<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission File Number: 0-19997
COLLEGE TELEVISION NETWORK, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 13-3557317
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5784 Lake Forrest Drive, Suite 275 30328
Atlanta, Georgia (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Issuer's Telephone Number, Including Area Code: (404) 256-9630
N/A
---------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding as of August 7, 1999: 14,409,060
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
Item 1. Financial Statements.
College Television Network, Inc.
- ---------------------------------------------------------------------------
BALANCE SHEET
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents........................................... $ 1,163,166
Accounts receivable, net of allowance of $200,125................... 1,559,446
Prepaid expenses.................................................... 148,315
Other current assets................................................ 104,653
-----------
Total current assets................................................ 2,975,580
Property and equipment, net.......................................... 8,097,215
Other assets......................................................... 261,777
Intangible assets, net............................................... 598,061
-----------
Total assets........................................................ $11,932,633
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts
payable.............................................................. $ 1,460,008
Accrued
expenses............................................................. 868,891
Deferred revenue..................................................... 138,126
-----------
Total current liabilities............................................ 2,467,025
Accrued severance, net of current portion............................ 397,768
-----------
Total liabilities.................................................... $ 2,864,793
-----------
Capital stock:
Common stock - $.005 par; authorized 50,000,000 shares;
issued and outstanding 14,409,060 shares............................. 72,045
Additional paid in capital........................................... 41,222,456
Unearned compensation............................................... (404,495)
Accumulated deficit.................................................. (31,882,166)
-----------
Total stockholders' equity........................................... 9,067,840
Total liabilities and stockholders' equity........................... $11,932,633
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue................................. $ 2,059,559 $ 1,903,990 $ 5,039,853 $ 3,674,968
------------------------------------------------------------------
Expenses
Operating............................... 1,950,638 667,364 3,784,026 1,278,838
Selling, general and administrative..... 3,509,415 2,411,426 7,159,336 5,674,747
Depreciation and amortization........... 359,303 800,454 667,392 1,007,263
------------------------------------------------------------------
Total Expenses.......................... 5,819,356 3,879,244 11,610,754 7,960,848
Interest Income, net.................... 10,797 124,711 59,364 270,003
------------------------------------------------------------------
Loss before income taxes and cumulative
effect of change in accounting
principle............................... (3,749,000) (1,850,543) (6,511,537) (4,015,877)
Provision for income taxes.............. - - - -
------------------------------------------------------------------
Loss before cumulative effect of change
in accounting principal................. (3,749,000) (1,850,543) (6,511,537) (4,015,877)
Cumulative effect of change in
accounting principle.................... - - - 140,044
------------------------------------------------------------------
Net loss................................ $(3,749,000) $(1,850,543) $(6,511,537) $(3,875,833)
------------------------------------------------------------------
Basic and diluted loss per share
Loss before cumulative effect of change $(.26) $ (.23) $ (.46) $ (.50)
in accounting principle.................
Cumulative effect of change in
accounting principle.................... - - - .02
Net Loss................................ $(.26) $ (.23) $ (.46) $ (.48)
------------------------------------------------------------------
Weighted average number of common shares
outstanding (basic and diluted).......... 14,315,369 8,015,153 14,307,141 8,015,153
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
1999 1998
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................ $(6,511,537) $(3,875,833)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 667,392 1,007,263
Compensation from stock options......... 408,451 -
Cumulative effect of change in
accounting principle.................... - (140,044)
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable..................... 701,645 (328,051)
Prepaid expenses........................ 178,193 (120,525)
Other assets............................ (6,489) (221,163)
Accounts payable 941,012 325,750
Accrued expenses........................ 128,527 458,482
Deferred revenue........................ 138,126 (236,252)
----------- -----------
Net cash used in operating activities... (3,354,680) (3,008,166)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment..... (2,222,107) (2,410,348)
Cash (paid for) acquired from
acquisitions, net of cash
received................................ (30,000) 109,209
----------- -----------
Net cash used in investing activities... (2,252,107) (2,301,139)
----------- -----------
Cash flows from financing activities:
Payments under capital lease
obligation.............................. - (125,664)
Redemption of preferred stock........... - (5,809)
Proceeds from exercise of warrants...... 350,030 -
Proceeds from exercise of stock
options................................. 8,500 -
----------- -----------
Net cash provided by (used in)
financing activities................... 358,530 (131,473)
Net (decrease) increase in cash and
cash equivalents........................ (5,248,257) (5,440,778)
Cash and cash equivalents, beginning of
period ............................... 6,411,423 11,438,289
----------- -----------
Cash and cash equivalents, end of
period.................................. $ 1,163,166 $ 5,997,511
=========== ===========
</TABLE>
<PAGE>
COLLEGE TELEVISION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements (the
"financial statements") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with the Company's financial
statements for the fiscal year ended December 31, 1998 included in the Annual
Report as filed on Form 10-KSB with the United States Securities and Exchange
Commission.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of June 30, 1999 and the
results of operations and of cash flows for the six months ended June 30, 1999
and 1998.
The results of operations for the six months ended June 30, 1999 and
1998 are not necessarily indicative of the results of operations for a full
fiscal year of the Company. Certain prior period amounts have been reclassified
to conform with current period presentation.
NOTE (A) - The Company
- ----------------------
College Television Network, Inc., (the "Company"), is a broadcasting
company which owns and operates the College Television Network ("CTN"), a
proprietary commercial television network operating on college and university
campuses, through single channel television systems placed free of charge
primarily in campus dining facilities and student unions. A majority of the
Company's revenue is derived from advertising displayed on CTN. At June 30,
1999 and 1998, CTN was installed or contracted for installation at approximately
1,182 and 419 locations, respectively, at various colleges and universities
throughout the United States. The Company believes CTN currently reaches a
viewership of approximately 1,500,000 daily impressions.
The Company also owns and publishes "Link Magazine," a publication
having a circulation in excess of one million students. Link Magazine is
distributed free of charge to more than 650 campuses nationwide. In addition,
the Company owns Sadler & Streib, an Atlanta-based advertising agency primarily
involved in placing media buys and providing creative services for its clients.
The Company's revenue is affected by the pattern of seasonality common
to most school-related businesses. Historically, the Company has generated a
significant portion of its revenue during the period from September through May
and substantially less revenue during the summer months when colleges and
universities do not hold regular classes.
<PAGE>
NOTE (B) - Property and Equipment
- ---------------------------------
Property and equipment consists of the following:
- -------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 Estimated useful lives
<S> <C> <C>
Entertainment systems completed............................... 8,080,603 5 years
Entertainment systems in progress............................. 109,889
Machinery and equipment....................................... 808,878 7 years
Furniture and Fixtures........................................ 417,415 7 years
Leasehold improvlements....................................... 209,957 7-11 years
--------- ----------
$ 9,626,742
Less: Accumulated depreciation............................... (1,529,527)
-----------
Total......................................................... $ 8,097,215
</TABLE>
Depreciation expense for the six months ended June 30, 1999 and the six months
ended June 30, 1998 was approximately $646,000 and $843,015, respectively.
The decrease in depreciation during the current year is a result of the
increased depreciation in the comparable period of the prior year in connection
with the accelerated depreciation taken on certain program equipment.
NOTE (C) - Commitments and Contingencies
- -----------------------------------------
The Company is currently utilizing Crawford Communications, Inc.
("Crawford") and Viatech International, Inc. to complete the installation of new
systems in the Company's existing locations, and to complete installations in
new locations. The Company has also entered into an Origination Services
Contract with Crawford. In accordance with this contract, Crawford is
responsible for the transmission via satellite of CTN's daily programming,
including encoding signals, testing, maintaining CTN's programming library, and
obtaining programming from Turner Private Networks, Inc. ("Turner") pursuant to
the Company's programming agreement with Turner, as well as other programming
from other CTN sources. Crawford is also responsible for the uplink of the
programming to a satellite as well as the downlink of the signal from the
satellite at each installation site. The Origination Services Contract has a
five-year term.
On March 21, 1998, the Company entered into a severance agreement with
one of its senior executives. The agreement provides for payments of
approximately $870,000 over a three year period ending in April, 2001. A
provision for this obligation is included in the Company's statement of
operations for the fiscal year ended December 31, 1998. As of June 30, 1999,
the Company has paid approximately $365,000 of this obligation.
On March 27, 1998, the Company signed an agreement with Turner to
provide news and sports programming on CTN through December 31, 2002. The total
license fee is approximately $2,900,000. This agreement supercedes the prior
programming agreement entered into on November 5, 1996. As of June 30, 1999,
the Company has paid approximately $762,000 of this obligation.
In connection with the delivery platform conversion, the Company
entered into a Transponder Use Agreement with Public Broadcasting Service
("PBS") on April 30, 1998. The Company has subleased capacity on a satellite
owned and operated by GE American Communications, Inc. ("GE") and leased to PBS
by GE. This contract terminates on July 31, 2003. The Company has protected
status on this satellite, where in the event of a satellite failure or
performance problem, the Company's programming will preempt transmissions of
other users on this satellite or on another satellite.
In May, 1998, the Company entered into a lease for new space in New
York City. The New York operations of CTN and Link Magazine have been
consolidated in this new office space, effective October 1, 1998. The lease
term is for ten (10) years and the initial annual rent is $249,900, subject to
<PAGE>
annual increases based upon certain economic factors. The landlord is required
to pay for certain tenant improvements in accordance with the lease.
On February 19, 1999, the Company entered into a severance agreement
with one of its senior executives and member of the Board of Directors. The
agreement provides for payments of approximately $476, 000 over a twenty-six
month period through April 2001. In conjunction with the severance agreement,
the Company also granted the officer an option to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.75 per share. The options
vested immediately and expire five years from the date of the severance
agreement. In connection with the severance agreement, the Company recorded
charges of $436,300, representing the present value of the cash severance
payments and $240,000, representing the fair value of the stock options, as
calculated under the Black Scholes model. As of June 30,1999 the Company has
paid approximately $73,000 of this obligation.
On May 24, 1999, the Company entered into an employment agreement with
Martin Grant. Mr. Grant has assumed the role of President of the Company and
was appointed to the Board of Directors. The employment period is for three
(3) years at a base salary of $500,000 per year. Mr. Grant has the potential to
receive annual bonuses of up to $100,000 upon achievment of certain performance
goals.
Note (D) Comprehensive Income
- -----------------------------
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This standard
establishes new rules for reporting and display of comprehensive income and its
components. The adoption of this statement has no impact on the Company's net
loss or stockholders' equity. During fiscal 1998 and the prior periods
presented, total comprehensive income substantially equaled net loss.
Note (E) Segment Reporting
- --------------------------
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement establishes new standards for the
manner in which companies report operating segment information as well as
disclosures about products and services and major customers. Currently the
Company has three reportable segments as defined under SFAS No. 131: (i) CTN;
(ii) Link; and (iii) Sadler & Streib. See Note A for a description of the
products and services provided by each segment. Prior to the Company's
acquisition of Sadler & Streib on July 1, 1998, CTN and Link were the only
reportable segments as defined in accordance with SFAS No. 131. The Company
evaluates each segment's performance based on income or loss before income
taxes. Information regarding the operations of these reportable segments are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended June Three Months Ended Three Months Ended
June 30, 1999 30,1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Revenues
CTN $3,090,049 $2,870,525 $ 1,288,252 $ 1,371,255
Link 1,164,313 804,443 469,492 532,735
S&S 785,491 - 301,815 -
--------------------------------------------------------------------------
Total $5,039,853 $3,674,968 $ 2,059,559 $ 1,903,990
--------------------------------------------------------------------------
Loss before income taxes
and cumulative effect of
change in accounting
principle
CTN (5,358,208) (3,902,880) (3,052,479) (1,889,065)
Link (965,467) (112,997) (534,781) 38,522
S&S (187,862) - (161,740) -
--------------------------------------------------------------------------
Total $(6,511,537) $(4,015,877) $3,749,000) $1,850,543)
--------------------------------------------------------------------------
Total Assets
CTN 10,872,600 11,430,463 10,872,600 11,430,463
Link 279,405 293,614 279,405 293,614
S&S 780,628 - 780,628 -
--------------------------------------------------------------------------
Total $11,932,633 $11,724,077 $11,932,633 $11,724,077
--------------------------------------------------------------------------
</TABLE>
Substantially all of the property and equipment owned by the Company is used in
the operations of CTN.
Note (F) Subsequent Events
- --------------------------
Acquisition of Assets
On July 16, 1999, the Company entered into a stock purchase agreement
to acquire all of the issued and outstanding capital stock of Armed Forces
Communications, Inc., a New York corporation d/b/a Market Place Media and
having its primary place of business in Santa Barbara, California ("MPM"), for a
purchase price of approximately $30,000,000, subject to certain adjustments.
Upon consummation of the contemplated stock purchase, MPM will be a wholly-owned
subsidiary of the Company. The closing of the acquisition is subject to certain
conditions such as no material adverse change in MPM.
The Company intends to finance the acquisition through additional
senior debt and/or additional equity financing (excluding debt and equity
financing recently obtained from LaSalle Bank National Association and U-C
Holdings, LLC, respectively ("Holdings")) .
Issuance of Preferred Stock
Pursuant to a purchase agreement dated July 23, 1999 (the "Purchase
Agreement") between the Company and Holdings, Holdings purchased 309,998 shares
of the Company's convertible preferred stock ("Convertible Preferred"), $0.001
par value per share for a purchase price of $4,649,970. The proceeds will be
used for general working capital purposes of the Company. The conversion ratio
of the Convertible Preferred is computed by multiplying the number of shares of
Convertible Preferred to be converted by the $15.00 per share purchase price and
dividing the result by the conversion price of the Convertible Preferred (the
"Conversion Price") then in effect with respect to such shares. On the date of
issuance, the Conversion Price was $6.854 (the 30-day average trading price of
Common Stock listed on Nasdaq ("Average Trading Price")). From the date of
issuance to and including the third anniversary of the date of issuance of the
Convertible Preferred the Conversion Price is subject to
<PAGE>
adjustment if at the end of the quarter the Average Trading Price of the Common
Stock is less than the Conversion Price then in effect; provided that, the
Conversion Price shall not be reduced below $2.75, as adjusted for stock splits,
stock dividends and other similar events. The Convertible Preferred is voting
stock on an as-converted basis to Common Stock based upon the number of shares
of Common Stock the Convertible Preferred is convertible into the date of
issuance. The Convertible Preferred accrues a cumulative dividend of 12% per
annum. If Holdings converted the Convertible Preferred based upon the current
Conversion Price it would acquire 678,432 shares of Common Stock of the Company.
Additionally, pursuant to the Purchase Agreement, the Company issued a
Class D Warrant (the "Warrant") to Holdings entitling it to purchase 135,686
shares of Common Stock, $0.005 par value per share, with an initial exercise
price of $6.854 per share. From the date of issuance to and including the third
anniversary of the date of issuance of the Warrant, such exercise price is
subject to adjustment if at the end of any quarter the Average Trading Price is
less than the exercise price then in effect, then the exercise price shall be
reduced to equal such Average Trading Price; provided that in no event shall the
exercise price be reduced to below $2.75, as adjusted for stock splits, stock
dividends and other similar events. Upon such adjustment to the exercise price,
the Warrant shall thereinafter evidence the right to purchase, at the adjusted
exercise price, that number of shares obtained by dividing (a) the product
obtained by multiplying the number of shares purchasable upon exercise of the
Warrant prior to adjustment of the number of shares by the exercise price in
effect prior to the adjustment of the exercise price by (b) the exercise price
in effect after such adjustment of the exercise price. If the exercise price was
reduced to $2.75 per share, Holdings could acquire 338,179 shares of Common
Stock. The Warrant expires on July 23, 2006.
Holdings has agreed not to "short sell" the Common Stock of the
Company.
LaSalle Bank Loan
On July 28, 1999, the Company obtained a $12,000,000 revolving credit
loan (the "Loan") from LaSalle Bank National Association for working capital
purposes. A condition to the receiving of this loan was the $4,649,970
investment by Holdings. The Loan is further secured by a first priority
perfected security interest in substantially all of the assets of the Company.
The loan is on a revolving credit basis and may be drawn on by the Company at
any time provided that there is not an event of default. The Loan bears
interest at either (i) the base rate (which is equal to the greater of (a) the
Federal Funds Rate plus 0.5% or (b) the Prime Rate , plus 2.0% per annum); or
(ii) the Eurodollar Rate (which is equal to the offered rate for deposits in
United States dollars which appears on Telerate page 3750 as of 11:00 am London
Time, plus 3.50% per annum). The loan expires and is due and payable in full on
December 29, 2000. There are several financial and operating covenants in the
loan agreement, including a prohibition on dividends by the Company until the
Loan is paid in full and limitations on capital expenditures.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
Certain forward-looking information contained in this Quarterly Report
is being provided in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 as set forth in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies and
objectives concerning the Company's future financial and operating performance.
Such forward-looking information is subject to assumptions and beliefs based on
current information known to the Company and factors that could yield actual
results differing materially from those anticipated. The Company undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes in future
operating results. Please see Exhibit 99.1 attached hereto "Safe Harbor
Compliance Statement for Forward-Looking Statements" for additional factors to
be considered by shareholders and prospective shareholders.
<PAGE>
Overview
College Television Network, Inc., a Delaware corporation formerly
known as UC Television Network Corp. (the "Company"), commenced operations in
January 1991. The Company owns and operates the College Television Network
("CTN" or the "Network"), a proprietary commercial television network that
operates on college and university campuses through single-channel television
systems placed free of charge primarily in campus dining facilities and student
unions. For the year ended December 31, 1998, approximately 78% of the
Company's revenues were derived from advertising displayed on CTN. At June 30,
1999, CTN was installed or contracted for installation at approximately 1,182
locations at various colleges and universities throughout the United States.
The Company believes CTN currently reaches a viewership of approximately
1,500,000 daily impressions.
The Company also owns and publishes "Link Magazine," a publication
having an approximate circulation in excess of one million students. Link
Magazine is distributed free of charge to more than 650 campuses nationwide. For
the year ended December 31, 1998, approximately 17% of the Company's revenue
was generated through advertisements placed in Link Magazine. In addition, the
Company owns Sadler & Streib, an Atlanta-based advertising agency primarily
involved in placing media buys and providing creative services for its clients.
For the six months ended June 30, 1999 approximately 15.6% of the Company's
revenue were generated through Sadler & Streib.
The Company's revenue is affected by the pattern of seasonality common
to most school-related businesses. Historically, the Company has generated a
significant portion of its revenue during the period of September through May
and substantially less revenue during the summer months when colleges and
universities do not hold regular classes.
Results of Operations
The following table sets forth certain financial data derived from the
Company's statement of operations for the six months ended June 30, 1999 and
June 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999 June 30, 1998
(unaudited) (unaudited)
-----------------------------------
% of % of
$ Revenue $ Revenue
-----------------------------------
<S> <C> <C> <C> <C>
Revenue 2,059,559 100 1,903,990 100
Operating expenses 1,950,638 95 667,364 35
Selling, general and administrative 3,509,415 175 2,411,426 125
Depreciation and amortization 359,303 18 800,454 42
Interest income 10,797 1 124,711 7
Loss before cumulative effect of change in
accounting principle 3,749,000 182 1,850,543 96
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 June 30, 1998
(unaudited) (unaudited)
% of % of
$ Revenue $ Revenue
------------------------------------
<S> <C> <C> <C> <C>
Revenue 5,039,853 100 3,674,968 100
Operating expenses 3,784,026 75 1,278,838 35
Selling, general and administrative 7,159,336 142 5,674,747 154
Depreciation and amortization 667,392 13 1,007,263 27
Interest income 59,364 1 270,003 7
Loss before cumulative effect of change in
accounting principle 6,511,537 129 4,015,877 109
</TABLE>
Revenue increased to $2,059,599 and $5,039,853 for the three and six
month periods ended June 30, 1999, versus $1,903,990 and $3,674,968 for the
comparable periods in the prior year. The primary source for the revenue
increase was derived from the acquisition of Sadler & Streib in July 1998.
Furthermore, advertising sales for Link increased due to the publication of two
additional issues for the period ended June 30, 1999. The Company anticipates
that it will experience sales growth throughout the fiscal year ending December
31, 1999 by continuing to expand its advertiser base and by increasing the rates
charged for its advertising spots to reflect an anticipated increase in
viewership. Although the Company has agreements with national advertisers and
has held discussions or had prior agreements with other national advertisers, no
assurance can be given that these or other advertisers will continue to purchase
advertising from the Company, or that future significant advertising revenue
will ever be generated. Failure to significantly increase advertising revenue
could have a material impact on the operations of the Company.
Operating expenses increased to $1,950,638 and $3,784,026 for the
three and six-month periods ended June 30, 1999, as compared to $667,364 and
$1,278,838 for the comparable periods in the prior year. The increase over the
comparable prior year periods is primarily attributable to direct costs relating
to the advertising agency business with no corresponding amount for the first
six months of 1998 as the agency was acquired in July 1998. Additionally
publishing costs associated with producing larger and higher quality issues of
Link Magazine account for a portion of the increase. The increase over the
prior year also reflects additional costs for improved network programming and
satellite transmission expenses.
Selling, general and administrative expenses increased to $ 3,509,415
and $7,159,336 for the three and six-month periods ended June 30, 1999, versus $
2,411,426 and $5,674,747 for the comparable periods in the prior year. The
increase is primarily attributable to increased marketing, research and expanded
sales efforts associated with the Network. In addition, due to the accelerated
ramp-up of affiliate locations, higher commission expenses were recorded.
Depreciation and amortization expense totaled $359,303 and $667,392
for the three and six-month periods ended June 30, 1999, as compared to $800,454
and $1,007,263 for the comparable period in the prior year. The decrease in
depreciation expense is directly related to the acceleration of depreciation on
obsolete system equipment taken in June of 1998 in connection with the
conversion of the delivery platform to the DVB system.
Interest income amounted to $10,797 and $59,364 for the three and
six-month period ended June 30, 1999, versus $124,711 and $270,003 for the
comparable period in the prior year. The decrease is attributable to the
Company's lower cash position as a result of expenditures directly related to
the equipment required for the increased number of installed affiliate
locations.
<PAGE>
The Company has incurred substantial losses since commencement of its
operations and anticipates that such losses will continue in Fiscal 1999. The
net loss before the cumulative effect of a change in accounting principle
amounted to $3,749,000 and $6,511,537 for the three and six-month periods ended
June 30, 1999, versus $1,850,543 and $4,015,877 for the comparable period in the
prior year. The net loss during the respective periods for the quarter reflects
the Company's continued efforts to expand its advertiser and affiliate bases.
Financial Condition and Liquidity
At June 30, 1999, the Company had working capital of $508,555. At
such date, the Company's cash and cash equivalents totaled $1,163,166.
Cash used in operations increased to $3,354,680 during the six-months
ended June 30, 1999, from $3,008,166 for the comparable period in the prior
year. The impact of an increased loss was offset by enhanced collection efforts
in accounts receivable in conjunction with a build up of accounts payable. The
Company has obtained an equity infusion from its majority stockholder and a
credit commitment from a lending institution to fund cash flow deficits, if any,
through December 31, 1999. See Note F, "Subsequent Events", for a description
of these transactions.
Cash used in investing activities decreased to $2,252,107 during the
six months ended June 30, 1999 from $2,301,139 for the comparable period in the
prior year due to the one time costs in the prior year for the purchase of new
equipment for the existing school locations when the initial conversion to DVB
took place in the Spring of 1998.
Cash provided by financing activities was $358,530 for the six months
ended June 30, 1999, compared to cash used in financing of $131,473 for the same
period in the prior year. The majority of the proceeds came from the exercise
of warrants for common stock by outside warrant holders, the remainder by
employees exercising stock options.
The Company has incurred substantial losses since commencement of its
operations and anticipates that such losses will continue through Fiscal 1999.
In order to reach the stage where the Company is profitable, it is expected that
additional expenditures will be required to increase the affiliate base and to
more aggressively market the Network to attract more advertisers.
Year 2000
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
Year 2000, those date code fields will need to accept four digit entries to
distinguish 21/st/ century dates from 20/th/ century dates. As a result, prior
to December 31, 1999, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements. The
Company relies on computer applications provided by third parties to deliver and
track its programming on CTN as well as to manage and monitor its accounting,
advertising sales and administrative functions. Because the Company is
dependent on vendor compliance, its ability to assure Year 2000 compliance is
limited. The Company has obtained representations from its most significant
computer system and software vendors that the services and products provided
are, or will be, Year 2000 compliant, with the exception that it has not
obtained any such representations from Public Broadcasting Service under its
Transponder Use Agreement, dated April 30, 1998. The Company has obtained
insurance for certain of the costs associated with a failure of the satellite
transmission equipment upon which CTN's programming delivery is based, including
the cost of redirecting satellite dishes, securing a new satellite transponder,
and lost advertising revenue resulting from an interruption in programming.
However, this business interruption insurance would not cover all costs
associated with a satellite failure. Despite the Company's efforts to address
the Year 2000 impact on its business operations and internal systems, there can
be no assurance that such impact will not result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
No events occurred during the quarter covered by this Report that
would require a response to this Item. See Note F "Subsequent Events" as to the
issuance of convertible preferred stock of the Company.
Item 2. Changes in Securities.
No events occurred during the quarter covered by this Report that
would require a response to this Item.
Item 3. Defaults Upon Senior Securities.
No events occurred during the quarter covered by this Report that
would require a response to this Item.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) On May 11, 1999 the Company held its annual meeting of shareholders.
At the annual meeting, the shareholders elected the following
individuals to the Board of Directors of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) Jason Elkin For: 13,140,440; Against: 11,610; Abstained: 0
(2) Peter Kauff For: 13,140,440; Against: 11,610; Abstained: 0
(3) Avy H. Stein For: 13,140,440; Against: 11,610; Abstained: 0
(4) Beth F. Johnston For: 13,140,440; Against: 11,610; Abstained: 0
(5) Stephen Roberts For: 13,140,440; Against: 11,610; Abstained: 0
(6) Hollis W. Rademacher For: 13,140,440; Against: 11,610; Abstained: 0
(7) James Wood For: 13,140,440; Against: 11,610; Abstained: 0
(8) C. Thomas McMillen For: 13,140,440; Against: 11,610; Abstained: 0
(9) Sergio Zyman For: 13,140,440; Against: 11,610; Abstained: 0
</TABLE>
The shareholders also elected PricewaterhouseCoopers LLP as the
Company's independent accountant for the current year: For: 13,144,256;
Against: 6,400; Abstained: 1,400;
The shareholders also adopted an amendment to the Company's Outside
Director's 1996 Stock Option Plan increasing the number of shares of common
stock issuable thereunder to 460,000: For: 13,120,430, Against: 28,700,
Abstained: 2,920.
Item 5. Other Information.
No events occurred during the quarter covered by this Report that
would require a response to this Item.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed with this Report:
<PAGE>
Exhibit 2.1 Stock Purchase Agreement dated as of July 16, 1999 between the
Company, Armed Forces Communications, Inc. (d/b/a Market
Place Media), Colleen Gordon and Kevin West.
Exhibit 10.1 Employment Agreement dated May 24, 1999 between the Company, U.C.
Holdings, L.L.C. and Martin Grant.
Exhibit 10.2 Credit Agreement dated as of July 26, 1999 among the Company and
LaSalle Bank National Association
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Safe Harbor Compliance Statement for Forward Looking Statements
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COLLEGE TELEVISION NETWORK INC.
Registrant
Date: August 16, 1999 /s/ Jason Elkin
-------------------------------------------
Jason Elkin
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Date: August 16, 1999 /s/ Patrick Doran
-------------------------------------------
Patrick Doran
Chief Financial Officer, Secretary and Treasurer
(Principal Accounting and Financial Officer)
<PAGE>
Exhibit 2.1
STOCK PURCHASE AGREEMENT
Dated July 16, 1999,
by and among
COLLEGE TELEVISION NETWORK, INC.
a Delaware corporation ("Purchaser");
---------
ARMED FORCES COMMUNICATIONS, INC.
d/b/a MARKET PLACE MEDIA
a New York corporation ("Company");
-------
and
COLLEEN GORDON and KEVIN WEST
(collectively, the "Shareholders")
------------
<PAGE>
TABLE OF CONTENTS
STOCK PURCHASE AGREEMENT
<TABLE>
<S> <C> <C>
ARTICLE I.................................................................... 1
SECTION 1.1 Agreement to Purchase and Sell Shares. 1
SECTION 1.2 Purchase Price. 1
SECTION 1.3 Closing. 2
ARTICLE II................................................................... 2
SECTION 2.1 Incorporation and Qualification of the Company. 2
SECTION 2.2 Capital Stock of the Company. 3
SECTION 2.3 Subsidiaries and Other Business Entities. 3
SECTION 2.4 Authority; Enforceability. 3
SECTION 2.5 Consents; No Conflicts. 4
SECTION 2.6 Corporate Records of the Company. 5
SECTION 2.7 Financial Statements; Limitations. 5
SECTION 2.8 Absence of Certain Changes, Events and Conditions. 6
SECTION 2.9 Accounts Receivable. 8
SECTION 2.10 Inventory. 8
SECTION 2.11 Intellectual Property. 8
SECTION 2.12 Tangible Personal Property. 9
SECTION 2.13 Material Contracts. 9
SECTION 2.14 Employee Benefit Plans. 10
SECTION 2.15 Labor and Immigration Matters. 15
SECTION 2.16 Taxes. 16
SECTION 2.17 Litigation and Claims. 17
SECTION 2.18 Licenses. 18
SECTION 2.19 Compliance with Laws. 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 2.20 Insurance. 18
SECTION 2.21 Bank Accounts. 18
SECTION 2.22 Brokers. 19
SECTION 2.23 Governmental Authorization. 19
SECTION 2.24 Amounts Owing. 19
SECTION 2.25 Employees and Consultants. 19
SECTION 2.26 No Undisclosed Liabilities. 19
SECTION 2.27 Real Property Leases. 19
SECTION 2.28 Certain Interests. 20
SECTION 2.29 Suppliers. 20
SECTION 2.30 Powers of Attorney. 20
SECTION 2.31 Environmental Compliance. 21
SECTION 2.32 Absence of Certain Business Practices. 22
SECTION 2.33 Year 2000 Compliance. 22
SECTION 2.34 Material Customers; No Change in Business Arrangements. 23
SECTION 2.35 Other Information. 23
ARTICLE III.................................................................. 23
SECTION 3.1 Incorporation and Authority of Purchaser. 23
SECTION 3.2 No Conflicts. 24
SECTION 3.3 Investment Purpose. 24
SECTION 3.4 Brokers and Consultants. 24
ARTICLE IV................................................................... 24
SECTION 4.1 Conduct of Business Prior to the Closing. 24
SECTION 4.2 Access to Information. 25
SECTION 4.3 Consents; Satisfaction of Closing Conditions. 25
SECTION 4.4 Notices of Certain Events. 25
SECTION 4.5 Certain Taxes Arising in Connection with this Agreement. 26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 4.6 Tax Matters. 26
SECTION 4.7 Public Announcements. 26
SECTION 4.8 Hart-Scott-Rodino Filing. 26
SECTION 4.9 Section 338(h)(10) Election. 26
SECTION 4.10 Expenses. 27
SECTION 4.11 Disclosure. 27
SECTION 4.12 [INTENTIONALLY OMITTED] 27
SECTION 4.13 Further Assurances. 27
SECTION 4.14 Certain Receivables Matters. 27
SECTION 4.15 Working Capital Adjustment. 28
ARTICLE V...................................................................... 28
SECTION 5.1 Conditions to Obligations of the Company and Shareholders. 28
SECTION 5.2 Conditions to Obligations of Purchaser. 29
ARTICLE VI..................................................................... 31
SECTION 6.1 Survival of Representations, Warranties and Covenants. 31
SECTION 6.2 Indemnification by the Shareholders. 31
SECTION 6.3 Indemnification by the Purchaser. 31
SECTION 6.4 General Indemnification Provisions. 31
SECTION 6.5 Limits on Indemnification and Liability. 32
SECTION 6.6 Payment of Claims. 33
SECTION 6.7 No Recourse Against the Company. 33
ARTICLE VII.................................................................... 33
SECTION 7.1 Termination. 33
SECTION 7.2 Waiver. 33
ARTICLE VIII................................................................... 33
SECTION 8.1 Notices. 33
SECTION 8.2 Headings. 34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 8.3 Severability. 34
SECTION 8.4 Entire Agreement. 35
SECTION 8.5 Assignment. 35
SECTION 8.6 No Third-Party Beneficiaries. 35
SECTION 8.7 "Knowledge" Defined. 35
SECTION 8.8 Amendment. 35
SECTION 8.9 Counterparts. 35
SECTION 8.10 Binding Agreement. 35
SECTION 8.11 Governing Law; Binding Arbitration. 36
</TABLE>
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made and entered into as of
---------
the 16th day of July, 1999, by and among COLLEGE TELEVISION NETWORK, INC., a
Delaware corporation ("Purchaser"), ARMED FORCES COMMUNICATIONS, INC., a New
---------
York corporation d/b/a Market Place Media (the "Company"), and COLLEEN GORDON
-------
("Gordon") and KEVIN WEST ("West"), both individual residents of the State of
- -------- ----
California (collectively, the "Shareholders").
------------
W I T N E S S E T H:
-------------------
WHEREAS, the Shareholders own all of the issued and outstanding shares of
capital stock (the "Shares") of the Company; and
------
WHEREAS, the Shareholders desire to sell, and Purchaser desires to
purchase, all of the Shares owned by the Shareholders;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which hereby are acknowledged conclusively, the parties,
intending to be legally bound, agree as follows:
ARTICLE I.
PURCHASE AND SALE
SECTION 1.1 Agreement to Purchase and Sell Shares.
-------------------------------------
Subject to the terms and conditions of this Agreement, the Shareholders
agree to sell, transfer and assign to Purchaser, and Purchaser agrees to
purchase, on the Closing Date (as defined in Section 1.3 below), all of the
Shares of the Company, free and clear of all security interests, pledges, liens,
encumbrances, charges, or restrictions on the ownership, use, voting, transfer,
receipt of dividends or other attributes of ownership.
SECTION 1.2 Purchase Price.
--------------
(a) The aggregate purchase price (the "Purchase Price") shall be
--------------
Thirty Million and No/100 Dollars ($30,000,000.00), subject to the adjustments
made, if any, pursuant to Section 4.11 of this Agreement. The Purchase Price
shall be allocated among the Shareholders in the manner set forth on Schedule
--------
1.2(a) attached.
- ------
(b) Subject to Section 4.11 hereof, at the Closing, $27,500,000 shall
be paid to the Shareholders in cash (the "Cash Payment") in accordance with the
------------
allocations set forth on Schedule 1.2(a), and $2,500,000 (the "Deferred
--------------- --------
Payment") shall be deposited into escrow, pursuant to the terms set forth in the
- -------
escrow agreement (the "Escrow Agreement") attached as Exhibit 1.2(b). All
---------------- --------------
expenses associated with the escrow shall be shared equally between the
Shareholders and the Purchaser. The Shareholders shall be entitled to any
interest that accrues in the escrow account on the Deferred Payment paid to the
Shareholders.
(c) The Company shall prepare, with the assistance of
PricewaterhouseCoopers, LLP, in connection with certain specific review
procedures, a balance sheet of the Company as of the Closing Date (the "Closing
-------
Balance Sheet"), and related statements of income for the period then ended. The
- -------------
completion of the Closing Balance Sheet shall be conducted in accordance with
generally accepted accounting principles, except as varied by prior Company
practices as set forth on Schedule 2.7(a) hereto.
---------------
<PAGE>
The Closing Balance Sheet shall be used to determine the Net Book Value of the
Company as of the Closing Date. The Purchase Price shall be adjusted downward,
dollar for dollar, to the extent that the Net Book Value of the Company on the
--------------
Closing Date is less than $1,420,000. For purposes of this Agreement, "Net Book
Value" shall mean the total assets of the Company, minus, without duplication,
(i) the sums attributable to (a) goodwill, (b) intangible items such as
unamortized debt discount and expense, patents, trade and service marks,
copyrights, and research and development expenses, and (c) all reserves not
already deducted from assets, and (ii) total liabilities (total liabilities
shall include the amount of all obligations that should in accordance with
generally accepted accounting principles be classified as liabilities on the
balance sheet of the Company, including in any event, all indebtedness,
contingent or otherwise). For purposes of the Net Book Value calculation, the
World Xchange Receivable (as defined in Section 4.14 hereof) shall be valued at
its full face value. Within 75 days following the Closing Date, the Closing
Balance Sheet shall be prepared by the Company and delivered to the Shareholders
together with working papers. In the event that the Purchaser and the
Shareholders agree in writing as to the Closing Balance Sheet (after any
mutually agreed modifications thereto are made), then such Closing Balance Sheet
shall be final and binding upon the parties hereto; provided, however, that the
--------- --------
determination of whether the Purchaser and the Shareholders agree as to the
Closing Balance Sheet shall be made no later than 100 days following the Closing
Date. In the event that the Shareholders and the Purchaser cannot so agree in
writing within 100 days following the Closing Date, then any items or issues in
dispute shall be resolved in accordance with Section 8.11 below. Notwithstanding
anything in this Section 1.2(c) to the contrary, should an adjustment to the
Purchase Price be made pursuant to Section 4.15 of this Agreement, the amount of
such adjustment shall be included within the determination of any adjustment to
be made pursuant to this Section 1.2(c), so that there are no multiple
reductions for the same shortfall.
SECTION 1.3 Closing. Subject to the terms and conditions hereof, the
-------
closing ("Closing") shall take place at such location specified by the Purchaser
-------
upon the later of (a) five business days following satisfaction of the
conditions set forth in sections 5.1(f) and 5.2(h) below, or (b) such other date
as shall be mutually acceptable to the Company, Purchaser and the Shareholders
(the "Closing Date").
------------
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS
As an inducement to Purchaser to enter into this Agreement, the Company and
the Shareholders hereby jointly and severally represent and warrant to, and
covenant and agree with, the Purchaser as set forth below. Notwithstanding any
investigation by Purchaser, its directors, officers, employees, independent
contractors, agents or representatives, including its attorneys and accountants,
no exception disclosed to Purchaser or its directors, officers, employees,
independent contractors, agents or its representatives, including its attorneys
and accountants, shall constitute an exception to a representation or warranties
set forth in this Agreement or any other agreement related hereto, including
this Article II, unless the exception is set forth in the Schedules attached to
this Agreement.
