<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 2)
<TABLE>
<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
</TABLE>
<TABLE>
<S> <C>
HA-LO INDUSTRIES, INC.
- ------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, without par value.
Series A Convertible Preferred Stock, without par value
(2) Aggregate number of securities to which transaction
applies:
17,000,000 shares of Common Stock
5,100,000 shares of Preferred Stock
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
$10.0625 per share, which is equal to the average of the
high and low prices of the Common Stock as reported on the
New York Stock Exchange on January 27, 2000. There is no
market for the Preferred Stock; however, because each such
share of Preferred Stock is initially convertible into one
share of Common Stock, the value of the Preferred Stock is
for purposes of this calculation equal to the market value
of the Common Stock.
(4) Proposed maximum aggregate value of transaction:
$241,381,250, which equals the sum of (i) $19 million in
cash payable in the merger, (ii) $171,062,500 in Common
Stock issuable in the merger (calculated as indicated in
(3) above), and (iii) $51,318,750 in Preferred Stock
issuable in the merger (calculated as indicated in (3)
above).
(5) Total fee paid:
$48,277
----------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
PROPOSED MERGER--YOUR VOTE IS VERY IMPORTANT
The board of directors of HA-LO Industries, Inc. has unanimously approved a
merger agreement that would result in HA-LO acquiring all of
Starbelly.com, Inc. If we complete the merger, Starbelly.com stockholders will
receive approximately $240 million which we will pay as follows:
(1) paying $19 million in cash (less Starbelly.com's merger expenses in excess
of $500,000);
(2) paying the balance by issuing:
(a) 17 million shares of HA-LO common stock valued in the merger agreement
at $170 million; and
(b) 5.1 million shares of HA-LO convertible preferred stock valued in the
merger agreement at $51 million.
The merger consideration includes HA-LO common stock and HA-LO convertible
preferred stock issuable upon exercise of Starbelly.com's outstanding stock
options which will be assumed by HA-LO.
You will continue to own your shares after the merger. Immediately after the
merger, pre-merger shareholders of HA-LO will own approximately 69% of the
outstanding common stock, and the former stockholders of Starbelly.com will own
approximately 31% of the outstanding common stock (assuming all of the preferred
shares are converted into common stock and all assumed options are exercised and
all preferred shares issued upon exercise are converted into common stock).
The board of directors and stockholders of Starbelly.com have approved the
merger. We cannot complete the merger unless it is approved by HA-LO's
shareholders. A vote in favor of the merger also constitutes a vote in favor of:
- the issuance of 17 million shares of common stock pursuant to the merger
agreement and upon exercise of options assumed by HA-LO under
Starbelly.com's stock option plan; and
- the amendment of the Company's articles of incorporation to permit the
issuance of convertible preferred stock in the merger and upon exercise of
options assumed in the merger and the reservation of 5.1 million shares of
common stock for issuance upon conversion of the convertible preferred
stock.
We have scheduled a special meeting for you to vote on the merger. In
addition, at the special meeting you will be asked to:
- approve the adoption of a new stock option plan under which HA-LO will
assume Starbelly.com's stock option plan and the options outstanding under
the plan;
- approve an amendment to our articles of incorporation to increase the
number of shares of common stock that HA-LO is authorized to issue from
100 million to 250 million and to increase the number of shares of
preferred stock that HA-LO is authorized to issue from 10 million to
20 million; and
- approve an amendment to our articles of incorporation to authorize the
board of directors to provide for the future issuance of preferred stock
without the approval of the holders of our common stock.
Please note that approval of the merger is conditioned on approval of the
adoption of the new stock option plan. Similarly, approval of the adoption of
the new stock option plan is conditioned on approval of the merger.
<PAGE>
YOUR VOTE IS VERY IMPORTANT. Please take the time to vote by completing the
enclosed proxy card and returning it in the return envelope provided, even if
you plan to attend the special shareholders' meeting. You should note that if
you sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote in favor of the proposals submitted at the
special meeting. If you hold your shares in the name of a bank or broker, you
should follow the instructions on the form you receive from your bank or broker.
The date, time and place of our meeting are:
May 3, 2000, 10:00 a.m., Chicago time
Harris Bank, Room 20C
111 West Monroe Street
Chicago, Illinois 60603
This document provides you with detailed information about the meeting, the
proposed merger and the other matters to be considered at the special meeting.
We encourage you to read this entire document carefully. IN PARTICULAR, YOU
SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE 15 WHICH DESCRIBES
CERTAIN RISKS THAT YOU SHOULD CONSIDER IN EVALUATING THE MERGER. You may also
obtain information about our company from publicly available documents that we
have filed with the Securities and Exchange Commission.
[SIGNATURE]
John R. Kelley, Jr.
President and Chief Executive Officer
HA-LO Industries, Inc.
<PAGE>
[LOGO]
HA-LO INDUSTRIES, INC.
5980 WEST TOUHY AVENUE
NILES, ILLINOIS 60714
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
APRIL 12, 2000
------------------------
Notice is hereby given that a Special Meeting of Shareholders of HA-LO
Industries, Inc., an Illinois corporation ("HA-LO" or the "Company"), will be
held at HARRIS BANK, ROOM 20C, 111 WEST MONROE STREET, CHICAGO, ILLINOIS 60603
on Wednesday, May 3, 2000 at 10:00 a.m., Chicago time, for the following
purposes:
(1) To consider and vote upon a proposal to approve the merger of
Starbelly.com with a wholly owned subsidiary of HA-LO. A vote in favor of
the merger also constitutes a vote in favor of (a) the issuance of
17 million shares of common stock pursuant to the merger agreement and
upon exercise of Starbelly.com's outstanding stock options which will be
assumed by HA-LO, (b) the amendment of the Company's articles of
incorporation to permit the issuance of 5.1 million shares of convertible
preferred stock in the merger and upon exercise of assumed options, and
(c) the reservation of 5.1 million shares of common stock for issuance
upon conversion of the convertible preferred stock.
(2) To consider and vote upon a proposal to adopt a new stock option plan
under which HA-LO will assume Starbelly.com's stock option plan and the
options outstanding under that plan.
(3) To consider and vote upon a proposal to amend Article Four of the
Company's articles of incorporation to increase the number of shares of
common stock HA-LO is authorized to issue from 100 million to
250 million and to increase the number of shares of preferred stock that
HA-LO is authorized to issue from 10 million to 20 million.
(4) To consider and vote upon a proposal to amend Article Four of the
Company's articles of incorporation to authorize your board of directors
to provide for the future issuance of preferred stock without the further
approval of the holders of our common stock.
(5) To consider and vote upon a proposal to postpone or adjourn the special
meeting, if proposed by your board of directors.
(6) To transact such other business as may properly come before the special
meeting or any postponement or adjournment thereof.
Please note that approval of proposal 1 is conditioned on approval of
proposal 2. Similarly, approval of proposal 2 is conditioned on approval of
proposal 1.
<PAGE>
You are entitled to exercise dissenters' rights in connection with the
merger in accordance with the Illinois Business Corporation Act of 1983, as
amended (the "IBCA"). In order to exercise dissenters' rights, you must:
- deliver to HA-LO, before the vote is taken at the special meeting, a
written demand for payment of your shares of HA-LO common stock if the
merger is completed;
- NOT vote in favor of the proposal to merge Starbelly.com and HA-LO's
wholly owned subsidiary; and
- comply with the other requirements contained in Sections 11.65 and 11.70
of the IBCA.
For additional details regarding dissenters' rights, please read carefully
the section of the accompanying proxy statement captioned "The Special
Meeting--Dissenters' Rights."
If you were a shareholder of record at the close of business on March 27,
2000, you are entitled to notice of and to vote at the meeting and at any
postponements or adjournments thereof. A complete list of the shareholders
entitled to vote at the meeting will be subject to inspection by any shareholder
at the Company's principal executive office, 5980 West Touhy Avenue, Niles,
Illinois 60714, during usual business hours, for a period of ten days prior to
the meeting.
By Order of the Board of Directors,
[SIGNATURE]
JOHN R. KELLEY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Niles, Illinois
April 12, 2000
------------------------
THE BOARD OF DIRECTORS EXTENDS A CORDIAL INVITATION TO ALL SHAREHOLDERS TO
ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE, SIGN AND RETURN AS PROMPTLY AS POSSIBLE THE ENCLOSED PROXY IN
THE ACCOMPANYING REPLY ENVELOPE. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE
THEIR PROXIES AND VOTE IN PERSON.
REFERENCES TO ADDITIONAL INFORMATION
The accompanying proxy statement incorporates important business and
financial information about HA-LO from documents we have filed with the
Securities and Exchange Commission but have not included in or delivered with
this document. If you write or call us, we will send you these documents without
charge. Please contact:
HA-LO Industries, Inc.
5980 West Touhy Avenue
Niles, Illinois 60714
Attention: Gregory J. Kilrea, Chief Financial Officer
(847) 647-2300
PLEASE REQUEST DOCUMENTS FROM US BY APRIL 21, 2000. If you request any
incorporated documents, we will mail the requested documents by first class
mail, or another equally prompt means, as soon as possible after we receive your
request.
See "Where To Find More Information" on page 91 for more information about
the documents referred to in the proxy statement.
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY TERM SHEET
HA-LO INDUSTRIES, INC.
PROPOSED MERGER WITH STARBELLY.COM, INC.
- --------------------------------------------------------------------------------
- - We are proposing a merger with Starbelly.com, Inc., a company that intends to
create a leading business to business e-commerce marketplace for the
custom-decorated merchandise industry. If the merger is completed,
Starbelly.com will become our wholly-owned subsidiary. See "The Merger" on
page 35.
- - The total merger consideration will be approximately $240 million which we
will pay by:
Q paying $19 million in cash (less certain expenses),
Q paying the balance by issuing:
- 17 million shares of our common stock valued in the merger agreement at
$170 million, and
- 5.1 million shares of our convertible participating preferred stock
valued in the merger agreement at $51 million.
The merger consideration includes shares issuable upon exercise of
Starbelly.com's outstanding stock options which we will assume. See "Description
of the Convertible Preferred Stock" on page 53 and "Assumption of Outstanding
Starbelly.com Options" on page 56.
- - Following the merger, our shareholders will own approximately 69% of our
common stock, and the former stockholders of Starbelly.com and holders of
Starbelly.com stock options will own approximately 31% of our common stock, if
all of their stock options are exercised and all shares of our convertible
preferred stock are converted into common stock. Our shareholders will
continue to own their shares after the merger.
- - The merger cannot be completed unless certain conditions are satisfied.
Approval of the merger by our shareholders is one of these conditions. See
"The Merger Agreement--Terms of the Merger--Conditions to the Merger" on
page 64.
- - If the merger is approved, the convertible preferred stock we will issue in
the merger and upon exercise of the assumed Starbelly.com stock options:
Q ranks senior to our common stock with respect to rights on liquidation,
winding-up and dissolution;
Q can be voted on all matters on which the holders of our common stock are
entitled to vote (with each share of convertible preferred stock having
the number of votes equal to the number of shares of common stock then
issuable upon conversion of such share of convertible preferred stock);
Q will be convertible initially on a one-for one basis into shares of our
common stock; and
Q is redeemable at the option of the holder during a 30-day period
commencing on the first anniversary of the merger at a cash price of $10
per share, plus any accrued and unpaid dividends.
- - We will register for resale the shares of our common stock received by the
Starbelly.com stockholders in the merger and the shares of our common stock
issuable to the Starbelly.com stockholders upon their conversion of
convertible preferred stock. We will register these shares in several steps
over a two-year period. We will also register for issuance the shares of
common stock and convertible preferred stock issuable upon exercise of the
Starbelly.com stock options that we are assuming in the merger and the shares
of common stock issuable upon conversion of the convertible preferred stock.
See "The Merger Agreement--Other Agreements Related to the Merger--
Registration Rights Agreements" on page 70.
- - We will account for the merger as a purchase of Starbelly.com. See "The
Merger--Accounting Treatment" on page 52.
<PAGE>
- - We have agreed to pay Starbelly.com for its and its stockholders'
merger-related expenses (up to $500,000) under certain circumstances involving
a termination of the merger, and under certain other circumstances, we would
additionally be responsible for their actual damages (up to $10 million). You
should be aware that we would be responsible for both these expenses and these
actual damages (up to the stated limits) if our shareholders do not approve
the merger. See "The Merger Agreement--Termination Fees" on page 68.
See "Description of the Convertible Preferred Stock" on page 54.
- - If the merger is approved, your board of directors will be increased from
seven to ten directors. All seven persons who are members of your board of
directors immediately before the merger will continue to serve as directors
immediately after the merger. The vacancies will be filled by your board of
directors after Starbelly.com's two most senior executives designate their
choices for these board seats. See "Your Board of Directors After the Merger"
on page 87.
- - If the merger is completed, and you have properly exercised your dissenters'
rights, you may require HA-LO to purchase your shares for cash at their fair
value. The procedures that you must follow are described under "The Special
Meeting, Voting and Proxies--Dissenters' Rights" on page 32.
See "Risk Factors" beginning on page 15 for certain matters you should consider.
