibit Bank from pledging or assigning this Note
or any of the Loan Documents or any interest therein to any Federal Reserve
Bank. Borrower shall not assign its rights and interest hereunder without the
prior written consent of Bank, and any attempt by Borrower to assign without
Bank's prior written consent is null and void. Any assignment shall not release
Borrower from the Obligations. Applicable Law; Conflict
5
<PAGE>
Between Documents. This Note and other Loan Documents shall be governed by and
construed under the laws of the State of Georgia without regard to that state's
conflict of laws principles. If the terms of this Note should conflict with the
terms of the Loan Agreement, the terms of this Note shall control. Jurisdiction.
Borrower irrevocably agrees to non-exclusive personal jurisdiction in the state
in which the office of Bank first shown above is located. Severability. If any
provision of this Note or of the other Loan Documents shall be prohibited or
invalid under applicable law, such provision shall be ineffective but only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Note or other such
document. Notices. Any notices to Borrower shall be sufficiently given, if in
writing and mailed or delivered to the Borrower's address shown above or such
other address as provided hereunder, and to Bank, if in writing and mailed or
delivered to Bank's office address shown above or such other address as Bank may
specify in writing from time to time. In the event that Borrower changes
Borrower's address at any time prior to the date the Obligations are paid in
full, Borrower agrees to promptly give written notice of said change of address
by registered or certified mail, return receipt requested, all charges prepaid.
Plural: Captions. All references in the Loan Documents to Borrower, guarantor,
person, document or other nouns of reference mean both the singular and plural
form, as the case may be, and the term "person" shall mean any individual,
person or entity. The captions contained in the Loan Documents are inserted for
convenience only and shall not affect the meaning or interpretation of the Loan
Documents. Binding Contract. Borrower by execution of and Bank by acceptance of
this Note agree that each party is bound to all terms and provisions of this
Note. Line of Credit Advances. Bank in its sole discretion may make other Line
of Credit Advances under this Note pursuant hereto. Posting of Payments. All
payments received during normal banking hours after 2:00 p.m. local time at the
office of Bank first shown above shall be deemed received at the opening of the
next banking day.
Fees and Taxes. Borrower shall promptly pay all documentary, intangible
recordation and/or similar taxes an this transaction whether assessed at closing
or arising from time to time.
ARBITRATION. Upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to this Note and other Loan Documents
("Disputes") between or among parties to this Note shall be resolved by binding
arbitration as provided herein. Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder. Disputes
may include, without limitation, tort claims, counterclaims, disputes as to
whether a matter is subject to arbitration, claims brought as class actions,
claims arising from Loan Documents executed in the future, or claims arising out
of or connected with the transaction reflected by this Note.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association (the "AAA") and Title 9 of the U.S. Code. All arbitration hearings
shall be conducted in the city in which the office of Bank first stated above is
located. The expedited procedures set forth in Rule 51 et seq, of the
-- ---
Arbitration Rules shall be applicable to claims of less than $1,000,000.00. All
6
<PAGE>
applicable statutes of limitation shall apply to any Dispute. A judgment upon
the award may be entered in any court having jurisdiction. The panel from which
all arbitrators are selected shall be comprised of licensed attorneys. The
single arbitrator selected for expedited procedure shall be a retired judge from
the highest court of general jurisdiction, state or federal, of the state where
the hearing will be conducted or if such person is not available to serve, the
single arbitrator may be a licensed attorney. Notwithstanding the foregoing,
this arbitration provision does not apply to disputes under or related to swap
agreements.
PRESERVATION AND LIMITATION OF REMEDIES. Notwithstanding the preceding binding
arbitration provisions, Bank and Borrower agree to preserve, without diminution,
certain remedies that any party hereto may employ or exercise freely,
independently or in connection with an arbitration proceeding or after an
arbitration action is brought. Bank and Borrower shall have the right to proceed
in any court of proper jurisdiction or by self-help to exercise or prosecute the
following remedies, as applicable: (i) all rights to foreclose against any real
or personal property or other security by exercising a power of sale granted
under Loan Documents or under applicable law or by judicial foreclosure and
sale, including a proceeding to confirm the sale; (ii) all rights of self-help
including peaceful occupation of real property and collection of rents, set-off,
and peaceful possession of personal property; (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and filing an involuntary bankruptcy
proceeding; and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a Dispute.