SECTION 2.1 Incorporation and Qualification of the Company. The Company is
----------------------------------------------
a corporation duly incorporated, validly existing and in good standing under the
laws of the State of New York, and has all corporate power and authority,
together with all material governmental licenses, authorizations, consents and
approvals, required to own, operate or lease the properties and assets now
owned, operated or leased by the Company and to carry on its business. The
Company is duly qualified as a foreign corporation to do business, and is in
good standing, in each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such qualification
necessary.
2
<PAGE>
All jurisdictions in which the Company is qualified as a foreign corporation are
set forth on Schedule 2.1 attached.
------------
SECTION 2.2 Capital Stock of the Company.
----------------------------
(a) The authorized capital stock of the Company consists of 200 shares
of common stock, no par value per share, of which 100 shares are issued and
outstanding. The issued and outstanding shares of common stock of the Company
(comprising all of the Shares) are owned as follows: 50 shares are owned by
Gordon, and 50 shares are owned by West. Each outstanding Share has been duly
authorized and validly issued, and is fully paid and non-assessable. There are
no outstanding (i) shares of capital stock or other voting securities of the
Company other than those owned by the Shareholders, as set forth above, (ii)
securities of the Company convertible into or exchangeable for shares of capital
stock or voting securities of the Company, (iii) options (including employee
stock options), warrants or rights of conversion or other rights, agreements,
arrangements or commitments obligating, or which may obligate, the Company to
sell or issue any additional shares of the Company's capital stock, (iv)
obligations of the Company to issue any voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company, or (v) equity equivalents, interests in the ownership or earnings, or
other similar rights of or with respect to the Company (the items in clauses
(i), (ii), (iii), (iv) and (v) being referred to collectively as the "Company
-------
Securities"). There are no outstanding obligations of the Company to repurchase,
- ----------
redeem or otherwise acquire any of the Company Securities.
(b) The Shareholders now have, and on the Closing Date will have,
good, valid and marketable title to the number and class of Shares listed
opposite such Shareholder's name on Schedule 2.2(b), free and clear of any Stock
---------------
Encumbrances (as defined below). The Shareholders now have, and on the Closing
Date will have, the legal right and power, and all consents, approvals and
authorizations required by law, to enter into this Agreement and to sell,
transfer and deliver such shares in the manner provided in this Agreement, and
no such action will contravene any provision of applicable law or any agreement
or other instrument binding upon such Shareholder or any writ, order or
injunction of any court or other governmental body. Upon Closing, the
Shareholders shall transfer to Purchaser all right, title and interest in and to
the Shares, (including, without limitation, the community property interest each
Shareholder may have in the Shares held by the other Shareholder), free and
clear of any Stock Encumbrances. As used in this Agreement, "Stock Encumbrances"
------------------
shall mean any security interest, pledge, lien, charge, adverse claim of
ownership or use, or any restriction on ownership, use, voting, transfer or
receipt of dividends, or any encumbrance of any kind.
SECTION 2.3 Subsidiaries and Other Business Entities. There are no
----------------------------------------
corporations, partnerships, joint ventures or other business entities in which
the Company owns, of record or beneficially, any direct or indirect equity
interest or any right, contingent or otherwise, to acquire the same.
SECTION 2.4 Authority; Enforceability.
-------------------------
(a) The Company has all corporate power and authority to enter into
this Agreement and to carry out its obligations hereunder and to consummate the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by the Company, and (assuming due authorization,
execution and delivery by Purchaser) constitutes a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, subject to the effect, if any, of bankruptcy, insolvency,
reorganization, moratorium and other
3
<PAGE>
similar laws affecting the rights of creditors generally, and the effect, if
any, of general principles of equity.
(b) The Shareholders have the full right, power and capacity to
execute, deliver and perform this Agreement and each other certificate,
agreement, document and instrument to be delivered by the Shareholders in
connection with the transactions contemplated by this Agreement (collectively,
the "Shareholder Ancillary Documents") and to consummate the transactions
-------------------------------
contemplated hereby and thereby. This Agreement and the Shareholder Ancillary
Documents have been duly and validly executed and delivered by the Shareholders
or, in the case of any Shareholder Ancillary Documents to be executed and
delivered hereafter, such Shareholder Ancillary Documents will have been duly
and validly executed and delivered as of the Closing. This Agreement and the
Shareholder Ancillary Documents each constitute, or in the case of any
Shareholder Ancillary Documents to be executed hereafter, such Shareholder
Ancillary Documents will constitute the Shareholders' legal, valid and binding
obligations, enforceable against the Shareholders in accordance with their
terms. The execution, delivery and performance by the Shareholders of this
Agreement and the Shareholder Ancillary Documents and consummation of the
transactions contemplated hereby and thereby will not, with or without the
giving of notice or the passing of time, or both, (i) violate any provision of
law, statute, rule or regulation to which the Shareholders are subject, (ii)
violate any order, judgment or decree applicable to the Shareholders, or (iii)
violate, conflict with or result in a breach or a default under, or cause the
termination of, any term or condition of any court order, trust document, will,
agreement, document or other instrument to which any Shareholder is a party or
by which any Shareholder or such Shareholder's properties are bound.
(c) The Company is not a guarantor or otherwise liable for the debts
or obligations of any other person.
SECTION 2.5 Consents; No Conflicts. Except as set forth on Schedule 2.5
---------------------- ------------
attached, the execution, delivery and performance of this Agreement by the
Company and the Shareholders and the consummation by the Company and the
Shareholders of the transactions contemplated hereby do not and will not:
(a) violate or conflict with the certificate of incorporation or
bylaws or other organizational documents of the Company;
(b) conflict with or violate any law, rule or regulation of, or any
order, writ, judgment, injunction, decree, stipulation, determination or award
entered by or with, any foreign federal, state or local governmental authority,
body, agency official, regulatory or administrative agency, body or official, or
governmental commission, court, tribunal, body, or agency (singularly and
collectively, a "Governmental Authority") applicable to the Company or its
----------------------
business;
(c) conflict with, result in any breach of, constitute a material
default under (or constitute an event which with the giving of notice or lapse
of time, or both, would become or result in a conflict, breach or default
under), or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any security interest, pledge,
mortgage, lien, charge, adverse claim of ownership or use or any encumbrance of
any kind (collectively, an "Encumbrance") on the Company, its assets or the
-----------
Shares pursuant to any agreement, contract or other instrument, to which the
Company is a party or by which any of its assets or properties or the Shares are
bound or affected.
4
<PAGE>
SECTION 2.6 Corporate Records of the Company. The stock records and minute
--------------------------------
books of the Company heretofore furnished to Purchaser by the Company correctly
show the total number of shares of its capital stock issued and outstanding and
all corporate action taken by the directors and shareholders of the Company
(including action taken by consent without a meeting), and contain true, correct
and complete copies or originals of the certification of incorporation and
bylaws and all amendments thereto.
SECTION 2.7 Financial Statements; Limitations.
---------------------------------
(a) The Company has previously delivered to Purchaser copies of
financial statements of the Company (the "Financial Statements") consisting of
--------------------
(i) balance sheets of the Company for the twelve month periods ending December
31, 1996, December 31, 1997 and December 31, 1998 (the "Fiscal Year-End Balance
-----------------------
Sheets"), and a balance sheet (the "Interim Balance Sheet") as of May 31, 1999
- ------ ---------------------
(the "Interim Balance Sheet Date"), and (ii) related statements of income and
--------------------------
retained earnings and cash flows of the Company for the periods then ended. The
Financial Statements and notes present fairly in all respects the financial
condition of the Company (as to the balance sheets), the results of operation
for the periods then ended, the changes in stockholders' equity and the cash
flow of the Company as at the respective dates of and for the periods referred
to in such Financial Statement, all in accordance with generally accepted
accounting principles (except as set forth on Schedule 2.7 hereto), and the
------------
Financial Statements reflect the consistent application of such accounting
principles throughout the periods involved, except as disclosed in Schedule 2.7.
------------
The books of account of the Company have been kept accurately in all material
respects in the ordinary course of business, the transactions entered therein
represent bona fide transactions, and the revenues, expenses, assets and
liabilities of the Company have been properly recorded therein in all material
respects.
(b) As of January 1, 1999, and until the Closing Date, the
Shareholders have not withdrawn and will not withdraw, in the aggregate, in
excess of $500,000 as dividends, as shareholders distributions or as
compensation; provided, however, that the foregoing limitation shall not include
--------- --------
(i) distributions made to the Shareholders on April 15, 1999, in the aggregate
amount of $525,000, for the payment of the balance of their respective 1998
income tax liabilities, or (ii) distributions made to the Shareholders for the
payment of their respective 1999 year-to-date income tax liabilities resulting
from distributions by the Company, which liabilities, as of the date of this
Agreement, are expected to be in the approximate aggregate amount of $370,000;
provided further, however, that the Shareholders shall notify the Purchaser in
- -------- ------- -------
writing prior to the Closing Date should the aggregate amount of the tax
liabilities described in the foregoing subparagraph (ii) exceed $370,000. In
connection with the withdrawals described in this paragraph (b), as of January
1, 1999, the Shareholders have not and will not cause the Company, outside of
the ordinary course of the Company's business, to accelerate its accounts
receivable collections in connection with such withdrawals. There are no accrued
and unpaid dividends or other distributions, nor any obligation of the Company
to pay such distributions or distributions to the Shareholders, other than as
set forth in this paragraph (b). For the Company's fiscal year ended December
31, 1998, total accrued dividends and compensation (including amounts for the
Shareholders' income tax liabilities) paid to the Shareholders, in the
aggregate, was $2,016,000.
(c) The Company has previously delivered to Purchaser copies of
financial statements (the "Prior Financial Statements") of the Company
--------------------------
consisting of (i) balance sheets of the Company for the 12-month periods ending
December 31, 1992 (the year ending immediately prior to the Company's subchapter
S election), December 31, 1993 (the first year during which the Company's
subchapter S election was effective), and December 31, 1994 (the second year
after the Company's subchapter S election became effective) (the "Prior Balance
-------------
Sheets"), and (ii) related statements of income of the Company. The Prior
- ------
Financial Statements present fairly in all respects the financial
5
<PAGE>
condition of the Company (as to the Prior Balance Sheets), the results of
operations for the periods then ended, and the changes in stockholders' equity
of the Company at the respective dates of and for the periods referred to in the
Prior Financial Statements, all such Prior Financial Statements having been
prepared (except for changes incurred with the election to be treated as a
subchapter S corporation) on a basis consistent with preceding years and
throughout the periods involved.
(d) As of the Closing Date, the Working Capital (as defined herein) of
the Company shall be approximately $680,000. For purposes of this Agreement,
"Working Capital" shall mean current assets less current liabilities.
---------------
SECTION 2.8 Absence of Certain Changes, Events and Conditions.
-------------------------------------------------
(a) Since December 31, 1998, there has not been any material adverse
change in the condition (financial or otherwise) of the business or the
liabilities, assets, operations, results of operations, prospects or conditions
(financial or other) of the Company.
(b) Except as disclosed on Schedule 2.8 hereto, since December 31,
------------
1998, the Company has operated its business in the ordinary course consistent
with past practice and the Company has not:
(i) permitted or allowed any of its assets to be mortgaged, pledged
or subjected to any Encumbrance, other than immaterial Encumbrances incurred in
the ordinary course of business consistent with past practice;
(ii) written down, or failed to write down, or written up the value
of any of its inventory or assets;
(iii) amended, terminated, cancelled or compromised any claims or
waived any other rights, or sold, transferred or otherwise disposed of any
properties or assets, real, personal or mixed (including, without limitation,
leasehold interests and intangible property), other than the sale of inventory
in the ordinary course of business;
(iv) disposed of or permitted to lapse any patent, trademark,
assumed name, service mark, trade name or copyright application, registration or
license to its business, or under which the Company has any right or license;
(v) granted any increase in the compensation of the employees of
the Company, including, without limitation, any such increase pursuant to any
Employee Benefit Plan (as defined in Section 2.14 below), or established or
increased or promised to increase any benefits under any such Employee Benefit
Plan;
(vi) made any material changes in the customary methods of
operation of its business, including practices and policies relating to
franchising, purchasing, marketing or selling;
(vii) declared, made, set aside or paid any dividends or other
distributions (whether in cash, securities or other property) to the
Shareholders with respect to the Shares, or redeemed any of its capital stock;
(viii) incurred or assumed any indebtedness for borrowed money or
guaranteed any such indebtedness;
6
<PAGE>
(ix) issued or sold any of its stock, notes, bonds or other
securities (including treasury shares), or any option, warrant or other rights
to purchase the same;
(x) sustained any damage, destruction or other casualty loss
(whether or not covered by insurance) affecting the business or assets of the
Company;
(xi) entered into any transaction, commitment, contract or
agreement relating to its assets or business (including the acquisition or
disposition of any assets) or the relinquishment of any contract or other right,
material to the Company, other than transactions and commitments in the ordinary
course of business consistent with past practice and those contemplated by this
Agreement;
(xii) (1) granted any severance or termination pay to any director,
officer or employee of the Company, (2) entered into any employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, officer or employee of the Company, (3) increased
benefits payable under any existing severance or termination pay policies or
employment agreements, or (4) increased compensation, bonus or other benefits
payable to directors, officers or employees of the Company;
(xiii) granted any option to purchase, or other right to acquire,
capital stock or any security or other instrument convertible into capital stock
of any class of the Company to any Person (as defined below);
(xiv) changed any method of accounting or accounting practice
(including in each case tax accounting), except for any such change required by
reason of a concurrent change in accordance with generally accepted accounting
principles and notice of which has been given in writing to Purchaser;
(xv) entered into, extended, amended or terminated any Material
Contract (as defined in Section 2.13 below), material agreement (other than
agreements relating to purchases of inventory in the ordinary course of business
consistent with past practice), lease, franchise, permit or license or any
material term of any outstanding security of the Company;
(xvi) made any amendment to its certificate of incorporation or
bylaws except such as may be necessary to comply with the terms of this
Agreement;
(xvii) gained knowledge of any labor dispute or pending labor
negotiation, or, to the knowledge of the Company and the Shareholders, any event
that is expected to cause or to give rise to any such labor dispute or
negotiation, or any activity or proceeding by a labor union or representative
thereof to organize any employees of the Company, which employees, to the
knowledge of the Company and the Shareholders, are not currently, and were not
at the Interim Balance Sheet Date, members of any labor union or subject to a
collective bargaining agreement, or any lockout, strike, slowdown, work stoppage
or threat thereof by or with respect to such employees;
(xviii) made any loan, advance or capital contributions to or
investment in any Person, except in the ordinary course of business consistent
with past practice; or
(xix) agreed, whether in writing or otherwise, to take any of the
actions specified in this Section 2.8(b).
7
<PAGE>
As used in this Agreement, "Person" means an individual, a corporation, a
------
partnership, an association, a trust or any other entity or organization,
including a government or political subdivision or any agency or instrumentality
thereof.
SECTION 2.9 Accounts Receivable. The accounts receivable have not been
-------------------
recorded in excess of their net realizable value on the Interim Balance Sheet.
Attached hereto as Schedule 2.9 is a list and aging of all accounts receivables
------------
of the Company. Except as set forth on Schedule 2.9 hereto, all accounts
------------
receivable set forth on the Interim Balance Sheet or incurred thereafter, up to
the Closing Date, (i) are and shall be valid obligations of the respective
makers thereof, (ii) have and shall have arisen in the ordinary course, (iii)
are and shall be fully collectible in the ordinary course of the Company's
business, and (iv) subject to the reserve for doubtful accounts, to the
knowledge of the Company and the Shareholders, need not be written off as
uncollectible.
SECTION 2.10 Inventory. The Company is a provider of services, and
---------
therefore maintains no inventory.
SECTION 2.11 Intellectual Property.
---------------------
(a) Schedule 2.11(a) lists any trademark, service mark, registration
----------------
thereof or application for registration therefor, trade name, invention, patent,
patent application, trade secret, know-how, copyright, copyright registration,
application for copyright registration, or any other similar type of proprietary
intellectual property (including, without limitation, any such right in computer
software) used in the conduct of the Company's business (collectively, the
"Intellectual Property"). Except as disclosed on Schedule 2.11(a), the Company
--------------------- ----------------
owns all such Intellectual Property subject only to the license rights described
on such Schedule. The consummation of the transactions contemplated hereby will
not alter or impair the Company's rights to own and use the Intellectual
Property. Except as disclosed on Schedule 2.11(a), no claims have been asserted,
----------------
no claims are pending, and, to the knowledge of the Company and the
Shareholders, no claims have been threatened by any Person relating to the use
of any such Intellectual Property or challenging or questioning the validity or
effectiveness of any state, federal or foreign registration of the Intellectual
Property. Listed on Schedule 2.11(a) are the state and federal registrations and
----------------
the pending applications, both domestic and foreign, owned by the Company. The
Intellectual Property of the Company is sufficient for the conduct of the
business of the Company as currently conducted.
(b) Except as listed on Schedule 2.11(b), (i) the Company has not been
----------------
a defendant in, and has not received a written charge in connection with, any
dispute, claim, suit, action or proceeding relating to its business that has not
been finally terminated prior to the date hereof and that involves a claim of
infringement of any patents, trademarks, service marks, or copyrights; (ii)
there is no other dispute, claim or infringement by the Company or, to the
knowledge of the Company and the Shareholders, any continuing infringement by
any other Person of any Intellectual Property of the Company; and (iii) no
Intellectual Property of the Company is subject to any outstanding order,
judgment, decree, stipulation or agreement restricting the use thereof by the
Company or restricting the licensing thereof by the Company to any Person. The
Company has not entered into any agreement to indemnify any other Person against
any charge of infringement of any patent, trademark, service mark or copyright,
other than those agreements entered into in the ordinary course of business and
listed on Schedule 2.11(b).
----------------
8
<PAGE>
(c) All of the Company's employees have executed an agreement with the
Company relating to its Intellectual Property, substantially in the form
attached to Schedule 2.11(c) (collectively, the "Intellectual Property
---------------- ---------------------
Agreements").
- ----------
SECTION 2.12 Tangible Personal Property. Schedule 2.12 describes by
-------------------------- -------------
category the machinery, equipment, tools, parts, supplies, furniture, fixtures,
personalty, automobiles and other tangible personal property (the "Tangible
--------
Personal Property") used in the Company's business as of the Interim Balance
- -----------------
Sheet Date. The Tangible Personal Property is in good operating condition and
repair, normal wear and tear excepted. Except as set forth on Schedule 2.12, the
-------------
Company has good and indefeasible title to and owns the Tangible Personal
Property free and clear of all Encumbrances or similar rights of third parties.
The Tangible Personal Property of the Company is being maintained at normal and
customary levels adequate for the conduct of the business of the Company as
currently conducted and includes all Tangible Personal Property and assets
applicable to or used in connection with the business of the Company, as being
conducted on the Closing Date.
SECTION 2.13 Material Contracts.
------------------
(a) Other than as set forth on Schedule 2.13, the Company is not a
-------------
party to any of the following contracts, agreements, or obligations (the
"Material Contracts"):
------------------
(i) any store, warehouse, office and other real property leases
other than those referenced in Section 2.27 below;
(ii) any broker, distributor, dealer, sales, agency, promotion,
market research, marketing, consulting or advertising contracts;
(iii) any contracts for the purchase or sale of raw materials,
commodities, goods, merchandise, supplies, other materials or personal property
with any supplier or purchaser or for the furnishing of services to or by the
Company or otherwise related to its business that provide for annual payments in
excess of $10,000;
(iv) any contracts of employment or employee compensation, any
contracts with independent contractors or consultants, and any management
contracts which are not terminable on thirty (30) days' notice or less without
penalty or legal obligation to make any payment after the expiration of such
thirty (30) day period;
(v) any contracts which contain warranties that survive final
payment under the contract;
(vi) any indentures, mortgages, notes, loan or credit agreements,
assumption agreements, assignments of rents, or any other contract relating in
any way to indebtedness for borrowed money, whether secured or unsecured,
including but not limited to indebtedness by way of lease or installment
purchase arrangement, guarantee, indemnity, keep-well or similar agreement,
arrangement or undertaking on which others rely in extending credit, or
otherwise, or any conditional sales contract, chattel and purchase money
mortgage or other security arrangement with respect to any equipment, personal
or other property or fixtures;
(vii) any contracts between the Company and any of the
Shareholders or any entity in which a Shareholder has a direct or indirect
financial or ownership interest ;
9
<PAGE>
(viii) any contracts with any Governmental Authority or any
department, agency or division thereof, to which the Company is a party;
(ix) any contract or commitment for capital expenditures or the
acquisition of fixed assets providing for payments in excess of $10,000 singly
and $25,000 in the aggregate;
(x) any contract relating to the rental or use of equipment, other
personal property or fixtures, involving payment of fixed or contingent annual
rentals or sums in excess of $10,000;
(xi) any contract, order or decree that substantially limits the
freedom of the Company to compete in any line of business or with any Person or
in any area or to use or disclose any information in its possession, and which
would so limit the freedom of the Company after the Closing Date;
(xii) any contract or commitment not made in the ordinary course
of business;
(xiii) any partnership, joint venture or other similar contract
arrangement or agreement;
(xiv) any other contract (A) which is not cancelable on ninety
(90) days' or less notice without any penalty or other financial obligation or
(B) if not so cancelable, involves annual aggregate payment of $10,000 or more;
or
(xv) any franchise, development, license, territorial and similar
contracts and commitments of the Company ("Franchise Documents") relating to the
-------------------
franchising of the business of the Company. In the granting of the franchises
under the Franchise Documents, the Company has complied with all state and
federal franchise, business opportunity and similar laws and regulations
governing the franchise and license of the business of the Company.
(b) The Company has made available to Purchaser copies of each of the
Material Contracts and any amendments thereto. Except as disclosed on Schedule
--------
2.13(b), (i) the Company is not in default under or in breach of any of the
- -------
terms, conditions or warranties, express or implied, of the Material Contracts;
(ii) no condition exists or has occurred which, with the giving of notice or the
lapse of time, or both, would constitute a default or breach by the Company of
any of the terms, conditions or warranties, express or implied, of the Material
Contracts; (iii) to the Company's and each Shareholder's knowledge, no
counterparty to the Material Contracts is in default or breach thereunder; (iv)
assuming the due authorization, execution and delivery by the counterparties
thereto, and the absence of default or breach by such counterparties, all
Material Contracts are valid and binding legal obligations of the Company, in
full force and effect and enforceable against the Company in accordance with
their terms, except that the enforceability of such contracts and agreements may
be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights generally and (B) equitable
principles which may limit the availability of certain equitable remedies (such
as specific performance); and (v) neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, nor
compliance with the terms and provisions hereof, will require the consent of any
Person pursuant to, or will result in the termination or impairment of, any such
Material Contract.
SECTION 2.14 Employee Benefit Plans.
----------------------
10
<PAGE>
(a) Schedule 2.14(a) attached sets forth a list of each "employee
----------------
benefit plan" (as defined by Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), and any other bonus, profit
-----
sharing, pension, compensation, deferred compensation, stock option, stock
purchase, fringe benefit, severance, post-retirement, scholarship, disability,
sick leave, vacation, individual employment, commission, bonus, payroll
practice, retention, or other plan, agreement, policy, trust fund or arrangement
(each such plan, agreement, policy, trust fund or arrangement is referred to
herein as an "Employee Benefit Plan", and collectively, the "Employee Benefit
--------------------- ----------------
Plans") that is currently in effect, was maintained since December 31, 1975, or
- -----
which has been approved before the date hereof but is not yet effective, for the
benefit of (i) directors or employees of the Company or any other persons
performing services for the Company, (ii) former directors or employees of the
Company or any other persons formerly performing services for the Company, or
(iii) beneficiaries of anyone described in (i) or (ii) (collectively, "Company
-------
Employees") or with respect to which the Company or any "ERISA Affiliate"
- --------- ---------------
(hereby defined to include any trade or business, whether or not incorporated,
other than the Company, which has employees who are or have been at any date of
determination occurring within the preceding six (6) years, treated pursuant to
Section 4001(a)(14) of ERISA and/or Section 414 of the Internal Revenue Code of
1986, as amended (the "Code"), as employees of a single employer which includes
----
the Company) has or has had any obligation on behalf of any Company Employee.
Except as disclosed on Schedule 2.14(a) attached, there are no other benefits to
----------------
which any Company Employee is entitled or for which the Company has any
obligation.
(b) The Shareholders have caused the Company to deliver to Purchaser,
with respect to each Employee Benefit Plan, true and complete copies of (i) the
documents embodying and relating to the plan, including, without limitation, the
current plan documents and documents creating any trust maintained pursuant
thereto, all amendments, investment management agreements, administrative
service contracts, group annuity contracts, insurance contracts, collective
bargaining agreements, the most recent summary plan description with each
summary of material modification, if any, and employee handbooks, (ii) annual
reports including but not limited to Forms 5500, 990 and 1041 for the last three
(3) years for the plan and any related trust, (iii) actuarial valuation reports
and financial statements for the last three years, and (iv) each communication
involving the plan or any related trust to or from the Internal Revenue Service
("IRS"), Department of Labor ("DOL"), Pension Benefit Guaranty Corporation
--- ---
("PBGC") or any other Governmental Authority including, without limitation, the
----
most recent determination letter received from the IRS pertaining to any
Employee Benefit Plan intended to qualify under Sections 401(a) or 501(c)(9) of
the Code.
(c) The Company has no obligation to contribute to or provide benefits
pursuant to, and has no other liability of any kind with respect to, (i) a
"multiple employer welfare arrangement" (within the meaning of Section 3(40) of
ERISA), or (ii) a "plan maintained by more than one employer" (within the
meaning of Section 413(c) of the Code).
(d) Except as otherwise set forth on Schedule 2.14(d), the Company is
----------------
not liable for, and neither the Company nor Purchaser will be liable for, any
contribution, tax, lien, penalty, cost, interest, claim, loss, action, suit,
damage, cost assessment or other similar type of liability or expense of any
ERISA Affiliate (including predecessors thereof) with regard to any Employee
Benefit Plan maintained, sponsored or contributed to by an ERISA Affiliate (if a
like definition of Employee Benefit Plan were applicable to the ERISA Affiliate
in the same manner as it applies to the Company), including, without limitation,
withdrawal liability arising under Title IV, Subtitle E, Part 1 of ERISA,
liabilities to the PBGC, or liabilities under Section 412 of the Code or Section
302(a)(2) of ERISA.
11
<PAGE>
(e) The Company, each ERISA Affiliate, each Employee Benefit Plan and
each Employee Benefit Plan "sponsor" or "administrator" (within the meaning of
Section 3(16) of ERISA) has complied in all respects with the applicable
requirements of Section 4980B of the Code and Section 601 et seq. of ERISA (such
statutory provisions and predecessors thereof are referred to herein
collectively as "COBRA"). Schedule 2.14(e) attached lists the name of each
----- ----------------
Company Employee who has experienced a "Qualifying Event" (as defined in COBRA)
with respect to an Employee Benefit Plan who is eligible for "Continuation
Coverage" (as defined in COBRA) and whose maximum period for Continuation
Coverage required by COBRA has not expired. Included in such list are the
current address for each such individual, the date and type of each Qualifying
Event, whether the individual has already elected Continuation Coverage and, for
any individual who has not yet elected Continuation Coverage, the date on which
such individual was notified of his or her rights to elect Continuation
Coverage. Schedule 2.14(e) also lists the name of each Company Employee who is
----------------
on a leave of absence (whether or not pursuant to the Family and Medical Leave
Act of 1993, as amended ("FAMLA")) and is receiving or entitled to receive
-----
health coverage under an Employee Benefit Plan, whether pursuant to FAMLA, COBRA
or otherwise.
(f) With respect to each Employee Benefit Plan and except as otherwise
set forth on Schedule 2.14(f) attached:
----------------
(i) each Employee Benefit Plan which is described in Section 3(2)
of ERISA qualifies under Section 401(a) of the Code and has received a
determination letter from the IRS to the effect that the Employee Benefit Plan
is qualified under Section 401 of the Code and that any trust maintained
pursuant thereto is exempt from federal income taxation under Section 501 of the
Code, and nothing has occurred or is expected to occur that caused or could
cause the loss of such qualification or exemption or the imposition of any
penalty or tax liability;
(ii) all payments required by the Employee Benefit Plan, any
collective bargaining agreement or by law (including all contributions,
insurance premiums, premiums due the PBGC or intercompany charges) with respect
to all periods through the date hereof have been made;
(iii) there are no violations of or failures to comply with ERISA
and the Code with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plan with the DOL, the IRS, the PBGC or
any other Governmental Authority, or any of the assets of the Employee Benefit
Plan or any related trust;
(iv) no claim, lawsuit, arbitration or other action has been
asserted or instituted or threatened in writing against the Employee Benefit
Plan, any trustee or fiduciaries thereof, the Company or any ERISA Affiliate,
any director, officer or employee thereof, or any of the assets of the Employee
Benefit Plan or any related trust;
(v) all amendments required to bring the Employee Benefit Plan
into conformity with applicable law, including, without limitation, ERISA and
the Code, have been timely adopted;
(vi) any bonding required with respect to the Employee Benefit
Plan in accordance with the applicable provisions of ERISA has been obtained and
is in full force and effect;
12
<PAGE>
(vii) the Employee Benefit Plan complies with and has been
maintained and operated in accordance with its respective terms and the terms
and the provisions of applicable law, including, without limitation, ERISA and
the Code (including rules and regulations thereunder);
(viii) no "prohibited transaction" (within the meaning of Section
4975 of the Code and Section 406 of ERISA) has occurred or is expected to occur
with respect to the Employee Benefit Plan (and the transactions contemplated by
this Agreement will not constitute or directly or indirectly result in such a
"prohibited transaction") which has subjected or could subject the Company, any
ERISA Affiliate or Purchaser or any officer, director or employee of the
Company, any ERISA Affiliate, Purchaser or the Employee Benefit Plan trustee,
administrator or other fiduciary, to a tax or penalty on prohibited transactions
imposed by either Section 502 of ERISA or Section 4975 of the Code or any other
liability with respect thereto;
(ix) the Employee Benefit Plan is not under audit or investigation
by the IRS or the DOL or any other Governmental Authority and no such completed
audit, if any, has resulted in the imposition of any tax, interest or penalty;
(x) if the Employee Benefit Plan purports to provide benefits
which qualify for tax-favored treatment under Sections 79, 105, 106, 117, 120,
125, 127, 129 or 132 of the Code, the Employee Benefit Plan satisfies the
requirements of said Section(s);
(xi) the Employee Benefit Plan may be unilaterally amended or
terminated on no more than 90 days notice;
(xii) if the Employee Benefit Plan purports to be a voluntary
employee beneficiary association ("VEBA"), a request for a determination letter
----
for the VEBA has been submitted to and approved by the IRS that the VEBA is
exempt from federal income tax under Section 501(c)(9) of the Code, and nothing
has occurred or is expected to occur that caused or could cause the loss of such
qualification or exemption or the imposition of any tax, interest or penalty
with respect thereto;
(xiii) the Employee Benefit Plan has not been terminated under
circumstances which would result in liability to the PBGC; (xiv) no "reportable
event" (within the meaning of Section 4043 of ERISA) has occurred; and
(xiv) no "reportable event" (within the meaning of Section 4043 of
ERISA) has occurred; and
(xv) if the Employee Benefit Plan is subject to Title IV of ERISA,
no proceeding has been or is expected to be initiated to terminate the
plan.
(g) The Company is not subject to any liens, or excise or other taxes
under ERISA, the Code or other applicable law relating to any Employee Benefit
Plan; has not ceased operations at a facility so as to become subject to the
provisions of Section 4062(e) of ERISA; has not withdrawn as a substantial
employer so as to become subject to the provisions of Section 4063 of ERISA; and
has not ceased making contributions to any Employee Benefit Plan subject to
4064(a) of ERISA to which the Company or any ERISA Affiliate made contributions
at any time during the six (6) years prior to the date hereof.
(h) With respect to each Employee Benefit Plan that is subject to Part
3 of Title I of ERISA, Title IV of ERISA and/or Section 412 of the Code but is
not a "Multiemployer Plan" (as defined in Section 4001(a)(3) of ERISA or Section
414(f) of the Code) (a "DB Plan"):
13
<PAGE>
(i) the present value of all vested and unvested "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) determined (A) based
on actuarial assumptions used for funding purposes as set forth in the most
recent actuarial report; (B) as required by the PBGC if the DB Plan were
terminated; and (C) as set forth in Financial Accounting Standards Board SFAS
No. 87 using the methodology to calculate the DB Plan's accrued benefit
obligation, do not exceed the current fair market value of the assets of the DB
Plan;
(ii) except as set forth in Section 2.14(h) of the Disclosure
Schedule, no amendments or other modifications to such DB Plan or its actuarial
assumptions have been adopted since the date of such DB Plan's most recent
actuarial report;
(iii) no "accumulated funding deficiency" (as defined in Section
302 of ERISA or Section 412 of the Code) has been incurred with respect to the
DB Plan, whether or not waived, and the DB Plan complies with all funding
requirements of the Code and ERISA; and
(iv) no excise or other taxes, interest or other charges have been
incurred or are due and owing with respect to the DB Plan because of any failure
to comply with the minimum funding standards of ERISA and the Code.
(i) In the case of any Employee Benefit Plan that is a Multiemployer
Plan, the Company has no withdrawal liability under Part 1 of Subtitle E of
Title IV of ERISA as a result of either a "complete withdrawal" (as defined in
Section 4203 of ERISA) or a "partial withdrawal" (as defined in Section 4205 of
ERISA) by the Company from such Employee Benefit Plan occurring on or prior to
the date hereof.
(j) The consummation of the transactions contemplated by this
Agreement will not give rise to any liability for any employee benefits,
including, without limitation, liability for severance pay, unemployment
compensation, termination pay or withdrawal liability, or accelerate the time of
payment or vesting or increase the amount of compensation or benefits due to any
Company Employee.
(k) No amounts payable under any Employee Benefit Plan will fail to be
deductible for federal income tax purposes by virtue of Section 280G of the
Code;
(l) Except as set forth in Schedule 2.14(e) attached, no Employee
----------------
Benefit Plan in any way provides for any benefits of any kind whatsoever (other
than under COBRA, the Federal Social Security Act or any Employee Benefit Plan
qualified under Section 401(a) of the Code) to any Company Employee who, at the
time the benefit is to be provided, is a former director or employee of, or
other provider of services to, the Company or an ERISA Affiliate (or a
beneficiary of any such person), or any other Company Employee, nor have any
representations, agreements, covenants or commitments been made to provide such
benefits.
(m) Since December 31, 1998 and through the Closing Date, except as
set forth on Schedule 2.14(m), neither the Company nor any ERISA Affiliate has,
----------------
nor will it, (i) institute or agree to institute any new employee benefit plan
or practice, (ii) make or agree to make any change in any Employee Benefit Plan,
(iii) make or agree to make any increase in the compensation payable or to
become payable by the Company or any ERISA Affiliate to any Company Employee, or
(iv) except pursuant to this Agreement and except for contributions required to
provide benefits pursuant to the provisions of the Employee Benefit Plans, pay
or accrue or agree to pay or accrue any bonus, percentage of compensation, or
other like benefit to, or for the credit of, any Company Employee.
14
<PAGE>
(n) Any contribution, insurance premium, excise tax, interest charge
or other liability or charge imposed or required with respect to any Employee
Benefit Plan which is attributable to any period or any portion of any period
prior to the Closing shall be reflected as a liability on the Interim Balance
Sheet, including, without limitation (i) any portion of the matching
contribution required with respect to the Company's 401(k) Plan for the plan
year ending after the Closing which is attributable to elective contributions
made by participants in such plan prior to the Closing and assuming that all
participants are employed by the Company as of the end of such plan year, and
(ii) an amount equal to a pro rata portion of the quarterly contribution
requirement with respect to any DB Plan for the quarter beginning immediately
prior to the Closing, based on the number of days that will have elapsed from
such date through the Closing.
(o) Nothing contained in this Agreement shall be construed to affect
or limit any right Purchaser, the Company or any of their respective affiliates
may have after the Closing with respect to the terms and conditions of
employment of any Company Employees (including but not limited to provision of
employee benefits different from those provided through the Employee Benefit
Plans) or to terminate the employment of any Company Employee at any time or to
modify the benefits currently provided to Company Employees through any Employee
Benefit Plan.
SECTION 2.15 Labor and Immigration Matters.
-----------------------------
(a) Except as set forth on Schedule 2.15(a), (i) the Company is not a
----------------
party to any collective bargaining agreement or other labor union contract
applicable to persons employed by the Company; (ii) the Company has not breached
or otherwise failed to comply with the provisions of any collective bargaining
or union contract to which it is a party and has not received written notice of
any outstanding grievances (nor, to the knowledge of the Company and the
Shareholders, is there any basis therefor) against the Company under any such
agreement or contract; (iii) there are no unfair labor practice complaints
pending against the Company before the National Labor Relations Board or any
other Governmental Authority (nor, to the knowledge of the Company and the
Shareholders, is there any basis therefor); (iv) to the knowledge of the Company
and the Shareholders, there have been no efforts by any union, or local thereof,
to seek to represent, at any location where they do not currently represent such
employees, employees of the Company within the last five years; (v) there have
been no strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or
with respect to any employees of the Company; and (vi) neither the Company nor
the Shareholders have any knowledge of any supplier of the Company that is
involved in or threatened with or affected by any labor dispute or other
proceeding or order.
(b) With respect to all employees (as defined in Section 274a.1(g) of
Title 8, Code of Federal Regulations) of the Company for whom compliance with
the Immigration Reform and Control Act of 1986 and all regulations promulgated
thereunder ("IRCA") by an employer (as defined in Section 274a.1(g) of Title 8,
----
Code of Federal Regulations) is required, the Company has complied with respect
to the completion, maintenance and other documentary requirements of Form I-9
(Employment Eligibility Verification Form) for all current and former employees
and the reverification of the employment status of any and all employees whose
employment authorization documents indicated a limited period of employment
authorization. Schedule 2.15(b) attached contains a true and complete list of
----------------
all employees of the Company who are not citizens of the United States of
America and who are not permanent residents of the United States of America,
together with a true and complete list of the visa status and visa expiration
dates of each such employee. The Company has only employed individuals
authorized to work in the United States. The Company has not received any
written notice of any inspection or
15
<PAGE>
investigation relating to its alleged noncompliance with or violation of IRCA,
nor has it been warned, fined or otherwise penalized by reason of any failure to
comply with IRCA within the last three years.