This document contains important information about the proposed merger. Please
read it carefully.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY OF PROXY STATEMENT.................................. 2
The Companies............................................. 2
About the Special Meeting................................. 3
The HA-LO Board of Directors Recommends Voting For the
Merger and the Other Proposals.......................... 4
Votes Necessary to Approve the Merger and the Other
Proposals............................................... 4
The Merger................................................ 4
Share Issuance and Ownership.............................. 5
Accounting Treatment...................................... 9
Material Federal Income Tax Consequences.................. 9
Regulatory Approvals...................................... 9
Description of the Convertible Preferred Stock............ 10
Assumption of Stock Options............................... 10
Amendment to Our Articles of Incorporation to Increase
Authorized Shares....................................... 10
Amendment to Our Articles of Incorporation to Authorize
the Board to Issue Preferred Stock Without Stockholder
Approval................................................ 11
Your Board of Directors After the Merger.................. 11
Limits on Forward-Looking Statements...................... 11
Risk Factors.............................................. 11
Summary Unaudited Pro Forma Financial Information......... 12
HA-LO Summary Selected Historical Financial Data.......... 12
Starbelly.com Summary Selected Historical Financial
Data.................................................... 13
Unaudited Comparative Per Share Data...................... 13
RISK FACTORS................................................ 15
Risks Related to the Merger............................... 15
Risks Related to Starbelly.com's Business................. 17
Risk Factors Generally Affecting All E-commerce Businesses
and Internet Businesses................................. 23
Risks Related to HA-LO Capital Stock...................... 26
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 28
THE SPECIAL MEETING, VOTING AND PROXIES..................... 30
Purpose; Time and Place................................... 30
Record Date; Voting Rights................................ 30
Quorum.................................................... 30
Required Vote............................................. 31
Proxies................................................... 31
Cost of Solicitation...................................... 32
Postponement or Adjournment............................... 32
Dissenters' Rights........................................ 32
THE MERGER.................................................. 35
General................................................... 35
Background of the Merger.................................. 35
Recommendation of the HA-LO Board and Reasons for the
Merger.................................................. 38
Opinion of Financial Advisor to HA-LO..................... 40
Starbelly.com's Reasons for the Merger.................... 49
Merger Consideration...................................... 50
Effective Time of the Merger.............................. 50
Management and Operations After the Merger................ 51
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Interests of Certain Persons in the Merger................ 51
Resale of HA-LO Shares.................................... 51
Accounting Treatment...................................... 52
New York Stock Exchange Listing........................... 52
Material Federal Income Tax Consequences.................. 52
Regulatory Approvals...................................... 53
DESCRIPTION OF THE CONVERTIBLE PREFERRED STOCK.............. 54
ASSUMPTION OF OUTSTANDING STARBELLY.COM OPTIONS............. 57
Introduction.............................................. 57
Plan Summary.............................................. 57
Certain Tax Matters....................................... 60
COMPARATIVE MARKET PRICE DATA............................... 61
THE MERGER AGREEMENT........................................ 63
Closing Of The Merger..................................... 63
Consideration to be Received in the Merger................ 63
Terms Of The Merger....................................... 64
Other Covenants and Agreements............................ 66
Termination of the Merger Agreement....................... 68
Termination Fees.......................................... 69
Indemnification........................................... 69
Amendment and Waiver...................................... 69
Other Agreements Related to the Merger Agreement.......... 70
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 73
HA-LO and Starbelly.com Pro Forma Combined Condensed
Financial Statements.................................... 73
STARBELLY.COM SELECTED HISTORICAL FINANCIAL DATA............ 76
STARBELLY.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 77
Overview.................................................. 77
Results of Operations..................................... 77
Liquidity and Capital Resources........................... 78
Recently Issued Accounting Pronouncements................. 78
THE BUSINESS OF STARBELLY................................... 79
General................................................... 79
Distribution Channels..................................... 79
Target Customers.......................................... 81
Order Fulfillment......................................... 81
Advantages to Starbelly.com's Marketplace Solutions....... 82
Product Categories and Brands............................. 83
Technology................................................ 84
Sales and Marketing....................................... 85
Customers................................................. 86
Competition............................................... 86
Other Information......................................... 86
YOUR BOARD OF DIRECTORS AFTER THE MERGER.................... 87
STOCK OWNERSHIP............................................. 87
</TABLE>
ii
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<TABLE>
<S> <C>
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO INCREASE AUTHORIZED CAPITAL STOCK........ 88
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION RELATING TO THE ISSUANCE OF PREFERRED
STOCK..................................................... 90
PROPOSED POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL
MEETING................................................... 90
SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS.................. 91
WHERE TO FIND MORE INFORMATION.............................. 91
EXHIBIT A--Merger Agreement................................. A-1
EXHIBIT B--Opinion of HA-LO's Financial Advisor............. B-1
EXHIBIT C--Sections 11.65 and 11.70 of the Illinois Business
Corporation Act........................................... C-1
EXHIBIT D--HA-LO Stock Option Plan for Starbelly.com
Employees................................................. D-1
EXHIBIT E--Amendments to HA-LO's Articles of
Incorporation............................................. E-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
1. AS A HA-LO SHAREHOLDER, WHAT DO I NEED TO DO NOW?
After carefully reading and considering the information contained in this
document, please complete and sign your proxy card. Then mail your signed proxy
card in the enclosed return envelope as soon as possible so that your shares may
be represented at the special meeting and voted as you wish.
2. IF MY HA-LO SHARES ARE HELD IN "STREET NAME" BY MY BROKER OR BANK, WILL IT
VOTE MY SHARES FOR ME?
Your broker or bank will vote your shares only if you provide instructions
on how to vote. You should contact your broker and ask what directions your
broker will need from you. Your broker will not be able to vote your shares
without instructions from you.
3. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You can change your vote at any time before your shares are voted at
the special meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy. Second, you can
complete and submit a new, later dated proxy card. If you choose either of these
two methods, you must submit your notice of revocation or your new proxy card to
HA-LO at the address given below. Third, you can attend the HA-LO special
meeting and vote in person. Simply attending the meeting, however, will not
revoke your proxy. If you have instructed a broker to vote your shares, you must
follow directions received from your broker to change your vote.
4. AS A HA-LO SHAREHOLDER, SHOULD I SEND IN MY SHARE CERTIFICATES?
No. HA-LO shareholders will keep their existing share certificates.
5. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
We are working to complete the merger as quickly as possible and expect the
merger to be completed promptly following the special meeting.
6. WHERE CAN I FIND MORE INFORMATION ABOUT HA-LO?
You may obtain additional information about HA-LO by calling or writing to
us or you may obtain documents through the Internet. See "Where To Find More
Information" on page 91.
7. WHAT DO I DO IF I DECIDE TO EXERCISE DISSENTERS' RIGHTS?
Each HA-LO shareholder is permitted to exercise dissenters' rights with
respect to the merger. For information regarding how to exercise dissenters'
rights, see the section "The Special Meeting, Voting and Proxies--Dissenters'
Rights" on page 32.
8. WHOM DO I CONTACT IF I HAVE QUESTIONS ABOUT THE MEETING OR THE MERGER?
If you would like additional information, you should contact:
HA-LO Industries, Inc.
5980 Touhy Avenue
Niles, Illinois 60714
Attention: Gregory J. Kilrea, Chief Financial Officer
(847) 647-2300
1
<PAGE>
SUMMARY OF PROXY STATEMENT
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS
REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" (PAGE 91). WE HAVE ATTACHED
THE MERGER AGREEMENT AS EXHIBIT A TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE
MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER. THE PAGE
REFERENCES BELOW WILL DIRECT YOU TO FURTHER INFORMATION IN THIS DOCUMENT
REGARDING THE TOPIC COVERED UNDER THAT CAPTION.
THE COMPANIES
HA-LO
HA-LO is a full service, innovative brand marketing organization whose
diverse marketing disciplines, or competency groups, are centered around its
client's brands. Brand marketing builds the value of the brand by connecting it
with target audiences to achieve strategic marketing objectives.
Our competency groups are organized into three operating segments:
promotional products, marketing services and telemarketing. The marketing
services segment is further divided into promotion marketing, brand strategy and
identity, presence marketing and consumer event marketing segments or divisions.
Each one of the segments has similar products and services, production
processes, types of customers, distribution methods and regulatory environments.
Our competency groups include:
PROMOTIONAL PRODUCTS, offered by HA-LO, physically connect brands with
identified target markets and individuals through repeated exposure to
merchandise that builds brand awareness, enhances brand recognition and creates
brand loyalty.
PROMOTION MARKETING, offered by UPSHOT, a subsidiary of HA-LO, connects
brands with consumers at strategic points of contact through consumer and retail
promotion, merchandising and sponsorship activation.
BRAND STRATEGY AND IDENTITY, offered by LAGA, a subsidiary of HA-LO,
connects a company product, service or image with a target audience by creating,
revitalizing, or leveraging a brand through brand identity, design, and
integrated communication programs.
PRESENCE MARKETING, offered by our HA-LO Sports & Entertainment and Events
By HA-LO divisions, connects brands with target audiences through sports and
corporate sponsorships, licensing, corporate meetings, events and sales
incentive programs.
RELATIONSHIP MARKETING, offered by UPSHOT and Market USA, subsidiaries of
HA-LO, connects brands with target audiences through consumer events--including
new product sampling and brand awareness programs--and through a range of
telemarketing services.
HA-LO's principal executive offices are located at 5980 West Touhy Avenue,
Niles, Illinois 60714, and its telephone number at that address is
(847) 647-2300.
STARBELLY.COM (PAGE 79)
Starbelly.com intends to create a leading business to business e-commerce
marketplace for the custom-decorated merchandise industry. The
business-to-business e-commerce marketplace facilitates transactions between
users that either utilize the goods or services acquired to produce additional
goods or services, or sell such goods or services directly to consumers via the
Internet or otherwise. This is in contrast to the business-to-consumer
e-commerce marketplace that facilitates transactions between businesses and
traditional "retail" consumers through the Internet medium. Starbelly.com
intends to redefine the traditional market for customized soft and hard goods
with an interactive
2
<PAGE>
marketplace that allows its customers to customize decorations on any product in
real-time from any Internet web browser.
Starbelly.com coordinates key aspects of the custom-decorated merchandise
supply chain through integrated and automatic fulfillment systems. These
fulfillment systems act together as a single interface between the end-user and
the suppliers to the industry, such as suppliers of undecorated merchandise
(referred to as "blanks" by sellers of custom decorated merchandise),
decorators, customer service representatives, offsite producers and shippers.
Starbelly.com's systems are geared to eliminate several links in the traditional
supply chain, providing its customers with exceptional convenience, a simplified
customizing and ordering process, faster delivery, status tracking, lower costs
and a more enjoyable customer experience. In addition, by accessing the national
distribution network directly, Starbelly.com is developing a virtual
distribution network with key distributors that provides it with inventory on a
just-in-time basis of a large selection of soft and hard goods, minimizing
inventory requirements for Starbelly.com and Starbelly.com's customers.
Starbelly.com intends to implement its custom-decorated merchandise
marketplace so as to provide multiple customized interfaces for four different
distribution channels. The custom-decorated merchandise marketplace includes
those industries which create, sell or otherwise produce promotional products,
marketing services, and advertising specialties, including novelty items and
uniforms. The customized interfaces to which Starbelly.com refers are four
separately designed e-commerce mediums which facilitate order placement for
these four distribution channels:
- the "BUSINESS-TO-BUSINESS" market, where Starbelly.com's business
customers can set up customizable virtual storefronts carrying merchandise
they select and purchase through Starbelly.com;
- the "INTERNET PROPERTIES" market, where Starbelly.com provides third-party
Internet websites such as Internet portals with virtual storefronts
offering merchandise with those third parties' own logos and brands;
- the "PROMOTIONAL PRODUCT DISTRIBUTION" market, comprised of 17,000
businesses which sell and distribute promotional products, to whom
Starbelly.com will offer their own private label, Internet presence and
access to Starbelly.com's fulfillment system; and
- the "BUSINESS-TO-CONSUMER" market, where consumers will be able to access
the Starbelly.com website to interactively design, customize and order
products.
ABOUT THE SPECIAL MEETING (PAGE 30)
The special meeting is scheduled to be held at 10:00 a.m., Chicago time, on
Wednesday, May 3, 2000, at Harris Bank, Room 20C, 111 W. Monroe Street, Chicago,
Illinois. March 27, 2000 is the record date for determining the holders of HA-LO
common stock entitled to vote at the special meeting. On the record date,
48,954,836 shares of HA-LO common stock were outstanding and entitled to vote.
At the special meeting, you will consider and vote on proposals to approve:
(1) the merger, including (a) issuance of 17 million shares of HA-LO common
stock in the merger and upon exercise of options assumed in the merger;
(b) an amendment to Article Four of the Company's articles of
incorporation to permit the issuance of 5.1 million shares of convertible
preferred stock in the merger and upon the exercise of options assumed in
the merger; and (c) the reservation of 5.1 million shares of common stock
for issuance upon conversion of the convertible preferred stock;
(2) the adoption of a new stock option plan under which HA-LO will assume
Starbelly.com's stock option plan and the options outstanding under the
plan;
3
<PAGE>
(3) an amendment to the Company's articles of incorporation to increase the
number of shares of common stock HA-LO is authorized to issue from
100 million to 250 million and to increase the number of shares of
preferred stock HA-LO is authorized to issue from 10 million to
20 million;
(4) an amendment to the Company's articles of incorporation to authorize
your board of directors to provide for the future issuance of preferred
stock without the further approval of the holders of our common stock;
(5) any postponement or adjournment of the special meeting proposed by your
board of directors; and
(6) such other business as may properly come before the special meeting and
any postponements and adjournments thereof.
THE HA-LO BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE MERGER AND THE
OTHER PROPOSALS (PAGE 38)
YOUR BOARD OF DIRECTORS, BY A UNANIMOUS VOTE, HAS APPROVED AND ADOPTED THE
MERGER AGREEMENT AND THE OTHER PROPOSALS TO BE CONSIDERED AT THE MEETING. THE
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AND THE
OTHER PROPOSALS. WE CANNOT COMPLETE THE MERGER UNLESS IT IS APPROVED BY HA-LO'S
SHAREHOLDERS. PLEASE NOTE THAT APPROVAL OF THE MERGER IS CONDITIONED ON APPROVAL
OF THE ADOPTION OF THE NEW STOCK OPTION PLAN. SIMILARLY, APPROVAL OF THE
ADOPTION OF THE NEW STOCK OPTION PLAN IS CONDITIONED ON APPROVAL OF THE MERGER.