Borrower and Bank agree that they shall not have a remedy of punitive or
exemplary damages against the other in any Dispute and hereby waive any right or
claim to punitive or exemplary damages they have now or which may arise in the
future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
INDEMNIFICATION OF BANK AND OTHERS.
From and at all times after the date of this Note, and in addition to all
of Bank's other rights and remedies against the Borrower, the Borrower hereby
defends, indemnifies and holds harmless Bank and each director, officer,
employee, agent, attorney and affiliate of Bank (all of whom are for purposes of
this Section collectively called the "Indemnified Parties") against and from any
and all claims, losses, damages, liabilities, costs and expenses of any kind or
nature whatsoever (including without limitation reasonable attorneys' fees,
costs and expenses actually incurred at both the trial and appellate levels)
incurred by any and all of the Indemnified Parties, from and after the date
hereof, whether direct, indirect or consequential, whether threatened or
initiated, as a result of or arising from or in any way relating to any suit,
action, claim, demand, or proceeding (including any inquiry or investigation)
(all of which suits, etc. are for purposes of this Section collectively called
"Claims") by any person or entity other than the Loan Parties asserting a claim
for any legal or equitable remedy against any person or entity under any statute
or regulation, including, but not limited to, any federal or state securities
laws, or under any
7
<PAGE>
common law or equitable cause or otherwise, arising from the acts or omissions
of the Loan Parties or any affiliate in connection with the negotiation,
preparation, execution or performance of this Note or the other Loan Documents,
or any transactions contemplated herein or therein, whether or not such
Indemnified Party is a party to any such claim.
The obligation of the Bank to indemnify the Indemnified Parties for a
Claim pursuant to this provision shall apply whether or not the Claim is
foreseeable, and such obligation includes the Indemnified Parties' reasonable
attorneys' and consultants' fees and court costs, in each case actually
incurred. Notwithstanding the foregoing, no Indemnified Party shall have the
right to be indemnified hereunder for any liability resulting from the gross
negligence, bad faith or willful misconduct of any Indemnified Party or the
breach or non-performance of any obligation of Bank hereunder or under any other
Loan Document. All of the foregoing losses, damages, costs and expenses of an
Indemnified Party shall be payable by the Borrower upon demand by Bank and shall
be additional Obligations hereunder. The Borrower's obligations under this
provision shall survive any termination of this Note or any other Loan Document.
(Signatures appear on following page)
8
<PAGE>
IN WITNESS WHEREOF, Borrower, on the day and year first above written, has
caused this Note to be executed under seal.
M2DIRECT, INC.
Taxpayer Identification: 58-2358460
CORPORATE By: /s/ Michael T. Kane
SEAL ---------------------------------
Its:
---------------------------------
9
<PAGE>
FIRST AMENDMENT
TO PROMISSORY NOTE
AND LOAN AGREEMENT
THIS FIRST AMENDMENT TO PROMISSORY NOTE AND LOAN AGREEMENT (the "Amendment")
is made and entered into as of the 4th day of May, 1999 by and between M2DIRECT,
INC., a Georgia corporation (the "Borrower"), and FIRST UNION NATIONAL BANK (the
"Bank").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower and the Bank are parties to (i) that certain Promissory
Note, dated as of March 30, 1999 (the "Note"), in the original principal amount
of $3,000,000, and (ii) that certain Loan Agreement, dated as of March 30, 199
(the "Loan Agreement"); and
WHEREAS, the Borrower has advised the Bank that the Borrower (i) has failed to
maintain an Effective Tangible Net Worth of not less than $750,000, and (ii) has
failed to maintain a ratio of Senior Funded Debt to EBITDA Ratio of not more
than 2.80:1.00, each of which failures constitutes a Default under the Note and
the Loan Agreement; and
WHEREAS, the Borrowers have requested that the Bank (i) waive such Defaults,
and (ii) amend the financial covenants contained in the Loan Agreement as
hereinafter set forth; and
WHEREAS, the Bank has agreed to grant the Borrower's request, subject to the
terms and conditions set forth herein;
NOW, THEREFORE, for and in consideration of the premises, the terms and
conditions set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Note and Loan Agreement,
to the extent defined therein.