SECTION 2.16 Taxes.
-----
(a) The following terms shall have the following meanings:
"Pre-Closing Tax Period" means any Tax period ending on or before the
----------------------
Closing Date.
"Post-Closing Tax Period" means any Tax period ending after the Closing
-----------------------
Date.
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any
--- ----- -------
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits, license,
withholding on amounts paid to or by the Company, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Governmental Authority (a
"Taxing Authority") responsible for the imposition of any such tax (domestic or
- -----------------
foreign), (ii) liability of the Company for the payment of any amounts of the
type described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period, and (iii) liability of
the Company for the payment of any amounts of the type described in (i) as a
result of any express or implied obligation to indemnify or pay the Tax
obligations of any other Person.
"Tax Asset" means any net operating loss, net capital loss, investment tax
---------
credit, foreign tax credit, charitable deduction or any other credit or tax
attribute of the Company which could reduce Taxes (including without limitation
deductions and credits related to alternative minimum Taxes, and Net Unrealized
Built-in Losses existing prior to the Closing Date).
(b) Except as set forth in Schedule 2.16(b) attached, (i) all Tax
----------------
returns, statements, reports and forms (including estimated tax returns and
reports and information returns and reports) required to be filed on or before
the Closing Date with any Taxing Authority by or on behalf of the Company
(collectively, the "Returns"), have been or shall be filed when due in
-------
accordance with all applicable laws, and no extensions have been filed to extend
the filing date of any Tax Returns; (ii) as of the time of filing, the Returns
correctly reflected and shall correctly reflect the material facts regarding the
income, business, assets, operations, activities and status of the Company, and
any other information required to be shown therein (as such information is
related to the Company's Taxes); (iii) the Company has timely paid or withheld
and remitted or shall timely pay, withhold and remit to the appropriate Taxing
Authority all Taxes due or payable on or before the Closing Date; (iv) the
accruals and reserves for Taxes reflected on the Financial Statement (excluding
any provision for deferred income taxes) (the "Tax Liability Reserve") are or
will be adequate to cover all Tax liabilities, contingent or otherwise as of the
dates of such Financial Statements and Balance Sheet; (v) all Federal, state and
foreign tax returns filed with respect to Taxable years of the Company through
the Taxable year ended December 31, 1998, have been examined and closed or are
returns with respect to which the applicable period for assessment under
applicable law, after giving effect to extensions or waivers, has expired; (vi)
the Company is not delinquent in the payment of any Tax and has not requested
any extension of time within which to file or send any Return; (vii) the Company
(or any member of any affiliated or combined group of which the Company is or
has been a member) has not been granted any extension or waiver of the
limitation period applicable to any Returns, which period (after giving effect
to such extension or waiver) has not yet expired; (viii) there has never been
and there is no claim, audit, action, suit or proceeding against or, to
16
<PAGE>
the knowledge of the Company and the Shareholders, threatened with respect to
the Company relating to any Tax; (ix) there are no requests for rulings or
determinations in respect of any Tax pending between the Company and any Taxing
Authority; (x) the Company has no interest in real property in the states in
which a Tax is imposed on the transfer of an interest in real property; (xi)
none of the property owned or used by the Company is subject to a tax benefit
transfer lease executed in accordance with Section 168(f)(8) of the Code (as
formerly in effect); (xii) none of the property owned or used by the Company is
subject to a lease, other than a "true" lease for federal income tax purposes;
(xiii) none of the property owned by the Company is "tax-exempt use property"
within the meaning of Section 168(h) of the Code; (xiv) neither the Company nor
any other Person on behalf of the Company has entered into or will enter into
any agreement or consent pursuant to Section 341(f) of the Code; (xv) there are
no liens for Taxes upon the assets of the Company except liens for current Taxes
not yet due; (xvi) the Company will not be required to include any adjustment in
taxable income for any Post-Closing Tax Period under Section 481(c) of the Code
pursuant to the provisions of any agreement entered into with any Taxing
Authority on or before the Closing Date with regard to the Tax liability of the
Company for any Pre-Closing Tax Period; (xvii) the Company has not been a member
of an affiliated group other than one of which the Company was the common
parent, or filed or been included in a combined, consolidated or unitary Return
other than one filed by the Company; (xviii) the Company is not currently under
any contractual obligation to pay the Tax obligations of any other Person, or to
pay the Tax obligations with respect to transactions relating to any other
Person, or to indemnify any other Person with respect to any Tax; and (xix) all
information set forth in the Financial Statements relating to Tax matters is
true, complete and accurate in all material respects; and (xx) any changes in
the method of accounting used by the Company for any Tax items made during the
Pre-Closing Tax Period have been approved by the Internal Revenue Service in
accordance with Section 446(e) of the Code.
(c) Schedule 2.16(c) attached sets forth a list of states, territories
---------------
and jurisdictions (whether foreign or domestic) to which any Tax is properly
payable by the Company.
(d) Without the prior written consent of Purchaser, the Company shall
not make or change any election, change an annual tax accounting period, adopt
or change any tax accounting method, file any amended Return, enter into any
closing agreement, settle any Tax claim or assessment, surrender any right to
claim a refund of Taxes, consent to any extension or waiver of the limitation
period applicable to any Tax claim or assessment, take any other action or omit
to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission may have
the effect of increasing the Tax liability or reducing any Tax Asset of the
Company, Purchaser or any affiliate of Purchaser.
(e) Prior to the date hereof, the Company has delivered to Purchaser
copies of the federal income tax returns filed by the Company for all Tax
periods for which the applicable statute of limitations has not expired. The
Company also has delivered to the Purchaser a notification form from the
Internal Revenue Service that the Company's election to be treated as a
subchapter S corporation was filed timely and accepted, and that such treatment
has been in effect (and shall be in effect through and including the Closing
Date) since January 1, 1993.
SECTION 2.17 Litigation and Claims.
---------------------
(a) Except as set forth on Schedule 2.17(a) attached, there are no
----------------
claims, actions, suits, arbitrations, inquiries, audits, proceedings or
investigations (or, to the knowledge of the Company and the Shareholders, any
basis therefor) by or against the Company or any of its assets or properties for
which the Company or any Shareholder has received notice pending before any
Governmental Authority
17
<PAGE>
or, to the knowledge of the Company and the Shareholders, threatened to be
brought against the Company by or before any Governmental Authority.
(b) Except as set forth on Schedule 2.17(b) attached, during the past
----------------
five years there have never been any claims, actions, suits, arbitrations,
inquiries, audits, proceedings or investigations (or, to the knowledge of the
Company and the Shareholders, any basis therefor) by or against the Company or
any of its assets or properties for which the Company or any Shareholder has
received notice with respect to products manufactured, shipped or sold by the
Company or its agents or services provided by the Company.
SECTION 2.18 Licenses. Except as disclosed on Schedule 2.18 attached, the
-------- -------------
Company is now and at the Closing will be the holder of all licenses,
authorizations, permits and certificates (the "Licenses") required by any
--------
Governmental Authority to conduct its businesses, and all of the Licenses are
now and at the Closing will be in full force and effect.
SECTION 2.19 Compliance with Laws. Except as disclosed on Schedule 2.19
-------------------- -------------
attached, the Company is not in violation of, and has not violated, any
applicable Federal, state, local or foreign or other law, regulation or order or
any other requirement of any governmental, regulatory or administrative agency
or authority or court or other tribunal relating to the Company (including, but
not limited to, any law, regulation, order or requirement relating to
securities, properties, business, products, manufacturing processes,
advertising, sales or employment practices, terms and conditions of employment,
wages and hours, safety, occupational safety, health or welfare conditions
relating to premises occupied, environmental protection, product safety and
liability or civil rights); and the Company is not now charged with, and to the
knowledge of the Company and the Shareholders, is not now under investigation
with respect to any possible violation of any applicable law, regulation, order
or requirement relating to any of the foregoing in connection with the business
of the Company, and the Company has filed all reports required to be filed with
any governmental, regulatory or administrative agency or authority on or before
the date hereof.
SECTION 2.20 Insurance. Schedule 2.20 attached contains a list and
--------- -------------
description of all policies of insurance existing or previously in existence
during the past five years and fidelity bonds relating to the assets of the
Company or the business or employees of the Company (except for any such
policies maintained to provide benefits to employees under a benefit plan or
arrangement described in Section 2.14 hereof), together with the annual premiums
payable with respect therefor. Such policies and bonds are in full force and
effect, and shall be in full force and effect on the Closing Date. All premiums
thereon have been paid and the Company has not received any notice of
cancellation with respect thereto. Except as disclosed on Schedule 2.20
-------------
attached, there are no claims pending under any of said policies or bonds or
disputes with underwriters. There are no pending or, to the knowledge of the
Company and the Shareholders, threatened terminations of, or premium increases
with respect to, any of such policies and bonds and the Company is in compliance
with all conditions contained therein. The Company has provided to Purchaser
copies of each insurance policy.
SECTION 2.21 Bank Accounts. Schedule 2.21 attached lists all of the (a)
------------- -------------
names of each bank, savings and loan, or other financial institution in which
the Company has an account, including cash contribution accounts, and the
account numbers and names of all persons authorized to draw thereon or having
access thereto, (b) locations of all lock boxes and safe deposit boxes of the
Company and the names of all persons authorized to draw thereon or having access
thereto.
18
<PAGE>
SECTION 2.22 Brokers. Except as set forth on Schedule 2.22 attached, no
------- -------------
broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions contemplated under
this Agreement based upon arrangements made by or on behalf of the Company or
the Shareholders.
SECTION 2.23 Governmental Authorization. The execution, delivery and
--------------------------
performance by the Company and by each Shareholder of this Agreement requires no
action by or in respect of, or filing with, any governmental body, agency,
official or authority other than compliance with any applicable requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
---
Act").
- ---
SECTION 2.24 Amounts Owing. On or prior to the Closing Date, except for
-------------
the amounts described distributed to the Shareholders in accordance with Section
2.7(b) hereof, the Company will have collected any amounts loaned or advanced to
or receivable from its directors, officers, the Shareholders or consultants.
SECTION 2.25 Employees and Consultants. Schedule 2.25 lists all of the
------------------------- -------------
Company's officers, directors, employees (also stating their position) and
consultants, and any and all compensation, pension or benefit arrangements,
whether written or oral, between the Company and said officers, directors,
employees and consultants as of the date of this Agreement. As used in this
Section 2.25, the term "compensation" means current annual compensation
including bonuses and all other taxable income. Attached to Schedule 2.25 are
-------------
true, complete and correct copies of all employment agreements and other similar
agreements or arrangements between the Company and any employee or independent
contractor of the Company. None of such officers, directors, employees and
consultants has informed the Company nor do the Company or the Shareholders have
reason to believe that he or she intends to terminate his or her employment or
relationship with the Company.
SECTION 2.26 No Undisclosed Liabilities. Except as set forth on Schedule
-------------------------- --------
2.26 hereto, there are no liabilities of the Company, whether accrued,
- ----
contingent, absolute, determined, determinable or otherwise, and there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in any such liability, other than:
(a) liabilities disclosed and/or provided for on the Interim Balance
Sheet;
(b) liabilities incurred in the ordinary course of business
consistent with past practice since the Interim Balance Sheet Date;
(c) liabilities under this Agreement or reflected in any schedule or
document delivered in connection with this Agreement.
SECTION 2.27 Real Property Leases.
--------------------
(a) The Company does not hold any interest in real property
(including, but not limited to, any interest as a fee owner or any interest as
lessor, lessee, sublessor, sublessee, assignor, assignee or guarantor or other
surety) except for the leasehold interests described on Schedule 2.27 attached,
-------------
and such Schedule specifies in the case of each lease the name of the lessor,
sublessor, lessee or sublessee thereunder, the lease term and the basic annual
rental and other items paid or payable with respect thereto.
19
<PAGE>
(b) The Company has valid, binding and enforceable leases and
subleases with respect to all real property listed on Schedule 2.27 attached, as
-------------
leased or subleased by it free and clear of all liens, claims and encumbrances
of any kind, except that the enforceability of the leases and subleases may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights generally and (ii) equitable principles
which may limit the availability of certain equitable remedies (such as specific
performance). Except as disclosed on Schedule 2.27 attached, to the knowledge of
-------------
the Company and the Shareholders, there is no development affecting any such
properties pending or that might curtail in any material respect the present or
future use of such property for the purpose for which it is used. Except as
disclosed on Schedule 2.27 attached, neither the Company nor, to the knowledge
-------------
of the Company and the Shareholders, any other party to any such lease has
breached any material provision of, or is in default in any material respect
under, the terms of such lease, nor does there exist any event which with notice
or the lapse of time or both would constitute a material breach or cause a
default in any material respect under the terms of any such lease. Except as
disclosed on Schedule 2.27 attached, the transactions contemplated by this
-------------
Agreement do not require the consent of any lessor under, and will not result in
the termination of, any such lease.
(c) The copies of the leases heretofore provided by the Company to
Purchaser are true, correct and complete copies of such leases. Said leases have
not been modified or amended since the commencement of the terms specified in
the respective leases, except as disclosed in the copies made available to
Purchaser, and each lease continues to be valid, binding and enforceable in
accordance with its terms, except that the enforceability of the leases may be
limited by (iii) applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights generally and (iv) equitable
principles which may limit the availability of certain equitable remedies (such
as specific performance).
SECTION 2.28 Certain Interests. Except as set forth on Schedule 2.28
----------------- -------------
attached, no officer or director of the Company and no Shareholder, nor any
relative of any such officer, director or Shareholder, nor any enterprise, firm,
partnership, association, corporation or trust of which any such officer,
director, Shareholder or relative is an officer, trustee, director, partner,
employee, agent, stockholder (other than of a public corporation with respect to
which such stockholder beneficially or legally holds less than two percent (2%)
of the outstanding equity securities issued by such corporation), owner or
beneficiary, is a party to or has an interest with respect to any contract which
relates to or affects the business of the Company or has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of the Company. For purposes of this Section 2.28, a relative of any
person means any person who is related by consanguinity, marriage or adoption to
such first person as a second cousin or closer relative or is a spouse of any
such relative.
SECTION 2.29 Suppliers. Schedule 2.29 attached (a) sets forth the names of
--------- -------------
the ten (10) largest suppliers, by dollar volume, of products and services to
the Company during the fiscal year ended December 31, 1998, and up to the
Interim Balance Sheet Date, (b) indicates the dollar volume and percentage of
total purchases by the Company from each such supplier during such fiscal year
and such period, and (c) sets forth the existing contractual arrangements for
continued supply with each such supplier. Except as set forth on Schedule 2.29
-------------
attached, there are no sole-source suppliers, other than manufacturers of a
specific brand, of significant products or services to the Company with respect
to which practical alternative sources of supply are not available on comparable
terms and conditions.
SECTION 2.30 Powers of Attorney. Except as set forth on Schedule 2.30, the
------------------ -------------
Company has no powers of attorney or comparable delegations of authority
outstanding in connection with its business which would not be revocable by the
Company immediately following the Closing Date.
20
<PAGE>
SECTION 2.31 Environmental Compliance. Except as disclosed on Schedule
------------------------ --------
2.31 attached:
- ----
(a) No notice, notification, demand, request for information,
citation, summons, complaint or order has been issued or filed, no penalty has
been assessed and no investigation or review is pending or, to the knowledge of
the Company and the Shareholders, threatened by any governmental or other entity
(i) with respect to any alleged violation of any Environmental Laws (as
hereinafter defined) or order of any governmental entity in connection with the
conduct of the business of the Company relating to any Environmental Laws, or
(ii) with respect to any alleged failure to have any permit, certificate,
license, approval, registration or authorization required pursuant to any
Environmental Laws in connection with the conduct of the business of the
Company, or (iii) with respect to any generation, treatment, storage, recycling,
transportation, disposal or release (including a release as defined in CERCLA,
as hereinafter defined) of any Hazardous Substance (as hereinafter defined) used
in connection with the business or assets of the Company. "Environmental Laws"
------------------
means the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), 42 U.S.C. (S)(S) 9601, et seq., the Emergency Planning and
------ -- ---
Community Right-to-Know Act ("EPCRA"), 42 U.S.C. (S)(S) 11001 et seq., the
----- -- ---
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)(S) 6901, et.
---- --
seq., the Clean Water Act, 33 U.S.C. (S)(S) 1251 et seq., the Clean Air Act, 42
- --- -- ---
U.S.C. (S)(S) 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. Section
-- ---
2601 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 (S)(S)
-- ---
136 et seq., and all other federal, state, or local environmental, health and/or
-- ---
safety laws, ordinances, rules, regulations and requirements pertaining to the
environment, health, safety or ecological conditions, including but not limited
to, those relating to emissions, discharges, or releases of pollutants,
contaminants, chemicals, including any Hazardous Substance or waste, into the
environment or otherwise relating to the manufacture, processing, use,
treatment, storage, disposal, transportation or handling of pollutants,
chemicals, contaminants or industrial toxic substances, Hazardous Substances or
wastes. "Hazardous Substance" means any substance or material which is (i)
-------------------
identified in Section 101(14) of CERCLA, 42 U.S.C. (S) 9601(14) and as set forth
in Title 40, Code of Federal Regulations, Part 302, as the same may be amended
from time to time, (ii) determined to be toxic, a pollutant or contaminant under
federal, state or local statute, law, ordinance, rule, or regulation or judicial
or administrative order or decision as the same may be amended from time to
time, (iii) petroleum and petroleum products and distillates, (iv) asbestos, (v)
radon, (vi) polychlorinated biphenyls, and (vii) such other materials,
substances or waste which are otherwise dangerous, hazardous, harmful or
deleterious to human health or the environment.
(b) The Company has not handled any Hazardous Substance, on any
property now or previously owned or leased by the Company (the "Properties"). No
----------
polychlorinated biphenyls ("PCBs") or urea formaldehyde was or has become
----
present at any of the Properties as a result of any activity which is or was,
directly or indirectly, within the control of the Company and no PCBs or urea
formaldehyde is or has been present at any of the Properties. No asbestos was or
has become present at any of the Properties as a result of any activity which is
or was, directly or indirectly, within the control of the Company and no
asbestos is or has been present at any such Properties. No underground storage
tank ("UST"), which has or had been used to store or has or had contained a
---
Hazardous Substance, was or has become present at any of the Properties as a
result of any activity which is or was, directly or indirectly, within the
control of the Company and there is no such UST currently in use or abandoned at
any of the Properties. There has been no release of a Hazardous Substance at, on
or under any of the Properties. No Hazardous Substance is present in a
reportable or threshold planning quantity, where such a quantity has been
established by Environmental Laws, at, on or under any of the Properties as a
result of any activity which is or was, directly or indirectly, within the
control of the Company and no such Hazardous Substance in such quantity was or
has become present at any of the Properties.
21
<PAGE>
(c) The Company has not transported or arranged for the
transportation (directly or indirectly) of any Hazardous Substance to any
location which is listed or proposed for listing on the National Priorities List
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), the Comprehensive Environmental Response,
------
Compensation and Liability Information System ("CERCLIS") or on any similar
-------
state list, or which is the subject of any federal, state or local enforcement
action or other investigation which may lead to claims for clean-up costs,
remedial work, damages to natural resources or for personal injury claims,
including, but not limited to, claims under CERCLA.
(d) No oral or written notification of a release of a Hazardous
Substance has been filed by or on behalf of the Company and none of the
Properties is, during the period of ownership or lease by the Company, listed
or, to the knowledge of the Company and the Shareholders, proposed for listing
on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS or on
any similar state list of sites requiring investigation or clean-up.
(e) There are no environmental Encumbrances on any asset of the
Company, no government actions have been taken or are in process which could
subject any of such assets to such Encumbrances, and no notice or restriction
relating to the presence of a Hazardous Substance is required to be placed in
any deed to such of said assets title to which would be conveyed by use of a
deed.
(f) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or which are in the
possession of the Company in relation to any of the Properties.
SECTION 2.32 Absence of Certain Business Practices. Neither the Company
-------------------------------------
nor any of its affiliates has given or offered to give any thing of value to any
governmental official, political party or candidate for government office, nor
taken any action which would constitute a violation of the Foreign Corrupt
Practices Act of 1977, as amended, or any similar law.
SECTION 2.33 Year 2000 Compliance. Each system, comprising of software,
--------------------
hardware, databases, or embedded control systems (microprocessor controlled,
robotic or other device)(collectively, a "System") that constitutes any part of,
------
or is used in connection with the use, operation or enjoyment of any material
tangible or intangible asset or real property of the Company and its
subsidiaries (if any) (i) is designed (or has been modified) to be used prior to
and after January 1, 2000, (ii) will operate without material error arising from
the creation, recognition, acceptance, calculation, display, reporting, storage,
retrieval, accessing, comparison, sorting, manipulation, processing or other use
of dates, or date-based, date-dependent or date-related data, including, but not
limited to, century recognition, day-of-the-week recognition, leap years, date
values and interfaces of date functionalities, and (iii) will not be adversely
affected by the advent of the year 2000 or subsequent years, the advent of the
twenty-first century or the transition from the twentieth century through the
year 2000 and into the twenty-first century (collectively, items (i) through
(iii) are referred to herein as "Year 2000 Compliant"). To the knowledge of the
-------------------
Company and the Shareholders and except as set forth on Schedule 2.33, no System
-------------
that is material to the business, finances or operations of the Company or any
subsidiary receives data from or communicates with any component or system
external to itself (whether or not such external component or system is the
Company's, any subsidiary's or any third party's) that is not itself Year 2000
Compliant excepting the parts of the external component or system within which
noncompliance will have no effect on the data or communications sent to the
Company or its subsidiaries, nor on the Systems of the Company or its
subsidiaries. To the knowledge of the Company and the Shareholders, and except
as set forth on Schedule 2.33, all licenses for the use of any System-
-------------
22
<PAGE>
related software, hardware, databases or embedded control system are certified
by the manufacturer to be Year 2000 Compliant and to contain the capabilities
required to enable them to be year 2000 Compliant within the Company and
subsidiary computer Systems (hardware and software), or the licenses permit the
Company or its subsidiaries or a third party to make all modifications,
bypasses, de-bugging, work-arounds, repairs, replacements, conversions or
corrections necessary to permit the System to operate compatibly, in conformance
with their respective specifications, and to be Year 2000 Compliant. Except as
set forth on Schedule 2.33, to the knowledge of the Company and the
-------------
Shareholders, the Company shall not incur any material expense arising from or
relating to the failure of any of its Systems as a result of not being Year 2000
Compliant.
SECTION 2.34 Material Customers; No Change in Business Arrangements.
------------------------------------------------------
Schedule 2.34 lists the top twenty customers (based on revenues) of the Company
- -------------
for the fiscal years ended December 31, 1997, and December 31, 1998. Except as
set forth on Schedule 2.34, neither the Company nor any Shareholder has received
-------------
any notice or communication that any of the Company's top 100 customers (based
on annual revenues during the 12-month period ended December 31, 1998) intends
to reduce the level of business between the Company and customer by 20% or more,
as compared to the Company's revenues derived from such customer during the
prior 12-month period. Each product or service provided by the Company has been
in conformity with all applicable contractual commitments and expressed or
implied warranties, and the Company has no liability (and there is not basis for
any present or future action, suit, proceeding, hearing, investigation, charge,
complaint, claim or demand against the Company giving rise to any liability) for
warranty services or other damages in connection therewith, subject only to the
reserve for warranty claims set forth on the face of the Fiscal Year End Balance
Sheets (rather than in notes thereto) as adjusted for the passage of time to the
Closing Date, in accordance with past custom or practice of the Company.
SECTION 2.35 Other Information. No document or item referenced in this
-----------------
Article II or referred to in any schedule or exhibit hereto, nor any information
set forth in any such schedule, exhibit, document or item, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements of the Company or any Shareholder contained
therein, in light of the circumstances under which they were made, not
misleading. There is no fact known to the Shareholders which has specific
application to the Company (other than general economic or industry conditions)
and which materially adversely affects or, so far as the Shareholders can
reasonably foresee, materially threatens the assets, business, condition
(financial or other), result of operations or prospects of the Company which has
not been described in this Agreement or the schedules hereto or otherwise
disclosed in writing to the Purchaser.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
As an inducement to the Company and the Shareholders to enter into this
Agreement, Purchaser represents and warrants to the Company and the Shareholders
as follows:
SECTION 3.1 Incorporation and Authority of Purchaser. Purchaser is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all necessary corporate power and authority to
enter into this Agreement, to carry out its obligations hereunder and to
consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by Purchaser, and (assuming due authorization, execution
and delivery by each Shareholder and the Company) constitutes a legal, valid and
binding obligation of the Purchaser, enforceable against Purchaser in accordance
with its terms, subject to the effect, if any, of bankruptcy,
23
<PAGE>
insolvency, reorganization, moratorium and other similar laws affecting the
rights of creditors generally and the effect, if any, of general principles of
equity.
SECTION 3.2 No Conflicts. The execution, delivery and performance of this
------------
Agreement by Purchaser do not and will not (a) violate or conflict with the
certificate of incorporation, bylaws or other organizational documents of
Purchaser; (b) assuming the requirements under the HSR Act (as defined in
Section 2.23 above) are met, conflict with or violate any law, rule or
regulation of, or any order, writ, judgment, injunction, decree, stipulation,
determination or award entered by or with, any Governmental Authority applicable
to Purchaser; or (c) conflict with, result in any breach of, constitute a
default under (or constitute an event which with the giving of notice or lapse
of time, or both, would become or result in a conflict, breach or default
under), any agreement or obligation to which Purchaser is a party or subject and
which would affect Purchaser's ability or authority to consummate the
transactions contemplated hereby.
SECTION 3.3 Investment Purpose. Purchaser is acquiring the Shares solely
------------------
for the purpose of investment and not with a view to, or for offer of sale in
connection with, any distribution thereof. Purchaser acknowledges that the
Shares have not been registered, and represents and warrants that Purchaser is
an "accredited investor" as such term is defined in rule 501 of Regulation D
under the Security Act, as amended.
SECTION 3.4 Brokers and Consultants. The Purchaser has employed no broker
-----------------------
or agent in connection with this Agreement, and agrees to indemnify the other
parties hereto against all loss, cost, damages or expense arising out of claims
for fees or commissions of brokers employed or alleged to have been employed by
the Purchaser.
ARTICLE IV.
ADDITIONAL COVENANTS
SECTION 4.1 Conduct of Business Prior to the Closing. From the date hereof
----------------------------------------
through the Closing Date, the Company and the Shareholders covenant and agree
that the Company shall conduct its business in the ordinary course consistent
with past practice and shall use its best efforts to preserve intact its
business organizations and relationships with third parties and to keep
available the services of its present officers and employees. Without limiting
the generality of the foregoing, from the date hereof until the Closing Date,
the Company will not (i) issue any shares of the stock, warrants or stock
equivalents or declare or make any payment on account of the purchase,
redemption, retirement or acquisition of any Shares, (ii) declare any dividends
or make any distributions to its Shareholders (other than those distributions
made to the Shareholders in accordance with Section 2.7(b) hereof), (iii) incur
any indebtedness from borrowed money except in the ordinary course of business
consistent with past practice, (iv) subject the assets of the Company to any
additional liens or encumbrances, (v) adopt or propose any change in its
articles of incorporation or bylaws, (vi) merge or consolidate with any other
Person, acquire a material amount of assets of any other Person or, except as
listed on Schedule 4.1 attached, make any additional capital expenditure or
------------
acquire any additional fixed assets, (vii) sell, lease, license or otherwise
dispose of any material assets or property except (1) pursuant to existing
contracts or commitments and (2) in the ordinary course consistent with past
practice; provided, however, that in no event will the Company sell, lease,
-------- -------
license or otherwise dispose of any asset or assets having a value greater than
$50,000 singly or $100,000 in the aggregate without the prior written consent of
Purchaser; and provided further, that nothing in this subparagraph (vii) shall
-------- -------
prevent the Company from selling inventory in the ordinary course of its
business consistent with past practice, (viii) enter into or renew (whether by
exercise of option or otherwise) or amend in any respect any Material Contract
or any lease
24
<PAGE>
identified in Section 2.27 above without the prior written consent of Purchaser,
(ix) increase compensation or benefits to any officer, director or employee of
the Company or pay any bonus, severance or termination pay to such officer,
director or employee of the Company, (x) take or agree or commit to take any
action that would make any representation or warranty of the Company or any
Shareholder inaccurate in any respect at or prior to the Closing Date
(including, without limitation the representation and warranty set forth in
Section 2.8 (Absence of Certain Changes, Events and Conditions) above) or omit
or agree or commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any respect at any such
time, or (xi) permit the Company to agree or commit to do any of the foregoing.
SECTION 4.2 Access to Information.
---------------------
(a) From the date hereof through the Closing Date, the Company and
Shareholders agree to (i) provide Purchaser and its independent accountants,
legal counsel, environmental consultants and other authorized representatives
with full access to the Company's properties, facilities, books, records,
financial operating data, contracts and other materials of the Company at
reasonable times for the purpose of Purchaser's conducting a complete and
thorough investigation, analysis and review of the Company, (ii) furnish to
Purchaser, its independent accountants, legal counsel, environmental consultants
and other authorized representatives such financial and operating data and other
information relating to the Company as such Persons may reasonably request, and
(iii) instruct the employees, counsel and financial and other advisors of the
Company to cooperate with Purchaser in its investigation of the Company;
provided, however, that no investigation pursuant to this Section shall limit or
- -------- -------
otherwise affect any representation or warranty given by the Company and the
Shareholders hereunder.
(b) From the date hereof through the Closing Date, and at such times
as are mutually agreed upon between the Company and the Shareholders, on the one
hand, and the Purchaser, on the other hand, the Purchaser shall be permitted to
contact certain of the Company's customers selected by the Purchaser, for the
purposes of investigating customer satisfaction (the "Customer Satisfaction
---------------------
Investigation"). During the conduct of its Customer Satisfaction Investigation,
- -------------
if the Purchaser determines, in its sole discretion, that the results thereof
are unfavorable and will cause the Purchaser not to consummate the closing of
the transactions contemplated by this Agreement, the Purchaser promptly shall
notify the Company and the Shareholders of such results and its determination
not to consummate the transactions contemplated hereby.
SECTION 4.3 Consents; Satisfaction of Closing Conditions. The Shareholders
--------------------------------------------
and the Company will use their best efforts to obtain, at the Shareholders' and
Company's sole cost and expense, all consents (including, without limitation,
Landlord Consents (as defined in Section 5.2(d) below)) from third parties
necessary or advisable in order to permit the consummation of the transactions
contemplated in this Agreement without impairing the validity or effectiveness
of any lease or other contract to which the Company is a party, and to obtain
the satisfaction on or before the Closing Date of the conditions specified in
Section 5.2.
SECTION 4.4 Notices of Certain Events. The Company and the Shareholders
-------------------------
shall promptly notify Purchaser of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
25
<PAGE>
(b) any notice or other communication (other than any routine or
incidental notice or communication) from any governmental or regulatory agency
or authority in connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations or proceedings
commenced or, to the knowledge of the Company and the Shareholders, threatened
against, relating to or involving or otherwise affecting the Company which, if
pending on the date of this Agreement, would have been required to have been
disclosed pursuant to Section 2.8 hereof, or which relate to the consummation of
the transactions contemplated by this Agreement; and
(d) any fact or circumstance which would make any representation or
warranty untrue or inaccurate in any material respect as of the Closing Date.
SECTION 4.5 Certain Taxes Arising in Connection with this Agreement. All
-------------------------------------------------------
transfer, documentary, sales, use, stamp, registration, value added and other
such Taxes and fees (including any penalties and interest) incurred in
connection with this Agreement (including any state gains tax, city transfer
tax, and any similar Tax imposed in other states or subdivisions) shall be borne
and paid by the Shareholders when due.
SECTION 4.6 Tax Matters. The Company will prepare the tax returns for all
-----------
periods ended on or prior to the Closing, and the Purchaser will prepare all tax
returns for periods ending after the Closing. In addition, the Purchaser will
provide the Shareholders with access to such of its books and records as may be
reasonably requested by the Shareholders in connection with federal, state and
local tax matters relating to periods prior to the Closing. The parties hereto
acknowledge that upon the Closing of the transactions contemplated by this
Agreement, the Company's status as a subchapter S corporation for federal income
tax purposes shall cease and that the taxable year of the Company in which such
Closing occurs shall be divided into two (2) short taxable years (an S short
year and a C short year). Except as may be set forth in Section 4.9 below, the S
tax returns and the prior year returns shall be prepared in all respects
consistently with the past practices of the Company.
SECTION 4.7 Public Announcements. Prior to the Closing, no party to this
--------------------
Agreement shall make any public announcement of the transactions contemplated by
this Agreement or otherwise communicate with any news media without prior
written agreement of the Company and Purchaser except (a) in a mutually
agreeable manner to the employees of the Company and (b) to the extent that such
announcement is required by law. The Company and Purchaser shall cooperate as to
the timing and contents of any such announcement.
SECTION 4.8 Hart-Scott-Rodino Filing. Purchaser, the Company and the
------------------------
Shareholders (as applicable) shall make appropriate filings of the Notification
and Report Form pursuant to the HSR Act with respect to the transactions
contemplated hereby promptly upon the execution by the parties of this
Agreement, and in no event later than within five business days following the
date hereof. The Purchaser shall pay all of the filing costs and expenses of an
"acquiring person" (as such term is defined in the HSR Act).
SECTION 4.9 Section 338(h)(10) Election. At Purchaser's option, the
---------------------------
Shareholders agree to join with the Purchaser in making a timely election on
Form 8023 under Sections 338(g) and 338(h)(10) of the Code (and any
corresponding elections under state, local or foreign law) (collectively, a
"Section 338(h)(10) Election") with respect to the purchase and sale of the
---------------------------
Shares of the Company hereunder, and if the Purchaser makes such an election,
the Purchaser shall pay to the Shareholders as additional
26
<PAGE>
consideration any additional income tax due by the Shareholders as a result of
such election, including any additional taxes that may be assessed by federal or
state taxing authorities upon later examination of tax returns, and including
any penalties and additions to tax that may result from such examination and
assessment. The total payment to the Shareholders shall be "grossed-up" to cover
the additional income taxes that may be payable upon the receipt of this payment
of additional consideration in an amount sufficient to place the Shareholders in
the same after-tax position as if no such additional taxes or other amounts were
due from the Shareholders. It is further agreed that any taxes imposed on the
Company, including built-in gains tax, that may result from such election are
the sole responsibility of the Purchaser, and that no decrease or offset of any
kind shall be made against the above payment to the Shareholders for additional
taxes. The parties agree that in the event of a Section 338(h)(10) Election, the
Purchase Price and the liabilities of the Company shall be allocated to the
assets of the Company for tax purposes in a manner consistent with such
election. The Purchaser and the Shareholders will file all returns (included
amended returns and claims for refunds) and information reports in a manner
consistent with such allocation.
SECTION 4.10 Expenses. The Purchaser will pay the fees, expenses and
--------
disbursements of the Purchasers and its agents, representatives, accountants and
counsel incurred in connection with the execution, delivery and performance of
this Agreement and any amendments hereto. The Shareholders will pay the fees,
expenses and disbursements of the Company and the Shareholders and their
respective agents, representatives, financial advisors, accountants and counsel
(including, without limitation, the obligations described on Schedule 2.22)
-------------
incurred in connection with the execution, delivery and performance of this
Agreement and any amendments hereto.
SECTION 4.11 Disclosure. Each Shareholder acknowledges and agrees that the
----------
due diligence review and inspections by Purchaser and its representatives shall
not waive, or release the Shareholders from, any of the Shareholders'
responsibilities, warranties or covenants under this Agreement. The disclosures
in the schedules to this Agreement, and those in any supplement thereto, shall
relate only to the representations and warranties in the section of this
Agreement to which each schedule expressly relates and to no other
representation or warranty. To the extent that any matter is to be "specifically
provided," "set forth" or "identified" in any schedule to this Agreement, or
subject to words of similar import, such matter must be specifically set forth
or identified in the schedule and will not be effectively disclosed merely by
virtue of appearing in a document included in such schedule.
SECTION 4.12 [INTENTIONALLY OMITTED]
SECTION 4.13 Further Assurances. At any time on or after the Closing Date,
------------------
each party will execute and deliver any further assignments, conveyances and
other assurances, documents and instruments of transfer reasonably requested by
another party to consummate the transactions contemplated hereby.
SECTION 4.14 Certain Receivables Matters. Notwithstanding anything in this
---------------------------
Agreement or any disclosure schedule or exhibit hereto to the contrary, with
respect to that certain outstanding account receivable balance in the
approximate amount of $882,889.80 due from World Xchange (the "World Xchange
-------------
Receivable") relating to an advertising campaign which ran from December 1998 to
- ----------
April 1999, the Purchaser agrees that, after the Closing, it shall cause the
Company to use its reasonable best efforts (which efforts shall not include,
without limitation, the Company's entering into reduced supplier rates or future
quotas on the placement of other advertising, commencing legal action or
otherwise expending funds on collection efforts by third parties) to collect
such receivable. The parties hereto agree that should such World Xchange
Receivable not be collected in full by the Company within 120 days after
27
<PAGE>
the Closing Date (net of any recoveries or credits from publishers), upon thirty
days' written notice thereof from the Purchaser to the Shareholders, the amount
of the World Xchange Receivable remaining outstanding, together with reasonable
costs expended by the Company in its efforts to collect the World Xchange
Receivable, shall be paid by the Shareholders to the Company in immediately
available funds, in which case such receivable shall be assigned to the
Shareholders of the Company.
SECTION 4.15 Working Capital Adjustment. The Purchase Price to be paid by
--------------------------
the Purchaser to the Shareholders shall be adjusted as follows: to the extent
that the Working Capital of the Company is less than $680,000, the Purchase
Price shall be reduced, on a dollar-for-dollar basis, by such deficiency;
provided, however, that notwithstanding anything in this Section 4.15 to the
contrary, should an adjustment to the Purchase Price be made pursuant to Section
1.2(c) of this Agreement, the amount of such adjustment shall be included within
the determination of any adjustment to be made pursuant to this Section 4.15, so
that there are no multiple reductions for the same shortfall. For purposes of
the Working Capital calculation, the World Xchange Receivable (as defined in
Section 4.14 hereof) shall be valued at its full face value.
ARTICLE V.
CONDITIONS TO CLOSING
SECTION 5.1 Conditions to Obligations of the Company and Shareholders. The
---------------------------------------------------------
obligations of the Company and the Shareholders to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to the Closing Date (or on such other date as may be agreed by the parties), of
each of the following conditions (any one or more of which may be waived by the
Shareholders in their sole discretion).