THE BOARD OF DIRECTORS AND THE STOCKHOLDERS OF STARBELLY.COM HAVE APPROVED
THE MERGER.
VOTES NECESSARY TO APPROVE THE MERGER AND THE OTHER PROPOSALS (PAGE 31)
Approval of the merger of Starbelly.com and HA-LO's wholly owned subsidiary
and each of the other proposals to be considered at the meeting (other than the
proposal to adopt the new stock option plan and any proposal to postpone or
adjourn the meeting) requires the affirmative vote of a majority of the
outstanding shares of HA-LO common stock. Broker non-votes and abstentions will
count as votes cast AGAINST each of these proposals.
Approval of the proposal to adopt the new stock option plan and any proposal
by your board of directors to postpone or adjourn the meeting requires the
affirmative vote of a majority of the shares of HA-LO common stock represented
in person or by proxy at the meeting. Broker non-votes and abstentions will NOT
count as votes cast for the proposal to adopt the new stock option or for any
proposal to postpone or adjourn the meeting and therefore will NOT have the
effect of a no vote on those proposals.
Each HA-LO shareholder has one vote per share on each proposal.
THE MERGER (PAGE 35)
The merger agreement provides for the merger of Starbelly.com with and into
our merger subsidiary, as a result of which our merger subsidiary will survive
the merger under the new name "Starbelly.com, Inc." and Starbelly.com will cease
its separate existence.
CONSIDERATION TO BE RECEIVED IN THE MERGER (PAGE 50)
If we complete the merger, Starbelly.com stockholders will receive
approximately $240 million which we will pay as follows:
(1) paying $19 million in cash (less Starbelly.com's merger expenses in
excess of $500,000);
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<PAGE>
(2) paying the balance by issuing:
(a) 17 million shares of HA-LO common stock valued in the merger
agreement at $170 million; and
(b) 5.1 million shares of HA-LO convertible preferred stock valued in the
merger agreement at $51 million.
The merger consideration includes shares of HA-LO common stock and HA-LO
convertible preferred stock issuable upon exercise of Starbelly.com's
outstanding stock options which will be assumed by HA-LO and will entitle the
holder to receive upon exercise the same number of shares of HA-LO common stock
and HA-LO convertible preferred stock as such holder would have received in the
merger if the option had been exercised immediately prior to the merger.
Starbelly.com has common stock, options to purchase common stock, Series A
preferred stock and Series B preferred stock outstanding. Under the terms of the
merger agreement, each class of stock is entitled to a different mix of merger
consideration. Starbelly.com estimates that its merger expenses will be
approximately $3.32 million. Assuming that is the case, each outstanding share
of Starbelly.com stock will be exchanged for (and each option to purchase a
share of Starbelly.com common stock will become an option to purchase) the
following:
<TABLE>
<CAPTION>
CASH AND SECURITIES FOR WHICH
ONE STARBELLY.COM SHARE WILL
BE EXCHANGED (OR ONE
STARBELLY.COM OPTION
WILL BE EXERCISABLE)
-------------------------------
HA-LO HA-LO
NUMBER OF COMMON PREFERRED
TYPE OF STARBELLY.COM STOCK SHARES CASH STOCK STOCK
- --------------------------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Common Stock (and options to purchase Common Stock)..... 19,878,567 -- .75 .08
Series A Preferred...................................... 1,500,000 $1.70 1.35 .14
Series B Preferred...................................... 5,653,711 $2.41 -- .59
</TABLE>
The formula establishing the number of shares of HA-LO common stock valued
in the merger agreement at $170 million and the number of shares of HA-LO
convertible preferred stock valued in the merger agreement at $51 million was
based on the lower of $10.00 or the average closing price of HA-LO common stock
on the New York Stock Exchange for each trading day over a 25-day period
consisting of the trading days during the 15 calendar days prior to the
execution of the merger agreement and the trading days during the 10 calendar
days following execution of the merger agreement. Since the average closing
price during the measurement period was $10.05, the number of shares of our
common stock (17 million) and the number of shares of our convertible preferred
stock (5.1 million) issuable in the merger was based on a $10.00 per share
price.
SHARE ISSUANCE AND OWNERSHIP
We will issue in the merger and reserve for issuance upon exercise of the
assumed stock options 17 million shares of our common stock and 5.1 million
shares of our convertible participating preferred stock.
You will continue to own your shares after the merger.
Immediately after the merger, pre-merger shareholders of HA-LO will own
approximately 69% of the outstanding common stock, and the former stockholders
of Starbelly.com will own approximately 31% of the outstanding common stock
(assuming all of the convertible preferred shares are converted into common
stock and all assumed options are exercised and all convertible preferred shares
issued upon exercise are converted into common stock).
5
<PAGE>
We will account for the merger as a purchase of Starbelly.com as described
under "The Merger--Accounting Treatment" (page 52).
REASONS FOR THE MERGER (PAGE 38)
Your board of directors has identified numerous benefits HA-LO may expect to
result from the merger, including the following:
- position HA-LO to capitalize on expanding e-commerce markets, especially
Internet- or intranet-based business-to-business markets;
- enhance HA-LO's customer service;
- rapidly expand, through electronic linkage, HA-LO's offering of
customizable blank products and pre-designed decorations;
- increase HA-LO's productivity;
- build HA-LO's brand recognition in e-commerce markets while enhancing our
reputation as an agent of change and a business leader;
- build HA-LO's promotional products customer base while encouraging repeat
business from existing customers;
- reduce HA-LO's costs to market and fulfill orders for custom-decorated
promotional products;
- infuse HA-LO's organization with new talent and cultural change; and
- increase HA-LO's pricing and marketing flexibility for custom-decorated
promotional products.
In addition to the factors described above, your board of directors also
considered the following negative factors relating to the merger:
- the challenges inherent in combining our operations with those of
Starbelly.com, including the radical departure from our existing business
model and managing potential conflicts in the business cultures of our
companies;
- the status of Starbelly.com's technology, some of which is still in the
developmental stage and therefore may not function as expected;
- the potential departure of sales force personnel;
- the potential of our competitors aggressively recruiting our employees;
- our need to borrow funds to pay the cash portion of merger consideration
and merger expenses, provide working capital to fund Starbelly.com's
future operations and pay the redemption price of the convertible
preferred stock if holders exercise their redemption rights; and
- the dilution of our shareholders' voting interest.
GRANT OF REGISTRATION RIGHTS TO THE STARBELLY.COM STOCKHOLDERS (PAGE 71)
We will register for resale, in four steps, the shares of our common stock
received by the Starbelly.com stockholders in the merger and the shares of our
common stock issuable to the Starbelly.com stockholders upon their conversion of
convertible preferred stock. We will register 25% of these shares within ten
days after completion of the merger, an additional 15% within three months after
completion of the merger, an additional 33 1/3% of these shares within nine
months after completion of the merger and the remaining shares within two years
after completion of the merger. In addition to registration on this schedule, we
are required to register for resale any shares of our common stock issuable upon
conversion of our convertible preferred stock by a stockholder of
6
<PAGE>
Starbelly.com, Chase Venture Capital Associates, L.P., or any of its affiliates,
within 30 days after notice of its conversion, to the extent not already
registered.
We will also register for issuance the shares of common and convertible
preferred stock issuable upon exercise of the Starbelly.com stock options that
we are assuming in the merger and the shares of common stock issuable upon
conversion of the convertible preferred stock.
AVAILABILITY OF DISSENTERS' RIGHTS (PAGE 32)
You will be entitled to exercise dissenters' rights in accordance with the
Illinois Business Corporation Act of 1983, as amended (the "IBCA"). In order to
exercise dissenters' rights, you must:
- deliver to HA-LO, before the vote is taken at the special meeting, a
written demand for payment of your shares of HA-LO common stock if the
merger is completed;
- NOT vote in favor of the proposal to merge Starbelly.com and HA-LO's
wholly owned subsidiary; and
- comply with the other requirements contained in Sections 11.65 and 11.70
of the IBCA. See "The Special Meeting--Dissenters' Rights."
Under the Delaware General Corporation Law, Starbelly.com stockholders are
entitled to exercise appraisal rights, and receive the "fair value" of their
Starbelly.com shares. Under Delaware law, the Delaware Court of Chancery would
make any determinations of "fair value" for Starbelly.com stockholders
exercising appraisal rights. However, Starbelly.com stockholders having
approximately 94% of the stockholder voting power have already approved the
merger and have granted irrevocable proxies to two of our executive officers so
that these stockholders cannot revoke their approval before the merger closes
(unless the merger agreement is earlier terminated and except as Delaware law
may otherwise require revocation of proxies). Accordingly, appraisal rights will
not be available to these persons.
OPINION OF FINANCIAL ADVISOR TO HA-LO (PAGE 40)
HA-LO's financial advisor, Credit Suisse First Boston, has delivered a
written opinion to the HA-LO board of directors as to the fairness, from a
financial point of view, to HA-LO of the aggregate merger consideration of
$240,000,000. The full text of Credit Suisse First Boston's written opinion is
attached to this document as Exhibit B. We encourage you to read this opinion
carefully in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken.
Credit Suisse First Boston's opinion is directed to the HA-LO board of directors
and relates only to the fairness of the merger consideration from a financial
point of view, does not address any other aspect of the proposed merger or any
related transaction, does not address the fairness of the merger consideration
to the holders of HA-LO common stock, and does not constitute a recommendation
to any shareholder as to any matter relating to the merger.
LOANS TO STARBELLY.COM
On January 6, 2000, while negotiating the merger agreement but before the
merger agreement was signed, we loaned Starbelly.com $5 million on an unsecured
basis, and, upon signing the merger agreement, we extended Starbelly.com an
additional unsecured $5 million loan. Under the merger agreement, we extended
Starbelly.com additional unsecured loans of $5 million each on March 1, 2000 and
April 4, 2000 because we did not complete the merger by such dates. These loan
amounts are not part of the merger consideration, although under certain
circumstances (1) Starbelly.com may not be required to pay back all or a portion
of these loans if we become obligated to pay Starbelly.com termination fees, and
(2) the maturity dates of the loans may be accelerated if we properly terminate
the merger agreement. See "HA-LO Loans to Starbelly.com" (page 71).
7
<PAGE>
CONDITIONS THAT MUST BE MET TO COMPLETE MERGER (PAGE 65)
HA-LO and Starbelly.com will not complete the merger unless a number of
conditions are satisfied or, if permitted, waived by them. These include:
1. HA-LO shareholders must approve the merger, including the issuance of
HA-LO shares to the Starbelly.com stockholders;
2. There must be no law, regulation or order preventing the merger;
3. The New York Stock Exchange must approve the shares of HA-LO common
stock issuable in the merger for listing on the New York Stock Exchange;
and
4. Consents and approvals from all third parties, including governmental
entities, have been received.
EVENTS THAT ALLOW TERMINATION OF THE MERGER AGREEMENT (PAGE 68)
HA-LO and Starbelly.com mutually can agree to terminate the merger agreement
at any time without completing the merger. In addition, the merger agreement may
be terminated if:
- Starbelly.com has breached the merger agreement and the damages we would
suffer as a result would reasonably be expected to exceed $14 million;
- we have breached the merger agreement and the damages Starbelly.com would
suffer as a result would reasonably be expected to exceed $40 million;
- any final decision of a governmental authority prohibits concluding the
merger;
- our shareholders fail to approve the merger at the special meeting or if
the merger is not completed by April 29, 2000;
- we have not, by February 28, 2000, provided evidence reasonably
satisfactory to Starbelly.com that we have a working capital credit
facility with substantially the same terms as our current facility; or
- because of your board of directors' fiduciary duties to our shareholders,
your board acts upon a proposal to enter into certain business
combinations with someone other than Starbelly.com.
In an amendment to the Merger Agreement, the parties extended to May 5, 2000
the date by which the merger must be completed. Starbelly.com extended to
April 20, 2000 the date by which HA-LO must provide evidence reasonably
satisfactory to Starbelly.com that we have a working capital credit facility
with substantially the same terms as our current facility. On April 3, 2000, we
established a new credit facility which provides for borrowings of up to $80
million and is secured by the Company's and its subsidiaries' domestic assets.
Borrowings under the new facility bear interest based on a defined ratio at
either between prime and prime plus 40 basis points or the London Interbank
Offered Rate (LIBOR) plus between 125 and 235 basis points. The term of this
facility is three years. The credit facility condition was subsequently deleted
from the merger agreement in the amendment to the merger agreement.
TERMINATION FEES (PAGE 69)
We have agreed to pay Starbelly.com for up to $500,000 of merger-related
expenses incurred by Starbelly.com and its stockholders, plus their actual
damages up to a maximum of $10 million, if (1) our shareholders do not approve
the merger, or (2) if your board of directors acts on a third-party proposal to
enter into a business combination with someone other than Starbelly.com. We have
also agreed that we will reimburse Starbelly.com for up to $500,000 of its
expenses related to the merger agreement if Starbelly.com terminates the
agreement because we materially breach it. If, however, our
8
<PAGE>
breach were to be in bad faith, we would also be liable to Starbelly.com for its
actual damages, up to a maximum of $10 million.
Starbelly.com has agreed to reimburse us for up to $500,000 of our expenses
related to the merger agreement if we terminate the merger agreement because
Starbelly.com materially breaches it. In addition, Starbelly.com would be
required to pay us, within six months, all amounts outstanding under the loans
we have extended to Starbelly.com. If, however, Starbelly.com's breach were to
be in bad faith, Starbelly.com would also be liable to us for our actual
damages, up to a maximum of $10 million, and Starbelly.com would be immediately
required to pay us all amounts outstanding under the loans we have extended.
ACCOUNTING TREATMENT (PAGE 52)
We intend to account for the merger as HA-LO's "purchase" of Starbelly.com.
Accordingly, Starbelly.com's results of operations will be included in our
consolidated results of operations after the completion date of the merger. In
preparing our consolidated financial statements, we will, if appropriate,
establish a new accounting basis for the Starbelly.com assets and liabilities.