2. Amendments to Loan Agreement. Subject to the terms and conditions
contained herein, the Loan Agreement is hereby amended as follows:
(a) The section of the Loan Agreement entitled "Financial Covenants" is
hereby amended by deleting the subsections entitled "Effective Tangible Net
Worth" and "Senior Funded Debt to EBITDA Ratio" contained therein, and by adding
thereto new subsections entitled "Effective Tangible Net Worth" and "Minimum
Quarterly EBITDA," such new subsection to read as follows:
<PAGE>
Effective Tangible Net Worth. Borrower and its consolidated Subsidiaries
shall, from August 31, 1999 until December 30, 1999, maintain an Effective
Tangible Net Worth of not less than $500,000. From fiscal-year end December
31, 1999, through the maturity of the facility, the minimum required Effective
Tangible Net Worth shall increase by not less than 50% of net income.
"Effective Tangible Net Worth" shall mean total assets minus Total
Liabilities. For purposes of this computation, the aggregate amount of any
intangible assets of Borrower and its consolidated Subsidiaries including
without limitation, goodwill, franchises, licenses, patents, trademarks, trade
names, copyrights, service marks, and brand names, shall be subtracted from
total assets. "Total Liabilities" shall mean all liabilities of Borrower and
its consolidated Subsidiaries, excluding debt fully subordinated to Bank on
terms and conditions acceptable to Bank and debt evidenced by that certain
$1,000,000 Zero Coupon Promissory Note issued by the Borrower to Provident
Bank, and including capitalized leases and all reserves for deferred taxes and
other deferred sums appearing on the liabilities side of a balance sheet, in
accordance with generally accepted accounting principles applied on a
consistent basis. Minimum Quarterly EBITDA. Borrower and its consolidated
Subsidiaries shall, for each applicable fiscal quarter end, report a minimum
quarterly EBITDA of not less than $1,200,000 for the fiscal quarter ending
June 30, 1999, not less than $2,000,000 for the fiscal quarter ending
September 30, 1999, and not less than $3,000,000 for the fiscal quarter ending
December 31, 1999 and each fiscal quarter thereafter. "EBITDA" shall mean the
sum of all earnings before interest, taxes, depreciation and amortization for
the given fiscal period.
(b) The Loan Agreement is hereby further amended by adding thereto a new
section entitled "Equity Contribution", such new section to read as
follows:
EQUITY CONTRIBUTION. The Borrower agrees that, no later than August 31,
1999, it shall obtain net cash proceeds as an equity contribution of at
least $3,000,000.
(c) The section of the Loan Agreement entitled "Defaults" is hereby amended
by adding thereto a new subsection entitled "Financial Statements", to read as
follows:
Financial Statements. The final, audited financial statements of the
Borrower and its consolidated Subsidiaries for its fiscal year ending
December 31, 1998 shall vary from the draft financial statements for such
period delivered to the Bank on May 4, 1999 in any material respect.
3. Amendment to Note. Subject to the terms and conditions contained herein,
the section of the Note entitled "Interest Rate" is hereby amended by deleting
such section in its entirety, and substituting in lieu thereof a new section, to
read as follows:
2
<PAGE>
INTEREST RATE. The outstanding principal amount of each Advance shall bear
interest at a fluctuating rate per annum equal to the Prime Interest Rate
plus one percent (1.00%), calculated daily.
4. Waiver of Defaults. Subject to the terms and conditions contained herein,
the Bank hereby waives the Defaults arising out of (i) the failure of the
Borrower to maintain at all times from December 31, 1998 through the date hereof
an Effective Tangible Net Worth of not less than $750,000, and (ii) the failure
of the Borrower to maintain at all times from December 31, 1998 through the date
hereof a Senior Funded Debt to EBITDA Ratio of not more than 2.80:1.00.