(a) Representations and Warranties; Covenants Performed; Officer's
--------------------------------------------------------------
Certificate. The representations and warranties of Purchaser contained in this
- -----------
Agreement shall be true and correct as of the Closing Date with the same force
and effect as if made as of the Closing Date, and all the covenants contained in
this Agreement to be complied with by Purchaser on or before the Closing Date
shall have been complied with, and the Shareholders shall have received a
certificate to such effect signed by a duly authorized officer of Purchaser.
(b) Cash Payments. The Shareholders shall have received the
-------------
aggregate Cash Payments, as set forth in Section 1.2(b) hereof.
(c) Deferred Payment. Purchaser shall have paid the Deferred Payment
----------------
into escrow under the Escrow Agreement.
(d) Escrow Agreement. Purchaser and the escrow agent shall have
----------------
executed an Escrow Agreement in the form of Exhibit 1.2(b) attached.
--------------
(e) Consulting Agreements. At the Closing, the Company shall have
---------------------
entered into a six-month consulting agreements with each of Gordon and West, in
the forms of Exhibits 5.1(e)(i) and 5.1(e)(ii) attached (the "Consulting
------------------ ---------- ----------
Agreements").
- ----------
(f) HSR Act. Any filing and waiting period (and any extension
-------
thereof) requirements under the HSR Act applicable to the consummation of the
transactions contemplated hereby shall have expired or been terminated and no
order, ruling or decision shall have been issued under the HSR Act prohibiting
the consummation of the transactions contemplated hereby.
28
<PAGE>
(g) Legal Opinion. The Shareholders and the Company shall have
-------------
received from counsel to the Purchaser a legal opinion, addressed to the
Shareholders and the Company and dated the Closing Date, containing opinions set
forth in Exhibit 5.1(g) attached hereto.
--------------
SECTION 5.2 Conditions to Obligations of Purchaser. The obligations of the
--------------------------------------
Purchaser to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment, at or prior to the Closing Date (or on such other
date as may be agreed by the parties), of each of the following conditions (any
one or more of which may be waived by Purchaser in its sole discretion):
(a) Representations and Warranties; Covenants Performed;
---------------------------------------------------
Shareholders' Certificates; Officer's Certificate. The representations and
- -------------------------------------------------
warranties of the Company and the Shareholders contained in this Agreement shall
be true and correct as of the Closing Date with the same force and effect as if
made as of the Closing Date, and all the covenants contained in this Agreement
to be complied with by the Company and the Shareholders on or before the Closing
Date shall have been complied with, and the Purchaser shall have received a
certificate to such effect from each Shareholder and from an officer of the
Company.
(b) Stock Certificates. Each Shareholder shall have executed and
------------------
delivered to Purchaser free and clear of all Stock Encumbrances a certificate or
certificates representing the Shares to be sold by such Shareholder to Purchaser
hereunder, duly endorsed for transfer to the Purchaser.
(c) Consents. The Company and/or the Shareholders shall have
--------
obtained and delivered to the Purchaser written consents to the transaction
contemplated herein from, and there shall have been given any required notices
of the transaction contemplated herein to, the appropriate party to or issuer of
each Material Contract, agreement, plan, policy, lease (other than the leases
referred to in paragraph (d) below), permit, license and other document or
instrument specified in any schedule hereto as requiring such consent or notice,
without change in the financial terms thereof or, in the aggregate, any cost to
the Company payable by the Company following the Closing in connection with
obtaining such consents or giving such notices. No court, arbitrator or
governmental body, agency or official shall have issued any order or adopted any
statute, rule or regulation which, in the opinion of the Purchaser, would
materially restrain the operation by the Purchaser of the business of the
Company after the Closing Date.
(d) Consents of Lessors. The Company and the Shareholders shall have
-------------------
obtained and delivered to the Purchaser written consents to the transaction
contemplated by this Agreement of, or notice of the transaction contemplated by
this Agreement to, lessors to the Leases. Each lessor under any lease referred
to in this paragraph shall have executed and delivered to the Company and
Purchaser a certificate substantially in the form of Exhibit 5.2(d) attached
--------------
hereto (the "Landlord Consents").
-----------------
(e) Acquisition Restrictive Covenant Agreements. Each Shareholder
-------------------------------------------
shall have executed and delivered to Purchaser an acquisition restrictive
covenant agreement in favor of the Purchaser, agreeing for a period of five (5)
years following the Closing Date not to directly or indirectly engage in a
business competitive with the Company within the geographic area referred to
therein, in the form of Exhibit 5.2(e) attached hereto (the "Acquisition
-------------- -----------
Restrictive Covenant Agreements").
- -------------------------------
(f) Legal Opinion. The Purchaser shall have received from counsel
-------------
to the Company and Shareholders a legal opinion, addressed to the Purchaser and
dated the Closing Date, containing opinions set forth in Exhibit 5.2(f) attached
--------------
hereto.
29
<PAGE>
(g) Escrow Agreement. The Shareholders and the escrow agent shall
----------------
have executed the Escrow Agreement.
(h) HSR Act. Any filing and waiting period (and any extension
-------
thereof) requirements under the HSR Act applicable to the consummation of the
transactions contemplated hereby shall have expired or been terminated and no
order, ruling or decision shall have been issued under the HSR Act prohibiting
the consummation of the transaction contemplated hereby or materially
interfering with or imposing any conditions on Purchaser's ownership of, or
ability to supervise the operations of, the Company.
(i) Corporate Minute Books; Secretary's Certificate. The Company
-----------------------------------------------
shall have delivered the original corporate minute books of the Company to the
Purchaser. The corporate minute books shall contain minutes and consents of all
Board and shareholders' actions and meetings, cancelled stock certificates of
all previously issued, but no longer outstanding, stock certificates of the
Company, a recently issued good standing certificates from the State of New York
and those states in which the Company is qualified to do business as a foreign
corporation, the resignations of all officers and directors of the Company
effective the close of business on the Closing Date, copies of the Articles of
Incorporation of the Company and any amendments thereto certified by the office
of the Secretary of State of New York, the Bylaws of the Company, and the stock
ledger with all issued or previously issued stock certificates accounted for. In
addition, the Company shall have delivered to the Purchaser a certificate of the
Company's Secretary relating to (i) the Company's Articles of Incorporation,
stating that such articles have not been amended since the date of certification
by the New York Secretary of State, (ii) the Company's Bylaws, stating that such
Bylaws have not been amended from the form presented, (iii) resolutions adopted
by the Company's Board of Directors authorizing and directing the execution and
delivery of this Agreement (and the document related hereto) by the Company, and
(iv) the incumbency and genuiness of the signature of each officer of the
Company executing this Agreement and the Documents related hereto.
(j) Releases. Each officer and director of the Company shall have
--------
executed and delivered to the Purchaser a general release of the Company in the
form of Exhibit 5.2(j) attached.
--------------
(k) Resignations. Each officer and/or director of the Company shall
------------
have executed and delivered to the Purchaser a resignation of his or her
position as an officer and/or director of the Company, in the form of
Exhibit 5.2(k) attached.
- --------------
(l) Consulting Agreements. At the Closing, each Shareholder shall
---------------------
have entered into a Consulting Agreement with the Company.
(m) Customer Satisfaction Investigation. The Purchaser shall have
-----------------------------------
completed its Customer Satisfaction Investigation and have been satisfied with
the results thereof.
(n) Intellectual Property Agreements. The Purchaser shall have
--------------------------------
received all of the executed Intellectual Property Agreements.
(o) Bank Accounts. The signatories to the Company's bank accounts
-------------
shall have been changed to the Purchaser's reasonable satisfaction.
(p) Employment Agreements. The Employment Agreements executed by each
---------------------
of the Shareholders with the Company shall be terminated and cancelled.
30
<PAGE>
(q) Apartment Lease Termination. The Lease of Single Family Residence
---------------------------
(Including, Apartments, Townhomes, Condominiums and Detached Houses) dated July
1, 1991 (the "Apartment Lease"), by and between Gordon and West, on the one hand
---------------
(as owner), and the Company, on the other hand (as tenant), for the apartment
located at 332 East 84th Street, no. 6-A, New York, New York, shall be
terminated and cancelled.
ARTICLE VI.
INDEMNIFICATION
SECTION 6.1 Survival of Representations, Warranties and Covenants. The
-----------------------------------------------------
representations, warranties and covenants of the parties hereto shall survive
the Closing for a period of two (2) years after the Closing Date; provided,
--------
however, that following the Closing, any breach of any representation, warranty
- -------
or covenant made by the Company or the Shareholders under (a) Sections 2.2
(Capital Stock of the Company) and 2.22 (Brokers) shall survive in perpetuity,
(b) Section 2.14 (Employee Benefit Plans) and 2.16 (Taxes) shall survive for the
respective applicable statutes of limitations with respect to the matters
contained therein, and (c) Section 2.31 (Environmental Compliance) shall survive
for the applicable statutes of limitation for all releases, violations,
liabilities, conditions or occurrences described in Section 2.31 existing or
occurring on or before the Closing Date (such termination dates set forth in
this Section 6.1 being collectively referred to as the "Expiration Dates"). If
----------------
written notice of a claim has been given prior to, but not after, the applicable
Expiration Date, then the relevant representations, warranties and covenants
shall survive as to such claim, until the claim has been finally resolved.
SECTION 6.2 Indemnification by the Shareholders. Except as otherwise
-----------------------------------
limited by this Article VI, each Shareholder, jointly and severally, shall
indemnify, defend and hold harmless the Company, Purchaser, and Purchaser's
shareholders, officers and directors, employees, representatives and agents and
their respective successors and assigns (collectively, the "Purchaser
---------
Indemnified Parties") from and against any and all claims, damages, liabilities,
- -------------------
obligations, losses, costs, expenses (including, without limitation, reasonable
legal costs and expenses) and judgments (at equity or at law) arising out of or
resulting from (a) the breach of any representation, warranty or covenant of the
Company or the Shareholders under this Agreement or any document, agreement or
instrument delivered by the Company or the Shareholders under this Agreement,
(b) products manufactured, shipped or sold by the Company or its agents, or
services provided by the Company, on or before the Closing Date, or (c) any
claim, demand, action or proceeding by a third party relating to provisions of
(a) or (b) of this Section 6.2, whether or not such third party prevails in any
such claim, demand, action or proceeding.
SECTION 6.3 Indemnification by the Purchaser. Except as otherwise limited
--------------------------------
by this Article VI, Purchaser shall indemnify, defend and hold harmless the
Shareholders and their respective heirs and beneficiaries from and against any
and all claims, damages, liabilities, obligations, losses, costs, expenses
(including, without limitation, reasonable legal costs and expenses) and
judgments (at equity or at law) arising out of or resulting from the breach of
any representation, warranty or covenant of the Purchaser under this Agreement
or any document, agreement or instrument delivered by the Purchaser under this
Agreement.
SECTION 6.4 General Indemnification Provisions.
----------------------------------
(a) The indemnified party shall promptly notify the indemnifying
party of any claim, demand, action or proceeding for which indemnification is
sought under Section 6.2 or 6.3 of this Agreement (such notice to state the
nature and basis of the claim, demand, action or proceeding and, if
31
<PAGE>
determinable, a good faith, non-binding estimate of the amount relating thereto)
and, if such claim, demand, action or proceeding is a claim, demand, action or
proceeding by a third party ("Third Party Claim"), the indemnifying party will
-----------------
have the right, at its own expense, to assume the defense thereof using counsel
reasonably acceptable to the indemnified party, except in the case of a claim
that relates to Taxes, as to which Purchaser shall assume the defense, and the
Shareholders may, at their sole expense, participate in such defense. The
indemnified party shall have the right to participate, at its own expense, with
respect to any such Third Party Claim. After the indemnifying party has notified
the indemnified party of its intention to undertake to defend or settle any such
asserted liability, and for so long as the indemnifying party diligently pursues
such defense, the indemnifying party shall not be liable for any additional
legal expenses incurred by the indemnified party in connection with any defense
or settlement of such asserted liability. In connection with any Third Party
Claim, the parties thereto shall cooperate with each other and provide each
other with access to relevant books and records in their possession. No such
Third Party Claim shall be settled without prior written consent of the
indemnified party which consent may not be unreasonably withheld; provided,
--------
however, that if a firm, written offer is made to settle any such Third Party
- -------
Claim and the indemnifying party proposes to accept such settlement and the
indemnified party refuses to consent to such settlement, then: (i) the
indemnifying party shall pay such amount to the indemnified party; (ii) the
indemnifying party shall be excused from, and the indemnified party shall be
solely responsible for, all further defense of such Third Party Claim; and (iii)
the maximum liability of the indemnifying party relating to such Third Party
Claim shall be the amount of the proposed settlement, if the amount thereafter
recovered from the indemnified party on such Third Party Claim is greater than
the amount of the proposed settlement, and, to this end, the indemnified party
shall reimburse the indemnifying party for any additional costs of defense which
it subsequently incurs with respect to such claims and all additional costs of
settlement or judgment.
(b) Any payment pursuant to this Article VI shall be made not later
than thirty (30) days after receipt by the indemnifying party of written notice
from the indemnified party stating that an indemnifiable amount has been paid to
a third party, and specifying the amount thereof and the amount of the indemnity
payment requested.
SECTION 6.5 Limits on Indemnification and Liability.
---------------------------------------
(a) Basket. The Purchaser shall not be entitled to assert any
------
indemnification right under this Agreement unless the aggregate amount of the
Purchaser's indemnified claims and liability exceed $100,000 (the "Basket"), at
------
which time all amounts over the first $25,000 of the Basket shall become payable
to the Purchaser, provided, however, that the Basket limitation shall not apply
-------- -------
with respect to (i) the Purchase Price adjustment, if any, to be made in
accordance with Section 1.2(c)(Net Book Value) or Section 4.15 (Working
Capital), (ii) the payments, if any, to be made by the Shareholders pursuant to
Section 4.14 (Certain Receivables Matters), or (ii) any breaches of
representations, warranties or covenants contained in Sections 2.2 (Capital
Stock of the Company) or 2.22 (Brokers).
(b) Maximum Indemnification Amount. The indemnification obligations
------------------------------
of the Shareholders under this Article VI shall be limited, in the aggregate, to
$8,000,000 (the "Maximum Indemnification Amount"); provided, however, that the
------------------------------ -------- -------
Maximum Indemnification Amount limitation shall not apply with respect to any
breaches of representations, warranties or covenants contained in Sections 2.2
(Capital Stock of the Company), 2.22 (Brokers) or 2.26 (No Undisclosed
Liabilities, but only to the extent that the Company or the Shareholders had
knowledge of such undisclosed liabilities).
(c) Notwithstanding the foregoing subparagraphs (a) and (b), the
indemnification limitations set forth in this Section 6.5 shall not apply to (i)
any Shareholder's indemnification
32
<PAGE>
obligations arising from fraud or intentional misrepresentation by the Company
or the Shareholders or (ii) the matters set forth in Section 4.14 hereof.
SECTION 6.6 Payment of Claims and Adjustments. To provide a fund against
---------------------------------
which the Purchaser may assert claims of indemnification under this Article VI,
and to provide a fund for the Purchase Price adjustments, if any, to be made in
accordance with Sections 1.2(c) and 4.15 hereof, the Deferred Payment has been
withheld from payment to the Shareholders as set forth in Section 1.2(b) hereof
and deposited into escrow at the Closing, pursuant to the Escrow Agreement. All
indemnification by the Shareholders under this Article VI, and all Purchase
Price adjustments, if any, to be made pursuant to Sections 1.2(c) and 4.15
hereof, shall be made first by means of an indemnification claim or an
adjustment claim, as applicable, against the Deferred Payment pursuant to the
Escrow Agreement. To the extent that the Deferred Payment is insufficient to
cover the claim and/or adjustment, the balance of the claim and/or adjustment
will be paid promptly by the Shareholders. The right of payment set forth herein
shall not be exclusive of any other right or remedy Purchaser may have, whether
under this Agreement or any other document delivered hereunder, or at law or in
equity.
SECTION 6.7 No Recourse Against the Company. On and after the Closing Date,
-------------------------------
each Shareholder shall have no claim for indemnification, contribution or other
recourse against the Company (all of which hereby are expressly waived by the
Shareholders) in connection with any claim made by the Purchaser against the
Shareholders, whether pursuant to this Article VI or otherwise.
ARTICLE VII.
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination.
-----------
This Agreement may be terminated at any time prior to the Closing:
(a) by the mutual written consent of the Shareholders and the
Purchaser; or
(b) by either the Shareholders and the Company, on the one hand, or
Purchaser, on the other, if the Closing shall not have occurred by August 31,
1999; provided, however, that the right to terminate this Agreement under this
-------- -------
Section 7.1(b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement shall have been the cause of, or shall have
resulted in the failure of, the Closing to occur on the Closing Date and nothing
contained herein shall relieve such party from liability for breach of this
agreement.
SECTION 7.2 Waiver. At any time prior to the Closing, either the
------
Shareholders or the Purchaser 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 of the other parties
contained herein or in any document delivered pursuant hereto, or (c) waive
compliance by the other parties with any of the agreements or conditions
contained herein. Any agreement on the part of either the Shareholders or
Purchaser to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party or parties to be bound thereby.
ARTICLE VIII.
GENERAL PROVISIONS
SECTION 8.1 Notices. Any notice, demand, claim, or other communication
-------
required or permitted under this Agreement shall be in writing and shall be
effectively given only if mailed by
33
<PAGE>
United States certified or registered mail, postage prepaid, return receipt
requested, or sent by a national commercial courier service, return receipt
requested for next day delivery, to be confirmed in writing by such courier, or
by hand delivery, or confirmed by signed receipt, and shall be deemed to have
been given, delivered and received three business days after the same is
deposited at a regularly maintained post office of the United States Postal
Service, twenty-four (24) hours after the same is deposited with such a courier
service, or upon hand delivery of the same, as applicable, to the parties at the
following addresses (or at such other address as a party may specify by notice
to the others, provided that notice of change of address shall be effective only
upon receipt):
If to the Shareholders: Colleen Gordon
479 El Cielito Road
Santa Barbara, California 93105
Kevin West
479 El Cielito Road
Santa Barbara, California 93105
With a copy to: Thelen, Reid & Priest, LLP
333 West San Carlos Street, 17th Floor
San Jose, California 95110-2701
Attn: Jay L. Margulies, Esq.
If to the Company: Market Place Media
26 Castilian Drive
Santa Barbara, California 93117
Attn: Chief Executive Officer
With a copy to: Thelen, Reid & Priest, LLP
333 West San Carlos Street, 17th Floor
San Jose, California 95110-2701
Attn: Jay L. Margulies, Esq.
If to Purchaser: College Television Network, Inc.
5784 Lake Forrest Drive
Suite 275
Atlanta, Georgia 30378
Attn: Jason Elkin, Chief Executive Officer
With a copy to: Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326-1044
Attn: Neil H. Dickson, Esq.
SECTION 8.2 Headings. The 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 8.3 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of
34
<PAGE>
this Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to any party. Upon such determination
that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall 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 so that transactions contemplated hereby are
fulfilled to the greatest extent possible.
SECTION 8.4 Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties and supersedes all prior agreements and undertakings
with respect to the subject matter hereof.
SECTION 8.5 Assignment. This Agreement and all rights and obligations
----------
hereunder may not be assigned or transferred without the prior written consent
of the other parties hereto; provided, however, Purchaser shall have the right
-------- -------
to assign any or all of the rights, assets or covenants under this Agreement to
an affiliate of Purchaser. For purposes of this Agreement, the term "affiliate"
shall mean with respect to Purchaser a Person that directly or indirectly,
through one or more intermediaries, controls or is controlled by or is under
common control with Purchaser.
SECTION 8.6 No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the parties hereto and nothing herein expressed or implied shall give
or be construed to give to any person or entity, other than the parties hereto
and such assigns, any legal or equitable rights hereunder.
SECTION 8.7 "Knowledge" Defined. As used in the Agreement, the terms "to
-------------------
the knowledge of the Company," "to the Company's knowledge," and words of
similar import with respect to the Company shall include the actual knowledge of
certain executives of the Company set forth hereafter, together with the
knowledge a reasonable business person would have obtained after making
reasonable inquiry and after exercising reasonable diligence with respect to the
matter at hand. The Company's executives shall consist of Colleen Gordon, Kevin
West, Andrew Sawyer and Greg Anthony. As used this Agreement, the terms "to the
knowledge of the Shareholders," "to the Shareholders' knowledge," and words of
similar import with respect to the Shareholders shall include the knowledge of
each such Shareholder, together with the knowledge a reasonable person in such
Shareholder's position would have obtained after making reasonable inquiry and
after exercising reasonable diligence with respect to the matter at hand.
SECTION 8.8 Amendment. This Agreement may not be amended, supplemented or
---------
modified except by an instrument in writing making specific reference to this
Agreement and signed by the parties hereto.
SECTION 8.9 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same instrument.
SECTION 8.10 Binding Agreement. This Agreement shall be binding upon and
-----------------
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and permitted assigns.
35
<PAGE>
SECTION 8.11 Governing Law; Binding Arbitration.
----------------------------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED
UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO
THE PRINCIPLES THEREOF RELATING TO CONFLICT OF LAWS.
(b) Except as otherwise specifically provided herein, all disputes
arising under this Agreement shall be submitted to and settled by arbitration.
Arbitration shall be by one (1) arbitrator selected in accordance with the rules
of the American Arbitration Association, Los Angeles, California ("AAA"), by the
---
AAA. The hearing before the arbitrator shall be held in Los Angeles, California
and shall be conducted in accordance with the rules existing at the date thereof
of the AAA, to the extent not inconsistent with this Agreement. The decision of
the arbitrator shall be final and binding as to any matters submitted to them
under this Agreement. All costs and expense incurred in connection with any such
arbitration proceeding and those incurred in any civil action to enforce the
same shall be borne by the party against which the decision is rendered.
[SIGNATURES APPEAR ON NEXT PAGE]
36
<PAGE>
[SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, under seal, as of the date first written above.
"PURCHASER"
COLLEGE TELEVISION NETWORK, INC.
By:
------------------------------------
Title:
---------------------------------
[CORPORATE SEAL]
"COMPANY"
ARMED FORCES COMMUNICATIONS,
INC. d/b/a MARKET PLACE MEDIA
By:
----------------------------------
Title:
-------------------------------
[CORPORATE SEAL]
"SHAREHOLDERS"
(L.S.)
- ----------------------------- -------------------------------------
Witness COLLEEN GORDON, Individually
(L.S.)
- ----------------------------- -------------------------------------
Witness KEVIN WEST, Individually
37
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT made as of May 13, 1999, between College
Television Network, Inc., a Delaware corporation (the "Company"), U-C Holdings,
L.L.C., a Delaware limited liability company ("Holdings") and Martin Grant
("Executive").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive accepts
----------
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the Effective Date and ending as provided
in paragraph 5 hereof (the "Employment Period").
2. Position and Duties.
-------------------
(a) During the Employment Period, Executive shall serve as the
President of the Company and shall have such duties, responsibilities and
authority of the President subject to the direction of the Company's Chairman of
the Board, Chief Executive Officer, and board of directors (the "Board").
Executive shall also become appointed to the Company's Board, at its next
meeting, in accordance with the governing documents of the Company.
(b) Executive shall report to the Chairman of the Board, Chief
Executive Officer, and the Board, and Executive shall devote his full business
time, attention and skills to the business and affairs of the Company, except as
otherwise approved by the Board.
3. Base Salary and Benefits.
------------------------
(a) During the Employment Period, Executive's base salary shall be
Five Hundred Thousand and No/ 100 Dollars ($500,000.00) per annum or such higher
rate as the Board may designate from time to time (the "Base Salary"), which
salary shall be payable semi-monthly in regular installments in accordance with
the Company's general payroll practices.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to time
with respect to travel, entertainment and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses. All travel shall be first class accommodations. In addition, during
the Employment Period, the Company shall provide Executive with an automobile
allowance of One Thousand and No/ 100 Dollars ($1,000.00) per month for the
monthly payments, maintenance and operating expenses for any automobile used by
Executive.
(c) In addition to the Base Salary, on a fiscal year basis for the
Company, Executive shall receive an annual bonus of One Hundred Thousand and No/
100 Dollars
<PAGE>
($100,000) (increasing to $200,000 as set forth below) (the "Performance
Bonus"), to be paid within 15 days following receipt by the Board of the results
of the yearly audit of the financial statements performed by the Company's
independent auditors for each fiscal year during the Employment Period , or the
determination of the auditors (on a reviewed basis) on a partial year basis for
the last year of the Employment Period. Such Performance Bonus shall be earned
if the Company's television network achieves at least 100% of its gross revenue
projection for the Company's television network for the applicable fiscal year,
which projections are attached hereto as Exhibit A and are subject to adjustment
by the Board in its reasonable judgment from time to time to account for
acquisitions, divestitures, asset sales or asset purchases. For the first year
of the Employment Period only, Executive shall be entitled to receive a
percentage of the Performance Bonus based on the percent of the total 1999
revenue goal for the Company's television network actually achieved, further
prorated for the portion of fiscal 1999 after the Effective Date (i.e. Company
achieves 80% of 1999 revenue goal and Executive works for six months in fiscal
1999 - Performance Bonus is $100,000 x .8 = $80,000 x .5 = $40,000). For any
partial fiscal year during the Employment Period, the Performance Bonus shall be
paid based upon a pro rata portion of $100,000 based upon the portion of the
year worked (nothing herein shall be deemed to grant to Executive the right to
receive a prorata portion of the Performance Bonus upon termination for any
reason and is intended to address partial years during the Employment Period as
contemplated by this Agreement). Other than for fiscal 1999, unless determined
to the contrary by the Board, there shall be no partial payment of a Performance
Bonus for achieving less than 100% of the revenue projection for the Company's
television network. Executive agrees to accept the judgment of the independent
auditors for the Company with regard to the attainment of Company's projections
as final and binding. In addition, if the Company achieves 110% (with no prorata
payments) of the revenue projection for the Company's television network,
Executive shall receive an additional $100,000 bonus.
(d) In addition, the Board may also from time to time, in its sole
discretion, award Executive bonuses, in addition to those bonuses set forth
above.
(e) In addition to the Base Salary and any Performance Bonus payable
to Executive pursuant to this paragraph 3, Executive shall be entitled to
participate in all employee benefit plans and programs of the Company for which
senior executive officers of the Company are eligible, including, to the extent
available or established by the Company, any:
(i) family health insurance, disability insurance, and dental
insurance coverage;
(ii) 401(k), retirement or similar benefit plans; and
(iii) Executive shall be entitled to four (4) weeks paid
vacation from working days per year.
(f) Executive will be granted options to purchase 50,000 shares of
Common Stock of the Company at the beginning of each year of the Employment
Period. The options will vest over three years, with immediate vesting upon a
Sale of the Company. The grant of such options is subject to the approval of
the Board.
2
<PAGE>
4. Term.
----
(a) The Employment Period shall commence on May 24, 1999 (the
"Effective Date") and end on May 23, 2002 (the "Expiration Date"); provided,
however, that the Employment Period shall be automatically extended for one year
on the Expiration Date and at the end of each subsequent year of the Executive's
employment (an "Extension Period"; any such Extension Periods shall be included
in the definition of Employment Period) unless at least ninety (90) days prior
to the Expiration Date or the end of the then current Extension Period, either
the Company or the Executive shall give written notice to the other that this
Agreement shall not be so extended; and provided further that (i) the Employment
--------
Period shall terminate prior to such date upon Executive's death, permanent
disability or incapacity (determined as set forth below), or resignation and
(ii) the Employment Period may be terminated by the Company at any time prior to
such date for Cause (as defined below) or without Cause. Permanent Disability or
incapacity shall occur if Executive misses ninety (90) consecutive days of work
due to illness or disability.
(b) If the Employment Period is terminated by the Company without
Cause, Executive shall be entitled to receive an aggregate amount equal to his
Base Salary, payable for the remainder of the Employment Period. This amount
shall be payable by the Company in equal monthly installments over the remainder
of the Employment Period to be paid when other employees of the Company are
paid, so long as Executive has not breached any of the provisions of Paragraphs
8, 9, 10 or 11 hereof. Executive shall be entitled to no other compensation.
(c) If the Employment Period is terminated by the Company for Cause,
upon the Executive's resignation, Executive's death or disability, or upon the
expiration of the Employment Period after either party has given notice of non-
extension pursuant to Paragraph 5(a), Executive shall be entitled to receive his
Base Salary through the date of termination and shall not be entitled to any
other amounts hereunder. Executive shall be entitled to no other compensation
upon termination pursuant to this Section 4(c).
(d) All of Executive's rights to fringe benefits hereunder (if any)
accruing at any time prior to or after the termination of the Employment Period
shall cease upon such termination, provided, however, that if Executive is
--------
terminated by the Company without Cause, the Company shall permit Executive to
continue to receive benefits under the Company's health insurance policies to
the extent permitted by such policies and applicable law by paying for
Executive's COBRA payment, and provided that the Company shall only maintain
--------
such insurance coverage until the earlier of (y) the end of the period for which
Executive is receiving severance payments pursuant to paragraph 5 hereof and (z)
the date Executive accepts other employment.
(e) For purposes of this Agreement, "Cause" shall mean (i) the
conviction of a felony or a crime involving moral turpitude or any other crime
involving dishonesty, disloyalty or fraud with respect to the Company or
Holdings, or (ii) gross negligence or willful misconduct with respect to the
Company, or (iii) any other material breach of this Agreement; or (iv) the
repeated failure to perform Executive's duties as directed by the Chief
Executive Officer of the
3
<PAGE>
Company or the Board; provided however, that with respect to clause (iii) or
--------
(iv) above, if such failure or breach is capable of cure as determined by the
Chief Executive Officer of the Company, in his reasonable judgment, such failure
or breach, as the case may be, shall not be deemed to constitute Cause unless
such failure or breach remains uncured after the expiration of ten (10) days
after notice thereof to Executive.
(f) If Executive is terminated without Cause and he obtains another
job, it shall reduce the payments hereunder.
5. Vesting of Executive Securities.
-------------------------------
(a) In addition to all sums payable to Executive pursuant to paragraph
4 above, Executive shall receive Three Hundred (300) Class A Management Units
and 50 Class B Management Units of Holdings at an aggregate purchase price of
$350.00 (the "Original Cost").
(b) Except as otherwise provided in paragraph 6(c) below, the
Management Units will become vested, over the 36 month period after the date
hereof, in equal proportions on each anniversary date of the Effective Date if,
as of such anniversary date, Executive is employed by Company (i.e. 33.3% on the
anniversary of each 12 month period). The vesting proportion of Class A to
Class B Management Units each year shall be based on the relative percentage of
each to all Management Units (i.e. 1/3 of each of the Class A and Class B
Management Units shall vest each year).
(c) Upon a Sale of the Company or a Sale of Holdings, all of the
Management Units, which have not yet become vested shall become vested at the
time of such event. All of the Management Units which have become vested
pursuant to this paragraph 5 are referred to herein as "Vested Executive
Securities", and all Unvested Management Units are referred to herein as
"Unvested Executive Securities."
(d) Executive shall also receive a warrant to purchase the equivalent
of one half of one percent (.5%) of an Investor Unit ("U C Warrant") in Holdings
from Jason Elkin, pursuant to a warrant agreement to be entered into on the date
herewith at the same price paid by other executives of the Company.
6. Repurchase Option.
-----------------
(a) General Repurchase Option. Upon the occurrence of the Termination
-------------------------
Date the Executive Securities (whether held by Executive or one or more of
Executive's Permitted Transferees) shall be subject to repurchase by Holdings
pursuant to the terms and conditions set forth in this paragraph 6 (the
"Repurchase Option"). The date on which Executive ceases to be employed by the
Company for any reason, is referred to herein as the "Termination Date."
(b) Termination Without Cause. Notwithstanding anything herein to the
-------------------------
contrary, if Executive is terminated without Cause all Unvested Executive
Securities shall become Vested Executive Securities and such Executive
Securities shall be subject to repurchase at Fair Market Value of such Executive
Securities.
4
<PAGE>
(c) Termination for Death or Disability. Subject to paragraph 6(h)
-----------------------------------
below, the purchase price for the Unvested Executive Securities on the
Termination Date if Executive is terminated for death or permanent disability
will be the Executive's Original Cost; and the purchase price for the Vested
Executive Securities shall be the Fair Market Value for such Vested Executive
Securities, as of the date of termination.
(d) Termination for Cause or Resignation. Subject to paragraph 6(h)
------------------------------------
below, the purchase price for all Vested and Unvested Executive Securities if
Executive is terminated for Cause or he resigns shall be the Executive's
Original Cost.
(e) Repurchase Option. As set forth above, Holdings may elect to
-----------------
purchase the applicable Executive Securities by delivering written notice (the
"Holdings Repurchase Notice") to the holder or holders of such Executive
Securities within 90 days after the Termination Date. The Repurchase Notice will
set forth the number of such Executive Securities to be acquired from each
holder, the aggregate consideration to be paid for such Executive Securities and
the time and place for the closing of the transaction, the number of such
Executive Securities to be repurchased by Holdings shall first be satisfied to
the extent possible from the Unvested Executive Securities held by Executive at
the time of delivery of the Repurchase Notice. If the number of such Executive
Securities then held by Executive is less than the total number of Executive
Securities Holdings has elected to purchase, Holdings shall purchase the
remaining Executive Securities elected to be purchased from the other holder(s)
of such Executive Securities under this paragraph 6, pro rata according to the
number of such Executive Securities held by such other holder(s), respectively,
at the time of delivery of the Repurchase Notice (determined as nearly as
practicable to the nearest unit or other applicable denomination).
(f) Closing. Subject to paragraph 6(g) below, the closing of the
-------
purchase of the applicable Executive Securities pursuant to the Repurchase
Option shall take place on the date designated by Holdings in the Repurchase
Notice, which date shall not be more than 60 days nor less than five days after
the later of (i) the delivery of such notice(s) or (ii) the Fair Market
Valuation Date. Payment for such Executive Securities to be purchased pursuant
to the Repurchase Option shall be made by Holdings in four (4) equal
installments, the first installment payable on the closing of such purchase, the
second payable four (4) months after the closing, the third payable eight (8)
months after the closing and the fourth payable twelve (12) months after the
closing, each such payment made by check or wire transfer of funds, at the
option of Holdings. Notwithstanding anything to the contrary contained in this
Agreement, Holdings may withdraw their Repurchase Notice at any time prior to
the closing of a purchase of such Executive Securities pursuant to the
Repurchase Option.
(g) Termination of Repurchase Option. The right of Holdings to
--------------------------------
repurchase Unvested Executive Securities pursuant to this paragraph 6 shall
terminate upon the first to occur of (i) the Sale of Holdings, or (ii) the Sale
-----------------
of the Company. The Repurchase Option set forth in this paragraph 6 will
continue with respect to such Executive Securities following any transfer
thereof other than a transfer to Holdings.
5
<PAGE>
(h) Repurchase Restrictions. Notwithstanding anything to the contrary
-----------------------
contained in this Agreement, all repurchases of Executive Securities by Holdings
shall be subject to applicable restrictions contained in the General Corporate
Law of the State of Delaware. If any such restrictions prohibit the repurchase
of the Executive Securities hereunder which Holdings is otherwise entitled or
required to make, Holdings may make such repurchases as soon as it is permitted
to do so under such restrictions.
(i) Section 83B Election. Within 30 days after Executive purchases
--------------------
any Executive Securities from Holdings, Executive shall make an effective
election with the Internal Revenue Service under Section 83(b) of the Internal
Revenue Code and the regulations promulgated thereunder.
(j) Representations and Warranties. Executive hereby represents,
------------------------------
warrants, covenants and agrees that:
(A) Executive has acquired the Management Units, the U C Warrants and
the Investor Units issuable thereunder for investment for an indefinite period,
not with a view to the sale or distribution of any part of all thereof by public
or private sale or disposition.
(B) Executive has been advised that the Management Units, the U C
Warrants and the Investor Units issuable thereunder have not been registered
under the Securities Act or registered or qualified under any other securities
law, on the ground, among others, that no distribution or public offering of the
Management Units is to be effected and the Management Units, the U C Warrants
and the Investor Units issuable thereunder will be issued in connection with a
transaction that does not involve any public offering within the meaning of
Section 4(2) of the Securities Act, or the rules and regulations of the
Securities and Exchange Commission and under comparable exemption provisions of
the securities laws, rules and regulations of other jurisdictions. Executive
understands that Holdings is relying in part on the Executive's representations
as set forth herein for purposes of claiming such exemptions and that the basis
for such exemptions may not be present if, notwithstanding Executive's
representations, Executive has in mind merely acquiring Management Units, the
U C Warrants and the Investor Units issuable thereunder for resale on the
occurrence or non-occurrence of some predetermined event. Executive has no such
intention.
(C) Executive has such knowledge and experience in financial and
business matters that Executive is capable of evaluating the merits and risks of
an investment in the Management Units, the U C Warrants and the Investor Units
issuable thereunder and has the capacity to protect Executive's own interest in
connection with Executive's proposed acquisition of the Management Units, the
U C Warrants and the Investor Units issuable thereunder. Executive is an
"Accredited Investor" as defined in Regulation D promulgated under the
Securities Act.
(D) Executive acknowledges that Executive has been furnished with such
financial and other information concerning the Company and Holdings as Executive
considers necessary in connection with Executive's acquisition of the Management
Units, the U C Warrants and the Investor Units issuable thereunder. Executive
has carefully reviewed such
6
<PAGE>
information and is thoroughly familiar with the proposed business, operations,
properties and financial condition of the Company and Holdings and has discussed
with representatives of the Company and Holdings any questions the acquisition
may have with respect thereto. Executive understands: (i) the risks involved in
this offering, including the speculative nature of the investment; (ii) the
financial hazards involved in this offering, including the risk of losing such
Executive's entire investment; (iii) the lack of liquidity and restrictions on
transfers of the Management Units, the U C Warrants and the Investor units
issuable thereunder; and (iv) the tax consequences of this investment. Executive
has consulted with Executive's own legal, accounting, tax, investment and other
advisers with respect to the tax treatment of an investment by Executive in the
Management Units, the U C Warrants and the Investor Units issuable thereunder
and the merits and risks of an investment in the Management Units, the U C
Warrants and the Investor Units issuable thereunder.
(E) The execution, delivery and performance by Executive of this
Agreement have been duly authorized by Executive. This Agreement constitutes a
valid and binding obligation of Executive, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding in equity or
at law).