We will record goodwill in an amount equal to substantially all of the merger
consideration and merger expenses and amortize this amount over five years.
After the merger, the goodwill amortization charge will reduce our earnings for
financial reporting purposes over the five-year amortization period.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 52)
TREATMENT OF US, OUR SHAREHOLDERS, OUR MERGER SUBSIDIARY AND STARBELLY.COM
We have been advised by our counsel, Neal, Gerber & Eisenberg, that the
merger will be treated for federal income tax purposes as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. Accordingly,
our existing shareholders will not recognize any gain or loss as a result of the
merger for federal income tax purposes. Similarly, neither we, nor our merger
subsidiary nor Starbelly.com, each of which is a party to the reorganization,
within the meaning of Section 368(b) of the Code, will recognize any gain or
loss as a result of the merger for federal income tax purposes. In rendering
this advice, Neal, Gerber & Eisenberg relied upon factual representations made
by officers of HA-LO.
TREATMENT OF HOLDERS OF STARBELLY.COM COMMON STOCK
It is a condition to the obligation of Starbelly.com to complete the merger
that it receive an opinion dated the closing date from a law firm retained as
counsel to Starbelly.com, which opinion may be based on such certificates and
letters as are acceptable to that law firm, to the effect that, for federal
income tax purposes, the Starbelly.com stockholders will not recognize income,
gain or loss upon the merger, except to the extent of any cash consideration
actually received or deemed received.
We will not seek a ruling from the Internal Revenue Service regarding the
merger and the advice and opinion of counsel referred to above will not be
binding on the Internal Revenue Service which may disagree with counsel's
conclusions.
REGULATORY APPROVALS (PAGE 53)
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
the merger cannot be completed until both companies, as well as Starbelly.com's
two largest stockholders, have given certain information and materials to the
Federal Trade Commission and Department of Justice and a required waiting period
has expired or been terminated. The companies submitted pre-merger notification
and report forms during the week of January 31, 2000 and received notification
of early termination of the waiting period on February 14, 2000.
9
<PAGE>
DESCRIPTION OF THE CONVERTIBLE PREFERRED STOCK (PAGE 54)
If the merger is completed, as part of the merger consideration, we will
issue 5.1 million shares of convertible preferred stock in the merger and upon
exercise of the assumed Starbelly.com stock options. The convertible preferred
stock ranks senior to the Company's common stock with respect to rights on
liquidation, winding up and dissolution and in parity with or senior to all
other existing and future classes of our capital stock and series of convertible
preferred stock. Preferred shareholders can vote on all matters on which the
holders of the Company's common stock are entitled to vote. Each share of
convertible preferred stock will have the number of votes equal to the number of
shares of common stock then issuable upon conversion of such shares. Each share
of convertible preferred stock will be convertible initially into one share of
our common stock at any time before redemption. However, if the average closing
price of the Company's common stock equals or exceeds $24 for ten consecutive
trading days, the convertible preferred stock will automatically convert into
common stock at the then effective conversion ratio. The holders of convertible
preferred stock can require us during a 30-day period commencing on the first
anniversary of the effective date of the merger to redeem all or any number of
their shares at a cash price of $10 per share, plus any accrued and unpaid
dividends.
ASSUMPTION OF STOCK OPTIONS (PAGE 57)
Under Starbelly.com's option plan, as amended, and before we complete the
merger, Starbelly.com may grant options to purchase up to an aggregate of
3,355,000 shares of its common stock. As of March 15, 2000, options for
2,894,334 shares of Starbelly.com common stock were issued and outstanding,
395,000 shares have been issued for exercised options, and 65,666 shares remain
available for grants. The merger agreement provides that as of the effective
date of the merger HA-LO will assume Starbelly.com's outstanding stock options.
Therefore, the board of directors recommends that shareholders vote in favor of
the adoption by HA-LO of a new stock option plan under which HA-LO will assume
Starbelly.com's outstanding options.
AMENDMENT TO OUR ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED SHARES (PAGE
88)
The board of directors unanimously recommends that Article Four of our
articles of incorporation be amended to increase the number of shares of our
common stock HA-LO is authorized to issue from 100 million to 250 million and to
increase the number of shares of preferred stock that HA-LO is authorized to
issue from 10 million to 20 million. If approved, the increased number of
authorized shares of common stock will be available for us to issue from time to
time without further vote of our shareholders, except as required under Illinois
law or the rules of the stock exchange where our common stock is traded.
(Similarly, if the matters relating to preferred stock issuance described in the
next paragraph are approved, the increased number of authorized shares of
preferred stock will be available for us to issue from time to time without
further vote of our shareholders, except as required under applicable law or the
rules of the stock exchange where our common stock is traded.) As of March 27,
2000, 48,954,836 shares of our common stock were issued and outstanding. If the
merger is approved, this number will increase to 65,954,836 shares when we issue
our common stock in the merger and upon exercise of stock options assumed in the
merger and to 71,054,836 shares if all of the convertible preferred shares
issued in the merger and upon exercise of assumed options were each to be
converted into common stock. If the merger is approved, an aggregate of
5.1 million shares of convertible preferred stock will be issued in the merger
or reserved for issuance upon exercise of stock options assumed in the merger.
The board of directors believes that the proposed authorized share increase will
ensure that the Company has a sufficient number of preferred shares authorized
to allow it to act upon transactions that may be proposed in the future. If the
merger is approved, the merger will be completed even if this proposal to amend
our articles of incorporation is not approved.
10
<PAGE>
AMENDMENT TO OUR ARTICLES OF INCORPORATION TO AUTHORIZE THE BOARD TO ISSUE
PREFERRED STOCK WITHOUT SHAREHOLDER APPROVAL (PAGE 90)
While the board of directors is authorized to establish the terms of any
preferred stock the Company proposes to issue, the articles of incorporation
require that the board determine the liquidation and dividend rights of
preferred stock to be issued as a class by filing articles of amendment to the
articles of incorporation. However, the adoption of an amendment to the articles
of incorporation requires the approval of the Company's shareholders. In order
to provide the board of directors with greater flexibility in establishing the
terms of any preferred stock the Company proposes to issue in the future and
avoid delays which would result from obtaining shareholder approval prior to
issuing any preferred stock, the board of directors recommends that our articles
of incorporation be amended to authorize the board of directors to provide for
the issuance of preferred stock without the approval of the Company's
shareholders. If the merger is approved, the merger will be completed even if
this proposal to amend our articles of incorporation is not approved.
YOUR BOARD OF DIRECTORS AFTER THE MERGER (PAGE 87)
At the time of the merger, your board of directors will be increased from
seven to ten directors. All seven persons who are members of your board of
directors immediately before the merger will continue to serve as directors
immediately after the merger. Immediately following the merger and continuing
until the next shareholder's meeting convened to elect directors,
Starbelly.com's two most senior executives will each have a right to designate
persons whom your board will place in the three vacancies created by the board
expansion. Under this arrangement, Bradley Keywell, Starbelly.com's co-founder
and chief executive officer, is entitled to designate one person to fill a
vacancy on the HA-LO board of directors until the next meeting of shareholders
convened to elect directors. Under a three-year employment agreement we have
agreed to enter into with Mr. Keywell at the merger closing, so long as
Mr. Keywell's employment agreement is in effect, he will have a right to request
the board of directors to nominate his designee, and if he does so, our
management (within legal limits) is required to present such designee to our
shareholders as a nominee for election. We have agreed to a similar arrangement
with Eric Lefkofsky, Starbelly.com's co-founder and president, except
Mr. Lefkofsky is entitled to designate two persons to fill vacancies on the
HA-LO board of directors until the next meeting of shareholders convened to
elect directors. Under a three-year employment agreement we have agreed to enter
into with Mr. Lefkofsky when we complete the merger, so long as Mr. Lefkofsky's
employment agreement is in effect, he will have the right to request the board
of directors to nominate and present two designees for election by our
shareholders; provided however his right shall be reduced to one designee if the
record ownership of Coventry Partners Family Limited Partnership falls below
4 1/2% of the outstanding shares of our common stock.
LIMITS ON FORWARD-LOOKING STATEMENTS (PAGE 28)
This document contains forward-looking statements that are subject to risks
and uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of HA-LO, Starbelly.com and the
combined company as well as statements preceded by, followed by or that include
the words "believes," "expects," "anticipates," "intends," or similar
expressions. You should understand that important factors, in addition to those
discussed elsewhere in this document and in the documents that are incorporated
herein by reference, could affect the future results of the combined companies
and could cause those results to differ materially from those expressed in our
forward-looking statements.
RISK FACTORS
Before deciding how to vote at the special meeting, you should carefully
review "Risk Factors" on page 15.
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents summary unaudited pro forma financial
information derived from the Unaudited Pro Forma Combined Condensed Financial
Statements included elsewhere in this proxy statement and has been presented
assuming the merger will be accounted for as a purchase business combination.
The Unaudited Pro Forma Condensed Combined Financial Statements do not purport
to present the financial position or results of operations of HA-LO had the
transaction and events assumed therein occurred on the date specified, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in HA-LO's Annual Report on Form 10-K, which is
incorporated by reference, "Starbelly.com's Management's Discussion and Analysis
of Financial Condition and Results of Operations" (page 77) and "HA-LO and
Starbelly.com Pro Forma Combined Condensed Financial Statements" (page 73)
included in this proxy statement.
HA-LO AND STARBELLY.COM SUMMARY PRO FORMA FINANCIAL INFORMATION
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999(1)
--------------------
(UNAUDITED)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED):(2)
Net sales............................................... $650,759
Net loss................................................ (59,817)
Pro forma loss per share (diluted)...................... (.99)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
(UNAUDITED)
<S> <C>
PRO FORMA BALANCE SHEET DATA:(2)
Total assets.............................................. $605,764
Working capital........................................... 138,844
Long-term debt, net of current portion.................... 44,788
Redeemable convertible participating preferred stock...... 48,688
Shareholders' equity...................................... 385,429
</TABLE>
- ------------------------
(1) Starbelly.com commenced operations on March 22, 1999. Therefore, financial
information for periods prior to this date does not exist for Starbelly.com,
and the pro forma data only includes Starbelly.com results for this
less-than-12-month period.
(2) The unaudited pro forma combined financial data presented (a) may not
indicate the results that would have been obtained had the merger actually
occurred on the date assumed, (b) is based on preliminary estimates of the
fair value of the net assets to be acquired and certain assumptions
management deems appropriate and (c) should be read in conjunction with
other historical and pro forma financial statements and the related notes
included elsewhere or incorporated by reference in this document.
HA-LO SUMMARY SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for HA-LO for each of the fiscal years 1995 to 1999. The
selected financial information for each of the fiscal years has been derived
from the Consolidated Financial Statements of HA-LO, which have been audited by
Arthur Andersen LLP, independent auditors to HA-LO, and from the underlying
accounting records of HA-LO.
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All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Combined Condensed Financial
Information" and the Consolidated Financial Statements and related notes of
HA-LO incorporated by reference herein.
HA-LO INDUSTRIES, INC.
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL:
INCOME STATEMENT DATA:
Net sales............................... $310,116 $375,736 $465,721 $589,669 650,412
Net income(loss)........................ 7,309 10,092 15,458 24,750 (13,538)
Pro forma net income(1)................. 5,902 9,879 14,846 24,520 N/A
Pro forma net income (loss) per share,
diluted............................... 0.17 0.25 0.36 0.53 (0.28)
Weighted average shares outstanding,
diluted............................... 34,586 40,266 41,112 46,447 48,598
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $124,331 $147,063 $238,053 $347,017 380,303
Working capital......................... 42,286 60,706 78,741 162,751 139,367
Long-term debt, net of current
portion............................... 13,263 29,863 44,930 -- 21,230
Shareholders' equity(2)................. 52,091 62,032 85,473 235,491 236,546
</TABLE>
- ------------------------
(1) Certain companies acquired and accounted for using the pooling-of-interests
accounting method had elected to be treated as subchapter S corporations and
were therefore not subject to Federal income taxes prior to their
acquisition by the Company. Pro forma net income and pro forma net income
per share amounts include an unaudited provision for Federal and state taxes
at an effective rate of 40%.
(2) Includes cash dividends of $7,761,000, $6,887,000, $5,296,000 and
$11,518,000, declared by acquired companies in 1995, 1996, 1997 and 1998,
respectively, prior to HA-LO's acquisition of such companies.
STARBELLY.COM SUMMARY SELECTED HISTORICAL FINANCIAL DATA
For Starbelly.com's selected historical financial data and other operating
information for period from inception, March 22, 1999, through December 31,
1999, see "Starbelly.com Selected Historical Financial Data" (page 76).