5. Loan Document; References in Loan Documents. This Amendment constitutes a
Loan Document, as such term is defined in the Note and/or the Loan Agreement.
Each reference in any Loan Document to the Note shall be deemed a reference to
the Note, as amended hereby, and each reference in any Loan Document to the Loan
Agreement shall be deemed a reference to the Loan Agreement, as amended hereby.
6. Modification Fee. In consideration of the waivers and amendments
contained herein, the Borrower agrees to pay the Bank a modification fee of
$50,000 (the "Modification Fee"), which Modification Fee shall be non-refundable
and fully earned upon receipt thereof by the Bank. The Borrower hereby
irrevocably authorizes and directs the Bank to debit the Borrower's operating
account at any time on or after the date hereof for the first installment of the
Modification Fee in an amount equal to $25,000, and to debit such operating
account at any time on or after June 3, 1999 for the second and final
installment of such Modification Fee in an amount equal to $25,000. The
Borrower acknowledges and agrees that each such debit shall constitute an
Advance under the Note.
7. Expenses. The Borrower agrees to pay, immediately upon demand by the
Bank, all costs, expenses, attorneys' fees, and other charges and expenses
reasonably incurred by the Bank in connection with the negotiation, preparation,
execution and delivery of this Amendment.
8. Defaults Hereunder. The breach of any representation, warranty or
covenant contained herein or in any document executed in connection herewith, or
the failure to observe or comply with any term or agreement contained herein or
in any document executed in conjunction herewith, shall constitute a Default
under the Loan Agreement and the Note, and the Bank shall be entitled to
exercise all rights and remedies it may have under the Loan Agreement, the Note,
any of the other Loan Documents and applicable law.
9. Representations and Warranties. The Borrower hereby restates, ratifies,
and reaffirms each and every term, condition, representation and warranty
heretofore made by the Borrower under or in connection with the execution and
delivery of the Loan Agreement, the Note, and the other Loan Documents, as fully
as though such representations and warranties had been made on the date hereof
and with specific reference to this Amendment, except to the extent that any
such representation or warranty relates solely to a prior date not otherwise
covered by this Agreement. The Borrower hereby further represents and warrants
that, as of the date hereof, after
3
<PAGE>
giving effect to the amendments and waivers set forth herein, there exists no
Default. The Borrower further represents and warrants that the draft financial
statements for the Borrower's fiscal year ended December 31, 1998, copies of
which have been delivered to the Bank on the date hereof, are true and accurate
in all material respects and contain no material misstatement or omission, and
fairly present the consolidated financial position, assets and liabilities of
Borrower and its consolidated Subsidiaries as of the date thereof and the
consolidated results of operations of Borrower and its consolidated Subsidiaries
for the period then ended.
10. Conditions Precedent. This Amendment shall not become effective unless
and until:
(i) the Bank shall have received the following documents, each duly executed
and delivered to the Bank, and each to be satisfactory in form and substance to
the Bank and its counsel:
(a) the Amendment;
(b) a Reaffirmation of the Subsidiary Guaranty, executed by each of the
Borrower's Subsidiaries;
(c) a Certificate of No Default and Related Matters, executed by an
executive officer of the Borrower; and
(d) such other documents, instruments and agreements with respect to the
transactions contemplated by this Amendment, in each case in such
form and containing such additional terms and conditions as may be
reasonably satisfactory to the Bank, and containing, without
limitation, representations and warranties which are customary and
usual in such documents.
(ii) The Bank shall be satisfied that any default or breach in respect of any
other indebtedness of the Borrower and/or its Subsidiaries (including, without
limitation, indebtedness owed to Sirrom Investments, Inc. or its successors)
shall have been waived or cured.
11. No Novation. The terms of this Amendment are not intended to and do not
serve to effect a novation as to the Loan Agreement, the Note or any other Loan
Document. The parties hereto expressly do not intend to extinguish any debt or
security interest created pursuant to the Note, the Loan Agreement or any other
Loan Document.