(F) Executive understands that the Management Units, the U C Warrants
and the Investor Units issuable thereunder will be "restricted securities" as
the term is defined in Rule 144 under the Securities Act, that the Management
Units, the U C Warrants and the Investor Units issuable thereunder must be held
indefinitely unless they are subsequently registered under the Securities Act
and qualified under any other applicable securities law or exemption from such
registration and qualification are available. Executive understands that
Holdings is under no obligation to register or qualify the Management Units, the
U C Warrants and the Investor Units issuable thereunder under the Securities
Act, or any other securities law.
(G) Executive agrees to be bound by the terms, conditions,
obligations, covenants and restrictions of the LLC Agreement and by the
execution of this Agreement Executive shall become and the Managing Member of
the LLC does hereby admit Executive as a "Member" and "Management Holder" of
Holdings.
7. Definitions.
-----------
"Executive Securities" mean: (i) any Management Units acquired by
Executive, and (ii) any equity or debt securities issued or issuable directly or
indirectly with respect to the Executive Securities referred to in clauses (i)
above by any of a conversion, split, distribution or dividend or in connection
with a combination of securities, recapitalization, merger, consolidation or
other reorganization. Executive Securities shall continue to be Executive
Securities in the hands of any holder thereof (other than Holdings or any of its
members).
"Fair Market Valuation Date" with respect to any Executive Securities
means the date on which its Fair Market Value is finally determined pursuant to
the definition of "Fair Market Value."
7
<PAGE>
"Fair Market Value" of the Management Units means the Fair Market
Value as shall be determined jointly in good faith by Holdings and Executive;
provided that if Holdings and Executive cannot so agree, then such value shall
be determined by an independent investment banking firm of national or regional
reputation utilizing valuation techniques then commonly used for the valuation
of such investment interests, which investment banking firm will be jointly
selected by Holdings and Executive in good faith, or if such parties cannot
agree on an investment banking firm, then such value shall be determined by an
investment banking firm selected by a lot from a group of six firms possessing
the above described qualifications (three of whom shall be selected by Holdings
and three of whom shall be selected by Executive) from which one firm designated
as objectionable by each of Holdings and Executive shall be eliminated (in
either case, the investment banking firm's determination shall be conclusive).
The expense of any such appraisal shall be borne equally by the parties. In
determining the Fair Market Value of the Management Units to be purchased
pursuant to he exercise of the Repurchase Option, the parties or the investment
bank, as the case may be, shall use the average of the thirty (30) day trading
price of Common Stock of the Company as a partial determining factor, taking
into account the limitations, restrictions and payment preferences of the
Management Units. References in this definition to Executive shall mean
Executive's personal representative if he is deceased or incapacitated.
"Investor Units" shall have the meaning, ascribed in the LLC
Agreement.
"LLC Agreement" shall mean the Second Amended and Restated Limited
Liability Company Agreement of U-C Holdings, L.L.C. dated May 15, 1997, as
amended from time to time.
"Management Units" shall have the meaning ascribed to it in the LLC
Agreement.
"Original Cost" of the Executive Securities will be the price per such
security paid by Executive pursuant to this Agreement or otherwise (in each
case, as proportionately adjusted for all subsequent security splits, security
dividends, security distributions and other recapitalizations affecting the
Executive Securities).
"Sale of Company" shall mean the sale of substantially all of the
stock of Company held by Holdings or the sale of all or substantially all of the
assets of Company.
"Sale of Holdings" shall mean the sale of substantially all of the
equity interest of Holdings or the sale of all or substantially all the assets
of Holdings in Company.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
8. Confidential Information. The Executive acknowledges that the
------------------------
information, observations and data obtained by him while employed by the
Company, or during the due diligence process in connection with Holdings
investment in the Company, concerning the business or affairs of the Company
("Confidential Information") are the property of the Company. Therefore.
Executive agrees that, except in the performance of duties for the Company, he
shall not disclose to any unauthorized person or use for his own account any
8
<PAGE>
Confidential Information without prior written consent of the Board, except (i)
to the extent that the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's wrongful
acts or omissions to act, (ii) as necessary to comply with compulsory legal
process, provided that Executive shall provide prior notice to the Company
--------
regarding such disclosure and the Company, as applicable, shall have the right
to contest such disclosure, (iii) as necessary to counsel and other professional
advisors retained by the Executive, subject to the attorney/client privilege or
a valid and binding non-disclosure agreement between Executive and such
professional and (iv) disclosures of information obtained from a third party
free of restrictions or disclosure of information in Executive's possession
prior to the date hereof which was obtained from a source other than the Company
or its predecessors. Executive shall deliver to the Company at the termination
of the Employment Period, all memoranda, notes, plans, records, reports,
computer tapes and software and other documents and data (and copies thereof)
relating to Confidential Information, Work Product or the business of the
Company which he may then possess or have under his control.
9. Inventions and Patents. Executive agrees that all ideas, concepts,
----------------------
marketing strategies, management techniques, product development, methods,
designs, analyses, drawings, reports, and all similar or related information
which relates to the Company's actual or anticipated business, research and
development or existing or future products or services and which are conceived,
developed or made by Executive while employed by the Company ("Work Product")
belong to the Company. Executive will promptly disclose such Work Product to the
Board and perform all actions reasonably requested by the Board (whether during
or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
10. Non-Compete, Non-Solicitation.
-----------------------------
(a) Executive acknowledges that in the course of his employment with
the Company he will become familiar with the Company's trade secrets and with
other confidential information concerning the Company and that his services will
be of special, unique and extraordinary value to the Company. Therefore,
Executive agrees that, during the Employment Period, during any period in which
he is receiving payments pursuant to paragraph 4 or for which he has received a
lump sum payment pursuant to this Agreement or any subsequent agreement, and, if
terminated for Cause or by Executive's resignation before the Expiration Date,
for two years after such termination (the "Non-Compete Period"), he shall not
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing with the
businesses of the Company (which business is an information or entertainment
network marketing to colleges and universities), within any geographical area in
which the Company engages or plans to engage in such businesses.
Notwithstanding the foregoing, nothing herein shall prohibit Executive from (i)
continuing his ownership, management and/or control of any business in which and
to the extent which he held such interests and managed such interests prior to
the Non-Compete Period, or (ii) being a passive owner of not more than 5% of the
outstanding stock of any class of a company which is publicly traded, so long as
Executive has no active participation in the management or the business of such
company.
9
<PAGE>
(b) During the Employment Period and for eighteen months thereafter,
Executive shall not directly or indirectly through another entity (i) solicit,
encourage, interview, entice, discuss with or induce or attempt to induce any
employee of the Company to leave the employ of the Company, or in any way
interfere with the relationship between the Company and any employee thereof,
(ii) hire any person who was an employee of the Company at any time during the
Employment Period or (iii) induce or attempt to induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company with whom
he had contact to cease doing business with the Company, or in any way interfere
with the relationship between any such customer, supplier, licensee or business
relation and the Company.
11. Enforcement. If, at the time of enforcement of paragraphs 8, 9, or 10
-----------
of this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parities hereto agree that
the maximum period, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope and area.
Because Executive's services are unique and because Executive has access to
Confidential Information and Work Product, the parties hereto agree that money
damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company or its successors or assigns may, in addition to other rights and
remedies existing in their favor, apply to any court of competent jurisdiction
for specific performance and/or injunctive or other relief in order to enforce,
or prevent any violations of, the provision hereof (without posting a bond or
other security).
12. Executive Representations. Executive hereby represents and warrants
-------------------------
to the Company that (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, (ii) Executive is
not a party to or bound by any employment agreement, non-compete agreement or
confidentiality agreement with any other person or entity, which would prohibit
his performance under this Agreement, and (iii) upon the execution and delivery
of this Agreement by the Company, this Agreement shall be valid and binding
obligation of Executive, enforceable in accordance with its terms.
13. Survival. Paragraphs 8, 9, 10, 11, 12 and 13 shall survive and
--------
continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period.
14. Notices. Any notice provided for in this Agreement shall be in
-------
writing and shall be either personally delivered, mailed by first class mail
(postage prepaid and return receipt
10
<PAGE>
requested) or sent by telecopy or reputable overnight courier service (charges
prepaid) to the recipient at the address or telecopy number below indicated:
Notices to Holdings:
U-C Holdings, L.L.C.
c/o Willis Stein & Partners, L.P.
227 W. Monroe Street, Suite 4300
Chicago, Illinois 60606
Telecopy No.: (312) 422-2424
Attention: Avy H. Stein
With a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Telecopy No.: (312) 861-2200
Attention: Margaret Gibson, Esq.
Notices to Executive:
Martin Grant
2 Sleepy Hollow
Chappaqua, New York 10514
Telecopy No.: (914) 666-5119
With a copy to:
__________________________________
__________________________________
__________________________________
Telecopy: (_____) _______________
Attention: Jack Lever
Notices to Company:
College Television Network, Inc.
5784 Lake Forrest Drive
Suite 275
Atlanta, GA 30328
Telecopy No.: (404) 257-9517
11
<PAGE>
With a copy to:
Morris, Manning & Martin, L.L.P.
3343 Peachtree Road, N.E.
1600 Atlanta Financial Center
Atlanta, Georgia 30326
Telecopy No.: (404) 365-9532
Attention: Neil H. Dickson, Esq.
or such other address or telecopy number or to the attention of such other
person as the recipient party shall have specified by prior written notice to
the sending party, any notice under this Agreement will be deemed to have been
given when so delivered or sent or, if mailed, five days after deposit in the
U.S. mail.
15. Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
16. Complete Agreement. This Agreement and those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
17. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which to be an original and all of which taken together
constitute one and the same agreement.
18. Successors and Assigns. This Agreement is intended to bind and inure
----------------------
to the benefit of and be enforceable by all parties and their respective heirs,
successors and assigns, except that Executive may not assign his rights or
delegate his obligations hereunder without the prior written consent of the
Company.
19. Choice of Law. This Agreement will be governed by the internal law,
--------------
and not the laws of conflicts, of the State of Georgia.
20. Amendment and Waiver. The provisions of this Agreement may be amended
---------------------
or waived with the prior written consent of the Company and Executive, and no
course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity binding effect or enforceability of this
Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
COLLEGE TELEVISION NETWORK, INC.
By: /s/ Jason Elkin
---------------------------------
Its: Chief Executive Officer
---------------------------------
U-C HOLDINGS, L.LC.
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By: /s/ Daniel M. Gill
--------------------------------
Its: Manager
/s/ Martin Grant
--------------------------------------
Martin Grant
By Managing Member of U-C Holdings, L.L.C.
as to Section 6(j)(G) hereof
By: Willis Stein & Partners, L.P.
Its: Managing Member
By: Willis Stein & Partners, L.L.C.
Its: General Partner
By: /s/ Daniel M. Gill
-----------------------------------
Its:Manager
13
<PAGE>
EXHIBIT 10.2
================================================================================
CREDIT AGREEMENT
dated as of July 26, 1999
among
COLLEGE TELEVISION NETWORK, INC.
and
LASALLE BANK NATIONAL ASSOCIATION
===============================================================================
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
SECTION 1 DEFINITIONS..................................................... 1
1.1 Definitions..................................................... 1
1.2 Other Interpretive Provisions................................... 10
SECTION 2 COMMITMENTS OF LENDER; BORROWING, CONVERSION.................... 11
2.1 Commitments..................................................... 11
2.2 Loan Procedures................................................. 11
2.2.1 Various Types of Loans................................... 11
2.2.2 Borrowing Procedures..................................... 12
2.2.3 Conversion and Continuation Procedures................... 12
2.3................................................................... 13
2.4 Certain Conditions.............................................. 13
SECTION 3 NOTES EVIDENCING LOANS.......................................... 13
3.1 Note............................................................ 13
3.2 Recordkeeping................................................... 13
SECTION 4 INTEREST........................................................ 14
4.1 Interest Rates.................................................. 14
4.2 Interest Payment Dates.......................................... 14
4.3 Setting and Notice of Eurodollar Rates.......................... 14
4.4 Computation of Interest......................................... 14
SECTION 5 FEES............................................................ 14
5.1 Non-Use Fee..................................................... 14
5.2 Intentionally Omitted........................................... 15
5.3 Upfront Fees.................................................... 15
SECTION 6 REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT
AMOUNT; PREPAYMENTS............................................. 15
6.1 Reduction or Termination of the Revolving Commitment Amount..... 15
6.1.1 Voluntary Reduction or Termination of the Revolving
Commitment Amount........................................ 15
6.1.2 Mandatory Reductions of Revolving Commitment Amount...... 15
6.2 Prepayments..................................................... 15
6.2.1 Voluntary Prepayments.................................... 15
6.2.2 Mandatory Prepayments.................................... 15
6.3 All Prepayments................................................. 16
SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES................. 16
7.1 Making of Payments.............................................. 16
</TABLE>
-i-
<PAGE>
7.2 Application of Certain Payments................................. 16
7.3 Due Date Extension.............................................. 16
7.4 Setoff.......................................................... 17
7.5 Intentionally Omitted........................................... 17
7.6 Taxes........................................................... 17
SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS........ 18
8.1 Increased Costs................................................. 18
8.2 Basis for Determining Interest Rate Inadequate or Unfair........ 19
8.3 Changes in Law Rendering Eurodollar Loans Unlawful.............. 19
8.4 Funding Losses.................................................. 20
8.5 Right of Banks to Fund through Other Offices.................... 20
8.6 Discretion of Banks as to Manner of Funding..................... 20
8.7 Mitigation of Circumstances; Replacement of Banks............... 20
8.8 Conclusiveness of Statements; Survival of Provisions............ 21
SECTION 9 WARRANTIES...................................................... 21
9.1 Organization.................................................... 21
9.2 Authorization; No Conflict...................................... 21
9.3 Validity and Binding Nature..................................... 22
9.4 Financial Condition............................................. 22
9.5 No Material Adverse Change...................................... 22
9.6 Litigation and Contingent Liabilities........................... 22
9.7 Ownership of Properties; Liens.................................. 22
9.8 Subsidiaries.................................................... 22
9.9 Pension Plans................................................... 22
9.10 Investment Company Act.......................................... 23
9.11 Public Utility Holding Company Act.............................. 23
9.12 Regulation U.................................................... 23
9.13 Taxes........................................................... 23
9.14 Solvency, etc................................................... 23
9.15 Environmental Matters........................................... 24
9.16 Year 2000 Problem............................................... 25
9.17 Insurance....................................................... 25
9.18 Real Property................................................... 25
9.19 Information..................................................... 25
9.20 Intellectual Property........................................... 25
9.21 Burdensome Obligations.......................................... 26
9.22 Labor Matters................................................... 26
9.23 No Default...................................................... 26
SECTION 10 COVENANTS....................................................... 26
-ii-
<PAGE>
10.1 Reports, Certificates and Other Information..................... 26
10.1.1 Annual Report........................................... 26
10.1.2 Interim Reports......................................... 27
10.1.3 Compliance Certificates................................. 27
10.1.4 Reports to the SEC and to Shareholders.................. 27
10.1.5 Notice of Default, Litigation and ERISA Matters......... 27
10.1.6 Intentionally Omitted................................... 28
10.1.7 Management Reports...................................... 28
10.1.8 Projections............................................. 28
10.1.9 Subordinated Debt Notices............................... 29
10.1.10 Year 2000 Problem....................................... 29
10.1.11 Other Information....................................... 29
10.2 Books, Records and Inspections.................................. 29
10.3 Maintenance of Property; Insurance.............................. 29
10.4 Compliance with Laws; Payment of Taxes and Liabilities.......... 30
10.5 Maintenance of Existence, etc................................... 30
10.6 Financial Covenants............................................. 31
10.6.1.......................................................... 31
EBITDA.......................................................... 31
10.6.2 Capital Expenditures.................................... 31
10.7 Limitations on Debt............................................. 31
10.8 Liens........................................................... 31
10.9 Operating Leases................................................ 32
10.10 Restricted Payments............................................. 33
10.11 Mergers, Consolidations, Sales.................................. 33
10.12 Modification of Organizational Documents........................ 33
10.13 Use of Proceeds................................................. 33
10.14 Further Assurances.............................................. 33
10.15 Transactions with Affiliates.................................... 34
10.16 Employee Benefit Plans.......................................... 34
10.17 Environmental Matters........................................... 34
10.18 Unconditional Purchase Obligations.............................. 34
10.19 Inconsistent Agreements......................................... 34
10.20 Business Activities............................................. 35
10.21 Investments..................................................... 35
10.22 Restriction of Amendments to Certain Documents.................. 35
10.23 Fiscal Year..................................................... 35
10.24 Cancellation of Debt............................................ 35
SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC....................... 36
11.1 Initial Credit Extension........................................ 36
11.1.1 Note.................................................... 36
11.1.2 Resolutions............................................. 36
-iii-
<PAGE>
11.1.3 Consents, etc........................................... 36
11.1.4 Incumbency and Signature Certificates................... 36
11.1.5 Reserved................................................ 36
11.1.6 Security Agreement...................................... 36
11.1.7 Reserved................................................ 37
11.1.8 Real Estate Documents................................... 37
11.1.9 Intentionally Omitted................................... 37
11.1.10 Intentionally Omitted........................................ 37
11.1.11 Opinions of Counsel..................................... 38
11.1.12 Insurance............................................... 38
11.1.13 Copies of Documents..................................... 38
11.1.14 Payment of Fees......................................... 38
11.1.15 Solvency Certificate.................................... 38
11.1.16 Pro Forma............................................... 38
11.1.17 Search Results; Lien Terminations....................... 38
11.1.18 Filings, Registrations and Recordings................... 38
11.1.19 Closing Certificate..................................... 39
11.1.20......................................................... 39
11.1.21 Intentionally Omitted................................... 39
11.1.22 Other................................................... 39
11.2 Conditions...................................................... 39
11.2.1 Compliance with Warranties, No Default, etc............. 39
11.2.2 Confirmatory Certificate................................ 39
SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT.............................. 39
12.1 Events of Default............................................... 39
12.1.1 Non-Payment of the Loans, etc........................... 40
12.1.2 Non-Payment of Other Debt............................... 40
12.1.3 Other Material Obligations.............................. 40
12.1.4 Bankruptcy, Insolvency, etc............................. 40
12.1.5 Non-Compliance with Loan Documents...................... 40
12.1.6 Warranties.............................................. 40
12.1.7 Pension Plans........................................... 41
12.1.8 Judgments............................................... 41
12.1.9 Intentionally Omitted................................... 41
12.1.10 Invalidity of Collateral Documents, etc................. 41
12.1.11 Invalidity of Subordination Provisions, etc............. 41
12.1.12 Change of Control....................................... 41
12.1.13 Material Adverse Effect................................. 42
12.2 Effect of Event of Default...................................... 42
SECTION 13................................................................. 42
-iv-
<PAGE>
SECTION 14 GENERAL......................................................... 42
14.1 Waiver; Amendments.............................................. 42
14.2 Confirmations................................................... 43
14.3 Notices......................................................... 43
14.4 Computations.................................................... 43
14.5 Regulation U.................................................... 43
14.6 Costs, Expenses and Taxes....................................... 43
14.7 Subsidiary References........................................... 44
14.8 Captions........................................................ 44
14.9 Assignments; Participations..................................... 44
14.9.1 Assignments............................................. 44
14.9.2 Forum Selection and Consent to Jurisdiction............. 45
14.9.3 Waiver of Jury Trial.................................... 45
-v-
<PAGE>
SCHEDULES
SCHEDULE 9.6 Litigation and Contingent Liabilities
SCHEDULE 9.15 Environmental Matters
SCHEDULE 9.17 Insurance
SCHEDULE 9.18 Real Property
SCHEDULE 9.22 Labor Matters
SCHEDULE 10.7 Existing Debt
SCHEDULE 10.8 Existing Liens
SCHEDULE 10.21 Investments
SCHEDULE 11.1 Debt to be Repaid
SCHEDULE 12.1.12 Key Executives
SCHEDULE 14.3 Addresses for Notices
-vi-
<PAGE>
EXHIBITS
EXHIBIT A Form of Note (Section 3.1)
EXHIBIT B Form of Compliance Certificate (Section 10.1.3)
EXHIBIT C Form of Guaranty (Section 1.1)
EXHIBIT D Form of Security Agreement (Section 1.1)
EXHIBIT E Form of Assignment Agreement (Section 14.9.1)
EXHIBIT F Form of Opinion of Morris, Manning & Martin (Section 11.1.11)
EXHIBIT G Form of Solvency Certificate (Section 11.1.15)
-vii-
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT, dated as of July 26, 1999 (this "Agreement"), is
---------
entered into by and between COLLEGE TELEVISION NETWORK, INC., a Delaware
corporation (the "Company"), and LASALLE BANK NATIONAL ASSOCIATION ("Lender").
------- ------
WHEREAS, Lender has agreed to make available to the Company a revolving
credit facility upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
SECTION 1 DEFINITIONS.
1.1 Definitions. When used herein the following terms shall have the
-----------
following meanings:
Account Debtor means any Person who is obligated to the Company or any
--------------
Subsidiary under an Account Receivable.
Account Receivable means, with respect to any Person, any right of such
------------------
person to payment for goods sold or leased or for services rendered, whether or
not evidenced by an instrument or chattel paper and whether or not yet earned by
performance.
Acquisition means any transaction or series of related transactions for the
-----------
purpose of or resulting, directly or indirectly, in (a) the acquisition of all
or substantially all of the assets of a Person, or of all or substantially all
of any business or division of a Person, (b) the acquisition of in excess of 50%
of the capital stock, partnership interests, membership interests or equity of
any Person, or otherwise causing any Person to become a Subsidiary, or (c) a
merger or consolidation or any other combination with another Person (other than
a Person that is a Subsidiary).
Affected Loan - see Section 8.3.
------------- -----------
Affiliate of any Person means (i) any other Person which, directly or
---------
indirectly, controls or is controlled by or is under common control with such
Person and (ii) any officer or director of such Person. A Person shall be
deemed to be "controlled by" any other Person if such Person possesses, directly
or indirectly, power to vote 5% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election of directors or managers or
power to direct or cause the direction of the management and policies of such
Person whether by contract or otherwise.
Agreement - see the Preamble.
--------- --------
<PAGE>
Asset Sale means the sale, lease, assignment or other transfer for value
----------
(each a "Disposition") by the Company or any Subsidiary to any Person (other
than the Company or any Subsidiary) of any asset or right of the company or such
Subsidiary other than (a) the Disposition of any asset which is to be replaced,
and is in fact replaced, within 30 days with another asset performing the same
or a similar function, (b) the sale or lease of inventory in the ordinary course
of business.
Assignment Agreement - see Section 14.9.1.
-------------------- --------------
Attorney Costs means, with respect to any Person, all reasonable fees and
--------------
charges of any counsel to such Person, the reasonable allocable cost of internal
legal services of such Person, all reasonable disbursements of such internal
counsel and all court costs and similar legal expenses.
Base Rate means at any time the greater of (a) the Federal Funds Rate plus
---------
0.5% and (b) the Prime Rate.
Base Rate Loan means any Loan which bears interest at or by reference to
--------------
the Base Rate.
Base Rate Margin equals 2.00% per annum.
----------------
Business Day means any day on which Lender is open for commercial banking
------------
business in Chicago, Illinois and, in the case of a Business Day which relates
to a Eurodollar Loan, on which dealings are carried on in the London interbank
eurodollar market.
Capital Expenditures means all expenditures which, in accordance with GAAP,
--------------------
would be required to be capitalized and shown on the consolidated balance sheet
of the Company (provided, however, that such balance sheet shall exclude the
assets and liabilities of MPM), but excluding expenditures made in connection
with the replacement, substitution or restoration of assets to the extent
financed (i) from insurance proceeds (or other similar recoveries) paid on
account of the loss of or damage to the assets being replaced or restored or
(ii) with awards of compensation arising from the taking by eminent domain or
condemnation of the assets being replaced.
Capital Lease means, with respect to any Person, any lease of (or other
-------------
agreement conveying the right to use) any real or personal property by such
Person that, in conformity with GAAP, is accounted for as a capital lease on the
balance sheet of such Person.
Cash Equivalent Investment means, at any time, (a) any evidence of Debt,
--------------------------
maturing not more than one year after such time, issued or guaranteed by the
United States Government or any agency thereof, (b) commercial paper, maturing
not more than one year from the date of issue, or corporate demand notes, in
each case (unless issued by Lender or its holding company) rated at least A-l by
Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc., (c)
any certificate of deposit (or time deposits represented by such certificates of
deposit) or banker's acceptance, maturing not more than one year after such
time, or overnight Federal Funds
2
<PAGE>
transactions that are issued or sold by Lender or its holding company or by a
commercial banking institution that is a member of the Federal Reserve System
and has a combined capital and surplus and undivided profits of not less than
$500,000,000 and (d) any repurchase agreement entered into with Lender (or other
commercial banking institution of the stature referred to in clause (c)) which
----------
(i) is secured by a fully perfected security interest in any obligation of the
type described in any of clauses (a) through (c) and (ii) has a market value
----------- ---
at the time such repurchase agreement is entered into of not less than 100% of
the repurchase obligation of Lender (or other commercial banking institution)
thereunder.
CERCLA - see Section 9.15.
------ ------------
Closing Date - see Section 11.1.
------------ ------------
Code means the Internal Revenue Code of 1986.
----
Collateral Documents means the Security Agreement, any Mortgage and any
--------------------
other agreement or instrument pursuant to which the Company, any Subsidiary or
any other Person grants collateral to Lender.
Commitment means Lender's commitment to make Loans under this Agreement.
----------
Company - see the Preamble.
------- --------
Consolidated Net Income means, with respect to the Company and its
-----------------------
Subsidiaries for any period, the net income (or loss) of the Company and its
Subsidiaries for such period, excluding any gains from Asset Sales, any
---------
extraordinary gains and any gains from discontinued operations.
Controlled Group means all members of a controlled group of corporations
----------------
and all members of a controlled group of trades or businesses (whether or not
incorporated) under common control which, together with the Company, are treated
as a single employer under Section 414 of the Code or Section 4001 of ERISA.
Debt of any Person means, without duplication, (a) all indebtedness of such
----
Person for borrowed money, whether or not evidenced by bonds, debentures, notes
or similar instruments, (b) all obligations of such Person as lessee under
Capital Leases which have been or should be recorded as liabilities on a balance
sheet of such Person in accordance with GAAP, (c) all obligations of such Person
to pay the deferred purchase price of property or services (excluding trade
accounts payable in the ordinary course of business, employment contracts in the
ordinary course of business and consulting contracts of a non-cancelable term of
less than two years for which the Company is not required to maintain reserves
or account for as a liability under GAAP), (d) all indebtedness secured by a
Lien on the property of such Person, whether or not such indebtedness shall have
been assumed by such Person, (e) all obligations, contingent or otherwise, with
respect to the face amount of all letters of credit (whether or not drawn) and
banker's
3
<PAGE>
acceptances issued for the account of such Person, (f) all Hedging Obligations
of such Person, (g) all Suretyship Liabilities of such Person and (h) all Debt
of any partnership of which such Person is a general partner.
Debt to be Repaid means Debt listed on Schedule 11.1.
----------------- -------------
Designated Proceeds - see Section 6.2.2(a).
------------------- ----------------
Disposal - see the definition of "Release".
-------- -------
Dollar and the sign "$" mean lawful money of the United States of America.
------ -
EBITDA means, for any period, Consolidated Net Income for such period plus,
------ ----
to the extent deducted in determining such Consolidated Net Income, Interest
Expense, income tax expense, depreciation and amortization for such period, and
non-cash expenses relating to compensation to employees of the Company arising
in connection with stock options granted to such employees as of the date
hereof.
Environmental Claims means all claims, however asserted, by any
--------------------
governmental, regulatory or judicial authority or other Person alleging
potential liability or responsibility for violation of any Environmental Law, or
for release or injury to the environment.
Environmental Laws means all present or future federal, state or local
------------------
laws, statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any governmental authority,
in each case relating to Environmental Matters.
Environmental Matters means any matter arising out of or relating to health
---------------------
and safety, or pollution or protection of the environment or workplace,
including any of the foregoing relating to the presence, use, production,
generation, handling, transport, treatment, storage, disposal, distribution,
discharge, release, control or cleanup of any Hazardous Substance.
ERISA means the Employee Retirement Income Security Act of 1974.
-----
Eurocurrency Reserve Percentage means, with respect to any Eurodollar Loan
-------------------------------
for any Interest Period, a percentage (expressed as a decimal) equal to the
daily average during such Interest Period of the percentage in effect on each
day of such Interest Period, as prescribed by the FRB, for determining the
aggregate maximum reserve requirements applicable to "Eurocurrency Liabilities"
pursuant to Regulation D or any other then applicable regulation of the FRB
which prescribes reserve requirements applicable to "Eurocurrency Liabilities"
as presently defined in Regulation D.
4
<PAGE>
Eurodollar Loan means any Loan which bears interest at a rate determined by
---------------
reference to the Eurodollar Rate (Reserve Adjusted).
Eurodollar Margin equals 3.50% per annum.
-----------------
Eurodollar Office means with respect to Lender the office or offices of
-----------------
Lender which shall be making or maintaining the Eurodollar Loans of Lender
hereunder. A Eurodollar Office of Lender may be, at the option of Lender,
either a domestic or foreign office.
Eurodollar Rate means, with respect to any Eurodollar Loan for any Interest
---------------
Period, a rate per annum equal to the offered rate for deposits in Dollars for a
period equal or comparable to such Interest Period which appears on Telerate
page 3750 as of 11:00 A.M. (London time) two Business Days prior to the first
day of such Interest Period. "Telerate Page 3750" means the display designated
as "Page 3750" on the Telerate Service (or such other page as may replace page
3750 on that service or such other service as may be nominated by the British
Bankers' Association as the information vendor for the purpose of displaying
British Bankers' Association Interest Settlement Rates for Dollar deposits).
Eurodollar Rate (Reserve Adjusted) means, with respect to any Eurodollar
----------------------------------
Loan for any Interest Period, a rate per annum (rounded upwards, if necessary,
to the nearest 1/16th of 1%) determined pursuant to the following formula:
Eurodollar Rate = Eurodollar Rate
---------------
(Reserve Adjusted) 1-Eurocurrency
Reserve Percentage.
Event of Default means any of the events described in Section 12.1.
---------------- ------------
Federal Funds Rate means, for any day, the rate set forth in the weekly
------------------
statistical release designated as H.15(519), or any successor publication,
published by the Federal Reserve Bank of New York (including any such successor
publication, "H.15(519)") on the preceding Business Day opposite the caption
"Federal Funds (Effective)"; or, if for any relevant day such rate is not so
published on any such preceding Business Day, the rate for such day will be the
arithmetic mean as determined by Lender of the rates for the last transaction in
overnight Federal funds arranged prior to 9:00 A.M. (New York City time) on that
day by each of three leading brokers of Federal funds transactions in New York
City selected by Lender.
Fiscal Quarter means a fiscal quarter of a Fiscal Year.
--------------
Fiscal Year means the fiscal year of the Company and its Subsidiaries,
-----------
which period shall be the 12-month period ending on December 31 of each year.
References to a Fiscal Year with a number corresponding to any calendar year
(e.g., "Fiscal Year 1998") refer to the Fiscal Year ending on December 31 of
such calendar year.
FRB means the Board of Governors of the Federal Reserve System or any
---
successor thereto.
5
<PAGE>
Funded Debt means, as to any Person, all Debt of such Person that matures
-----------
more than one year from the date of its creation (or is renewable or extendible,
at the option of such Person, to a date more than one year from such date).
GAAP means generally accepted accounting principles set forth from time to
----
time in the opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date of
determination.
Group - see Section 2.2.1.
----- -------------
Guaranty means a guaranty substantially in the form of Exhibit C.
-------- ---------
Hazardous Substances - see Section 9.15.
-------------------- ------------
Hedging Agreement means any interest rate, currency or commodity swap
-----------------
agreement, cap agreement or collar agreement, and any other agreement or
arrangement designed to protect a Person against fluctuations in interest rates,
currency exchange rates or commodity prices.
Hedging Obligation means, with respect to any Person, any liability of such
------------------
Person under any Hedging Agreement.
Interest Expense means for any period the consolidated interest expense of
----------------
the Company and its Subsidiaries for such period (including all imputed interest
on Capital Leases).
Interest Period means, as to any Eurodollar Loan, the period commencing on
---------------
the date such Loan is borrowed or continued as, or converted into, a Eurodollar
Loan and ending on the date one, two or three months thereafter as selected by
the Company pursuant to Section 2.2.2 or 2.2.3, as the case may be; provided
------------- ----- --------
that:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, such Interest Period shall be extended to the
following Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month, in which event
such Interest Period shall end on the preceding Business Day;
(ii) any Interest Period that begins on a day for which there is
no numerically corresponding day in the calendar month at the end of
such Interest Period shall end on the last Business Day of the
calendar month at the end of such Interest Period; and
6
<PAGE>
(iii) the Company may not select any Interest Period for a
Revolving Loan which would extend beyond the scheduled Termination
Date.
Inventory has the meaning assigned to such term in the Uniform Commercial
---------
Code as in effect in the State of Illinois on the date hereof.
Investment means, relative to any Person, any investment in another Person,
----------
whether by acquisition of any debt or equity security, by making any loan or
advance or by becoming obligated with respect to a Suretyship Liability in
respect of obligations of such other Person (other than travel and similar
advances to employees in the ordinary course of business).
Lender - See the Preamble.
------ --------
Lien means, with respect to any Person, any interest granted by such Person
----
in any real or personal property, asset or other right owned or being purchased
or acquired by such Person which secures payment or performance of any
obligation and shall include any mortgage, lien, encumbrance, charge or other
security interest of any kind, whether arising by contract, as a matter of law,
by judicial process or otherwise.
Loan Documents means this Agreement, the Note, any Guaranty, and the
--------------
Collateral Documents.
Loan Party means the Company, MPM and each Subsidiary.
----------
Loans means Revolving Loans.
-----
Mandatory Repayment Event - see Section 6.2.2(a).
------------------------- ----------------
Margin Stock means any "margin stock" as defined in Regulation U.
------------
Material Adverse Effect means (a) a material adverse change in, or a
-----------------------
material adverse effect upon, the financial condition, operations, assets,
business, properties or prospects of the Company, its Subsidiaries and MPM taken
as a whole, (b) a material impairment of the ability of the Company, any
Subsidiary and MPM, as applicable, to perform any of its obligations under any
Loan Document or (c) a material adverse effect upon any substantial portion of
the collateral under the Collateral Documents or upon the legality, validity,
binding effect or enforceability against the Company, any Subsidiary and MPM of
any Loan Document.
MPM means Armed Forces Communications, Inc., a New York corporation, d/b/a
---
"Market Place Media".
7
<PAGE>
MPM Acquisition means the acquisition by the Company on or before September
---------------
30, 1999 of all or substantially all of the issued and outstanding stock of MPM
pursuant to and in accordance with the terms and provisions of the MPM Purchase
Agreement.
MPM Purchase Agreement means that certain Stock Purchase Agreement dated as
----------------------
of July 16, 1999 by and among the Company, MPM and the Sellers.
Mortgage means a mortgage, deed of trust, leasehold mortgage or similar
--------
instrument granting Lender a Lien on real property of the Company or any
Subsidiary.
Multiemployer Pension Plan means a multiemployer plan, as defined in
--------------------------
Section 4001(a)(3) of ERISA, to which the Company or any member of the
Controlled Group may have any liability.
Net Cash Proceeds means:
-----------------
(a) with respect to any Asset Sale the aggregate cash proceeds (including
cash proceeds received by way of deferred payment of principal
pursuant to a note, installment receivable or otherwise, but only as
and when received) received by the Company or any Subsidiary pursuant
to such Asset Sale net of (i) the direct costs relating to such sale,
transfer or other disposition (including sales commissions and legal,
accounting and investment banking fees), (ii) taxes paid or reasonably
estimated by the Company to be payable as a result thereof (after
taking into account any available tax credits or deductions and any
tax sharing arrangements) and (iii) amounts required to be applied to
the repayment of any Debt secured by a Lien on the asset subject to
such Asset Sale (other than the Loans);
(b) with respect to any issuance of equity securities, the aggregate cash
proceeds received by the Company or any Subsidiary pursuant to such
issuance, net of the direct costs relating to such issuance (including
sales and underwriter's commission; and
(c) with respect to any issuance of Debt, the aggregate cash proceeds
received by the Company or any Subsidiary pursuant to such issuance,
net of the direct costs of such issuance (including up-front fees and
placement fees).
Non-Use Fee Rate equals 0.50% per annum.
----------------
Note - see Section 3.1.
---- -----------
Operating Lease means any lease of (or other agreement conveying the right
---------------
to use) any real or personal property by the Company or any Subsidiary, as
lessee, other than any Capital Lease.
8
<PAGE>
PBGC means the Pension Benefit Guaranty Corporation and any entity
----
succeeding to any or all of its functions under ERISA.
Pension Plan means a "pension plan", as such term is defined in Section
------------
3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer
Pension Plan), and to which the Company or any member of the Controlled Group
may have any liability, including any liability by reason of having been a
substantial employer within the meaning of Section 4063 of ERISA at any time
during the preceding five years, or by reason of being deemed to be a
contributing sponsor under Section 4069 of ERISA.
Person means any natural person, corporation, partnership, trust, limited
------
liability company, association, governmental authority or unit, or any other
entity, whether acting in an individual, fiduciary or other capacity.
Pledge Agreement means a pledge agreement in substantially the form of
----------------
Exhibit E.
- ---------
Prime Rate means, for any day, the rate of interest in effect for such day
----------
as publicly announced from time to time by Lender as its prime rate (whether or
not such rate is actually charged by Lender and which rate is not necessarily
the lowest rate charged by Lender to its customers). Any change in the Prime
Rate announced by Lender shall take effect at the opening of business on the day
specified in the public announcement of such change.
Public Reports means Form 10Q, Form 10KSB, Form 10K and/or Form 8K filed
--------------
pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
RCRA - see Section 9.15.
---- ------------
Regulation D means Regulation D of the FRB.
------------
Regulation U means Regulation U of the FRB.
------------
Release has the meaning specified in CERCLA and the term "Disposal" (or
------- --------
"Disposed") has the meaning specified in RCRA; provided that in the event either
- --------- --------
CERCLA or RCRA is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply as of the effective date of such
amendment; and provided, further, that to the extent that the laws of a state
-------- -------
wherein any affected property lies establish a meaning for "Release" or
-------
"Disposal" which is broader than is specified in either CERCLA or RCRA, such
- ---------
broader meaning shall apply.