UNAUDITED COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of HA-LO
and Starbelly.com and combined per share data on an unaudited pro forma basis,
based on the assumption that the merger occurred on March 22, 1999 (date of
inception of Starbelly.com) and was accounted for using the purchase method of
accounting. The pro forma comparative per share data has been adjusted to give
effect to the issuance in the merger of 17 million shares of common stock and
5.1 million shares of convertible preferred stock, assuming exercise of all the
assumed Starbelly.com stock options. The Starbelly.com equivalent share pro
forma information shows the effect of the merger from the perspective of an
owner of Starbelly.com common stock. The information was computed by multiplying
the combined company's pro forma per share information by the exchange ratio of
approximately .83 of
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a share of HA-LO common stock (including shares of common stock issuable upon
conversion of HA-LO convertible preferred stock issued in the merger) for each
outstanding share of Starbelly.com common stock. See "Description of the
Convertible Preferred Stock." The pro forma comparative share data does not
purport to represent what HA-LO's financial position or results of operation
would actually have been had the merger occurred at the beginning of the
earliest period presented or to project HA-LO's financial position or results of
operation for any future date or period. This data should be read in conjunction
with the "Unaudited Pro Forma Combined Condensed Financial Information" and the
Consolidated Financial Statements and related notes of HA-LO included or
incorporated by reference herein and the Financial Statements and related notes
of Starbelly.com included elsewhere herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
DECEMBER 31, 1999
HA-LO HISTORICAL PER COMMON SHARE DATA: -----------------
<S> <C>
Basic earnings per share--continuing operations........... $(0.28)
Diluted earnings per share--continuing operations......... (0.28)
Dividends per common share................................ --
Book value per common share............................... 4.85
STARBELLY.COM HISTORICAL PER COMMON SHARE DATA:
Basic earnings per share--continuing operations........... $(0.51)
Diluted earnings per share--continuing operations......... (0.51)
Dividends per common share................................ --
Book value per common share............................... 0.07
UNAUDITED PRO FORMA COMBINED:
Basic earnings per share--continuing operations........... $ (.99)
Diluted earnings per share--continuing operations......... (.99)
Dividends per common share(1)............................. --
Book value per common share............................... 6.07
UNAUDITED PRO FORMA COMBINED STARBELLY.COM EQUIVALENT
SHARE(2):
Basic earnings per share--continuing operations........... $ (.83)
Diluted earnings per share--continuing operations......... (.83)
Dividends per common share................................ --
Book value per common share............................... 5.04
</TABLE>
- ------------------------
(1) There are no pro forma cash dividends per share as HA-LO does not intend to
pay cash dividends in the foreseeable future.
(2) The equivalent pro forma amounts are determined by multiplying the pro forma
combined loss per share from continuing operations, pro forma combined book
value per share and pro forma combined dividends per share by the merger
exchange ratio.
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<PAGE>
RISK FACTORS
When deciding how to vote on the merger, you should consider carefully all
of the information contained in this document, including the following factors
which relate to the merger and to the combined businesses of HA-LO and
Starbelly.com. All of the identified risks can be substantial and many of such
risks could materially and adversely affect HA-LO's results of operations,
financial condition, business and prospects, as well as the market price of our
common stock.
RISKS RELATED TO THE MERGER
UNCERTAINTIES IN ACHIEVING BENEFITS OF MERGER AND INTEGRATING THE BUSINESSES
We cannot assure you that we will realize any of the anticipated benefits of
the merger. Whether we achieve these benefits will depend in part upon our
ability to integrate our businesses in an efficient manner. We cannot be certain
that this will occur. To achieve the merger benefits, we will incur significant
costs, expend significant capital and fund substantial anticipated Starbelly.com
operating losses. Our costs could be higher than anticipated and we may have to
expend additional capital and fund higher-than-expected operating losses to
achieve the anticipated benefits of the merger.
COMBINING THE COMPANIES COULD HAVE ADVERSE IMPACT
The integration of our business and Starbelly.com's business will require
substantial attention from management. The diversion of management's attention
and any difficulties encountered in the transition and integration process could
have a material adverse effect on the revenues, levels of expenses and operating
results of the combined company. For a discussion of other factors and
assumptions related to estimated merger benefits. See "The
Merger--Recommendation of the HA-LO Board and Reasons for the Merger"
(Page 38).
MERGER COSTS MAY BE MORE THAN EXPECTED
We estimate that the direct costs of the merger will be from $4.0 million to
$4.5 million. These direct costs include $500,000 of direct merger costs for
which we have agreed to reimburse Starbelly.com and Starbelly.com's stockholders
for their direct merger costs. These costs are not included in the unaudited pro
forma data appearing elsewhere in this proxy statement. We also estimate that we
will have to expend capital equal to approximately $13.0 million and fund
estimated Starbelly.com operating losses of approximately $16.0 million during
the twelve months following the merger to achieve the expected merger benefits
referred to above. If these costs, capital expenditures or operating losses are
higher than estimated, the merger benefits may be reduced or delayed.
THE PRICE PER SHARE OF OUR COMMON STOCK AT THE EFFECTIVE TIME OF THE MERGER MAY
BE GREATER THAN THE PRICE USED TO ESTABLISH THE NUMBER OF SHARES TO BE ISSUED
IN THE MERGER
Under the merger agreement, the formula establishing the number of shares of
HA-LO common stock and convertible preferred stock into which the Starbelly.com
common stock will be converted was based on the lower of $10.00 or the average
closing price of HA-LO common stock on the New York Stock Exchange for each
trading day over a 25 day period consisting of the trading days during the
15 calendar days prior to the execution of the merger agreement and the trading
days during the 10 calendar days following the execution of the merger
agreement. Since this average closing price during the measurement period was
$10.05, the number of shares of our common stock and our convertible preferred
stock issuable in the merger was based on a $10.00 share price. Accordingly, it
is possible that the market price of our common stock at the effective time of
the merger will be higher than $10.00 per share. If this is the case, the value
of the consideration to be received by Starbelly.com stockholders will be more
than the price on which the number of shares issuable in the merger was based.
HA-LO's financial advisor, Credit Suisse First Boston, has delivered a written
opinion dated
15
<PAGE>
January 17, 2000 to the HA-LO board of directors as to the fairness, from a
financial point of view, to HA-LO of the aggregate merger consideration of
$240,000,000. As is customary, the opinion was necessarily based on financial,
economic, market and other conditions as they existed and could be evaluated on
the date of the opinion. Credit Suisse First Boston did not express any opinion
as to the actual value of the HA-LO common stock when issued in the merger or
the prices at which our common stock will trade subsequent to the merger. Your
board of directors will not request that Credit Suisse First Boston update its
opinion. The historical market prices of our common stock are included under
"Comparative Market Price Data--HA-LO Common Stock" (page 61).
REDUCTION OF HA-LO SHAREHOLDERS' VOTING POWER; NEW MAJOR SHAREHOLDERS
The issuance of shares of HA-LO common stock and convertible preferred stock
in the merger and upon exercise of assumed options will substantially dilute the
voting interest of the current HA-LO shareholders. The convertible preferred
stock will entitle the holders to one vote per share on all matters submitted to
holders of our common stock. These convertible preferred stock voting rights
will dilute the voting power of our common shareholders. As a result of the
merger, Starbelly.com stockholders will own approximately 31% of the voting
power of HA-LO after the merger (including shares that may be issued upon
conversion of our convertible preferred stock and exercise of all assumed
options). Following the merger, (1) Coventry Partners Family Limited
Partnership, of which Bradley Keywell, the chief executive officer of
Starbelly.com, is a beneficial owner, will have approximately 8.2% of the voting
power of HA-LO common stock and (2) Bloomfield Partners Family Limited
Partnership, of which Eric Lefkofsky, the president of Starbelly.com, is a
beneficial owner, will have approximately 8.2% of the voting power of HA-LO
common stock (assuming conversion of our convertible preferred stock and
exercise of all the assumed Starbelly.com stock options).
THE MERGER WILL HAVE AN IMPACT ON VOTING AND MANAGEMENT OF OUR COMPANY.
The parties have agreed that, at the closing of the merger, our by-laws will
be amended to increase the size of your board of directors from seven to ten
directors. Under the merger agreement, at the closing of the merger, Bradley
Keywell and Eric Lefkofsky are entitled to request for nomination three
directors to your board. Mr. Keywell is entitled to designate one person to fill
a vacancy on the HA-LO board of directors until the next meeting of shareholders
convened to elect directors, and Mr. Lefkofsky is entitled to designate two
persons to fill vacancies on the HA-LO board of directors until the next meeting
of shareholders convened to elect directors. Furthermore, under a three-year
employment agreement we have agreed to enter into with Mr. Keywell at the merger
closing, so long as Mr. Keywell's employment agreement is in effect, he will
have the right to request the board of directors to nominate his designee, and
if he does so, our management (within legal limits) is required to present such
designee to our shareholders as a nominee for election. Under a three-year
employment agreement we have agreed to enter into with Mr. Lefkofsky at the
merger closing, so long as Mr. Lefkofsky's employment agreement is in effect, he
will have the right to request the board of directors to nominate and present
two designees for election by our shareholders.
IF THE MERGER IS NOT APPROVED BY OUR SHAREHOLDERS, WE ARE OBLIGATED TO PAY A
SUBSTANTIAL TERMINATION FEE.
We have agreed to pay Starbelly.com up to $500,000 of its expenses plus its
actual damages up to a maximum of $10 million if our shareholders do not approve
the merger. While we cannot predict with any certainty the approximate amount of
expenses and actual damages Starbelly.com could incur or suffer if the merger is
not concluded, it is possible that these amounts could be material to HA-LO.
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<PAGE>
RISKS RELATED TO STARBELLY.COM'S BUSINESS
STARBELLY.COM'S EXTREMELY LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING
DIFFICULT
Starbelly.com was incorporated in March 1999. From March until June 1999
Starbelly.com focused on developing its business model, technology and
operations, hiring personnel and raising capital. Since June 1999 Starbelly.com
has been selling products and offering services in the business-to-business
channel and through the Internet, both on a limited basis. As a result of
Starbelly.com's extremely limited operating history, it is difficult to
accurately forecast Starbelly.com's revenues or to predict Starbelly.com's
operating expenses. Starbelly.com's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in an early
stage of development, particularly companies engaged in new and rapidly evolving
markets such as electronic commerce.
STARBELLY.COM'S BUSINESS SYSTEM IS NEW AND UNPROVEN
Starbelly.com has designed a new business system that redefines the process
of ordering custom-decorated merchandise and the fulfillment process with
respect to those orders. Starbelly.com has only been delivering products under
this system since June 1999 on a limited basis. Starbelly.com's success depends
upon its ability to implement Starbelly.com's system on the Internet. Moreover,
the volume of orders Starbelly.com has filled is substantially below designed
capacity and the levels that are necessary for Starbelly.com to achieve
profitability. As a result, the success of Starbelly.com's system on the
Internet and in a high volume order environment has yet to be proven.
Refinements or modifications to Starbelly.com's business systems and
technologies may be necessary or advisable as Starbelly.com evaluates its
continuing operations, particularly its ongoing ability to receive undecorated
products, or "blanks," on a timely basis and in the necessary quantities, and
its ability to scale Starbelly.com's business through partnerships with
additional distributors and "pre-press" and contract decoration providers.
STARBELLY.COM'S POTENTIAL CUSTOMERS MAY NOT ACCEPT STARBELLY.COM'S SOLUTIONS OR
SYSTEMS
Many of the new customers Starbelly.com intends to pursue have long-standing
business relationships and personal ties to their existing distributors or other
suppliers of decorated products. Those customers may be reluctant to disrupt
these relationships. Customers are also often reluctant to change their existing
ordering habits, or to adopt new technologies, such as Internet ordering, to
replace existing relationships. To successfully market Starbelly.com's products
through the Internet, Starbelly.com will generally be required to educate
potential customers on the use and benefits of the Starbelly.com system, which
may require Starbelly.com to incur substantial expense. Although Starbelly.com
believes its new method for providing customized decorated products will provide
significant cost and time savings for Starbelly.com's existing and potential
customers, there can be no assurance that such customers will accept it. If they
do not, our future operating results would be materially and adversely affected.
Starbelly.com's success depends substantially on its ability to initiate, manage
and expand its relationships with customers, and Starbelly.com's failure to do
this could limit its anticipated growth in revenues and seriously harm its
business.
STARBELLY.COM HAS INCURRED SIGNIFICANT LOSSES SINCE INCEPTION, AND STARBELLY.COM
ANTICIPATES THAT IT WILL CONTINUE TO INCUR LARGE FUTURE LOSSES
Starbelly.com has incurred significant losses since inception and expects to
continue to incur significantly larger losses in the future. Starbelly.com's net
loss was approximately $8.6 million during the period from its inception on
March 22, 1999 to December 31, 1999. Starbelly.com expects to continue to incur
significant marketplace development, technology, sales and marketing and
administrative expenses for Starbelly.com's business. In fact, Starbelly.com
currently expects to increase its operating expenses significantly in connection
with expanding Starbelly.com's sales and marketing
17
<PAGE>
channels, developing its Web site, services and technologies and hiring
additional personnel. Starbelly.com will need to generate significant revenue to
achieve and maintain profitability, and we cannot be certain that it will
achieve this. Even if Starbelly.com does reach profitability, Starbelly.com may
not be able to sustain or increase its profitability.
STARBELLY.COM'S OPERATING RESULTS ARE EXPECTED TO BE VOLATILE AND DIFFICULT TO
PREDICT
Starbelly.com's operating results may fluctuate significantly in the future
particularly in the early stages of its business due to a variety of factors,
many of which are outside of Starbelly.com's control. Factors that may harm
Starbelly.com's business or cause its operating results to fluctuate include the
size, timing, and variance of customer orders, particularly large orders from a
limited number of customers; Starbelly.com's ability to retain existing
customers, attract new customers and maintain customer satisfaction; the ability
to successfully launch the Starbelly.com Web site and customer virtual
storefront websites, and the level of traffic to such sites; changes in
inventory availability from third-party suppliers; general economic conditions
and economic conditions specific to the Internet, electronic commerce or the
custom-decorated merchandise industry, the level of use of the Internet and
acceptance of the Internet and commercial online services for the purchase of
custom-decorated products; Starbelly.com's ability to upgrade and develop
systems and infrastructure and to attract new personnel in a timely and
effective manner, technical difficulties, system downtime or Internet brownouts;
the amount and timing of operating costs and capital expenditures relating to
expansion of Starbelly.com's business, operations and infrastructure; potential
governmental regulation; unforeseen events affecting the custom-decorated
merchandise industry; decreases in the prices at which Starbelly.com can sell
its products; the timing of the introduction or enhancement of products by
Starbelly.com, Starbelly.com's customers and Starbelly.com's competitors; and
defects and other quality problems with Starbelly.com's products. Any change in
one or more of these factors, as well as others, could cause Starbelly.com's
operating results to fluctuate.