12. Limitation of Amendment. Except as expressly set forth herein, this
Amendment shall not be deemed to waive, amend or modify any term or condition of
the Loan Agreement, the Note or any of the other Loan Documents, each of which
is hereby ratified and reaffirmed, and which shall remain in full force and
effect, nor to serve as a consent to any matter prohibited by the terms and
conditions thereof.
4
<PAGE>
13. Acknowledgment of Borrower. To induce the Bank to enter into this
Amendment and grant the accommodations set forth herein, the Borrower (a)
acknowledges and agrees that no right of offset, defense, counterclaim, claim or
objection exists in favor of the Borrower against the Bank arising out of or
with respect to the Note, the Loan Agreement, the other Loan Documents, the
obligations of the Borrower or any guarantor thereunder, or any other
arrangement or relationship between the Bank and the Borrower, and (b) releases,
acquits, remises and forever discharges the Bank and its affiliates and all of
their past, present and future officers, directors, employees, agents,
attorneys, representatives, successors and assigns from any and all claims,
demands, actions and causes of action, whether at law or in equity, whether now
accrued or hereafter maturing, and whether known or unknown, which the Borrower
now or hereafter may have by reason of any matter, cause or things occurring or
existing before and including the date of this Amendment with respect to matters
arising out of or with respect to the Note, the Loan Agreement, the other Loan
Documents, the obligations arising thereunder, or any other arrangement or
relationship between the Bank and the Borrower.
14. Counterparts. This Amendment may be executed in any number of
counterparts, and any party hereto may execute any counterpart, each of which,
when executed and delivered, will be deemed to be an original and all of which,
taken together, will be deemed to be but one and the same agreement. Any
signature page to this Amendment may be witnessed by a telecopy or other
facsimile of any original signature page or any counterpart hereof may be
appended to any other counterpart hereof to form a completely executed
counterpart hereof.
15. Successors and Assigns. This Amendment shall be binding upon and inure
to the benefit of the successors and permitted assigns of the parties hereto.
16. Section References. Section titles and references used in this Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
17. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Georgia.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal
as of the date first written above.
BORROWER:
M2DIRECT, INC.
By: /s/ Michael T. Kane
-------------------------------
Name: Michael T. Kane
Title: Chief Financial Officer
Attest: /s/ Charles D. Vaughn
---------------------------
Name: Charles D. Vaughn
Title: Assistant Secretary
[CORPORATE SEAL]
BANK:
FIRST UNION NATIONAL BANK
By: /s/ Joe A. Padgett, Jr.
--------------------------
Name: Joe A. Padgett, Jr.
Title: Vice President
6
<PAGE>
[Letterhead of Sirrom Investments, Inc.]
May 4, 1999
M2Direct, Inc.
2030 Powers Ferry Road
Suite 120
Atlanta, GA 30339
Attn: John P. Kelly, President and Chief Executive Officer
Re: Loan Agreement and Loan Documents dated as of March 6, 1998 (as
amended, the "Loan Documents") by and between M2Direct, Inc., formerly
named MegaMarketing Corporation ("Borrower"), and Sirrom Investments,
Inc. ("Lender")
Ladies and Gentlemen:
Borrower is planning to file a registration statement on Form S-1 with the
Securities and Exchange Commission to register shares of its common stock,
including shares to be acquired by Lender before the effective date of such
registration statement by exercising in part that certain Stock Purchase Warrant
between Borrower and Lender dated as of March 6, 1998 (the "1998 Warrant").
Lender and Borrower are also parties to another Stock Purchase Warrant dated
February 3, 1999 (the "1999 Warrant," and together with the 1998 Warrant, the
"Warrants").
In preparing for its initial public offering under the registration
statement referred to above, Borrower has entered into certain agreements
requiring the waiver and consent of Lender. Further, Borrower and Lender desire
to agree upon the number of shares of common stock purchasable under the 1998
Warrant in light of certain unanticipated non-cash and other one-time
adjustments to Borrower's financial statements. In consideration of the mutual
benefits for Lender and Borrower, this letter agreement constitutes an amendment
to the 1998 Warrant and a waiver and consent to certain matters under the Loan
Documents.