Revolving Commitment Amount means $12,000,000, as reduced from time to time
---------------------------
pursuant to Section 6.1.
-----------
Revolving Loan - see Section 2.1.
-------------- -----------
9
<PAGE>
Revolving Outstandings means, at any time, the aggregate principal amount
----------------------
of all outstanding Revolving Loans.
SEC means the Securities and Exchange Commission or any other governmental
---
authority succeeding to any of the principal functions thereof.
Security Agreement means a security agreement substantially in the form of
------------------
Exhibit D.
- ---------
Sellers means Colleen Gordon and Kevin West, jointly, as sellers under the
-------
MPM Purchase Agreement, including any successor, heir, legatee or permitted
assignee of either such Person.
Senior Debt means all Debt of the Company and its Subsidiaries other than
-----------
Subordinated Debt.
Subordinated Debt means any unsecured Debt of the Company which has
-----------------
subordination terms, covenants, pricing and other terms which have been approved
in writing by Lender.
Subsidiary means, with respect to any Person, a corporation, partnership,
----------
limited liability company or other entity of which such Person and/or its other
Subsidiaries own, directly or indirectly, such number of outstanding shares or
other ownership interests as have more than 50% of the ordinary voting power for
the election of directors or other managers of such corporation, partnership,
limited liability company or other entity; provided, however, that unless
-------- -------
otherwise expressly stated, MPM shall not be deemed a Subsidiary of the Company
for purposes of this Agreement. Unless the context otherwise requires, each
reference to Subsidiaries herein shall be a reference to Subsidiaries of the
Company.
Suretyship Liability means any agreement, undertaking or arrangement by
--------------------
which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to or otherwise to invest in a
debtor, or otherwise to assure a creditor against loss) any indebtedness,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Person's obligation in respect of any Suretyship Liability shall (subject to any
limitation set forth therein) be deemed to be the principal amount of the debt,
obligation or other liability supported thereby.
Termination Date means the earlier to occur of (a) December 29, 2000, or
----------------
(b) such other date on which the Commitments terminate pursuant to Section 6 or
---------
12.
- --
Type of Loan or Borrowing - see Section 2.2.1. The types of Loans or
------------------------- -------------
borrowings under this Agreement are as follows: Base Rate Loans or borrowings
and Eurodollar Loans or borrowings.
10
<PAGE>
UC Holdings - see Section 11.1.
----------- ------------
Unmatured Event of Default means any event that, if it continues uncured,
--------------------------
will, with lapse of time or notice or both, constitute an Event of Default.
Warrants means those certain warrants issued by the Company to certain
--------
shareholders in connection with a private placement of securities by the Company
in 1997, for approximately 1,200,000 shares of common stock of the Company, each
with an exercise price as of the date hereof of $6.03 per share.
Wholly-Owned Subsidiary means, as to any Person (including, without
-----------------------
limitation, MPM), another Person (including, without limitation, MPM) all of the
shares of capital stock or other ownership interests of which (except directors'
qualifying shares) are at the time directly or indirectly owned by such Person
and/or another Wholly-Owned Subsidiary of such Person.
Year 2000 Problem means the risk that computer applications and embedded
-----------------
microchips in non-computing devices may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999.
1.2 Other Interpretive Provisions. (a) The meanings of defined terms are
-----------------------------
equally applicable to the singular and plural forms of the defined terms.
(b) Section, Schedule and Exhibit references are to this Agreement unless
------- -------- -------
otherwise specified.
(c) The term "including" is not limiting and means "including without
limitation."
(d) In the computation of periods of time from a specified date to a later
specified date, the word "from" means "from and including"; the words "to" and
"until" each mean "to but excluding", and the word "through" means "to and
including."
(e) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all subsequent amendments and other modifications thereto, but
only to the extent such amendments and other modifications are not prohibited by
the terms of any Loan Document, and (ii) references to any statute or regulation
shall be construed as including all statutory and regulatory provisions
amending, replacing, supplementing or interpreting such statute or regulation.
(f) This Agreement and the other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and each shall be
performed in accordance with its terms.
11
<PAGE>
(g) This Agreement and the other Loan Documents are the result of
negotiations among and have been reviewed by counsel to Lender, counsel to the
Company, Lender and the Company and are the products of all such Persons.
Accordingly, they shall not be construed against Lender merely because of the
involvement of Lender or Lender's counsel in their preparation.
SECTION 2 COMMITMENTS OF LENDER; BORROWING, CONVERSION
2.1 Commitments. On and subject to the terms and conditions of this
-----------
Agreement, Lender agrees to make loans on a revolving basis ("Revolving Loans")
---------------
from time to time until the Termination Date as the Company may request from
Lender; provided that the Revolving Outstandings will not at any time exceed the
--------
Revolving Commitment Amount.
2.2 Loan Procedures.
---------------
2.2.1 Various Types of Loans. Each Revolving Loan shall be divided into
----------------------
tranches which are, either a Base Rate Loan or a Eurodollar Loan (each a "type"
----
of Loan), as the Company shall specify in the related notice of borrowing or
conversion pursuant to Section 2.2.2 or 2.2.3. Eurodollar Loans having the same
------------- -----
Interest Period are sometimes called a "Group" or collectively "Groups". Base
----- ------
Rate Loans and Eurodollar Loans may be outstanding at the same time, provided
--------
that not more than three different Groups of Eurodollar Loans shall be
outstanding at any one time.
2.2.2 Borrowing Procedures. The Company shall give written notice or
--------------------
telephonic notice (followed immediately by written confirmation thereof) to
Lender of each proposed borrowing not later than (a) in the case of a Base Rate
borrowing, 11:00 A.M., Chicago time, on the proposed date of such borrowing, and
(b) in the case of a Eurodollar borrowing, 11:00 A.M., Chicago time, at least
three Business Days prior to the proposed date of such borrowing. Each such
notice shall be effective upon receipt by Lender, shall be irrevocable, and
shall specify the date, amount and type of borrowing and, in the case of a
Eurodollar borrowing, the initial Interest Period therefor. Not later than 1:00
P.M., Chicago time, on the date of a proposed borrowing, so long as Lender has
not received written notice that the conditions precedent set forth in Section
-------
11 with respect to such borrowing have not been satisfied, Lender shall pay over
- --
the funds to the Company on the requested borrowing date. Each borrowing shall
be on a Business Day. Each Base Rate borrowing shall be in an aggregate amount
of at least $100,000 and an integral multiple of $100,000, and each Eurodollar
borrowing shall be in an aggregate amount of at least $500,000 and an integral
multiple of at least $100,000.
2.2.3 Conversion and Continuation Procedures. (a) Subject to Section
-------------------------------------- -------
2.2.1, the Company may, upon irrevocable written notice to Lender in accordance
- -----
with clause (b) below:
----------
(i) elect, as of any Business Day, to convert any Loans (or any
part thereof in an aggregate amount not less than $500,000 a higher
integral multiple of $100,000) into Loans of the other type; or
12
<PAGE>
(ii) elect, as of the last day of the applicable Interest
Period, to continue any Eurodollar Loans having Interest Periods
expiring on such day (or any part thereof in an aggregate amount not
less than $500,000 or a higher integral multiple of $100,000) for a
new Interest Period;
provided that after giving effect to any repayment, conversion or continuation,
- --------
the aggregate principal amount of each Group of Eurodollar Loans shall be at
least $500,000 and an integral multiple of $100,000.
(b) The Company shall give written or telephonic (followed
immediately by written confirmation thereof) notice to Lender of each proposed
conversion or continuation not later than (i) in the case of conversion into
Base Rate Loans, 11:00 A.M., Chicago time, on the proposed date of such
conversion and (ii) in the case of conversion into or continuation of Eurodollar
Loans, 11:00 A.M., Chicago time, at least three Business Days prior to the
proposed date of such conversion or continuation, specifying in each case:
(i) the proposed date of conversion or continuation;
(ii) the aggregate amount of Loans to be converted or continued;
(iii) the type of Loans resulting from the proposed conversion or
continuation; and
(iv) in the case of conversion into, or continuation of,
Eurodollar Loans, the duration of the requested Interest Period
therefor.
(c) If upon the expiration of any Interest Period applicable to
Eurodollar Loans, the Company has failed to select timely a new Interest Period
to be applicable to such Eurodollar Loans, the Company shall be deemed to have
elected to convert such Eurodollar Loans into Base Rate Loans effective on the
last day of such Interest Period.
(d) Lender will, if no timely notice is provided by the Company,
notify the Company of the details of any automatic conversion.
(e) Any conversion of a Eurodollar Loan on a day other than the last
day of an Interest Period therefor shall be subject to Section 8.4.
-----------
2.3 Intentionally Omitted
---------------------
2.4 Certain Conditions. Notwithstanding any other provision of this
------------------
Agreement, Lender shall not have an obligation to make any Loan, or to permit
the continuation of or any conversion into any Eurodollar Loan, if an Event of
Default or Unmatured Event of Default exists.
13
<PAGE>
SECTION 3 NOTE EVIDENCING LOANS.
3.1 Note. The Loans shall be evidenced by a promissory note (the "Note")
---- ----
substantially in the form set forth in Exhibit A, with appropriate insertions,
---------
payable to the order of Lender in a face principal amount equal to the Revolving
Commitment Amount. Each Revolving Loan shall be paid in full on the Termination
Date.
3.2 Recordkeeping. Lender shall record in its records, or at its option
-------------
on the schedule attached to its Note, the date and amount of each Loan made by
it, each repayment or conversion thereof and, in the case of each Eurodollar
Loan, the dates on which each Interest Period for such Loan shall begin and end.
The aggregate unpaid principal amount so recorded shall be rebuttable
presumptive evidence of the principal amount owing and unpaid on such Note. The
failure to so record any such amount or any error in so recording any such
amount shall not, however, limit or otherwise affect the obligations of the
Company hereunder or under any Note to repay the principal amount of the Loans
evidenced by such Note together with all interest accruing thereon.
SECTION 4 INTEREST.
4.1 Interest Rates. The Company promises to pay interest on the unpaid
--------------
principal amount of each Loan for the period commencing on the date of such Loan
until such Loan is paid in full as follows:
(a) at all times while such Loan is a Base Rate Loan, at a rate per annum
equal to the sum of the Base Rate from time to time in effect plus the Base Rate
Margin from time to time in effect; and
(b) at all times while such Loan is a Eurodollar Loan, at a rate per annum
equal to the sum of the Eurodollar Rate (Reserve Adjusted) applicable to each
Interest Period for such Loan plus the Eurodollar Margin from time to time in
effect;
provided that at any time an Event of Default exists, if requested by Lender,
- --------
the interest rate applicable to each Loan shall be increased by two percent
(2.0%).
4.2 Interest Payment Dates. Accrued interest on each Base Rate Loan shall
----------------------
be payable in arrears on the last day of each month and at maturity. Accrued
interest on each Eurodollar Loan shall be payable on the last day of each
Interest Period relating to such Loan and at maturity. After maturity, accrued
interest on all Loans shall be payable on demand. If the date on which any
interest payment is due in accordance herewith is not a Business Day, then such
payment shall be due on the next day immediately following that is a Business
Day and interest shall continue to accrue.
4.3 Setting and Notice of Eurodollar Rates. The applicable Eurodollar
--------------------------------------
Rate for each Interest Period shall be determined by Lender, and notice thereof
shall be given by Lender
14
<PAGE>
promptly to the Company. Each determination of the applicable Eurodollar Rate by
Lender shall be conclusive and binding upon the parties hereto, in the absence
of demonstrable error. Lender shall, upon written request of the Company,
deliver to the Company a statement showing the computations used by Lender in
determining any applicable Eurodollar Rate hereunder.
4.4 Computation of Interest. Interest shall be computed for the actual
-----------------------
number of days elapsed on the basis of a year of 360 days. The applicable
interest rate for each Base Rate Loan shall change simultaneously with each
change in the Base Rate.
SECTION 5 FEES.
5.1 Non-Use Fee. The Company agrees to pay to Lender a non-use fee, for
-----------
the period from the Closing Date to the Termination Date, at the Non-Use Fee
Rate in effect from time to time of the unused amount of the Revolving
Commitment Amount. For purposes of calculating usage under this Section, the
Revolving Commitment Amount shall be deemed used to the extent of the aggregate
principal amount of all outstanding Revolving Loans. Such non-use fee shall be
payable in arrears on the last day of each calendar quarter and on the
Termination Date for any period then ending for which such non-use fee shall not
have previously been paid. The non-use fee shall be computed for the actual
number of days elapsed on the basis of a year of 360 days.
5.2 Intentionally Omitted.
---------------------
5.3 Upfront Fees. The Company agrees to pay to Lender on the Closing Date
------------
an upfront fee in the amount equal to $240,000, representing 2.00% of the
Revolving Commitment Amount.
SECTION 6 REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT;
REPAYMENTS.
6.1 Reduction or Termination of the Revolving Commitment Amount.
-----------------------------------------------------------
6.1.1 Voluntary Reduction or Termination of the Revolving Commitment
--------------------------------------------------------------
Amount. The Company may from time to time on at least five Business Days' prior
- ------
written notice received by Lender permanently reduce the Revolving Commitment
Amount to an amount not less than the Revolving Outstandings. Any such
reduction shall be in an amount not less than $500,000 or a higher integral
multiple of $100,000. Concurrently with any reduction of the Revolving
Commitment Amount to zero, the Company shall pay all interest on the Revolving
Loans, and all non-use fees.
6.1.2 Mandatory Reductions of Revolving Commitment Amount. On the date of
---------------------------------------------------
any Mandatory Repayment Event, the Revolving Commitment Amount shall be
permanently reduced by an amount (if any) equal to the Designated Proceeds of
such Mandatory Repayment Event.
15
<PAGE>
6.2 Repayments.
----------
6.2.1 Voluntary Repayments. The Company may from time to time repay the
--------------------
Loans in whole or in part; provided that the Company shall give Lender notice
--------
thereof not later than 11:00 A.M., Chicago time, on the day of such repayment
(which shall be a Business Day), specifying the Loans to be prepaid and the date
and amount of repayment. Any such partial repayment shall be in a principal
amount equal to $100,000 or a higher integral multiple of $100,000. Amounts
repaid by the Company pursuant to this subsection 6.2.1 may be reborrowed in
accordance with and subject to the provisions of this Agreement.
6.2.2 Mandatory Repayments. (a) The Company shall make a repayment of the
--------------------
Loans upon the occurrence of any of the following (each a "Mandatory Repayment
-------------------
Event") at the following times and in the following amounts (such applicable
- -----
amounts being referred to as "Designated Proceeds"):
-------------------
(i) Concurrently with the receipt by the Company or any Subsidiary of
any Net Cash Proceeds from any Asset Sale, in an amount equal to
100% of such Net Cash Proceeds.
(ii) Concurrently with the receipt by the Company or any Subsidiary of
any Net Cash Proceeds from any issuance of equity securities of
the Company or any Subsidiary (excluding (a) any issuance of
shares of capital stock pursuant to any employee or director
stock option program, benefit plan or compensation program, (b)
any issuance by a Subsidiary to the Company or another
Subsidiary, (c) in connection with the equity contribution
required pursuant to subsection 11.1 hereof, (d) in connection
with the exercise of the Warrants, and (e) any issuance of shares
of capital stock to UC Holdings in an amount equal to not more
than $25,000,000 for purposes of financing the MPM Acquisition,
provided that such funds are actually utilized by the Company in
connection with consummating the MPM Acquisition), in an amount
equal to 100% of such Net Cash Proceeds.
(iii) Concurrently with the receipt by the Company or any Subsidiary
of any Net Cash Proceeds from any issuance of any Debt of the
Company or any Subsidiary (excluding Debt permitted by clauses
(a) through (h) of Section 10.7), in an amount equal to 100% of
------------
such Net Cash Proceeds.
(b) If on any day on which the Revolving Commitment Amount is reduced
pursuant to Section 6.1.2 the Revolving Outstandings exceed the Revolving
-------------
Commitment Amount, the Company shall immediately repay Revolving Loans in an
amount sufficient to eliminate such excess.
16
<PAGE>
6.3 All Repayments. Any partial repayment or prepayment of a Group of
--------------
Eurodollar Loans shall be subject to the proviso to Section 2.2.3(a). Any
----------------
repayment or prepayment of a Eurodollar Loan on a day other than the last day of
an Interest Period therefor shall include interest on the principal amount being
repaid and shall be subject to Section 8.4.
-----------
SECTION 7 MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES.
7.1 Making of Payments. All payments of principal of or interest on the
------------------
Note, and of all fees, shall be made by the Company to Lender in immediately
available funds at the office specified by Lender not later than noon, Chicago
time, on the date due; and funds received after that hour shall be deemed to
have been received by Lender on the following Business Day.
7.2 Application of Certain Payments. Each payment of principal shall be
-------------------------------
applied to such Loans as the Company shall direct by notice to be received by
Lender on or before the date of such payment or, in the absence of such notice,
as Lender shall determine in its discretion.
7.3 Due Date Extension. If any payment of principal or interest with
------------------
respect to any of the Loans, or of any fees, falls due on a day which is not a
Business Day, then such due date shall be extended to the immediately following
Business Day (unless, in the case of a Eurodollar Loan, such immediately
following Business Day is the first Business Day of a calendar month, in which
case such due date shall be the immediately preceding Business Day) and, in the
case of principal, additional interest shall accrue and be payable for the
period of any such extension.
7.4 Setoff. The Company agrees that Lender has all rights of set-off and
------
bankers' lien provided by applicable law, and in addition thereto, the Company
agrees that at any time any Event of Default exists, Lender may apply to the
payment of any obligations of the Company hereunder, whether or not then due,
any and all balances, credits, deposits, accounts or moneys of the Company then
or thereafter with Lender.
7.5 Intentionally Omitted.
---------------------
7.6 Taxes. All payments of principal of, and interest on, the Loans and
-----
all other amounts payable hereunder shall be made free and clear of and without
deduction for any present or future income, excise, stamp or franchise taxes and
other taxes, fees, duties, withholdings or other charges of any nature
whatsoever imposed by any taxing authority, excluding franchise taxes and taxes
imposed on or measured by Lender's net income or receipts (all non-excluded
items being called "Taxes"). If any withholding or deduction from any payment
-----
to be made by the Company hereunder is required in respect of any Taxes pursuant
to any applicable law, rule or regulation, then the Company will:
(a) pay directly to the relevant authority the full amount required to
be so withheld or deducted;
17
<PAGE>
(b) promptly forward to Lender an official receipt or other
documentation satisfactory to Lender evidencing such payment to such
authority; and
(c) pay to Lender such additional amount or amounts as is necessary to
ensure that the net amount actually received by Lender will equal the full
amount Lender would have received had no such withholding or deduction been
required.
Moreover, if any Taxes are directly asserted against Lender with respect to any
payment received by Lender hereunder, Lender may pay such Taxes and the Company
will promptly pay such additional amounts (including any penalty, interest or
expense) as is necessary in order that the net amount received by such Person
after the payment of such Taxes (including any Taxes on such additional amount)
shall equal the amount such Person would have received had such Taxes not been
asserted.
If the Company fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to Lender the required receipts or other required
documentary evidence, the Company shall indemnify Lender for any incremental
Taxes, interest or penalties that may become payable by Lender as a result of
any such failure.
SECTION 8 INCREASED COSTS; SPECIAL PROVISIONS FOR EURODOLLAR LOANS.
8.1 Increased Costs. (a) If, after the date hereof, the adoption of, or
---------------
any change in, any applicable law, rule or regulation, or any change in the
interpretation or administration of any applicable law, rule or regulation by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender (or any
Eurodollar Office of Lender) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency
(i) shall subject Lender (or any Eurodollar Office of Lender) to any
tax, duty or other charge with respect to its Eurodollar Loans, its Note or
its obligation to make Eurodollar Loans, or shall change the basis of
taxation of payments to Lender of the principal of or interest on its
Eurodollar Loans or any other amounts due under this Agreement in respect
of its Eurodollar Loans or its obligation to make Eurodollar Loans (except
for changes in the rate of tax on the overall net income of Lender or its
Eurodollar Office imposed by the jurisdiction in which Lender's principal
executive office or Eurodollar Office is located);
(ii) shall impose, modify or deem applicable any reserve (including
any reserve imposed by the FRB, but excluding any reserve included in the
determination of interest rates pursuant to Section 4), special deposit or
---------
similar requirement against assets of, deposits with or for the account of,
or credit extended by Lender (or any Eurodollar Office of Lender); or
18
<PAGE>
(iii) shall impose on Lender (or its Eurodollar Office) any other
condition affecting its Eurodollar Loans, its Note or its obligation to
make Eurodollar Loans;
and the result of any of the foregoing is to increase the cost to (or to impose
a cost on) Lender (or any Eurodollar Office of Lender) of making or maintaining
any Eurodollar Loan, or to reduce the amount of any sum received or receivable
by Lender (or its Eurodollar Office) under this Agreement or under its Note with
respect thereto, then upon demand by Lender (which demand shall be accompanied
by a statement setting forth the basis for such demand and a calculation of the
amount thereof in reasonable detail, a copy of which shall be furnished to
Lender), the Company shall pay directly to Lender such additional amount as will
compensate Lender for such increased cost or such reduction.
(b) If Lender shall reasonably determine that any change in, the adoption
or phase-in of, any applicable law, rule or regulation regarding capital
adequacy, or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Lender or any Person
controlling Lender with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on Lender's or such controlling Person's capital as a consequence of Lender's
obligations hereunder to a level below that which Lender or such controlling
Person could have achieved but for such change, adoption, phase-in or compliance
(taking into consideration Lender's or such controlling Person's policies with
respect to capital adequacy) by an amount deemed by Lender or such controlling
Person to be material, then from time to time, upon demand by Lender (which
demand shall be accompanied by a statement setting forth the basis for such
demand and a calculation of the amount thereof in reasonable detail, a copy of
which shall be furnished to Lender), the Company shall pay to Lender such
additional amount as will compensate Lender or such controlling Person for such
reduction.
8.2 Basis for Determining Interest Rate Inadequate or Unfair. If with
--------------------------------------------------------
respect to any Interest Period:
(a) deposits in Dollars (in the applicable amounts) are not being
offered to Lender in the interbank eurodollar market for such Interest
Period, or Lender otherwise reasonably determines (which determination
shall be binding and conclusive on the Company) that by reason of
circumstances affecting the interbank Eurodollar market adequate and
reasonable means do not exist for ascertaining the applicable Eurodollar
Rate; or
(b) the making or funding of Eurodollar Loans has become impracticable
as a result of an event occurring after the date of this Agreement which in
the opinion of Lender materially affects such Loans;
19
<PAGE>
then Lender shall promptly notify the Company thereof and, so long as such
- ----
circumstances shall continue, (i) Lender shall not be under any obligation to
make or convert into Eurodollar Loans and (ii) on the last day of the current
Interest Period for each Eurodollar Loan, such Loan shall, unless then repaid in
full, automatically convert to a Base Rate Loan.
8.3 Changes in Law Rendering Eurodollar Loans Unlawful. If any change in,
--------------------------------------------------
or the adoption of any new, law or regulation, or any change in the
interpretation of any applicable law or regulation by any governmental or other
regulatory body charged with the administration thereof, should make it (or in
the good faith judgment of Lender cause a substantial question as to whether it
is) unlawful for Lender to make, maintain or fund Eurodollar Loans, then Lender
shall promptly notify the Company and, so long as such circumstances shall
continue, (a) Lender shall have no obligation to make or convert into Eurodollar
Loans (but shall make Base Rate Loans concurrently with the making of or
conversion into Eurodollar Loans by Lender which are not so affected, in each
case in an amount equal to the amount of Eurodollar Loans which would be made or
converted into by Lender at such time in the absence of such circumstances) and
(b) on the last day of the current Interest Period for each Eurodollar Loan of
Lender (or, in any event, on such earlier date as may be required by the
relevant law, regulation or interpretation), such Eurodollar Loan shall, unless
then repaid in full, automatically convert to a Base Rate Loan. Each Base Rate
Loan made by Lender which, but for the circumstances described in the foregoing
sentence, would be a Eurodollar Loan (an "Affected Loan") shall remain
-------------
outstanding for the same period as the Group of Eurodollar Loans of which such
Affected Loan would be a part absent such circumstances.
8.4 Funding Losses. The Company hereby agrees that upon demand by Lender
--------------
(which demand shall be accompanied by a statement setting forth the basis for
the amount being claimed, a copy of which shall be furnished to Lender), the
Company will indemnify Lender against any net loss or expense which Lender may
sustain or incur (including any net loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by Lender to
fund or maintain any Eurodollar Loan), as reasonably determined by Lender, as a
result of (a) any payment, prepayment or conversion of any Eurodollar Loan of
Lender on a date other than the last day of an Interest Period for such Loan
(including any conversion pursuant to Section 8.3) or (b) any failure of the
-----------
Company to borrow, convert or continue any Loan on a date specified therefor in
a notice of borrowing, conversion or continuation pursuant to this Agreement.
For this purpose, all notices to Lender pursuant to this Agreement shall be
deemed to be irrevocable. Without limiting the generality of the foregoing,
upon (i) any default by the Company in making any borrowing of, conversion into
or continuation of any Eurodollar Loan following the Company's delivery to
Lender of any request in respect thereof or (ii) any payment of a Eurodollar
Loan on any day that is not the last day of the Interest Period applicable
thereto (regardless of the source of such prepayment and whether voluntary, by
acceleration or otherwise), the Company shall pay Lender an amount equal to the
amount of any losses, expenses and liabilities (including, without limitation,
any loss (including interest paid) sustained by Lender in connection with the
re-employment of such funds) that Lender may sustain as a result of such default
or such payment.
20
<PAGE>
8.5 Right of Lender to Fund through Other Offices. Lender may, if it so
---------------------------------------------
elects, fulfill its commitment as to any Eurodollar Loan by causing a foreign
branch or Affiliate of Lender to make such Loan; provided that in such event for
--------
the purposes of this Agreement such Loan shall be deemed to have been made by
Lender and the obligation of the Company to repay such Loan shall nevertheless
be to Lender and shall be deemed held by it, to the extent of such Loan, for the
account of such branch or Affiliate.
8.6 Discretion of Lender as to Manner of Funding. Notwithstanding any
--------------------------------------------
provision of this Agreement to the contrary, Lender shall be entitled to fund
and maintain its funding of all or any part of its Loans in any manner it sees
fit, it being understood, however, that for the purposes of this Agreement all
determinations hereunder (including with respect to subsections 8.5 above) shall
be made as if Lender had actually funded and maintained each Eurodollar Loan
during each Interest Period for such Loan through the purchase of deposits
having a maturity corresponding to such Interest Period and bearing an interest
rate equal to the Eurodollar Rate for such Interest Period.
8.7 Mitigation of Circumstances. Lender shall promptly notify the Company
----------------------------
of any event of which it has knowledge which will result in, and will use
reasonable commercial efforts available to it (and not, in Lender's sole
judgment, otherwise disadvantageous to Lender) to mitigate or avoid, (i) any
obligation by the Company to pay any amount pursuant to Section 7.6 or 8.1 or
----------- ---
(ii) the occurrence of any circumstances described in Section 8.2 or 8.3.
----------- ---
Without limiting the foregoing, Lender will designate a different funding office
if such designation will avoid (or reduce the cost to the Company of) any event
described in clause (i) or (ii) of the preceding sentence and such designation
---------- ----
will not, in Lender's sole judgment, be otherwise disadvantageous to Lender.
8.8 Conclusiveness of Statements; Survival of Provisions. Determinations
----------------------------------------------------
and statements of Lender pursuant to Section 8.1, 8.2, 8.3 or 8.4 shall be
----------- --- --- ---
conclusive absent demonstrable error. Lender may use reasonable averaging and
attribution methods in determining compensation under Sections 8.1 and 8.4, and
------------ ---
the provisions of such Sections shall survive repayment of the Loans,
cancellation of the Note and termination of this Agreement.
SECTION 9 WARRANTIES.
To induce Lender to enter into this Agreement and to make Loans, the
Company warrants to Lender as follows (For purposes of this Section 9, the terms
"Subsidiary" or "Subsidiaries" shall include MPM at all times following the MPM
Acquisition):
9.1 Organization. The Company is a corporation validly existing and in
------------
good standing under the laws of the State of Delaware and the Company is duly
qualified to do business in each jurisdiction where, because of the nature of
its activities or properties, such qualification is
21
<PAGE>
required, except for such jurisdictions where the failure to so qualify would
not have a Material Adverse Effect.
9.2 Authorization; No Conflict. The Company and each other Loan Party is
--------------------------
duly authorized to execute and deliver each Loan Document to which it is a
party; the Company is duly authorized to borrow monies hereunder and each of the
Company and each other Loan Party is duly authorized to perform its obligations
under each Loan Document to which it is a party. The execution, delivery and
performance by the Company of this Agreement and by the Company and each other
Loan Party of each Loan Document to which it is a party, and the borrowings by
the Company hereunder, do not and will not (a) require any consent or approval
of any governmental agency or authority (other than any consent or approval
which has been obtained and is in full force and effect), (b) conflict with (i)
any provision of law, (ii) the charter, by-laws or other organizational
documents of the Company or any other Loan Party or (iii) any agreement,
indenture, instrument or other document, or any judgment, order or decree, which
is binding upon the Company or any other Loan Party or any of their respective
properties or (c) require, or result in, the creation or imposition of any Lien
on any asset of the Company, any Subsidiary or any other Loan Party (other than
Liens in favor of Lender created pursuant to the Collateral Documents).
9.3 Validity and Binding Nature. This Agreement and each other Loan
---------------------------
Document to which the Company or any other Loan Party is a party is the legal,
valid and binding obligation of such Person, enforceable against such Person in
accordance with its terms, subject to bankruptcy, insolvency and similar laws
affecting the enforceability of creditors' rights generally and to general
principles of equity.
9.4 Financial Condition. The audited consolidated financial statements of
-------------------
the Company as at December 31, 1998 and the unaudited consolidated financial
statements of the Company as at March 31, 1999, copies of each of which have
been delivered to Lender, were prepared in accordance with GAAP (subject, in the
case of such unaudited statements, to the absence of footnotes and to normal
year-end adjustments) and present fairly the consolidated financial condition of
the Company and its Subsidiaries as at such dates and the results of their
operations for the periods then ended.
9.5 No Material Adverse Change. Except as set forth in Schedule 9.5,
-------------------------- ------------
since December 31, 1998 there has been no material adverse change in the
financial condition, operations, assets, business, properties or prospects of
the Company.
9.6 Litigation and Contingent Liabilities. No litigation (including
-------------------------------------
derivative actions), arbitration proceeding or governmental investigation or
proceeding is pending or, to the Company's knowledge, threatened against the
Company or any Subsidiary which might reasonably be expected to have a Material
Adverse Effect, except as set forth in Schedule 9.6 (as the same may be amended
------------
or supplemented upon and in connection with the MPM Acquisition, in a manner
acceptable to Lender). Other than any liability incident to such litigation or
proceedings, neither
22
<PAGE>
the Company nor any Subsidiary has any material contingent liabilities not
listed on Schedule 9.6, reflected in its financial statements contained in the
------------
Public Reports, or permitted by Section 10.7.
------------
9.7 Ownership of Properties; Liens. The Company and each Subsidiary
------------------------------
(excluding MPM for purposes of this subsection 9.7) owns good and, in the case
of real property, marketable title to all of its properties and assets, real
and personal, tangible and intangible, of any nature whatsoever (including
patents, trademarks, trade names, service marks and copyrights), free and clear
of all Liens, charges and claims (including infringement claims with respect to
patents, trademarks, service marks, copyrights and the like) except as permitted
by Section 10.8.
------------
9.8 Subsidiaries. As of the Closing Date, the Company has no
------------
Subsidiaries.
9.9 Pension Plans. (a) During the twelve-consecutive-month period prior
-------------
to the date of the execution and delivery of this Agreement or the making of any
Loan, (i) no steps have been taken to terminate any Pension Plan and (ii) no
contribution failure has occurred with respect to any Pension Plan sufficient to
give rise to a Lien under Section 302(f) of ERISA. No condition exists or event
or transaction has occurred with respect to any Pension Plan which could result
in the incurrence by the Company of any material liability, fine or penalty.
(b) All contributions (if any) have been made to any Multiemployer Pension
Plan that are required to be made by the Company or any other member of the
Controlled Group under the terms of the plan or of any collective bargaining
agreement or by applicable law; neither the Company nor any member of the
Controlled Group has withdrawn or partially withdrawn from any Multiemployer
Pension Plan, incurred any withdrawal liability with respect to any such plan or
received notice of any claim or demand for withdrawal liability or partial
withdrawal liability from any such plan, and no condition has occurred which, if
continued, might result in a withdrawal or partial withdrawal from any such
plan; and neither the Company nor any member of the Controlled Group has
received any notice that any Multiemployer Pension Plan is in reorganization,
that increased contributions may be required to avoid a reduction in plan
benefits or the imposition of any excise tax, that any such plan is or has been
funded at a rate less than that required under Section 412 of the Code, that any
such plan is or may be terminated, or that any such plan is or may become
insolvent.
9.10 Investment Company Act. Neither the Company nor any Subsidiary is an
----------------------
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940.
9.11 Public Utility Holding Company Act. Neither the Company nor any
----------------------------------
Subsidiary is a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935.
23
<PAGE>
9.12 Regulation U. The Company is not engaged principally, or as one of
------------
its important activities, in the business of extending credit for the purpose of
purchasing or carrying Margin Stock.
9.13 Taxes. The Company and each Subsidiary has filed all tax returns and
-----
reports required by law to have been filed by it and has paid all taxes and
governmental charges thereby shown to be owing, except any such taxes or charges
which are being diligently contested in good faith by appropriate proceedings
and for which adequate reserves in accordance with GAAP shall have been set
aside on its books.
9.14 Solvency, etc. On the Closing Date, and immediately prior to and
--------------
after giving effect to each borrowing hereunder and the use of the proceeds
thereof, (a) the Company's and each other Loan Party's assets will exceed its
liabilities and (b) the Company and each other Loan Party will be solvent, will
be able to pay its debts as they mature, will own property with fair saleable
value greater than the amount required to pay its debts and will have capital
sufficient to carry on its business as then constituted.
9.15 Environmental Matters.
---------------------
(a) No Violations. Except as set forth on Schedule 9.15, neither the
------------- -------------
Company nor any Subsidiary, nor any operator of the Company's or any
Subsidiary's properties, is in violation, or alleged violation, of any judgment,
decree, order, law, permit, license, rule or regulation pertaining to
environmental matters, including those arising under the Resource Conservation
and Recovery Act ("RCRA"), the Comprehensive Environmental Response,
----
Compensation and Liability Act of 1980 ("CERCLA"), the Superfund Amendments and
------
Reauthorization Act of 1986 or any other Environmental Law which (i) in any
single case, requires expenditures in any three-year period of $25,000 or more
by the Company and its Subsidiaries in penalties and/or for investigative,
removal or remedial actions or (ii) individually or in the aggregate otherwise
might reasonably be expected to have a Material Adverse Effect.
(b) Notices. Except as set forth on Schedule 9.15 and for matters
------- -------------
arising after the Closing Date, in each case none of which could singly or in
the aggregate be expected to have a Material Adverse Effect, neither the Company
nor any Subsidiary has received notice from any third party, including any
Federal, state or local governmental authority: (a) that any one of them has
been identified by the U.S. Environmental Protection Agency as a potentially
responsible party under CERCLA with respect to a site listed on the National
Priorities List, 40 C.F.R. Part 300 Appendix B; (b) that any hazardous waste, as
defined by 42 U.S.C. (S)6903(5), any hazardous substance as defined by 42 U.S.C.
(S)9601(14), any pollutant or contaminant as defined by 42 U.S.C. (S)9601(33) or
any toxic substance, oil or hazardous material or other chemical or substance
regulated by any Environmental Law (all of the foregoing, "Hazardous
---------
Substances") which any one of them has generated, transported or disposed of has
- ----------
been found at any site at which a Federal, state or local agency or other third
party has conducted a remedial investigation, removal or other response action
pursuant to any Environmental Law; (c) that the Company or any
24
<PAGE>
Subsidiary must conduct a remedial investigation, removal, response action or
other activity pursuant to any Environmental Law; or (d) of any Environmental
Claim.
(c) Handling of Hazardous Substances. Except as set forth on
--------------------------------
Schedule 9.15, (i) no portion of the real property or other assets of the
- -------------
Company or any Subsidiary has been used for the handling, processing, storage or
disposal of Hazardous Substances except in accordance in all material respects
with applicable Environmental Laws; and no underground tank or other underground
storage receptacle for Hazardous Substances is located on such properties; (ii)
in the course of any activities conducted by the Company, any Subsidiary or the
operators of any real property of the Company or any Subsidiary, no Hazardous
Substances have been generated or are being used on such properties except in
accordance in all material respects with applicable Environmental Laws; (iii)
there have been no Releases or threatened Releases of Hazardous Substances on,
upon, into or from any real property or other assets of the Company or any
Subsidiary, which Releases singly or in the aggregate might reasonably be
expected to have a material adverse effect on the value of such real property or
assets; (iv) there have been no Releases on, upon, from or into any real
property in the vicinity of the real property or other assets of the Company or
any Subsidiary which, through soil or groundwater contamination, may have come
to be located on, and which might reasonably be expected to have a material
adverse effect on the value of, the real property or other assets of the Company
or any Subsidiary; and (v) any Hazardous Substances generated by the Company and
its Subsidiaries have been transported offsite only by properly licensed
carriers and delivered only to treatment or disposal facilities maintaining
valid permits as required under applicable Environmental Laws, which
transporters and facilities have been and are operating in compliance in all
material respects with such permits and applicable Environmental Laws.
9.16 Year 2000 Problem. The Company and its Subsidiaries (a) have
-----------------
reviewed the areas within their business and operations which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and (b) have made appropriate inquiries as
to the effect the Year 2000 Problem will have on their material suppliers and
customers. Based on such review, program and inquiries, the Company reasonably
believes that the "Year 2000 Problem" will not have a Material Adverse Effect.
9.17 Insurance. Set forth on Schedule 9.17 is a complete and accurate
--------- -------------
summary of the property and casualty insurance program of the Company as of the
Closing Date (including the names of all insurers, policy numbers, expiration
dates, amounts and types of coverage, annual premiums, exclusions, deductibles,
self-insured retention, and a description in reasonable detail of any self-
insurance program, retrospective rating plan, fronting arrangement or other risk
assumption arrangement involving the Company).