We believe Starbelly.com's customers will tend to order sporadically, and
their purchases may vary significantly from quarter to quarter. Starbelly.com's
customers are unlikely to forecast expected purchases in advance, frequently may
not order as expected (E.G., with regard to timing, quantities or product mix),
and may place purchase orders only shortly before the scheduled delivery date.
These order habits are likely to cause Starbelly.com's revenue to fluctuate
significantly, particularly in the early stages of its business.
A number of factors will also cause gross margins for Starbelly.com's
products to fluctuate in future periods. As the markets for Starbelly.com's
products mature, and as Starbelly.com faces additional competition, it is likely
that the average unit prices of such products will decrease in response to
competitive pricing pressures, increased sales discounts, new product
introductions by Starbelly.com's competitors or other factors. In response, we
believe Starbelly.com will likely need to reduce the cost of its products
through increased efficiencies and reductions in the amount Starbelly.com pays
for materials or labor. At the same time, Starbelly.com will likely also seek to
increase sales of higher margin products. If these efforts are not successful,
Starbelly.com's revenue and gross margins will decline, significantly harming
its operating results and financial condition.
STARBELLY.COM FACES A NUMBER OF CHALLENGES IN FULFILLING ORDERS, AND MAY NOT BE
ABLE TO PRODUCE ITS PRODUCTS IN REQUESTED VOLUMES OR MEET CUSTOMERS' ORDERS
A cornerstone of Starbelly.com's strategy is the ability to deliver to
Starbelly.com's customers customized goods in certain key product categories
within seven business days of their confirmed online order. Starbelly.com does
not maintain an inventory of custom-decorated merchandise nor does it control a
distribution system for these products. Instead, Starbelly.com depends on
distributors to carry a wide variety of blanks and to ship these products to a
decorator who then decorates the products. Fulfilling these orders in this
timeframe presents significant challenges.
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In order to provide timely service for Starbelly.com's customers, while
eliminating Starbelly.com's need to hold inventory, Starbelly.com relies on
contract carriers (such as UPS and Federal Express) to ship blanks from
distributors to on-site or off-site contract decorators and to ship finished
products from those decorators to Starbelly.com's customers. Starbelly.com is
therefore subject to the risks, including employee strikes and inclement weather
associated with such carriers' ability to provide delivery services to meet
Starbelly.com's needs. Starbelly.com also relies on its distributors to carry
sufficient quantities of goods and to accurately apprise Starbelly.com as to the
current inventories for the products Starbelly.com sells. The failure of
distributors to provide blanks to decorators on time and without abnormal
amounts of defects, and the failure of contract carriers to timely ship products
to or from decorators, would tarnish Starbelly.com's reputation and brands, and
could adversely affect Starbelly.com's sales and prospects.
As Starbelly.com expands, Starbelly.com expects it will enter into
agreements and form alliances with other contract decoration facilities
throughout the United States and, eventually, the world. Accordingly, the
success of Starbelly.com's expansion will depend on a number of factors,
including Starbelly.com's ability to integrate the operations of new decorators
into its existing operations; to coordinate and manage those decorators in
multiple and perhaps geographically distant locations; and to establish and
maintain adequate quality control, management and information systems and
financial controls over those decorators. If Starbelly.com is not successful in
these efforts, Starbelly.com's ability to expand and grow could be materially
and adversely affected. Furthermore, Starbelly.com's ability to expand its
fulfillment capacity and its business will depend in part upon Starbelly.com's
ability to obtain the agreement of additional contractors to permit
Starbelly.com to embed its business processes into their such contractors'
operations and equipment. If Starbelly.com is unable to convince other
decorators to agree to such terms, Starbelly.com may need to directly invest in
employees and equipment to increase its decorating capacity, which may adversely
affect Starbelly.com's ability to expand or its financial results.
IF WE FAIL TO SUCCESSFULLY DEVELOP THE STARBELLY.COM BRAND, STARBELLY.COM'S
REVENUE MAY BE ADVERSELY AFFECTED
We believe that establishing and maintaining the Starbelly.com brand is a
critical aspect of developing and maintaining strategic customer relationships,
and that the importance of brand recognition will increase as the number of
customers ordering products grows. Starbelly.com's failure to successfully
develop Starbelly.com's brand may adversely affect its ability to generate
revenue. Starbelly.com intends to increase its sales and marketing staff and to
increase spending on programs, including advertising campaigns and marketing
events, to create and maintain brand loyalty among its customers. If
Starbelly.com does not generate a corresponding increase in Starbelly.com's
revenue as a result of its branding efforts or otherwise fails to promote the
Starbelly.com brand successfully, or if Starbelly.com incurs excessive expenses
in its efforts, its business, results of operations and financial condition may
be significantly harmed. In addition, if Starbelly.com's customers do not
perceive Starbelly.com products to be of high quality, or if Starbelly.com
introduces new products that are not accepted by the market, the value of the
Starbelly.com brand will decline and its business will suffer.
STARBELLY.COM MAY HAVE DIFFICULTY MANAGING ITS GROWTH
Starbelly.com's business has grown rapidly since its inception in
March 1999. Starbelly.com incorporated in March 1999 with no employees, and by
March 15, 2000 Starbelly.com had 174 full time employees and 31 independent
contractors engaged on a full-time basis. To help manage future growth
effectively, Starbelly.com must maintain and enhance its financial and
accounting system and controls, hire and integrate new personnel and manage
expanded operations. Starbelly.com's failure to manage recent or future
expansion successfully could have a material adverse effect on the quality of
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Starbelly.com's products and technology, its ability to retain customers and key
personnel and its operating results and financial condition.
STARBELLY.COM'S MANAGEMENT TEAM IS NEW AND MAY NOT BE ABLE TO WORK TOGETHER
SUCCESSFULLY
Starbelly.com's success depends to a significant degree upon the continued
joint contributions of Starbelly.com's key management, none of whom were hired
before March 1999 and many of whom have been hired much more recently. Because
of the limited time during which Starbelly.com's management team has been
working together, there can be no assurance that its management will be able to
work effectively as a team to meet the many challenges Starbelly.com faces.
MANAGEMENT MAY HAVE DIFFICULTY INTEGRATING THE BUSINESS AND CORPORATE CULTURES
OF HA-LO AND STARBELLY.COM
The merger and related transactions involve the integration of two business
organizations that have previously operated independently. HA-LO and
Starbelly.com may encounter difficulties in integrating the operations of the
two businesses. The companies may not be able to successfully blend their
products, services and technology to create the advantages which the merger is
intended to create. Also, HA-LO's client base may not be willing to shift
significant portions of their promotional product purchasing to the Internet.
Furthermore, any delays or unexpected obstacles or costs in connection with such
integration could have a material adverse effect on the combined company's
business, operating results or financial condition and the expected value of the
merger.
There is also the risk that the operations, management and personnel of the
two companies may not be compatible, and either HA-LO or Starbelly.com may
experience the loss of key personnel for that reason. HA-LO or Starbelly.com may
also experience a disruption in their employee base as a result of uncertainty
following the merger and during the integration process. As a result, key
employees may seek employment elsewhere, including with competitors.
IF STARBELLY.COM LOSES KEY PERSONNEL OR IS UNABLE TO HIRE ADDITIONAL QUALIFIED
PERSONNEL, STARBELLY.COM MAY NOT BE SUCCESSFUL
The loss of the services of one or more of key personnel could seriously
harm Starbelly.com's business. Starbelly.com depends on the continued services
and performance of its senior management and other key personnel, particularly
Bradley Keywell, Starbelly.com's founder and chief executive officer, and Eric
Lefkofsky, Starbelly.com's founder and president. Although we will enter into
three-year employment agreements with Mr. Keywell and Mr. Lefkofsky if we
complete the merger, the contractual relationships can be terminated under
certain circumstances, and some of these circumstances may not be within our
control.
Starbelly.com's future success also depends upon the continued service of
its other executive officers and its key software development, merchandising,
technical, marketing, finance and support personnel and its ability to attract
additional personnel in each of these areas. Competition for qualified personnel
in these areas is intense, particularly at the senior level, and Starbelly.com
might not be able to hire the kind and number of employees Starbelly.com is
targeting. Starbelly.com's failure to attract and retain these key employees
could have a material adverse effect on Starbelly.com's business, results of
operations and financial condition. In addition, employees may leave
Starbelly.com and subsequently seek to compete against Starbelly.com, even
though they have signed agreements not to do so.
STARBELLY.COM DEPENDS ON THIRD PARTIES TO PROVIDE RELIABLE SOFTWARE, SYSTEMS,
AND RELATED SERVICES
Starbelly.com depends on certain third-party service and software providers,
including Oracle and Level 3. Starbelly.com depends on these third-party
providers to continue to offer, maintain and update
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Starbelly.com's software infrastructure. Any discontinuation of such services,
or any reduction in performance that requires Starbelly.com to replace such
services, would be disruptive to Starbelly.com's business. Starbelly.com depends
on its software providers for the development and maintenance of electronic
commerce processing systems. The failure of such systems could have a material
adverse effect on Starbelly.com's business and operations.
In the past, certain of Starbelly.com's third-party service providers have
experienced interruptions or failures in their system or services. If such
failures were to occur in the future, Starbelly.com's customers could be
prevented from accessing or purchasing products through the Starbelly.com Web
site. Any reduction in performance, disruption in Internet or online access or
discontinuation of services provided by any of Starbelly.com's Internet service
providers could have a material adverse effect on Starbelly.com's business,
operating results and financial condition.
Some of Starbelly.com's agreements with third-party service and software
providers have terms of, or expire within, one year or less and in some cases
are subject to cancellation for any reason or no reason upon short notice. Any
cancellation of services by any those third-party providers, or failure to renew
services upon expiration, without notice sufficient to allow Starbelly.com to
transition to a new service provider in a timely and cost-effective manner would
have a material adverse effect on Starbelly.com's business, operating results
and financial condition.
IF DEMAND EXCEEDS THE CAPACITY CONSTRAINTS OF STARBELLY.COM'S INTERNET
TECHNOLOGY SYSTEMS OR FULFILLMENT SYSTEMS OR IF STARBELLY.COM DOES NOT CONTINUE
TO DEVELOP THESE SYSTEMS PROPERLY, STARBELLY.COM'S BUSINESS COULD BE ADVERSELY
AFFECTED
Starbelly.com's revenues depend on the number of businesses and consumers
who use its Web site or Web sites it has designed for purchase of
custom-decorated merchandise. Accordingly, the satisfactory performance,
reliability and availability of these Web sites, transaction-processing systems
and network infrastructure are critical to Starbelly.com's operating results, as
well as its ability to attract and retain customers and maintain adequate
customer service levels. Any system interruptions that result in the
unavailability of Starbelly.com's Web sites or reduced performance of the
transaction system would reduce the volume of sales, which could have a material
adverse effect on Starbelly.com's business, operating results and financial
condition.
Starbelly.com uses an internally developed system for its Web site and those
Web sites which Starbelly.com develops for its customers.
Starbelly.com-developed customer Web sites handle substantially all aspects of
transaction processing, including product customization, customer profiling and
confirmations. Starbelly.com may experience periodic system interruptions from
time to time. A substantial increase in the volume of traffic on Starbelly.com's
Web sites, or the number of orders placed by customers in excess of projected
amounts will require Starbelly.com to expand and upgrade further its technology,
transaction-processing systems and network infrastructure. Starbelly.com may
also experience temporary capacity constraints due to sharply increased traffic
during sales or other promotions, which could cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality and delays in reporting accurate financial information. There
can be no assurance that Starbelly.com's transaction-processing system and
network infrastructure will be able to accommodate its system traffic in the
future, or that Starbelly.com will, in general, be able to accurately project
the rate or timing of such increases or upgrade Starbelly.com's system and
infrastructure to accommodate future traffic levels on its Web sites and those
Starbelly.com develops for its customers.
In the future, Starbelly.com intends to upgrade and expand its system and to
integrate newly developed or purchased modules with Starbelly.com's existing
systems in order to improve its accounting, control and reporting methods and
support increased transaction volume. Starbelly.com's inability to add
additional software and hardware or to develop and upgrade further its existing
technology, transaction processing systems or network infrastructure to
accommodate increased traffic
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on its Web site or those Web sites Starbelly.com develops for its customers or
its inability to handle increased sales volume through Starbelly.com's
transaction-processing systems may cause unanticipated system disruptions,
slower response times, degradation in levels of customer service, impaired
quality and speed of order fulfillment, and delays in reporting accurate
financial information. There can be no assurance that Starbelly.com will be
able, in a timely manner, to effectively upgrade and expand its
transaction-processing systems or to integrate smoothly any newly developed or
purchased modules with its existing systems. Any inability to do so could have a
material effect on Starbelly.com's business, operating results and financial
condition.
A SYSTEM FAILURE WOULD ADVERSELY AFFECT STARBELLY.COM'S BUSINESS
Starbelly.com's ability to successfully receive and transmit orders online
and provide high-quality customer service largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems.
Some of the Starbelly.com systems or their components are untested in
high-volume operations. Some Starbelly.com intranet and database systems are
located in Chicago, Illinois. These systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
break-ins and similar events. The failure of Starbelly.com's intranet and
database systems could have a material adverse effect on Starbelly.com's
business, operating results and financial condition.
Starbelly.com's servers and related technology are currently housed on-site
with redundant systems located off-site. Despite the implementation of network
security measures, Starbelly.com's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and confirm
customer orders or to provide orders to distributors or decorators. The
occurrence of any of the foregoing risks could have a material adverse effect on
Starbelly.com's business, operating results and financial condition. Any virus
infecting Starbelly.com's system or other damage to Starbelly.com's system could
adversely affect the computer systems of a third party. Such an event could
expose Starbelly.com to a risk of loss or litigation or possible liability.