1. Amendments to 1998 Warrant.
A. The 1998 Warrant is amended by deleting Article 1 thereof and
replacing it with the following:
<PAGE>
M2Direct, Inc.
May 4, 1999
Page 2
"1. Issuance of Warrant; Term.
-------------------------
(a) For and in consideration of SIRROM INVESTMENTS, INC. making a loan
to the Company in an amount of Three Million and no/100ths Dollars
($3,000,000) pursuant to the terms of a secured promissory note of even
date herewith (the "Note") and related loan agreement of even date
herewith, as now or hereafter amended, (the "Loan Agreement"), and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company hereby grants to Holder the right to
purchase 581,935 shares (the "Base Amount") of the Company's common stock
(the "Common Stock"), provided that in the event that the indebtedness
evidenced by the Note is outstanding on the following dates, the Base
Amount shall be increased to the corresponding number set forth below (the
"Outstanding Debt Ratchets"):
Date Base Amount
------------- ---------------------------------------------
March 6, 2001 703,911 shares of Common Stock, which the
Company represents equals 10.5% of the
capital stock of the Company on the date
hereof calculated on a fully diluted basis
including the Base Amount.
March 6, 2002 857,143 shares of Common Stock, which the
Company represents equals 12.5% of the
capital stock of the Company on the date
hereof calculated on a fully diluted basis
including the Base Amount.
March 6, 2003 1,017,544 shares of Common Stock, which the
Company represents equals 14.5% of the
capital stock of the Company on the date
hereof calculated on a fully diluted basis
including the Base Amount.
and further provided that if the Company has not repaid the Note in full by
September 30, 1999, the initial Base Amount shall be increased to 693,846
shares of Common Stock, which the Company represents equals 10% of the
capital stock of the Company on the date hereof calculated on a fully
diluted basis including the Base Amount, provided that in the event that
the indebtedness evidenced by the Note is outstanding on the following
<PAGE>
M2Direct, Inc.
May 4, 1999
Page 3
dates, the Outstanding Debt Ratchets shall be increased to the
corresponding number set forth below:
Date Base Amount
------------- ---------------------------------------------
March 6, 2001 818,182 shares of Common Stock, which the
Company represents equals 12% of the capital
stock of the Company on the date hereof
calculated on a fully diluted basis including
the Base Amount.
March 6, 2002 976,744 shares of Common Stock, which the
Company represents equals 14% of the capital
stock of the Company on the date hereof
calculated on a fully diluted basis including
the Base Amount.
March 6, 2003 1,142,857 shares of Common Stock, which the
Company represents equals 16% of the capital
stock of the Company on the date hereof
calculated on a fully diluted basis including
the Base Amount.
(b) The shares of Common Stock issuable upon exercise of this Warrant
are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from the date hereof until
May 31, 2003. For purposes of this Warrant the term "fully diluted basis"
shall be determined in accordance with generally accepted accounting
principles as of the date hereof."
B. The 1998 Warrant is amended further by deleting Section 9(a)
thereof and replacing it with the following:
"(a) The Company hereby irrevocably grants and issues to Holder the right
and option to sell to the Company (the "Put") this Warrant (to the extent not
previously exercised) for a period of 30 days immediately prior to the
expiration thereof, at a purchase price (the "Purchase Price") equal to the Fair
Market Value (as hereinafter defined) of the shares of Common Stock issuable to
Holder upon exercise of this Warrant; provided, however, that the Put shall
terminate upon the closing of a Qualified Public Offering as defined in Section
12(c)."
C. The 1998 Warrant is amended further by deleting Section 17
thereof and replacing it with the following:
<PAGE>
M2Direct, Inc.
May 4, 1999
Page 4
"17. Stock Options. The Company may grant stock options to employees
--------------
representing up to 20% of the common stock of the Company provided such options
granted after February 3, 1999 shall have an exercise price equal to or greater
than the fair market value of the shares issuable thereunder on the date of
issuance ("Fair Exercise Price"). Any stock options to employees granted after
the date hereof with an exercise price below the Fair Exercise Price for such
options or representing in excess of 20% of the Common Stock of the Company
shall be subject to the anti-dilution provisions in Section 4(c)."