9.18 Real Property. Set forth on Schedule 9.18 is a complete and accurate
------------- -------------
list, as of the Closing Date (which schedule shall be amended and supplemented
as of and in connection with the MPM Acquisition), of the address of all real
property owned or leased by the Company or any
25
<PAGE>
Subsidiary, together with, in the case of leased property, the name and mailing
address of the lessor of such property.
9.19 Information. All information heretofore or contemporaneously
-----------
herewith furnished in writing by the Company or any other Loan Party to Lender
for purposes of or in connection with this Agreement and the transactions
contemplated hereby is, and all written information hereafter furnished by or on
behalf of the Company or any Subsidiary to Lender pursuant hereto or in
connection herewith will be, true and accurate in every material respect on the
date as of which such information is dated or certified, and none of such
information is or will be incomplete by omitting to state any material fact
necessary to make such information not misleading in light of the circumstances
under which made (it being recognized by Lender that any projections and
forecasts provided by the Company are based on good faith estimates and
assumptions believed by the Company to be reasonable as of the date of the
applicable projections or assumptions and that actual results during the period
or periods covered by any such projections and forecasts may differ from
projected or forecasted results).
9.20 Intellectual Property. The Company and each Subsidiary owns and
---------------------
possesses or has a license or other right to use all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, service marks,
service mark rights and copyrights as are necessary for the conduct of the
business of the Company and its Subsidiaries, without any infringement upon
rights of others which could reasonably be expected to have a Material Adverse
Effect.
9.21 Burdensome Obligations. To the best of the Company's knowledge,
----------------------
after due inquiry, neither the Company nor any Subsidiary is a party to any
agreement or contract or subject to any corporate or partnership restriction
which might reasonably be expected to have a Material Adverse Effect.
9.22 Labor Matters. Except as set forth on Schedule 9.22, neither the
------------- -------------
Company nor any Subsidiary is subject to any labor or collective bargaining
agreement. There are no existing or threatened strikes, lockouts or other labor
disputes involving the Company or any Subsidiary that singly or in the aggregate
could reasonably be expected to have a Material Adverse Effect. Hours worked by
and payment made to employees of the Company and its Subsidiaries are not in
violation of the Fair Labor Standards Act or any other applicable law, rule or
regulation dealing with such matters.
9.23 No Default. No Event of Default or Unmatured Event of Default exists
----------
or would result from the incurring by the Company of any Debt hereunder or under
any other Loan Document.
26
<PAGE>
SECTION 10 COVENANTS.
Until the expiration or termination of the Commitments and thereafter until
all obligations of the Company hereunder and under the other Loan Documents are
paid in full, the Company agrees that, unless at any time Lender shall otherwise
expressly consent in writing, it will:
10.1 Reports, Certificates and Other Information. Furnish to Lender:
-------------------------------------------
10.1.1 Annual Report. Promptly when available and in any event within 90
-------------
days after the close of each Fiscal Year, a copy of the annual audit report of
the Company and its Subsidiaries for such Fiscal Year, including therein
consolidated balance sheets and statements of earnings and cash flows of the
Company and its Subsidiaries as at the end of such Fiscal Year, certified
without qualification by PricewaterhouseCoopers LLP or other independent
auditors of recognized standing selected by the Company and reasonably
acceptable to Lender, together with, during all times in which the Company fails
or is not required to file any Public Reports, a comparison with the budget for
such Fiscal Year and a comparison with the previous Fiscal Year.
10.1.2 Interim Reports. (a) Promptly when available and in any event
---------------
within 45 days after the end of each Fiscal Quarter (except the last Fiscal
Quarter of each Fiscal Year), consolidated and consolidating balance sheets of
the Company and its Subsidiaries as of the end of such Fiscal Quarter, together
with consolidated and consolidating statements of earnings and cash flows for
such Fiscal Quarter and for the period beginning with the first day of such
Fiscal Year and ending on the last day of such Fiscal Quarter, together with a
comparison with the corresponding period of the previous Fiscal Year and a
comparison with the budget for such period of the current Fiscal Year, certified
by the Chief Financial Officer or the Treasurer of the Company; and (b) promptly
when available and in any event within 30 days after the end of each month
(except the last month of each Fiscal Quarter), consolidated and consolidating
balance sheets of the Company and its Subsidiaries as of the end of such month,
together with consolidated and consolidating statements of earnings and a
consolidated statement of cash flows for such month and for the period beginning
with the first day of such Fiscal Year and ending on the last day of such month,
together with, to the extent the Company fails or is no longer required to
deliver Public Reports, a comparison with the corresponding period of the
previous Fiscal Year and a comparison with the budget for such period of the
current Fiscal Year, certified by the Chief Financial Officer of the Company.
10.1.3 Compliance Certificates. Contemporaneously with the furnishing of
-----------------------
a copy of each annual audit report pursuant to Section 10.1.1 and each set of
--------------
quarterly statements pursuant to Section 10.1.2, a duly completed compliance
--------------
certificate in the form of Exhibit B, with appropriate insertions, dated the
---------
date of such annual report or such quarterly statements and signed by the Chief
Financial Officer or the Treasurer of the Company, containing (i) a computation
of each of the financial ratios and restrictions set forth in Section 10.6 and
------------
to the effect that such officer has not become aware of any Event of Default or
Unmatured Event of Default that has occurred and is continuing or, if there is
any such event, describing it and the steps, if any, being taken to cure it and
(ii) to the extent the Company has failed or is no longer required to file any
Public Reports, a
27
<PAGE>
written statement of the Company's management setting forth a discussion of the
Company's financial condition, changes in financial condition and results of
operations.
10.1.4 Reports to the SEC and to Shareholders. Promptly upon the filing
--------------------------------------
or sending thereof, copies of all Public Reports and all other regular, periodic
or special reports of the Company or any Subsidiary filed with the SEC; copies
of all registration statements of the Company or any Subsidiary filed with the
SEC (other than on Form S-8); and copies of all proxy statements or other
communications made to security holders generally.
10.1.5 Notice of Default, Litigation and ERISA Matters. Promptly upon
-----------------------------------------------
becoming aware of any of the following, written notice describing the same and
the steps being taken by the Company or the Subsidiary affected thereby with
respect thereto:
(a) the occurrence of an Event of Default or an Unmatured Event of
Default;
(b) any litigation, arbitration or governmental investigation or
proceeding not previously disclosed by the Company to the Banks which has
been instituted or, to the knowledge of the Company, is threatened against
the Company, any Subsidiary or MPM or to which any of the properties of any
thereof is subject which might reasonably be expected to have a Material
Adverse Effect;
(c) the institution of any steps by any member of the Controlled
Group or any other Person to terminate any Pension Plan, or the failure of
any member of the Controlled Group to make a required contribution to any
Pension Plan (if such failure is sufficient to give rise to a Lien under
Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the
taking of any action with respect to a Pension Plan which could result in
the requirement that the Company furnish a bond or other security to the
PBGC or such Pension Plan, or the occurrence of any event with respect to
any Pension Plan or Multiemployer Pension Plan which could result in the
incurrence by any member of the Controlled Group of any material liability,
fine or penalty (including any claim or demand for withdrawal liability or
partial withdrawal from any Multiemployer Pension Plan), or any material
increase in the contingent liability of the Company with respect to any
post-retirement welfare plan benefit, or any notice that any Multiemployer
Pension Plan is in reorganization, that increased contributions may be
required to avoid a reduction in plan benefits or the imposition of an
excise tax, that any such plan is or has been funded at a rate less than
that required under Section 412 of the Code, that any such plan is or may
be terminated, or that any such plan is or may become insolvent;
(d) any cancellation or material change in any insurance maintained
by the Company or any Subsidiary; or
28
<PAGE>
(e) any other event (including (i) any violation of any Environmental
Law or the assertion of any Environmental Claim or (ii) the enactment or
effectiveness of any law, rule or regulation) which might reasonably be
expected to have a Material Adverse Effect.
10.1.6 Intentionally Omitted.
---------------------
10.1.7 Management Reports. Promptly upon the request of Lender, copies of
------------------
all detailed financial and management reports submitted to the Company by
independent auditors in connection with each annual or interim audit made by
such auditors of the books of the Company. To the extent the Company has failed
or is no longer required to file any Public Reports, together with each delivery
of financial statements of the Company pursuant to this Section 10, a management
report (1) describing the operations and financial condition of the Company for
the period then ended and the portion of the current fiscal year then elapsed
(or for the fiscal year then ended in the case of year-end financials), (2)
setting forth in comparative form the corresponding figures for the
corresponding periods of the previous fiscal year and the corresponding figures
from the most recent Projections for the current fiscal year delivered pursuant
to subsection 10.1.8, discussing the reasons for any significant variations.
The information above shall be presented in reasonable detail and shall be
certified by the Chief Financial Officer of the Company to the effect that such
information fairly presents the results of operations and financial condition of
the Company and its Subsidiaries as at the dates and for the periods indicated.
10.1.8 Projections. As soon as practicable, and in any event within 30
-----------
days prior to the commencement of each Fiscal Year, financial projections for
the Company and its Subsidiaries for such Fiscal Year (including an operating
budget and a cash flow budget) prepared in a manner consistent with the
projections delivered by the Company Lender prior to the Closing Date or
otherwise in a manner reasonably satisfactory to Lender, accompanied by a
certificate of the Chief Financial Officer of the Company on behalf of the
Company to the effect that (i) such projections were prepared by the Company in
good faith, (ii) the Company has a reasonable basis for the assumptions
contained in such projections and (iii) such projections have been prepared in
accordance with such assumptions.
10.1.9 Subordinated Debt Notices. Promptly from time to time, copies of
-------------------------
any notices (including notices of default or acceleration) received from any
holder or trustee of, under or with respect to any Subordinated Debt.
10.1.10 Year 2000 Problem. Promptly upon the request of Lender, such
-----------------
updated information or documentation as may be requested from time to time
regarding the efforts of the Company and its Subsidiaries to address the Year
2000 Problem; and
10.1.11 Other Information. Promptly from time to time, such other
-----------------
information concerning the Company and its Subsidiaries as Lender may reasonably
request.
29
<PAGE>
10.2 Books, Records and Inspections. Keep, and cause each Subsidiary to
------------------------------
keep, its books and records in accordance with sound business practices
sufficient to allow the preparation of financial statements in accordance with
GAAP; permit, and cause each Subsidiary to permit, Lender or any representative
thereof to inspect the properties and operations of the Company or such
Subsidiary; and permit, and cause each Subsidiary to permit, at any reasonable
time and with reasonable notice (or at any time without notice if an Event of
Default exists and Lender declares all of the Loans to be immediately due and
payable), Lender or any representative thereof to visit any or all of its
offices, to discuss its financial matters with its officers and its independent
auditors (and the Company hereby authorizes such independent auditors to discuss
such financial matters with Lender or any representative thereof), and to
examine (and, at the expense of the Company or the applicable Subsidiary,
photocopy extracts from) any of its books or other records; and permit, and
cause each Subsidiary to permit, Lender and its representatives to inspect the
Inventory and other tangible assets of the Company or such Subsidiary, to
perform appraisals of the equipment of the Company or such Subsidiary, and to
inspect, audit, check and make copies of and extracts from the books, records,
computer data, computer programs, journals, orders, receipts, correspondence and
other data relating to Inventory, Accounts Receivable and any other collateral.
All such inspections or audits by Lender shall be at the Company's expense,
provided, however, that absent the existence of an Event of Default, such audits
- -------- -------
or inspections shall occur no more frequently than two times per calendar year
and the cost to the Company shall not exceed $2,500 per audit or inspection.
10.3 Maintenance of Property; Insurance. (a) Keep, and cause each
----------------------------------
Subsidiary and MPM to keep, all property useful and necessary in the business of
the Company or such Subsidiary and MPM in good working order and condition,
ordinary wear and tear excepted.
(b) Maintain, and cause each Subsidiary and MPM to maintain, with
responsible insurance companies, such insurance as may be required by any law or
governmental regulation or court decree or order applicable to it and such other
insurance, to such extent and against such hazards and liabilities, as is
customarily maintained by companies similarly situated, but which shall insure
against all risks and liabilities of the type identified on Schedule 9.17 and
-------------
shall have insured amounts no less than, and deductibles no higher than, those
set forth on such schedule and, upon request of Lender, furnish to Lender a
certificate setting forth in reasonable detail the nature and extent of all
insurance maintained by the Company and its Subsidiaries. The Company shall
cause each issuer of an insurance policy to provide Lender with an endorsement
(i) showing loss payable to Lender with respect to each policy of property or
casualty insurance and naming Lender as an additional insured with respect to
each policy of insurance for liability for personal injury or property damage,
(ii) providing that 30 days' notice will be given to Lender prior to any
cancellation of, material reduction or change in coverage provided by or other
material modification to such policy and (iii) reasonably acceptable in all
other respects to Lender. The Company shall execute and deliver to Lender a
collateral assignment, in form and substance satisfactory to Lender, of each
business interruption insurance policy maintained by the Company.
(c) UNLESS THE COMPANY PROVIDES LENDER WITH EVIDENCE OF THE INSURANCE
COVERAGE REQUIRED BY THIS AGREEMENT, LENDER MAY
30
<PAGE>
PURCHASE INSURANCE AT THE COMPANY'S EXPENSE TO PROTECT LENDER'S INTERESTS IN THE
COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE COMPANY'S INTERESTS.
THE COVERAGE THAT LENDER PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST
THE COMPANY IN CONNECTION WITH THE COLLATERAL. THE COMPANY MAY LATER CANCEL ANY
INSURANCE PURCHASED BY LENDER, BUT ONLY AFTER PROVIDING LENDER WITH EVIDENCE
THAT THE COMPANY HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF LENDER
PURCHASES INSURANCE FOR THE COLLATERAL, THE COMPANY WILL BE RESPONSIBLE FOR THE
COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE
IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE
CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE
ADDED TO THE PRINCIPAL AMOUNT OF THE LOANS OWING HEREUNDER. THE COSTS OF THE
INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE THE COMPANY MAY BE ABLE TO
OBTAIN ON ITS OWN.
10.4 Compliance with Laws; Payment of Taxes and Liabilities. (a) Comply,
------------------------------------------------------
and cause each Subsidiary and MPM to comply, in all material respects with all
applicable laws, rules, regulations, decrees, orders, judgments, licenses and
permits, except where failure to comply could not reasonably be expected to have
a Material Adverse Effect; and (b) pay, and cause each Subsidiary and MPM to
pay, prior to delinquency, all taxes and other governmental charges against it
or any of its property, as well as claims of any kind which, if unpaid, might
become a Lien on any of its property; provided that the foregoing shall not
--------
require the Company or any Subsidiary or MPM to pay any such tax or charge so
long as it shall contest the validity thereof in good faith by appropriate
proceedings and shall set aside on its books adequate reserves with respect
thereto in accordance with GAAP.
10.5 Maintenance of Existence, etc. Maintain and preserve, and (subject
------------------------------
to Section 10.11) cause each Subsidiary and MPM to maintain and preserve, (a)
-------------
its existence and good standing in the jurisdiction of its organization and (b)
its qualification to do business and good standing in each jurisdiction where
the nature of its business makes such qualification necessary (except in those
instances in which the failure to be qualified or in good standing does not have
a Material Adverse Effect).
10.6 Financial Covenants.
-------------------
10.6.1 EBITDA. Not permit EBITDA for any measurement period indicated
------
below to be less than the applicable amount set forth below for such measurement
period:
Measurement
Period Ending EBITDA
------------- ------
Three months ending June 30, 1999 -$3,500,000
31
<PAGE>
Sixth months ending September 30, 1999 -$6,000,000
Nine months ending December 31, 1999 -$5,250,000
Trailing twelve months ending March 31, 2000 -$6,000,000
Trailing twelve months ending June 30, 2000 -$1,000,000
Trailing twelve months ending September 30, 2000 $ 1,850,000
Trailing twelve months ending December 31, 2000 $ 5,000,000
10.6.2 Capital Expenditures. Not permit the aggregate amount of all
--------------------
Capital Expenditures made by the Company and its Subsidiaries for any
measurement period indicated below to exceed the applicable amount set forth
below for such measurement period:
Measurement
Period Ending CAPEX Limit
------------- -----------
Three months ending June 30, 1999 $2,000,000
Sixth months ending September 30, 1999 $4,500,000
Nine months ending December 31, 1999 $6,500,000
Trailing twelve months ending March 31, 2000 $8,500,000
Trailing twelve months ending June 30, 2000 $8,500,000
Trailing twelve months ending September 30, 2000 $8,000,000
Trailing twelve months ending December 31, 2000 $7,500,000
10.7 Limitations on Debt. Not, and not permit any Subsidiary to, create,
-------------------
incur, assume or suffer to exist any Debt, except:
(a) obligations under this Agreement and the other Loan Documents;
(b) Debt secured by Liens permitted by Section 10.8(d), and
---------------
extensions, renewals and refinancings thereof; provided that the aggregate
--------
amount of all such Debt at any time outstanding shall not exceed $150,000;
(c) Debt of Subsidiaries to the Company;
(d) unsecured Debt of the Company to Subsidiaries;
(e) Subordinated Debt;
(f) Hedging Obligations incurred for bona fide hedging purposes and
not for speculation;
(g) Debt described on Schedule 10.7 and any extension, renewal or
-------------
refinancing thereof so long as the principal amount thereof is not
increased; and
32
<PAGE>
(h) the Debt to be Repaid (so long as such Debt is repaid on the
Closing Date with the proceeds of the initial Loans hereunder).
10.8 Liens. Not, and not permit any Subsidiary to, create or permit to
-----
exist any Lien on any of its real or personal properties, assets or rights of
whatsoever nature (whether now owned or hereafter acquired), except:
(a) Liens for taxes or other governmental charges not at the time
delinquent or thereafter payable without penalty or being contested in good
faith by appropriate proceedings and, in each case, for which it maintains
adequate reserves;
(b) Liens arising in the ordinary course of business (such as (i)
Liens of carriers, warehousemen, mechanics and materialmen and other
similar Liens imposed by law and (ii) Liens incurred in connection with
worker's compensation, unemployment compensation and other types of social
security (excluding Liens arising under ERISA) or in connection with surety
bonds, bids, performance bonds and similar obligations) for sums not
overdue or being contested in good faith by appropriate proceedings and not
involving any deposits or advances or borrowed money or the deferred
purchase price of property or services and, in each case, for which it
maintains adequate reserves;
(c) Liens described on Schedule 10.8;
-------------
(d) subject to the limitation set forth in Section 10.7(b), (i) Liens
---------------
arising in connection with Capital Leases (and attaching only to the
property being leased), (ii) Liens existing on property at the time of the
acquisition thereof by the Company or any Subsidiary (and not created in
contemplation of such acquisition) and (iii) Liens that constitute purchase
money security interests on any property securing debt incurred for the
purpose of financing all or any part of the cost of acquiring such
property, provided that any such Lien attaches to such property within 60
--------
days of the acquisition thereof and attaches solely to the property so
acquired;
(e) attachments, appeal bonds, judgments and other similar Liens, for
sums not exceeding $50,000 arising in connection with court proceedings,
provided the execution or other enforcement of such Liens is effectively
--------
stayed and the claims secured thereby are being actively contested in good
faith and by appropriate proceedings;
(f) easements, rights of way, restrictions, minor defects or
irregularities in title and other similar Liens not interfering in any
material respect with the ordinary conduct of the business of the Company
or any Subsidiary;
(g) Liens arising under the Loan Documents; and
33
<PAGE>
(i) the replacement, extension or renewal of any Lien permitted by
clauses (c) or (h) above upon or in the same property theretofore subject
----------- ---
thereto arising out of the extension, renewal or replacement of the Debt
secured thereby (without increase in the amount thereof).
10.9 Operating Leases. Not permit the aggregate amount of all rental
----------------
payments under Operating Leases made (or scheduled to be made) by the Company
and its Subsidiaries (on a consolidated basis) to exceed $600,000 in any Fiscal
Year.
10.10 Restricted Payments. Not, and not permit any Subsidiary or MPM to,
-------------------
(a) make any distribution to any of its shareholders or partners (other than
distributions or dividends made by MPM to the Company for purposes of defraying,
paying or reimbursing its allocable share of expenses, overhead, pension
liabilities, taxes or other costs), (b) purchase or redeem any of its capital
stock, partnership interests or other equity interests or any warrants, options
or other rights in respect thereof, (c) pay any management fees or similar fees
to any of its shareholders, partners or any Affiliate thereof (other than
payments made by MPM to the Company), (d) make any redemption, prepayment,
defeasance or repurchase of any Subordinated Debt or (e) set aside funds for any
of the foregoing. Notwithstanding the foregoing, any Subsidiary may pay
dividends or make other distributions to the Company or to a Wholly-Owned
Subsidiary. Nothing contained in this subsection 10.10 is intended or shall be
construed to prohibit the Company from paying up to $25,000,000 of Dedicated
Funds to the Sellers (or other parties designated by the Sellers) pursuant to
and in accordance with the MPM Purchase Agreement in order to effectuate the MPM
Acquisition and to fund initial working capital of MPM. For purposes of this
subsection 10.10, "Dedicated Funds" means equity capital contributed by UC
Holdings and specifically reserved by the Company for the express purpose of
consummating the MPM Acquisition.
10.11 Mergers, Consolidations, Sales. Not, and not permit any Subsidiary
------------------------------
or MPM to, be a party to any merger or consolidation, or purchase or otherwise
acquire all or substantially all of the assets or any stock of any class of, or
any partnership or joint venture interest in, any other Person, or, except in
the ordinary course of its business, sell, transfer, convey or lease all or any
substantial part of its assets, or sell or assign with or without recourse any
receivables, except for (a) any such merger, consolidation, sale, transfer,
conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into the
Company or into, with or to any other Wholly-Owned Subsidiary; and (b) any such
purchase or other acquisition by the Company or any Wholly-Owned Subsidiary of
the assets or stock of any Wholly-Owned Subsidiary.
10.12 Modification of Organizational Documents. Not permit the
----------------------------------------
Certificate or Articles of Incorporation, By-Laws or other organizational
documents of the Company or any Subsidiary or MPM to be amended or modified in
any way which might reasonably be expected to materially adversely affect the
interests of Lender, including, without limitation, the imposition,
implementation or adoption of any super-majority voting requirements relating to
the governance of the Company and the election of the members of the Board of
Directors thereof. The Company hereby represents and warrants to Lender that
the Articles of Incorporation and By-Laws of the Company do not
34
<PAGE>
currently require or impose any such super-majority voting requirements on any
Company actions or with respect to the elections of members of its Board of
Directors.
10.13 Use of Proceeds. Use the proceeds of the Loans solely for working
---------------
capital, for Capital Expenditures and for other general corporate purposes; and
not use or permit any proceeds of any Loan to be used, either directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
"purchasing or carrying" any Margin Stock.
10.14 Further Assurances. Take, and cause each Subsidiary and MPM to
------------------
take, such actions as are necessary or as Lender may reasonably request from
time to time (including, except for MPM, the execution and delivery of a
Guaranty, a security agreement, a Pledge Agreement, Mortgages, deeds of trust,
financing statements and other documents, the filing or recording of any of the
foregoing, and the delivery of stock certificates and other collateral with
respect to which perfection is obtained by possession) to ensure that (a) the
obligations of the Company hereunder and under the other Loan Documents (i) are
secured by substantially all of the assets of the Company (including the pledge,
pursuant to a Pledge Agreement, of any Subsidiary capital stock owned by the
Company), and (ii) guaranteed by all of its Subsidiaries (including, promptly
upon the acquisition or creation thereof, any Subsidiary acquired or created
after the date hereof) by execution of a Guaranty, and (b) the obligations of
each Subsidiary under such Guaranty are secured by substantially all of the
assets of such Subsidiary.
10.15 Transactions with Affiliates. Not, and not permit any Subsidiary or
----------------------------
MPM directly or indirectly to enter into or permit to exist any transaction,
arrangement or contract (including the purchase, sale, lease or exchange of any
property or the rendering of any management, consulting, investment banking,
advisory or other similar services) with any Affiliate or with any director,
officer or employee of any Loan Party, the aggregate payments under which,
economic impact of or amount involved therein exceeds $60,000, whether in one or
a series of related or similar transactions, arrangements or contracts, except
(a) as set forth on Schedule 10.15 or as expressly disclosed in any Public
Report, (b) transactions in the ordinary course of and pursuant to the
reasonable requirements of the business of the Company, any of its Subsidiaries
or MPM, and upon fair and reasonable terms which are fully disclosed to Lender
and are no less favorable to the Company, such Subsidiary or MPM than would be
obtained in a comparable arm's length transaction with a Person that is not an
Affiliate, (c) payment of reasonable compensation to officers and employees for
services actually rendered to the Company, such Subsidiary or MPM and (d)
payment of reasonable and customary director's fees. Notwithstanding the
foregoing, unless otherwise approved by Lender, no payments may be made with
respect to any items set forth on Schedule 10.15 after the occurrence and during
the continuation of a Default or Event of Default.
10.16 Employee Benefit Plans. Maintain, and cause each Subsidiary and MPM
----------------------
to maintain, each Pension Plan in substantial compliance with all applicable
requirements of law and regulations.
35
<PAGE>
10.17 Environmental Matters. (a) If any Release or Disposal of Hazardous
---------------------
Substances shall occur or shall have occurred on any real property or any other
assets of the Company, any Subsidiary and MPM, the Company shall, or shall cause
the applicable Subsidiary to, cause the prompt containment and removal of such
Hazardous Substances and the remediation of such real property or other assets
as necessary to comply with all Environmental Laws and to preserve the value of
such real property or other assets. Without limiting the generality of the
foregoing, the Company shall, and shall cause each Subsidiary and MPM to, comply
with any valid Federal or state judicial or administrative order requiring the
performance at any real property of the Company, MPM or any Subsidiary of
activities in response to the Release or threatened Release of a Hazardous
Substance.
(b) To the extent that the transportation of "hazardous waste" as
defined by RCRA is permitted by this Agreement, the Company shall, and shall
cause its Subsidiaries to, dispose of such hazardous waste only at licensed
disposal facilities operating in compliance with Environmental Laws.
10.18 Unconditional Purchase Obligations. Not, and not permit any
----------------------------------
Subsidiary to, enter into or be a party to any contract for the purchase of
materials, supplies or other property or services if such contract requires that
payment be made by it regardless of whether delivery is ever made of such
materials, supplies or other property or services.
10.19 Inconsistent Agreements. Not, and not permit any Subsidiary to,
-----------------------
enter into any agreement containing any provision which would (a) be violated or
breached by any borrowing by the Company hereunder or by the performance by the
Company or any Subsidiary of any of its obligations hereunder or under any other
Loan Document, (b) prohibit the Company or any Subsidiary from granting to
Lender, a Lien on any of its assets or (c) create or permit to exist or become
effective any encumbrance or restriction on the ability of any Subsidiary to (i)
pay dividends or make other distributions to the Company or any other applicable
Subsidiary, or pay any Debt owed to the Company or any other Subsidiary, (ii)
make loans or advances to the Company or (iii) transfer any of its assets or
properties to the Company.
10.20 Business Activities. Not, and not permit any Subsidiary to, engage
-------------------
in any line of business other than the businesses engaged in on the date hereof
and businesses reasonably related thereto.
10.21 Investments. Not, and not permit any Subsidiary to, make or permit
-----------
to exist any Investment in any other Person, except (without duplication) the
following:
(a) contributions by the Company to the capital of any of its
Subsidiaries, or by any such Subsidiary to the capital of any of its
Subsidiaries;
(b) in the ordinary course of business, Investments by the Company in
any Subsidiary or by any Subsidiary in the Company, by way of intercompany
loans, advances or guaranties, all to the extent permitted by Section 10.7;
------------
36
<PAGE>
(c) Suretyship Liabilities permitted by Section 10.7;
------------
(d) Cash Equivalent Investments;
(e) bank deposits in the ordinary course of business, provided that
--------
the aggregate amount of all such deposits which are maintained with any
bank other than Lender shall not at any time exceed $10,000;
(f) Investments in securities of account debtors received pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such account debtors; and
(g) Investments listed on Schedule 10.21;
--------------
provided that (x) any Investment which when made complies with the requirements
- --------
of the definition of the term "Cash Equivalent Investment" may continue to be
--------------------------
held notwithstanding that such Investment if made thereafter would not comply
with such requirements; (y) no Investment otherwise permitted by clause (b) or
(c) shall be permitted to be made if, immediately before or after giving effect
thereto, any Event of Default or Unmatured Event of Default exists.
10.22 Restriction of Amendments to Material Documents. Not amend or
-----------------------------------------------
otherwise modify, or waive any rights under, any material contract, agreement or
document which modification or waiver could result in a Material Adverse Effect.
10.23 Fiscal Year. Not change its Fiscal Year.
-----------
10.24 Cancellation of Debt. Not, and not permit any Subsidiary to, cancel
--------------------
any claim or debt owing to it, except for reasonable consideration or in the
ordinary course of business.
SECTION 11 EFFECTIVENESS; CONDITIONS OF LENDING, ETC.
The obligation of Lender to make its Loans is subject to the following
conditions precedent:
11.1 Initial Credit Extension. The obligation of Lender to make the
------------------------
initial Loans is, in addition to the conditions precedent specified in Section
-------
11.2, subject to the conditions precedent that (1) all Debt to be Repaid has
- ----
been (or concurrently with the initial borrowing will be) paid in full, and that
all agreements and instruments governing the Debt to be Repaid and that all
Liens securing such Debt to be Repaid have been (or concurrently with the
initial borrowing will be) terminated and (2) Lender shall have received (a)
evidence, satisfactory to Lender in its sole and absolute discretion, that the
Company has received cash equity contributions from U-C Holdings, LLC, a
Delaware limited liability company ("UC Holdings") and the holders of the
-----------
Warrants, in an aggregate amount not less than $5,000,000, not less than
$3,800,000 of which shall be contributed by UC Holdings,
37
<PAGE>
and which shall be satisfactory in all respects to Lender; and (b) all of the
following, each duly executed and dated the Closing Date (or such earlier date
as shall be satisfactory to Lender), in form and substance satisfactory to
Lender (and the date on which all such conditions precedent have been satisfied
or waived in writing by Lender is called the "Closing Date"):
------------
11.1.1 Note. The Note.
----
11.1.2 Resolutions. Certified copies of resolutions of the Board of
-----------
Directors or Executive Committee of the Company authorizing the execution,
delivery and performance by the Company of this Agreement, the Note and the
other Loan Documents to which the Company is a party; and certified copies of
resolutions of the Board of Directors of each other Loan Party authorizing the
execution, delivery and performance by such Loan Party of each Loan Document to
which such entity is a party.
11.1.3 Consents, etc. Certified copies of all documents evidencing any
--------------
necessary corporate or partnership action, consents and governmental approvals
(if any) required for the execution, delivery and performance by the Company and
each other Loan Party of the documents referred to in this Section 11.
----------
11.1.4 Incumbency and Signature Certificates. A certificate of the
-------------------------------------
Secretary or an Assistant Secretary (or other appropriate representative) of
each Loan Party certifying the names of the officer or officers of such entity
authorized to sign the Loan Documents to which such entity is a party, together
with a sample of the true signature of each such officer (it being understood
that Lender and Lender may conclusively rely on each such certificate until
formally advised by a like certificate of any changes therein).
11.1.5 Year 2000 Survey/Questionnaire.
------------------------------
11.1.6 Security Agreement. A counterpart of the Security Agreement
------------------
executed by the Company.
11.1.7 Landlord Consent, Estoppel and Waiver. With respect to the Company's
-------------------------------------
Atlanta, Georgia headquarters located at 5784 Lake Forrest Drive, a duly
executed Landlord Consent, Estoppel and Waiver in form and substance reasonably
acceptable to Lender.
11.1.8 Real Estate Documents. With respect to each parcel of real
---------------------
property now or hereafter owned or leased by the Company, if requested by
Lender, a duly executed Mortgage providing for a fully perfected Lien, in favor
of Lender, in all right, title and interest of the Company in such real
property, together with:
(a) an ALTA Loan Title Insurance Policy, issued by an insurer
acceptable to Lender, insuring Lender's Lien on such real property and
containing such endorsements as
38
<PAGE>
Lender may reasonably require (it being understood that the amount of
coverage, exceptions to coverage and status of title set forth in such
policy shall be acceptable to Lender);
(b) copies of all documents of record concerning such real property
as shown on the commitment for the ALTA Loan Title Insurance Policy
referred to above;
(c) original or certified copies of all insurance policies required
to be maintained with respect to such real property by this Agreement, the
applicable Mortgage or any other Loan Document;
(d) a survey certified to Lender meeting such standards as Lender may
reasonably establish and otherwise reasonably satisfactory to Lender;
(e) a flood insurance policy concerning such real property,
reasonably satisfactory to Lender, if required by the Flood Disaster
Protection Act of 1973; and
(f) an appraisal, satisfactory to Lender, prepared by an independent
appraiser engaged directly by Lender, of such parcel of real property or
interest in real property, which appraisal shall satisfy the requirements
of the Financial Institutions Reform, Recovery and Enforcement Act, if
applicable, and shall evidence compliance with the supervisory loan-to-
value limits set forth in the Federal Deposit Insurance Corporation
Improvement Act of 1991, if applicable.
Additionally, in the case of any leased real property, a consent, in form
and substance satisfactory to Lender, from the owner and/or mortgagee (a)
consenting to the Mortgage in favor of Lender with respect to such property and
(b) waiving any landlord's Lien in respect of personal property kept at the
premises subject to such lease.
11.1.9 Intentionally Omitted.
---------------------
11.1.10 Intentionally Omitted.
---------------------
11.1.11 Opinions of Counsel. The opinion of Morris, Manning & Martin, LLP
-------------------
substantially in the form of Exhibit I-1.
-----------
11.1.12 Insurance. Evidence satisfactory to Lender of the existence of
---------
insurance required to be maintained pursuant to Section 10.3(b), together with
---------------
evidence that Lender has been named as a lender's loss payee and an additional
insured on all related insurance policies, and, that all of the Company's right,
title and interest in any policy of business interruption insurance has been
collaterally assigned and pledged to Lender as additional security hereunder.
39
<PAGE>
11.1.13 Copies of Documents. Copies, certified by the Secretary of the
-------------------
Company, of the agreements and contracts specifically scheduled in the
Assignment of Contracts of even date herewith made by the Company in favor of
Lender and for those employees listed on Schedule 12.1.12.
11.1.14 Payment of Fees. Evidence of payment by the Company of all
---------------
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the Closing Date, together with all Attorney Costs of Lender to the extent
invoiced prior to the Closing Date, plus such additional amounts of Attorney
----
Costs as shall constitute Lender's reasonable estimate of Attorney Costs
incurred or to be incurred by Lender through the closing proceedings (provided
--------
that such estimate shall not thereafter preclude final settling of accounts
between the Company and Lender).
11.1.15 Solvency Certificate. A Solvency Certificate, substantially in
--------------------
the form of Exhibit J, executed by the Chief Financial Officer of the Company.
---------
11.1.16 Pro Forma. A consolidated pro forma balance sheet of the Company
--------- --- -----
as at the Closing Date, adjusted to give effect to the consummation of the
financings contemplated hereby as if such transactions had occurred on such
date, consistent in all material respects with the sources and uses of cash as
previously described to Lender and the forecasts previously provided to Lender.
11.1.17 Search Results; Lien Terminations. Certified copies of Uniform
---------------------------------
Commercial Code Requests for Information or Copies (Form UCC-11), or a similar
search report certified by a party acceptable to Lender, dated a date reasonably
near to the Closing Date, listing all effective financing statements which name
the Company and each Subsidiary (under their present names and any previous
names) as debtors and which are filed in the jurisdictions in which filings are
to be made pursuant to the Collateral Documents, together with (i) copies of
such financing statements, (ii) executed copies of proper Uniform Commercial
Code Form UCC-3 termination statements, if any, necessary to release all Liens
and other rights of any Person in any collateral described in the Collateral
Documents previously granted by any Person (other than Liens permitted by
Section 10.8) and (iii) such other Uniform Commercial Code Form UCC-3
- ------------
termination statements as Lender may reasonably request.
11.1.18 Filings, Registrations and Recordings. Lender shall have received
-------------------------------------
each document (including Uniform Commercial Code financing statements) required
by the Collateral Documents or under law or reasonably requested by Lender to be
filed, registered or recorded in order to create in favor of Lender, a perfected
Lien on the collateral described therein, prior and superior to any other
Person, in proper form for filing, registration or recording.
11.1.19 Closing Certificate. A certificate signed by the Chief Financial
-------------------
Officer of the Company dated as of the Closing Date, affirming the matters set
forth in Section 11.2.1 as of the Closing Date.
--------------
11.1.20 Intentionally Omitted.
---------------------
40
<PAGE>
11.1.21 Intentionally Omitted
---------------------
11.1.22 Other. Such other documents as Lender may reasonably request.
-----
11.2 Conditions. The obligation of Lender to make each Loan is subject to
----------
the following further conditions precedent that:
11.2.1 Compliance with Warranties, No Default, etc. Both before and after
--------------------------------------------
giving effect to any borrowing, the following statements shall be true and
correct:
(a) the representations and warranties of the Company, MPM and each
Subsidiary, as applicable, set forth in this Agreement and the other Loan
Documents shall be true and correct in all material respects with the same
effect as if then made (except to the extent stated to relate to a specific
earlier date, in which case such representations and warranties shall be
true and correct as of such earlier date); and
(b) no Event of Default or Unmatured Event of Default shall have then
occurred and be continuing.
11.2.2 Confirmatory Certificate. If requested by Lender, Lender shall
------------------------
have received a certificate dated the date of such requested Loan and signed by
a duly authorized representative of the Company as to the matters set out in
Section 11.2.1 (it being understood that each request by the Company for the
- --------------
making of a Loan shall be deemed to constitute a warranty by the Company that
the conditions precedent set forth in Section 11.2.1 will be satisfied at the
--------------
time of the making of such Loan), together with such other documents as Lender
may reasonably request in support thereof.
11.2.3 Additional Landlord Consents and Waivers. If requested by Lender,
----------------------------------------
Lender shall have received a duly executed Landlord's Consent, Estoppel and
Waiver in form and substance reasonably acceptable to Lender with respect to
each parcel of real property hereafter leased by the Company or any of its
Subsidiaries. The Company agrees and covenants to use its best efforts to
obtain Landlord Consents, Estoppels and Waivers with respect to those properties
leased by the Company as of the Closing Date (other than the Atlanta, Georgia
office) within 60 days following the Closing Date.