STARBELLY.COM MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE INCREASINGLY
COMPETITIVE CUSTOM-DECORATED MERCHANDISE MARKET
The custom-decorated merchandise market is a rapidly evolving and intensely
competitive industry, and electronic commerce generally is a new and rapidly
evolving medium. Starbelly.com competes primarily with various producers of
custom-decorated merchandise. As the market for custom decorated products
continues to grow, Starbelly.com expects other competitors, including
established retail and mail order suppliers or other electronic commerce
companies, to develop online services that compete with Starbelly.com's
services. The level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. Many of Starbelly.com's potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than Starbelly.com does and may
enter into strategic or commercial relationships with larger, more established
and well-financed companies. Certain of Starbelly.com's competitors may be able
to secure services and products from suppliers on more favorable terms, devote
greater resources to marketing and promotional campaigns and devote
substantially more resources to Web site and systems development than
Starbelly.com can. In addition, new technologies and the expansion of existing
technologies may increase competitive pressures. Increased competition may
result in reduced operating margins, as well as loss of market share and brand
recognition. There can be no assurance that Starbelly.com will be able to
compete successfully against current and future competitors, and competitive
pressures could have a material adverse effect on Starbelly.com's business,
operating results and financial condition.
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FEDERAL, STATE AND LOCAL ENVIRONMENTAL LAWS AND REGULATIONS, AND FAILURE TO
COMPLY WITH THEM COULD HARM STARBELLY.COM'S BUSINESS
Starbelly.com's vendors, who perform decorating services, including those
residing in Starbelly.com's Chicago headquarters, are subject to a variety of
federal, state, and local environmental laws and regulations related to the use,
storage, discharge and disposal of wastewater and other chemicals used in their
processes. They may incur significant costs to comply with current or future
environmental laws and regulations, or be adversely affected by the cost of
compliance with these laws and regulations, which would effectively increase
Starbelly.com's costs. In addition, Starbelly.com may be directly responsible
for the remediation of any environmental contamination caused by decorators
residing on its properties. Any such liability could have a material adverse
effect on Starbelly.com's operations.
RISK FACTORS GENERALLY AFFECTING ALL E-COMMERCE BUSINESSES AND INTERNET
BUSINESSES
STARBELLY.COM DEPENDS ON THE CONTINUED GROWTH OF ELECTRONIC COMMERCE
Starbelly.com's viability is substantially dependent upon the widespread
acceptance and use of the Internet as an effective medium for commerce. The use
of the Internet as a means of effecting transactions, particularly in the market
for custom-decorated products, is at an early stage of development. For
Starbelly.com to be successful, businesses and consumers must accept and utilize
new ways of conducting business and exchanging information. Convincing
businesses and consumers to evaluate and purchase custom-decorated products
online may be particularly difficult, as such these parties have traditionally
relied on advertising specialty retailers and specialty catalogs to purchase
such products. Advertising specialty retailers are retailers who focus their
efforts on selling to customers merchandise that is custom decorated with the
customer's brands, which those customers use for the promotion of their brands.
Rapid growth in the use of and interest in the Web, the Internet and commercial
online services is a recent phenomenon, and there can be no assurance that
acceptance and use will continue to develop or that a sufficiently broad base of
customers will adopt, and continue to use, the Internet and commercial online
services as a medium of commerce, particularly for evaluating and purchasing
custom-decorated products.
Demand for recently introduced services and products over the Internet and
commercial online services is subject to a high level of uncertainty. A minority
of these services and products have proved to be profitable. The development of
the Internet and commercial online services into a viable commercial marketplace
is subject to a number of factors, including continued growth in the number of
users of such services, concerns about transaction security, continued
development of the necessary technological infrastructure, development of
enabling technologies, uncertain and increasing government regulation and the
development of complementary services and products.
To the extent that the Internet and other online services continue to
experience growth in the number of users, their frequency of use or increase in
their bandwidth requirements, there can be no assurance that the infrastructure
for the Internet and other online services will be able to support the demands
placed upon them. In addition, the Internet or other online services could lose
their viability due to delays in the development or adoption of new standards
and protocols required to handle increased levels of Internet or other online
service activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
Starbelly.com in particular. If the use of the Internet and other online
services does not continue to grow or grows more slowly than expected, if the
infrastructure for the Internet and other online services do not effectively
support growth that may occur or if the Internet and other online services do
not become a viable commercial marketplace,
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Starbelly.com's business operating results and financial condition would be
materially and adversely affected.
RAPID TECHNOLOGICAL CHANGE COULD MATERIALLY AFFECT STARBELLY.COM
The Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render
Starbelly.com's existing technology and systems obsolete. The emerging nature of
these products and services and their rapid evolution will require Starbelly.com
to continually improve the performance, features and reliability of its
e-commerce services, particularly in response to competitive offerings.
Starbelly.com's success will depend, in part on its ability to enhance existing
services and to develop and license new services and technologies that address
the increasingly sophisticated and varied needs of Starbelly.com's prospective
customers. Starbelly.com will also need to respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development or licensing of online sites and other proprietary technology
entails significant technical and business risks and requires substantial
expenditures and lead time. There can be no assurance that Starbelly.com will
use new technologies effectively or adapt its Web site, proprietary technology
and transaction processing systems to customer requirements or emerging industry
standards. If Starbelly.com is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner in response to changing market conditions
or customer requirements, Starbelly.com's business, operating results and
financial condition could be materially and adversely affected.
STARBELLY.COM'S MARKETPLACE OR DATABASE MAY BE SUSCEPTIBLE TO SECURITY BREACHES
A fundamental requirement for electronic commerce and communications is the
secure transmission of confidential information over public networks.
Starbelly.com will rely on encryption and authentication technology licensed
from third parties to provide the security and authentication necessary to
effect secure transmission of confidential information, such as customer credit
card numbers. In addition, Starbelly.com intends to maintain an extensive,
confidential database of customer profiles and transaction information. There
can be no assurance that advances in computer capabilities, new discoveries in
the field of cryptography, or other events or developments will not result in a
compromise or breach of the algorithms Starbelly.com uses to protect customer
transaction data contained in its customer database. Further, Starbelly.com's
servers may be vulnerable to computer viruses, physical or electronic break-ins
and similar disruptions. If any such compromise of Starbelly.com's security were
to occur, it could have a material adverse effect on its reputation, business,
operating results and financial condition. A party who is able to circumvent
Starbelly.com's security measures could misappropriate proprietary information
or cause interruptions in its operations. Starbelly.com may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of transactions conducted on the Internet and commercial online
services and the privacy of users may also inhibit the growth of the Internet
and commercial online services, especially as a means of conducting commercial
transactions. To the extent that Starbelly.com's activities or third-party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers or other personal information, security breaches
could expose Starbelly.com to a risk of loss or litigation and possible
liability. There can be no assurance that Starbelly.com's security measures will
prevent security breaches or that failure to prevent such security breaches will
not have a material adverse effect on Starbelly.com's business, operating
results and financial condition.
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STARBELLY.COM MAY HAVE LIABILITY FOR INTERNET CONTENT IN ITS MARKETPLACE
As a publisher and distributor of online content, Starbelly.com faces
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
that it receives, stores, publishes or distributes. Such claims have been
brought and sometimes successfully pressed, against online services. There is a
risk that Starbelly.com may be exposed to these claims in connection with the
future operations of its various Web sites. In addition, Starbelly.com does not
and cannot practically screen all of the content generated by its users, and
Starbelly.com could be exposed to liability with respect to such content.
Although Starbelly.com carries general liability insurance, its insurance may
not cover claims of these types or may not be adequate to indemnify
Starbelly.com for all liability that may be imposed. Any imposition of
liability, particularly liability that is not covered by insurance or is in
excess of insurance coverage, could have a material adverse effect on its
reputation, business, operating results and financial condition.
FUTURE GOVERNMENTAL REGULATION OF THE INTERNET MAY RESTRICT STARBELLY.COM'S
BUSINESS
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including user privacy, pricing and
the characteristics and quality of products and services. An increase in
regulation or the application of existing laws to the Internet could
significantly increase Starbelly.com's costs of operations and harm its
business. For example, the Communications Decency Act of 1996 sought to prohibit
the transmission of certain types of information and content over the Web.
Additionally, several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. Imposition of access fees could increase
the cost of transmitting data over the Internet.
STARBELLY.COM RELIES ON INTELLECTUAL PROPERTY RIGHTS THAT MAY NOT ADEQUATELY
PROTECT STARBELLY.COM UNDER CURRENT LAWS
To establish and protect Starbelly.com's trademarks, services marks and
other proprietary rights in its products and services, Starbelly.com relies on a
combination of copyright, unfair competition, trademark, service mark and trade
secret laws; confidentiality agreements with licensees and other third parties;
and confidentiality agreements and policies covering employees. Starbelly.com
cannot assure us or you that these measures will be adequate, that Starbelly.com
will be able to secure registrations for all of its marks in the U.S. or
internationally or that third parties will not infringe upon or misappropriate
its proprietary rights. Any infringement, misappropriation or litigation
relating to intellectual property rights may divert Starbelly.com's management's
attention and its funds to litigate such claims. Provisions in Starbelly.com's
license agreements with its customers protecting against unauthorized use,
copying, transfer and disclosure of its licensed products may be unenforceable
under the laws of specific jurisdictions and foreign countries. In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent, as do the laws of the United States. Starbelly.com cannot assure us or
you that its methods of protecting its proprietary rights in the United States
or abroad will be adequate. Starbelly.com also cannot assure us or you that
competing companies will not independently develop technology similar to its
proprietary technology.
Legal standards relating to the validity, enforceability and scope of
protection of certain property rights in Internet-related businesses are
uncertain and evolving. In particular, new domain name registration and
ownership property procedures may be adopted that may make it more difficult for
Starbelly.com and other Internet-related businesses to retain or obtain
desirable domain names.
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Companies in Starbelly.com's industry and other electronic commerce-based
industries have been the subject of claims that their Web site content, method
of doing business and processes for conducting on-line transactions violate the
patent, trademark, copyright and other intellectual property rights of their
competitors or other third parties. Although Starbelly.com believes that its
proprietary rights do not infringe on the intellectual property rights of
others, other parties may assert infringement claims against Starbelly.com or
claims that Starbelly.com has violated a patent or infringed a copyright,
trademark or other intellectual property right belonging to such other parties.
Starbelly.com may be subject to claims of this type in the future as it develops
and introduces new products and methods of doing business in the future. Any
infringement claims, even if not meritorious, could result in Starbelly.com's
expenditure of significant financial and managerial resources, which could harm
its business.
Starbelly.com also intends to continue to strategically license certain
content for its Web site from third parties, including content which is
integrated with internally developed content and used on its Web site to provide
key services. There can be no assurance that these third party content licenses
will be available to Starbelly.com on commercially reasonable terms or that
Starbelly.com will be able to successfully integrate such third-party content.
Such content licenses may expose Starbelly.com to increased risks, including
risks associated with the assimilation of new content, the diversion of
resources from the development of on-line content and functionality, the
inability to generate revenues from new content sufficient to offset associated
acquisition costs and the maintenance of uniform, appealing content. The
inability to obtain any of these licenses could result in delays in Web site
development or services until equivalent content can be identified, licensed and
integrated. Any such delays in development or services could have a material
adverse effect on Starbelly.com's business, operating results and financial
condition.
Companies in Starbelly.com's industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices or have assisted the employee in breaching noncompetition or
nondisclosure agreements. Starbelly.com may be subject to claim of this type in
the future as it seeks to hire qualified employees. Starbelly.com could incur
substantial costs in defending itself against these claim or litigation
associated with these claims, regardless of their merit. On the other hand,
courts have taken a restrictive view with regard to the enforcement of
noncompetition and nonsolicitation covenants and nondisclosure and secrecy
agreements, particularly with respect to Internet-related businesses. Therefore,
Starbelly.com may not be able to enforce the agreements it has with its
employees regarding restrictions on their ability to compete against
Starbelly.com.
RISKS RELATED TO HA-LO CAPITAL STOCK
INCREASED NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND CONVERTIBLE PREFERRED
STOCK COULD HAVE AN ANTI-TAKEOVER EFFECT
If the proposed amendments to our articles of incorporation are approved,
the resulting increase in the authorized number of shares of our common stock
and our convertible preferred stock, and the ability of the board of directors
to issue convertible preferred stock without further shareholder action, could
delay or prevent a change in control of HA-LO. Within legal limits imposed by
the Illinois Business Corporation Act and the rules of the New York Stock
Exchange, your board of directors could issue shares of authorized (but yet
unissued) common stock or convertible preferred stock in one or more
transactions that would make a change in control of HA-LO more difficult, and
therefore less likely. By potentially discouraging initiation of any such
unsolicited takeover attempt, the proposed amendments may limit the opportunity
for our shareholders to dispose of their shares at the higher price generally
available in takeover attempts or that may be available under a merger proposal.
The proposed amendments may permit HA-LO's management, the current board of
directors and the new directors filling vacancies created at the time of the
merger to retain their positions, and place them in
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a better position to resist changes that shareholders may wish to make if they
are dissatisfied with the conduct of HA-LO's business. In addition, the issuance
of these additional shares of our common stock or convertible preferred stock
could also dilute the earnings per share and book value per share of outstanding
shares of our common stock or convertible preferred stock. These additional
shares could be used to dilute the stock ownership or voting rights of a person
seeking to obtain control of HA-LO. However, your board of directors is not
aware of any attempt to take control of HA-LO and the board has not presented
these proposals with the intent that they be used as a type of anti-takeover
device.
RISKS RELATING TO THE HA-LO CONVERTIBLE PREFERRED STOCK
At any time during the 30-day period commencing on the first anniversary of
the effective date of the merger, the holders of the convertible preferred stock
issued in the merger and upon exercise of the assumed options will have the
right to require the Company to redeem all or any part of their shares at a
price per share in cash equal to the liquidation preference of $10.00 per share,
plus any accrued and unpaid dividends. If holders of a significant number of
shares of convertible preferred stock elect to have their shares redeemed, HA-LO
will be required to borrow the funds necessary to pay the redemption price or to
raise such funds through the public or private sale of debt or equity
securities. There can be no assurance that adequate financing will be available
to pay the redemption price or that the terms of any such financing will be
satisfactory to HA-LO.