2. Waivers and Consent.
A. Lender hereby (i) waives the Default and Event of Default resulting
from Borrower's failure to comply with Section 3.19 of the Loan Agreement and
paragraph 8 of that certain Second Amendment to Loan Agreement and Loan
Documents between Borrower and Lender dated as of February 3, 1999, and (ii)
agrees that such Section 3.19 and paragraph 8, respectively, shall be of no
force and effect until January 1, 2000, when they shall again apply to Borrower,
provided that the foregoing agreement regarding the ineffectiveness of paragraph
8 until January 1, 2000 shall not be interpreted to allow Borrower to obtain a
working capital line of credit in addition to its $3.0 million line of credit
with First Union National Bank unless Borrower is in full compliance with such
paragraph 8 as heretofore in effect.
B. Lender hereby consents to Borrower's issuance to Provident Bank
of (a) a stock purchase warrant for the purchase of 100,000 shares of Borrower's
common stock at an exercise price of $0.01 per share and (b) a zero coupon
promissory note in the amount of $1,000,000, which must be prepaid in full
without discount upon the closing of Borrower's initial public offering. Lender
agrees that the foregoing actions shall not constitute a Default or Event of
Default under any Loan Document and acknowledges receipt of copies of the
foregoing documents. Lender further agrees that the anti-dilution provisions in
Section 4 of each of the Warrants shall not be deemed to apply to Borrower's
issuance of the stock purchase warrant to Provident Bank.
3. Miscellaneous.
A. Lender's agreement contained in this letter is limited to the
specific transactions described above and is not intended to be, and shall not
be deemed or construed to be, a consent or agreement to any other transaction or
action which may be prohibited by the provisions of the Loan Documents.
B. The Loan Documents shall remain in full force and effect and,
subject to the agreements set forth in this letter, are hereby ratified,
approved, and confirmed in all respects.
<PAGE>
M2Direct, Inc.
May 4, 1999
Page 5
C. Notwithstanding anything to the contrary in this letter, this
letter shall not be effective unless and until Borrower shall have executed the
acceptance of this letter on the enclosed counterpart of this letter and
returned such signed counterpart to Lender.
Very truly yours,
Sirrom Investments, Inc.
By: /s/ Elizabeth Lurding
---------------------
Name and Title: Elizabeth Lurding, VP
---------------------
Accepted, agreed and approved
as of the 4th day of May, 1999
M2Direct, Inc.,
formerly named MegaMarketing Corporation
By: /s/ Michael T. Kane
-------------------
Name and Title: Michael T. Kane, CFO
--------------------
<PAGE>
The following companies are wholly-owned subsidiaries of M2Direct, Inc.:
1. Control Group, Ltd., a Delaware corporation
2. Genesis Direct, Inc., a Georgia corporation
3. Aberdeen Marketing Group, Inc., a Georgia corporation
4. UST, Inc., a Georgia corporation
5. DeskGate Technologies, Inc., a Delaware corporation
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and all references to our firm) included in or made a part of this registration
statement.
/s/ Arthur Andersen LLP
- ------------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
May 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of M2Direct, Inc. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 619,009
<SECURITIES> 0
<RECEIVABLES> 5,893,046
<ALLOWANCES> 32,627
<INVENTORY> 0
<CURRENT-ASSETS> 7,446,399
<PP&E> 1,513,369
<DEPRECIATION> 217,754
<TOTAL-ASSETS> 20,568,190
<CURRENT-LIABILITIES> 9,838,911
<BONDS> 3,235,948
0
2,353,899
<COMMON> 12,890,874
<OTHER-SE> (10,174,893)
<TOTAL-LIABILITY-AND-EQUITY> 20,568,190
<SALES> 25,925,793
<TOTAL-REVENUES> 25,925,793
<CGS> 21,076,437
<TOTAL-COSTS> 33,058,987
<OTHER-EXPENSES> 5,925,844
<LOSS-PROVISION> 3,800
<INTEREST-EXPENSE> 659,580
<INCOME-PRETAX> (7,761,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,761,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,671,280)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