SECTION 12 EVENTS OF DEFAULT AND THEIR EFFECT.
12.1 Events of Default. Each of the following shall constitute an Event
-----------------
of Default under this Agreement:
12.1.1 Non-Payment of the Loans, etc. Default in the payment when due of
------------------------------
the principal of any Loan; or default, and continuance thereof for five days, in
the payment when due of any interest, fee or other amount payable by the Company
hereunder or under any other Loan Document.
41
<PAGE>
12.1.2 Non-Payment of Other Debt. Any default shall occur under the terms
-------------------------
applicable to any Debt of the Company or any Subsidiary and such default shall
(a) consist of the failure to pay such Debt when due, whether by acceleration or
otherwise, or (b) accelerate the maturity of such Debt or permit the holder or
holders thereof, or any trustee or agent for such holder or holders, to cause
such Debt to become due and payable (or require the Company or any Subsidiary to
purchase or redeem such Debt) prior to its expressed maturity.
12.1.3 Other Material Obligations. Default in the payment when due, or in
--------------------------
the performance or observance of, any material obligation of, or condition
agreed to by, the Company or any Subsidiary with respect to any material
purchase or lease of goods or services where such default, singly or in the
aggregate with all other such defaults, might reasonably be expected to have a
Material Adverse Effect.
12.1.4 Bankruptcy, Insolvency, etc. The Company, MPM or any Subsidiary
----------------------------
becomes insolvent or generally fails to pay, or admits in writing its inability
or refusal to pay, debts as they become due; or the Company, MPM or any
Subsidiary applies for, consents to, or acquiesces in the appointment of a
trustee, receiver or other custodian for the Company, MPM or such Subsidiary or
any property thereof, or makes a general assignment for the benefit of
creditors; or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for the Company, MPM or any
Subsidiary or for a substantial part of the property of any thereof and is not
discharged within 60 days; or any bankruptcy, reorganization, debt arrangement,
or other case or proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding, is commenced in respect of the Company,
MPM or any Subsidiary, and if such case or proceeding is not commenced by the
Company, MPM or such Subsidiary, it is consented to or acquiesced in by the
Company, MPM or such Subsidiary, or remains for 60 days undismissed; or the
Company, MPM or any Subsidiary takes any action to authorize, or in furtherance
of, any of the foregoing.
12.1.5 Non-Compliance with Loan Documents. (a) Failure by the Company to
----------------------------------
comply with or to perform any covenant set forth in Sections 10.1.5(a), 10.5
------------------------
through 10.8, 10.10 through 10.15, and 10.20 through 10.22; or (b) failure by
---- ----- ----- ----- -----
the Company to comply with or to perform any other provision of this Agreement
or any other Loan Document (and not constituting an Event of Default under any
other provision of this Section 12) and continuance of such failure described in
----------
this clause (b) for 30 days following written notice by Lender thereof.
----------
12.1.6 Warranties. Any warranty made by the Company, MPM or any
----------
Subsidiary herein or any other Loan Document is breached or is false or
misleading in any material respect, or any schedule, certificate, financial
statement, report, notice or other writing furnished by the Company, MPM or any
Subsidiary to Lender in connection herewith is false or misleading in any
material respect on the date as of which the facts therein set forth are stated
or certified.
12.1.7 Pension Plans. (i) Institution of any steps by the Company or any
-------------
other Person to terminate a Pension Plan if as a result of such termination the
Company could be required to make a contribution to such Pension Plan, or could
incur a liability or obligation to such Pension Plan, in
42
<PAGE>
excess of $25,000; (ii) a contribution failure occurs with respect to any
Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or
(iii) there shall occur any withdrawal or partial withdrawal from a
Multiemployer Pension Plan and the withdrawal liability (without unaccrued
interest) to Multiemployer Pension Plans as a result of such withdrawal
(including any outstanding withdrawal liability that the Company and the
Controlled Group have incurred on the date of such withdrawal) exceeds $25,000.
12.1.8 Judgments. Final judgments which exceed an aggregate of $50,000
---------
shall be rendered against the Company or any Subsidiary and shall not have been
paid, discharged or vacated or had execution thereof stayed pending appeal
within 30 days after entry or filing of such judgments.
12.1.9 Intentionally Omitted.
----------------------
12.1.10 Invalidity of Collateral Documents, etc. Any Collateral Document
----------------------------------------
shall cease to be in full force and effect; or the Company or any Subsidiary (or
any Person by, through or on behalf of the Company or any Subsidiary) shall
contest in any manner the validity, binding nature or enforceability of any
Collateral Document.
12.1.11 Invalidity of Subordination Provisions, etc. Any subordination
--------------------------------------------
provision in any document or instrument governing Subordinated Debt, or any
subordination provision in any guaranty by any Subsidiary of any Subordinated
Debt, shall cease to be in full force and effect, or the Company, MPM or any
other Person (including the holder of any applicable Subordinated Debt) shall
contest in any manner the validity, binding nature or enforceability of any such
provision.
12.1.12 Change of Control. (a) Avy H. Stein shall cease to be a member of
-----------------
the Board of Directors of the Company; or (b) a period of 30 consecutive days
shall have elapsed during which time any two of the individuals named in
Schedule 12.1.12 shall have ceased to hold executive offices with the Company at
- ----------------
least equal in seniority and responsibility to such individuals' present
offices, as set out in such Schedule 12.1.12, excluding any such individual who
---------------- ---------
has been replaced by another individual or individuals reasonably satisfactory
to Lender (it being understood that any such replacement individual shall be
deemed added to Schedule 12.1.12 on the date of approval thereof by Lender); or
----------------
(c) UC Holdings and/or Affiliates thereof shall cease to own and control 100% of
the issued and outstanding common stock of the Company owned by it as of the
Closing Date and, in any event, shall cease at any time to own and control,
directly or indirectly, at least 51.0% of the voting stock of the Company
(including on a fully diluted basis); or (d) Willis Stein & Partners, L.P., a
Delaware limited partnership, shall either (i) cease to be the sole manager of
UC Holdings, or (ii) at any time cease to own and control a majority of the
membership and/or other equity interests of UC Holdings sufficient to enable it
to direct and control the business of UC Holdings.
12.1.13 Material Adverse Effect. The occurrence of any event having a
-----------------------
Material Adverse Effect under clauses (b) and/or (c) of the definition of such
term.
12.2 Effect of Event of Default. If any Event of Default described in
--------------------------
Section 12.1.4 shall occur, the Commitment (if it has not theretofore
- --------------
terminated) shall immediately terminate and the Loans and all other obligations
hereunder shall become immediately due and payable, all without presentment,
demand, protest or notice of any kind (except notices expressly required
hereunder);
43
<PAGE>
and, if any other Event of Default shall occur and be continuing, Lender shall
declare the Commitments (if it has not theretofore terminated) to be terminated
and/or declare all Loans and all other obligations hereunder to be due and
payable, whereupon the Commitment (if it has not theretofore terminated) shall
immediately terminate and/or all Loans and all other obligations hereunder shall
become immediately due and payable, all without presentment, demand, protest or
notice of any kind (except notices expressly required hereunder). Lender shall
promptly advise the Company of any such declaration, but failure to do so shall
not impair the effect of such declaration. Notwithstanding the foregoing, the
effect as an Event of Default of any event described in Section 12.1.1 or
--------------
Section 12.1.4 may be waived by the written consent of Lender, and the effect as
- --------------
an Event of Default of any other event described in this Section 12 may be
----------
waived by the written consent of Lender.
SECTION 13 RESERVED
SECTION 14 GENERAL.
14.1 Waiver; Amendments. No delay on the part of Lender in the exercise
------------------
of any right, power or remedy shall operate as a waiver thereof, nor shall any
single or partial exercise by any of them of any right, power or remedy preclude
other or further exercise thereof, or the exercise of any other right, power or
remedy. No amendment, modification or waiver of, or consent with respect to,
any provision of this Agreement or the Note shall in any event be effective
unless the same shall be in writing and signed and delivered by Lender with
respect thereto, and then any such amendment, modification, waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
14.2 Confirmations. The Company and each holder of a Note agree from time
-------------
to time, upon written request received by it from the other, to confirm to the
other in writing (with a copy of each such confirmation to Lender) the aggregate
unpaid principal amount of the Loans then outstanding under such Note.
14.3 Notices. Except as otherwise provided in Sections 2.2.2 and 2.2.3,
------- -------------- -----
all notices hereunder shall be in writing (including facsimile transmission) and
shall be sent to the applicable party at its address shown on Schedule 14.3 or
-------------
at such other address as such party may, by written notice received by the other
parties, have designated as its address for such purpose. Notices sent by
facsimile transmission shall be deemed to have been given when sent; notices
sent by mail shall be deemed to have been given three Business Days after the
date when sent by registered or certified mail, postage prepaid; and notices
sent by hand delivery or overnight courier service shall be deemed to have been
given when received. For purposes of Sections 2.2.2 and 2.2.3, Lender shall be
-------------- -----
entitled to rely on telephonic instructions from any person that Lender in good
faith believes is an authorized officer or employee of the Company, and the
Company shall hold Lender harmless from any loss, cost or expense resulting from
any such reliance.
44
<PAGE>
14.4 Computations. Where the character or amount of any asset or
------------
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with GAAP, consistently applied; provided that if the Company
--------
notifies Lender that the Company wishes to amend any covenant in Section 10 to
----------
eliminate or to take into account the effect of any change in GAAP on the
operation of such covenant (or if Lender notifies the Company that Lender wish
to amend Section 10 for such purpose), then the Company's compliance with such
----------
covenant shall be determined on the basis of GAAP in effect immediately before
the relevant change in GAAP became effective, until either such notice is
withdrawn or such covenant is amended in a manner satisfactory to the Company
Lender.
14.5 Regulation U. Lender represents that it in good faith is not
------------
relying, either directly or indirectly, upon any Margin Stock as collateral
security for the extension or maintenance by it of any credit provided for in
this Agreement.
14.6 Costs, Expenses and Taxes. The Company agrees to pay on demand all
-------------------------
reasonable out-of-pocket costs and expenses of Lender (including Attorney Costs)
in connection with the preparation, execution, syndication, delivery and
administration of this Agreement, the other Loan Documents and all other
documents provided for herein or delivered or to be delivered hereunder or in
connection herewith (including any amendment, supplement or waiver to any Loan
Document), and all reasonable out-of-pocket costs and expenses (including
Attorney Costs) incurred by Lender after an Event of Default in connection with
the enforcement of this Agreement, the other Loan Documents or any such other
documents. In addition, the Company agrees to pay, and to save Lender harmless
from all liability for, (a) any stamp or other taxes (excluding income taxes and
franchise taxes based on net income) which may be payable in connection with the
execution and delivery of this Agreement, the borrowings hereunder, the issuance
of the Note or the execution and delivery of any other Loan Document or any
other document provided for herein or delivered or to be delivered hereunder or
in connection herewith and (b) any fees of the Company's auditors in connection
with any reasonable exercise by Lender of its rights pursuant to Section 10.2.
------------
All obligations provided for in this Section 14.6 shall survive repayment of the
------------
Loans, cancellation of the Note, and termination of this Agreement.
14.7 Subsidiary References. The provisions of this Agreement relating to
---------------------
Subsidiaries shall apply only during such times, if any, as the Company has one
or more Subsidiaries. Any representations, agreements, covenants or warranties
relating to MPM shall apply only and at all times following the MPM Acquisition.
14.8 Captions. Section captions used in this Agreement are for
--------
convenience only and shall not affect the construction of this Agreement.
45
<PAGE>
14.9 Assignments; Participations.
---------------------------
14.9.1 Assignments. Lender may at any time assign and delegate to one or
-----------
more commercial banks or other Persons (any Person to whom such an assignment
and delegation is to be made being herein called an "Assignee") all or any
--------
fraction of Lender's Loans and Commitment (which assignment and delegation shall
be of a constant, and not a varying, percentage of all Lender's Loans and
Commitment) in a minimum aggregate amount equal to $1,000,000; provided that (a)
--------
no assignment and delegation may be made to any Person if, at the time of such
assignment and delegation, the Company would be obligated to pay any greater
amount under Section 7.6 or Section 8 to the Assignee than the Company is then
----------- ---------
obligated to pay to Lender under such Sections (and if any assignment is made in
violation of the foregoing, the Company will not be required to pay the
incremental amounts) and (b) the Company shall be entitled to continue to deal
solely and directly with Lender in connection with the interests so assigned and
delegated to an Assignee until the date when all of the following conditions
shall have been met:
(x) five Business Days shall have passed after written notice of such
assignment and delegation, together with payment instructions, addresses
and related information with respect to such Assignee, shall have been
given to the Company by Lender and the Assignee, and
(y) Lender and the Assignee shall have executed and delivered to the
Company an assignment agreement substantially in the form of Exhibit H (an
---------
"Assignment Agreement"), together with any documents required to be
--------------------
delivered thereunder, which Assignment Agreement shall have been accepted
by Lender.
14.9.2 From and after the date on which the conditions described above
have been met, (x) such Assignee shall be deemed automatically to have become a
party hereto and, to the extent that rights and obligations hereunder have been
assigned and delegated to such Assignee pursuant to such Assignment Agreement,
shall have the rights and obligations of a lender hereunder and (y) Lender, to
the extent that rights and obligations hereunder have been assigned and
delegated by it pursuant to such Assignment Agreement, shall be released from
its obligations hereunder. Within five Business Days after effectiveness of any
assignment and delegation, the Company shall execute and deliver to Lender (for
delivery to the Assignee) a new note in the principal amount of the Assignee's
Pro Rata Share of the Revolving Commitment Amount and, if Lender has retained a
Commitment hereunder, a replacement note in the principal amount of the pro rata
share of the Revolving Commitment Amount retained by Lender (such note to be in
exchange for, but not in payment of, the predecessor note held by such
assigning Bank). Each such note shall be dated the effective date of such
assignment. Lender shall mark the predecessor Note "exchanged" and deliver it
to the Company. Accrued interest on that part of the predecessor Note being
assigned shall be paid as provided in the Assignment Agreement. Accrued
interest and fees on that part of the predecessor Note not being assigned shall
be paid to Lender. Accrued interest and accrued fees shall be paid at the same
time or times provided in the predecessor Note and in this Agreement. Any
attempted assignment and delegation not made in accordance with this Section
-------
14.9.1 shall be null and void.
- ------
46
<PAGE>
The Company shall not be required to provide any information or reports in
connection with any assignment that is not otherwise required under the terms of
this Agreement.
Notwithstanding the foregoing provisions of this Section 14.9.1 or any
--------------
other provision of this Agreement, Lender may at any time assign all or any
portion of its Loans and its Note to a Federal Reserve Bank (but no such
assignment shall release Lender from any of its obligations hereunder).
14.9.3 Participations. Lender may at any time sell to one or more
--------------
commercial banks or other Persons participating interests in any Loan owing to
it, the Note held by it, the Commitment of Lender, or any other interest of
Lender hereunder (any Person purchasing any such participating interest being
herein called a "Participant"). In the event of a sale by Lender of a
-----------
participating interest to a Participant, (x) Lender shall remain the holder of
the Note for all purposes of this Agreement, (y) the Company shall continue to
deal solely and directly with Lender in connection with Lender's rights and
obligations hereunder and (z) all amounts payable by the Company shall be
determined as if Lender had not sold such participation and shall be paid
directly to Lender. The Company agrees that if amounts outstanding under this
Agreement and the Note are due and payable (as a result of acceleration or
otherwise), each Participant shall be deemed to have the right of setoff in
respect of its participating interest in amounts owing under this Agreement and
any note to the same extent as if the amount of its participating interest were
owing directly to it as a lender under this Agreement or such note. The Company
also agrees that each Participant shall be entitled to the benefits of Section
-------
7.6 and Section 8 as if it were Lender (provided that no Participant shall
- --- --------- --------
receive any greater compensation pursuant to Section 7.6 or Section 8 than would
----------- ---------
have been paid to Lender if no participation had been sold).
14.10 Governing Law. This Agreement and the Note shall be a contract
-------------
made under and governed by the internal laws of the State of Illinois applicable
to contracts made and to be performed entirely within such State. Whenever
possible each provision of this Agreement shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement. All obligations of the Company and rights of the Lender expressed
herein or in any other Loan Document shall be in addition to and not in
limitation of those provided by applicable law.
14.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts and
each such counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same Agreement.
14.12 Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and Lender their respective successors and permitted assigns, and shall
inure to the benefit of the Company, and the Lender and the successors and
assigns thereof.
47
<PAGE>
14.13 Indemnification by the Company. In consideration of the execution
------------------------------
and delivery of this Agreement by Lender and the agreement to extend the
Commitment provided hereunder, the Company hereby agrees to indemnify, exonerate
and hold Lender and each of the officers, directors, employees, Affiliates and
agents of Lender (each a "Bank Party") free and harmless from and against any
----------
and all actions, causes of action, suits, losses, liabilities, damages and
expenses, including Attorney Costs (collectively, the "Indemnified
-----------
Liabilities"), incurred by the Bank Parties or any of them as a result of, or
- -----------
arising out of, or relating to (i) any tender offer, merger, purchase of stock,
purchase of assets or other similar transaction financed or proposed to be
financed in whole or in part, directly or indirectly, with the proceeds of any
of the Loans, (ii) the use, handling, release, emission, discharge,
transportation, storage, treatment or disposal of any hazardous substance at any
property owned or leased by the Company, MPM or any Subsidiary, (iii) any
violation of any Environmental Laws with respect to conditions at any property
owned or leased by the Company, MPM or any Subsidiary or the operations
conducted thereon, (iv) the investigation, cleanup or remediation of offsite
locations at which the Company, MPM or any Subsidiary or their respective
predecessors are alleged to have directly or indirectly disposed of hazardous
substances or (v) the execution, delivery, performance or enforcement of this
Agreement or any other Loan Document by any of the Bank Parties, except for any
such Indemnified Liabilities arising on account of the applicable Bank Party's
gross negligence or willful misconduct. If and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Company hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. All
obligations provided for in this Section 14.13 shall survive repayment of the
-------------
Loans, cancellation of the Note, any foreclosure under, or any modification,
release or discharge of, any or all of the Collateral Documents and termination
of this Agreement.
14.14 Non-liability of Lender. The relationship between the Company on
-----------------------
the one hand and Lender on the other hand shall be solely that of borrower and
lender. Lender shall not have any fiduciary responsibility to the Company.
Lender does not undertake any responsibility to the Company to review or inform
the Company or any matter in connection with any phase of the Company's business
or operations. The Company agrees that Lender shall not have liability to the
Company (whether sounding in tort, contract or otherwise) for losses suffered by
the Company in connection with, arising out of, or in any way related to the
transactions contemplated and the relationship established by the Loan
Documents, or any act, omission or event occurring in connection therewith,
unless it is determined in a final non-appealable judgment by a court of
competent jurisdiction that such losses resulted from the gross negligence or
willful misconduct of the party from which recovery is sought. Lender shall not
have any liability with respect to, and the Company hereby waives, releases and
agrees not to sue for, any special, indirect or consequential damages suffered
by the Company in connection with, arising out of, or in any way related to the
Loan Documents or the transactions contemplated thereby.
48
<PAGE>
14.15 Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED
-------------------------------------------
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS
OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
--------
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT LENDER'S OPTION, IN THE COURTS
OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE
COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET
FORTH ABOVE. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT
THE STATE OF ILLINOIS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT
REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
14.16 Waiver of Jury Trial. EACH OF THE COMPANY, LENDER HEREBY WAIVES ANY
--------------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY
RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY
BANKING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND
AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY.
Balance of Page Intentionally Left Blank
- Signature Page Follows -
49
<PAGE>
This Credit Agreement was executed by the parties hereto and delivered at
Chicago, Illinois, as of the day and year first above written.
COLLEGE TELEVISION NETWORK, INC., a Delaware
corporation
By: /s/ Jason Elkin
----------------------------------------
Title: Chief Executive Officer
----------------------------------------
LASALLE BANK NATIONAL ASSOCIATION, a national
banking association
By: /s/ Peter Bulandr
---------------------------------------
Title: First Vice President
---------------------------------------
50
<PAGE>
EXHIBIT A
---------
FORM OF
NOTE
July 26, 1999
$12,000,000 Chicago, Illinois
The undersigned, for value received, promises to pay to the order of
LaSalle Bank National Association (the "Bank") at the principal office of the
----
Bank in Chicago, Illinois, the aggregate unpaid amount of all Loans made to the
undersigned by the Bank pursuant to the Credit Agreement referred to below (as
shown on the schedule attached hereto (and any continuation thereof) or in the
records of the Bank), such principal amount to be payable on the dates set forth
in the Credit Agreement.
The undersigned further promises to pay interest on the unpaid principal
amount of each Loan from the date of such Loan until such Loan is paid in full,
payable at the rate(s) and at the time(s) set forth in the Credit Agreement.
Payments of both principal and interest are to be made in lawful money of the
United States of America.
This Note evidences indebtedness incurred under, and is subject to the
terms and provisions of, the Credit Agreement, dated as of July 26, 1999 (as
amended or otherwise modified from time to time, the "Credit Agreement"; terms
----------------
not otherwise defined herein are used herein as defined in the Credit
Agreement), among the undersigned, and the Bank, to which Credit Agreement
reference is hereby made for a statement of the terms and provisions under which
this Note may or must be paid prior to its due date or its due date accelerated.
This Note is made under and governed by the laws of the State of Illinois
applicable to contracts made and to be performed entirely within such State.
COLLEGE TELEVISION NETWORK,
INC., a Delaware corporation
By:
Title:
3
<PAGE>
Schedule attached to Note dated ___________, _____ of COLLEGE TELEVISION
NETWORK, INC. payable to the order of _____________
<TABLE>
<CAPTION>
Date and Date and
Amount of Amount of
Loan or of Repayment or of Interest
Conversion from Conversion into Period/ Unpaid
another type of another type of Maturity Principal Notation
Loan Loan Date Balance Made by
- ----------------- --------------- -------- --------- --------
<S> <C> <C> <C> <C>
1. BASE RATE LOANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. EURODOLLAR LOANS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
EXHIBIT B
FORM OF COMPLIANCE CERTIFICATE
------------------------------
To: LaSalle Bank National Association, as Lender
Please refer to the Credit Agreement dated as of July 26, 1999 (as amended
or otherwise modified from time to time, the "Credit Agreement") between College
----------------
Television Network, Inc., (the "Company"), and LaSalle Bank National
-------
Association, as Lender. Terms used but not otherwise defined herein are used
herein as defined in the Credit Agreement.
I. Reports. Enclosed herewith is a copy of the [annual
-------
audited/quarterly/monthly] report of the Company as at _____________, ____
(the "Computation Date"), which report fairly presents in all material
----------------
respects the financial condition and results of operations [(subject to the
absence of footnotes and to normal year-end adjustments)] of the Company as
of the Computation Date and has been prepared in accordance with GAAP
----------------
consistently applied.
II. Financial Tests. The Company hereby certifies and warrants to you that the
---------------
following is a true and correct computation as at the Computation Date of
the following ratios and/or financial restrictions contained in the Credit
Agreement:
A. Calculation of EBITDA
1. Consolidated Net Income $________
2. Plus: Interest Expense $________
income tax expense $________
depreciation $________
amortization $________
3. Total (EBITDA) $________
B. Section 10.6.1-Minimum EBITDA
1. EBITDA
(from Item A(3) above) $_________
2. Minimum required $_________
B-1
<PAGE>
C. Section 10.6.2 - Capital Expenditures
1. Capital Expenditures for the
measurement period $_________
2. Maximum Permitted Capital
Expenditures $_________
The Company further certifies to you that no Event of Default or Unmatured
Event of Default has occurred and is continuing.
IN WITNESS WHEREOF, the Company has caused this Certificate to be executed
and delivered by its duly authorized officer on _________, ____.
COLLEGE TELEVISION NETWORK, INC.
By
Title
C-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE JUNE 30, 1999 REPORT FILED ON
FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,163,166
<SECURITIES> 0
<RECEIVABLES> 1,759,571
<ALLOWANCES> 200,125
<INVENTORY> 0
<CURRENT-ASSETS> 2,975,580
<PP&E> 9,626,742
<DEPRECIATION> 1,529,527
<TOTAL-ASSETS> 11,932,633
<CURRENT-LIABILITIES> 2,467,025
<BONDS> 0
0
0
<COMMON> 72,045
<OTHER-SE> 8,995,795
<TOTAL-LIABILITY-AND-EQUITY> 11,932,633
<SALES> 5,039,853
<TOTAL-REVENUES> 5,099,217
<CGS> 0
<TOTAL-COSTS> 11,610,754
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,511,537)
<EPS-BASIC> (.46)
<EPS-DILUTED> (.46)
</TABLE>
<PAGE>
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
You should consider carefully the following factors in evaluating us and our
business. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us, which we
currently deem immaterial or that are similar to those faced by other companies
in our industry or business in general, may also impair our business operations.
If any of the following risks actually occurs, our business, financial condition
or results of future operations could be materially and adversely affected.
We have experienced, and continue to experience, net losses.
Since our inception, we have experienced, and are continuing to experience,
operating losses and negative cash flow from operations. Our statements of
operations for the fiscal year ended October 31, 1997, for the two-month
transition period ended December 31, 1997, for the fiscal year ended December
31, 1998, and for the six-month period ended June 30, 1999, reflect net losses
of approximately $4,003,590, $1,135,927, $8,453,903, and $6,511,537,
respectively, or approximately $.77, $.14, $.89 and $.46 per share,
respectively. In addition, we expect to incur operating losses in the near
future and until such time as operations generate sufficient revenues to cover
our costs.
We may require additional working capital or financing to meet our operating
demands in 1999 and 2000.
The rapid development of our business will continue to require substantial
capital expenditures for additional installations. Our future financial results
will depend primarily on our ability to increase our number of affiliate
locations, maintain our existing installations and increase advertising
revenues. We cannot assure that we will achieve or sustain profitability or
positive cash flows from future operating activities. If we fail to increase
the number of installation sites or experience operating difficulties, or if
advertising revenues do not increase substantially, it is likely that we may be
required to raise additional capital or obtain additional financing to fund our
operations.
We depend upon our advertising revenues.
We primarily derive our revenues from advertisers displaying their commercials
on CTN. Although we have agreements with certain national advertisers and have
held discussions or had prior agreements with other national advertisers, we
cannot assure that these advertisers will continue to purchase advertising from
us, that new advertisers will purchase advertising from us, or that future
significant advertising revenues will be generated. Because certain advertisers
may discontinue or reduce advertising on CTN from time to time, we anticipate
that we could experience fluctuations in operating results and revenues. The
failure to attract and enter into new and/or additional agreements with national
advertisers and to derive significant revenues from these advertisers would have
a material adverse effect on our business and financial results.
We must secure new installations and maintain existing installations.
Our growth is dependent upon our ability to increase the number of
installation sites at colleges and universities. If we increase our
installation sites, we will have increased viewership and should be able to
increase our advertising revenue. In addition, we believe that if we are able
to increase our installation sites, it will become more difficult for a
competitor to enter the market. We have increased our number of installations,
including contracts for future installations, from 265 as of December 31, 1997,
to 736 as of December 31, 1998 and to 1,182 as of June 30, 1999. Although we
have been successful in increasing our
<PAGE>
installation sites, we cannot assure that this growth will continue and that
colleges and universities will not require the removal of our system from
current locations. Our contracts with colleges and universities for installation
sites typically have a three-year term. The failure to increase installation
sites would have a material adverse effect on our business and financial
results.
We depend upon satellite technology.
The ability of CTN to transmit our programming, and thereby derive advertising
revenue, is dependent upon proper performance of the satellite transmission
equipment upon which CTN's programming delivery is based. Our contract with
Public Broadcasting Service, Inc. provides for our sublease of transponder
capacity on a satellite owned and operated by GE American Communications, Inc.
We are entitled to limited protected service under the sublease in the event the
satellite fails, which would enable CTN's programming to be redirected to a
different satellite under certain circumstances and subject to certain
limitations. However, in the event that CTN's programming is required to be
redirected to a different satellite, our satellite dishes installed in each of
our affiliate locations would be required to be redirected in order for the
programming signals to be received from the satellite. This redirection
procedure could take up to 21 days for completion and would involve significant
cost to us. We have obtained insurance for certain of the costs associated with
such a satellite failure, including the costs of redirecting the satellite
dishes and securing a new satellite transponder, and the lost advertising
revenues resulting from the interruption in programming.
We depend on our agreements with third parties.
The ability of CTN to transmit our programming and to maintain and install our
equipment is dependent upon performance by certain third parties under contracts
with us. We are substantially dependent upon performance by unaffiliated
companies for our day-to-day programming operations and system installation and
maintenance.
Any failure to maintain or improve market acceptance for CTN would adversely
affect our business.
Our prospects will be significantly affected by the success of our affiliate
marketing efforts, the acceptance of our programming by potential viewers and
our ability to attract advertisers. Achieving market acceptance for CTN will
require significant effort and expenditures by us to enhance awareness and
demand by viewers and advertisers. Our current strategy and future marketing
plans may be subject to change as a result of a number of factors, including
progress or delays in our affiliate marketing efforts, the nature of possible
affiliation and other broadcast arrangements that may become available to us in
the future and factors affecting the direct broadcast industry. We cannot assure
that our strategy will result in initial or continued market acceptance for CTN.
We depend upon our access to programming.
We believe that our ability to maintain access to music videos and other
programming on a regular, long-term basis, on terms favorable to us is important
to our future success and profitability. We obtain music videos pursuant to
oral agreements with music companies. We have such agreements or arrangements
with a number of the major music company labels, which include Sony, Warner
Elektra, EMI, Columbia, MCA and BMG. We also receive CNN news and sports
programming pursuant to our agreement with Turner Private Networks, Inc.
Termination of substantially all or a large number of our programming agreements
would have a material adverse effect on our business and financial results.
<PAGE>
We depend upon our key executives.
We are substantially dependent on the efforts of Jason Elkin, our Chairman and
Chief Executive Officer, Peter Kauff, our Vice Chairman, and Martin Grant, our
President. The loss of any of these executives could have a material adverse
effect on our business and financial results. All of these executives have
entered into multi-year employment agreements with us.
We may not be able to compete successfully with other companies.
CTN competes for advertisers with many other forms of advertising media,
including television, radio, print, direct mail and billboard. There are no
meaningful intellectual property barriers to prevent competitors from entering
into this market, and we cannot assure that a competitor with greater resources
than us will not enter into the market. We believe that competition could
increase as other organizations perceive the potential for commercial
application of our product or service.
We must continue to advance our technology.
We expect technological developments and enhancements to continue at a rapid
pace in the direct broadcast satellite network industry and related industries,
and we cannot assure that technological developments will not require us to
switch to a different transmission technology or cause our technology and
products to be dated. Our future success could be largely dependent upon our
ability to adapt to technological change and remain competitive.
Our principal stockholder continues to control our affairs.
U-C Holdings, L.L.C. beneficially owns approximately 80.3% of our outstanding
common stock. As a result of its ownership, U-C Holdings has, and will continue
to have, sufficient voting power to determine our direction and policies, the
election of our directors, the outcome of any other matter submitted to a vote
of stockholders and to prevent or cause a change in our control. See "We may be
subject to conflicts of interest and related party transactions."
We may be subject to conflicts of interest and related party transactions.
Certain conflicts of interest may arise as a result of the beneficial
ownership interests in U-C Holdings that are held by a majority of our
directors, including our chairman and chief executive officer. Several members
of our Board of Directors may be deemed to be an indirect beneficial owner of
the securities beneficially owned by U-C Holdings. Conflicts of interest may
arise as a result of these affiliated relationships. Although no specific
measures to resolve such conflicts of interest have been formulated, our
management has a fiduciary obligation to deal fairly and in good faith with us
and will exercise reasonable judgment in resolving any specific conflict of
interest that may occur.
The holders of our common stock could be materially diluted under certain
circumstances.
On July 23, 1999, U-C Holdings purchased 309,998 shares of our convertible
preferred stock for $4,649,970. U-C Holdings also was issued a Class D Warrant
which entitles it to purchase 135,686 shares of our common stock. The
convertible preferred stock provides that the conversion price for the stock
will adjust at the end of each fiscal quarter if the average trading price of
the common stock for the 30 days prior to the end of the fiscal quarter is less
than the then current conversion price of the convertible preferred stock
($6.854 at the time of the purchase); however, the conversion price cannot be
reduced below $2.75. The exercise price of the Class D Warrant contains a
nearly identical provision. The conversion of the shares of convertible
preferred stock into common stock and the exercise of the Class D Warrant will
result in dilution of voting rights of the currently outstanding public holders
of the common stock. If the conversion price of the convertible preferred stock
and the exercise price of the Class D Warrant are adjusted due to decreases in
<PAGE>
the average trading price of the common stock and the price of the common stock
later increases, the public holders of the common stock will be financially
diluted as well.
The funding for the MPM Acquisition (see "There are several risks associated
with our acquisition strategy" below) will likely require us to incur additional
debt and to issue additional equity in the Company. This will result in
additional dilution of the voting power of the public holders of our common
stock and may result in financial dilution to such holders as well.
Our stock price has been volatile, and declines could cause us to lose our
listing on Nasdaq.
The market price for our common stock could be subject to significant
fluctuations in response to our business and financial results. We currently
satisfy the conditions for continued listing on The Nasdaq SmallCap Market.
However, we cannot assure that the market price of the common stock will not
decline to a level where it does not satisfy these listing conditions.
Our revenues are subject to seasonality.
Our revenues are affected by the pattern of seasonality common to most school-
related businesses. Historically, we generate a significant portion of our
revenues during the period of September through May and substantially less
revenues during the summer months when most colleges and universities do not
hold regular classes.
Our stock price and ability to raise capital or obtain financing could be hurt
by our outstanding warrants and options.
As of June 30, 1999, there are outstanding options to purchase 1,216,958
shares of our common stock granted to certain of our officers and directors
pursuant to our stock option plans. In addition, there are warrants outstanding
that permit their holders to purchase 2,080,258 shares of our common stock. U-C
Holdings has entered into certain Equity Protection Agreements, dated April 25,
1997, which allow U-C Holdings to purchase additional shares of our common stock
upon the exercise of options or warrants that were outstanding on April 25, 1997
at a price of $2.75 per share (as adjusted). U-C Holdings also received a
warrant to purchase 152,100 shares of our common stock in connection with the
standby commitment U-C Holdings made to us pursuant to the rights offering we
completed in October 1998. Certain other holders of options and warrants also
have demand and piggy-back registration rights. While such rights, warrants and
options are outstanding, they may (i) adversely affect the market price of our
common stock and (ii) impair our ability to, and the terms on which we can,
raise additional equity capital or obtain debt financing.
Sales of our shares could cause our stock price to fall.
Sales of a substantial number of shares of common stock in the public market
could adversely affect the market price of our common stock prevailing from time
to time. All shares of our common stock, including shares held by U-C Holdings,
are freely tradable without restriction, or may be sold pursuant to Rule 144
under the Securities Act. The sale of the shares of our common stock acquired
by U-C Holdings are subject to certain limitations set forth in Rule 144 under
the Securities Act. As of June 30, 1999, options to purchase 1,216,958 shares
and warrants to purchase 2,080,258 shares of our common stock were outstanding,
of which options to purchase 685,389 shares and warrants to purchase 2,080,258
shares were exercisable.
There are several risks associated with our acquisition strategy.
On July 16, 1999, we entered into a stock purchase agreement to acquire all of
the issued and outstanding capital stock of Armed Forces Communications, Inc., a
New York corporation d/b/a Market Place Media and having its primary place of
business in Santa Barbara, California ("MPM"), for a purchase
<PAGE>
price of approximately $30,000,000 cash, subject to adjustment. Upon
consummation of the MPM Acquisition, MPM will be our wholly-owned subsidiary.
The closing of the MPM Acquisition is subject to conditions such as no material
adverse change in MPM. We intend to finance the acquisition through additional
senior debt (excluding debt recently obtained from the LaSalle Bank National
Association) and/or additional equity financing.
We believe that the MPM Acquisition represents an excellent opportunity to
further expand our business. However, our Board of Directors and senior
management face a significant challenge in their efforts to integrate the
businesses of MPM and CTN so that the different cultures and operations can be
effectively managed to continue to grow. The dedication of management resources
to such integration may detract attention from the day-to-day business of CTN.
There can be no assurance that there will not be substantial costs associated
with such activities or that there will not be other material adverse effects as
a result of these integration efforts, either of which could have a material
adverse effect on the financial results of CTN. Further, while the management
of CTN believes that the diverse experience of the combined companies will serve
to strengthen CTN, there can be assurance that this or any other of the
anticipated benefits of the MPM Acquisition will be fully realized.
In addition to the MPM Acquisition, we may seek to expand or complement our
operations through the possible acquisition of other companies or through the
licensing of programs that we believe are compatible with our business. While
we explore acquisition opportunities from time to time, as of the date of this
report, we have no definitive plans, agreements, commitments, arrangements or
understandings with respect to any significant acquisition other than the MPM
Acquisition. We have not established any minimum criteria for any other
acquisition, and our management and Board of Directors will have complete
discretion in determining the terms of any such acquisition. We cannot assure
that we will be able to ultimately effect any acquisition, including the MPM
Acquisition, or successfully integrate into our operations any business that we
may acquire, including MPM. Under Delaware law, various forms of business
combinations can be effected without stockholder approval and, accordingly,
stockholders will, in all likelihood, neither receive nor otherwise have the
opportunity to evaluate any financial or other information which may be made
available to us in connection with any acquisition and must rely entirely upon
the ability of management in selecting, structuring and consummating
acquisitions that are consistent with our business objectives.
Year 2000 risks may result in material adverse effects on our business.
Many currently-installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, over the
next six months, computer systems and/or software used by many companies will
need to be upgraded to comply with such "Year 2000" requirements. Because we
are dependent on vendor compliance, our ability to assure Year 2000 compliance
is limited. We have required certain of our computer system and software
vendors to represent that the services and products provided are, or will be,
Year 2000 compliant.
Our ability to issue preferred stock may inhibit a takeover of our company.
Our Board of Directors has the authority to issue up to 2,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by our stockholders. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of a
preferred stock that may be issued in the future. While we have no present
intention to issue shares of preferred stock, such issuance, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock.