If the Company defaults on its obligation to redeem any shares of
convertible preferred stock, for so long as the Company is in default, the
shares of convertible preferred stock that the Company failed to redeem will
accrue dividends, at a rate of 8% of the liquidation price per annum on the
$10.00 per share issuance price of such shares, beginning on the first date on
which the Company failed to redeem such shares of convertible preferred stock
until the redemption price has been paid in full. The rate at which dividends
accrue will increase by 4% of the liquidation price per annum on each six month
anniversary of the date of default until the redemption price (including accrued
dividends) has been paid in full.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this proxy statement constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The forward-looking statements relate to anticipated financial
performance, management's plans and objectives for future operations, business
prospects, outcome of regulatory proceedings, market conditions and other
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements in certain circumstances. The following
discussion is intended to identify the forward-looking statements and certain
factors that could cause future outcomes to differ materially from those set
forth in the forward-looking statements.
Forward-looking statements include the information concerning possible or
assumed future results of operations of HA-LO, as well as other future events
set forth under "Questions and Answers About the Merger," "Risk Factors--Risks
Related to the Merger--Uncertainties in Achieving Benefits of the Merger and
Integrating the Businesses," "--Risks Related to Starbelly.com's Business," "The
Merger--Background of the Merger," "--Recommendation of the HA-LO Board and
Reasons for the Merger," "--Opinion of Financial Adviser to HA-LO,"
"--Management and Operations After the Merger," "Unaudited Pro Forma Combined
Condensed Financial Information," and other statements in this proxy statement
identified by words such as "anticipate," "estimate," "expect," "intend,"
"believe," and "objective," and include, in particular, the statements as to:
1. the ability of the combined company to compete effectively in its
markets;
2. the anticipated levels and sources of merger benefits resulting from
the merger and estimated timing of achieving those benefits;
3. the ability to convince customers to use Starbelly.com's services and
systems;
4. the anticipated manner in which identified merger benefits will be
achieved;
5. the estimated amount of costs and capital expenditures necessary to
achieve the merger benefits;
6. the estimated future costs, operating losses and capital expenditures
associated with Starbelly.com's business;
7. the ability of the combined entity to further diversify through
acquisitions or development of new business and the marketing and
delivery of new products and services;
8. the ability to attract and retain qualified employees; and
9. the ability of sales people who quit to take customers with them.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
combined company to be materially different from any future results, performance
or achievements expressed or implied by the forward-looking statements. These
factors may affect HA-LO's operations, markets, products, services and prices.
In addition to any assumptions and other factors referred to specifically in
connection with forward-looking statements, factors that could cause HA-LO's
actual results to differ materially from those contemplated in any
forward-looking statement include, among others, the following:
1. general economic and business conditions;
2. industry capacity;
3. changes in technology;
4. changes in political, social and economic conditions;
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5. regulatory matters, including the possibility of new regulations
affecting e-commerce;
6. challenges associated with the integration of the operations of HA-LO
and Starbelly.com;
7. regulatory delays or conditions imposed by regulatory bodies in
approving the merger;
8. adverse regulatory treatment;
9. the ability of HA-LO and Starbelly.com to implement and realize
anticipated cost savings and revenue enhancements from the merger;
10. the actual costs required to effect the merger and to realize
anticipated cost savings and revenue enhancements;
11. the actual duration of Starbelly.com's continuing operating losses;
12. the loss of any significant customers;
13. changes in business strategy or development plans;
14. actual future costs of operating expenses;
15. actual costs of continuing investments in technology;
16. the availability of capital to finance possible acquisitions and to
refinance debt;
17. the ability of management to implement the strategy of acquisitions and
process improvements;
18. changes in the capital markets affecting the ability to finance capital
requirements; and
19. the other factors listed in our annual report on Form 10-K or in other
reports previously or hereafter filed by HA-LO with the Securities and
Exchange Commission, which are incorporated by reference herein.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of these other
assumptions to be realized, as well as other factors, may also cause actual
results to differ materially from those projected. HA-LO does not assume any
obligation to update any forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting those
forward-looking statements.
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THE SPECIAL MEETING, VOTING AND PROXIES
This document is being furnished to HA-LO's shareholders in connection with
the solicitation of proxies by the board of directors for use at the HA-LO
special meeting.
PURPOSE; TIME AND PLACE
The HA-LO special meeting is scheduled to be held at 10:00 a.m., Chicago
time, on Wednesday, May 3, 2000, at Harris Bank, Room 20C, 111 W. Monroe Street,
Chicago, Illinois. The purpose of the special meeting is:
(1) To consider and vote upon a proposal to approve the merger of
Starbelly.com with a wholly owned subsidiary of HA-LO. A vote in favor of
the merger also constitutes a vote in favor of: (a) the issuance of
17 million shares of common stock pursuant to the merger agreement;
(b) the amendment of the Company's articles of incorporation to permit
the issuance of 5.1 million shares of convertible preferred stock in the
merger and upon exercise of the assumed options; (c) the reservation of
5.1 million shares of common stock for issuance upon conversion of the
convertible preferred stock;
(2) To consider and vote upon a proposal to adopt a new stock option plan
under which HA-LO will assume Starbelly.com's stock option plan and the
options outstanding under the plan;
(3) To consider and vote upon a proposal to amend Article Four of the
Company's articles of incorporation to increase the number of shares of
common stock that HA-LO is authorized to issue from 100 million to
250 million and to increase the number of shares of preferred stock that
HA-LO is authorized to issue from 10 million to 20 million;
(4) To consider and vote upon a proposal to amend Article Four of the
Company's articles of incorporation to authorize the board of directors
to provide for the issuance of preferred stock without the further
approval of the holders of our common stock;
(5) To consider and vote upon a proposal to postpone or adjourn the special
meeting, if proposed by your board of directors; and
(6) To transact such other business as may properly come before the special
meeting or any postponement or adjournment thereof.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND DETERMINED THAT
THE TRANSACTIONS CONTEMPLATED BY IT ARE FAIR TO AND IN THE BEST INTERESTS OF
HA-LO AND THE HA-LO SHAREHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE MERGER AND FOR THE OTHER PROPOSALS. APPROVAL OF THE MERGER
IS CONDITIONED ON APPROVAL OF THE ADOPTION OF THE NEW STOCK OPTION PLAN.
SIMILARLY, APPROVAL OF THE NEW STOCK OPTION PLAN IS CONDITIONED ON APPROVAL OF
THE MERGER.
RECORD DATE; VOTING RIGHTS
Holders of record of shares of HA-LO common stock at the close of business
on March 27, 2000, the record date, will be entitled to notice of and to vote at
the special meeting. As of the record date, 48,954,836 shares of HA-LO common
stock were issued and outstanding and entitled to vote. Each outstanding share
of HA-LO common stock is entitled to one vote upon each matter presented at the
special meeting.
QUORUM
The holders of a majority of the issued and outstanding shares of HA-LO
common stock must be present in person or represented by proxy at the HA-LO
special meeting for a quorum to be present. Abstentions and broker non-votes
(I.E., proxies from brokers or nominees indicating that those persons
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have not received instructions from the beneficial owners or other persons
entitled to vote shares as to a matter with respect to which brokers or nominees
do not have discretionary power to vote) will be considered present for the
purpose of establishing a quorum.
REQUIRED VOTE
Approval of the proposed merger requires the affirmative vote of a majority
of the outstanding shares of common stock. Broker non-votes and abstentions will
count as votes cast AGAINST this proposal.
Approval of the proposals to amend our articles of incorporation to increase
the number of shares of our common stock that HA-LO is authorized to issue from
100 million to 250 million and to increase the number of shares of our preferred
stock that HA-LO is authorized to issue from 10 million to 20 million, and to
permit the board of directors to authorize the future issuance of preferred
stock without the further approval of the holders of our common stock requires
the affirmative vote of a majority of the outstanding shares of common stock.
Broker non-votes and abstentions will count as votes cast AGAINST these
proposals.
Approval of the proposal to adopt the new stock option plan under which
HA-LO will assume Starbelly.com's stock option plan and any proposal to postpone
or adjourn the special meeting each require the affirmative vote of a majority
of the outstanding shares of HA-LO common stock represented in person or by
proxy at the meeting. Broker non-votes and absentions will NOT count as votes
cast AGAINST these proposals.
PROXIES
You may vote either in person or by properly executed proxy. By completing
and returning the form of proxy, you authorize the persons named therein to vote
all your HA-LO shares on your behalf. Each properly completed and returned proxy
will be voted in accordance with the instructions indicated on that proxy. If no
instructions are given, properly executed proxies will be voted:
- FOR approval of the merger (and the related transactions described in this
proxy statement);
- FOR approval of the adoption of the new stock option plan under which
HA-LO will assume Starbelly.com's stock option plan;
- FOR approval of the amendment to our articles of incorporation to increase
the number of authorized shares of our common stock and our convertible
preferred stock;
- FOR approval of the amendment to our articles of incorporation to
authorize the board of directors to provide for the future issuance of
convertible preferred stock without the further approval of the holders of
our common stock; and
- FOR approval of any proposal to postpone or adjourn the special meeting,
if proposed by your board of directors.
Your board of directors does not know of any matters to be presented at the
special meeting other than those described in this proxy statement. If other
matters are properly brought before the meeting, the persons named as proxies
intend to use their judgment in voting on those matters.
You may revoke a previously granted proxy at any time before it is voted at
the special meeting. If you wish to revoke your proxy, you must do one of the
following:
- deliver to the Secretary of HA-LO written instructions to revoke your
proxy; or
- deliver to the Secretary of HA-LO another duly executed and subsequently
dated proxy; or
- attend the meeting and vote in person.
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Attending the special meeting will not, by itself, revoke a previously
granted proxy. Harris Bank, HA-LO's stock transfer agent, will receive and
tabulate proxies and ballots.
PLEASE DO NOT SEND ANY SHARE CERTIFICATES WITH YOUR PROXY CARDS.
COST OF SOLICITATION
HA-LO will pay all expenses for soliciting proxies for the special meeting.
Our officers and employees, who will receive no compensation above their regular
salaries for their services, may solicit proxies from our shareholders in person
or by mail, telephone, telecopy or telegram. We have asked banking institutions,
brokerage firms, custodians, trustees, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of our common stock held of
record by those holders, and, upon request, we will reimburse them for their
reasonable forwarding expenses.
POSTPONEMENT OR ADJOURNMENT
The special meeting may be postponed or adjourned to another date and/or
place for any proper purpose (including, without limitation, for the purpose of
soliciting additional proxies). We are asking for your vote to approve a
postponement or an adjournment if proposed by your board of directors.
DISSENTERS' RIGHTS
The rights of HA-LO shareholders who dissent in connection with the merger
are governed by specific legal provisions contained in sections 11.65 and 11.70
of the IBCA. Although we describe in the paragraphs below the dissenters' rights
available under Illinois law, we encourage you to read sections 11.65 and 11.70
of the IBCA, a copy of which we have attached to this proxy statement as
Exhibit C.
If the merger is completed, HA-LO shareholders who have fully complied with
the relevant provisions of the IBCA may have the right to require us to purchase
their shares of HA-LO common stock for cash at the fair value of such shares,
plus any accrued interest, as of the merger closing. Beneficial owners of shares
of HA-LO common stock whose shares are held by another person, such as a
trustee, broker or nominee, should instruct the record holder to follow the
procedures outlined below if such persons wish to dissent with respect to any or
all of their shares. Under the IBCA, no shareholder who is entitled to exercise
dissenters' rights has any right to challenge the validity of the merger or to
have the merger set aside or rescinded, except in an action to determine whether
the merger is fraudulent against the shareholder or HA-LO or constitutes a
breach of a fiduciary duty owed to the shareholder.
We must purchase shares of HA-LO common stock upon demand from a dissenting
shareholder if such shareholder has complied with the relevant IBCA
requirements. The procedures to be followed include the following requirements:
- The shareholder of record MUST NOT vote all of his shares to approve the
merger. The shareholder MAY vote part of his shares in favor of the
merger. In such a case, the shareholder will retain the right to have us
purchase those shares that were not voted in favor of the merger.
- A beneficial owner of shares who is not the record owner may assert
dissenters' rights as to shares held on such person's behalf only if the
beneficial owner submits to us the record owner's written consent to the
dissent before or at the same time the beneficial owner asserts
dissenters' rights.
- The notice of meeting to the shareholders of HA-LO relating to the
proposal to approve the merger must inform the shareholders of their right
to dissent and the procedure to dissent. If, before the special meeting,
we give our shareholders material information about the merger that will
objectively enable our shareholders to vote on the merger and to determine
whether or not to exercise dissenters' rights, a shareholder may assert
dissenters' rights only if the shareholder
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does not vote in favor of the approval of the merger and the shareholder
delivers to us, before the vote is taken at the special meeting, a written
demand for purchase of his shares if the merger is completed.
Within ten days after the merger is completed or 30 days after the
shareholder delivers to us written demand for payment, whichever is later, we
will send each shareholder who has delivered a written demand for payment the
following items:
- a statement setting forth our opinion as to the estimated fair value of
the shares;
- our latest balance sheet as of the end of a fiscal year ending not earlier
than 16 months before the delivery of the statement, together with the
statement of income for that year and the latest available interim
financial statements; and
- either (1) a commitment to pay for the shares of the dissenting
shareholder at their estimated fair value upon the delivery to us of the
share certificate or certificates (or other evidence of ownership with
respect to the shares), or (2) instructions to the dissenting shareholder
to sell his or her shares within ten days after delivery of our statement
to the shareholder.
Under the IBCA, we are permitted to instruct the shareholder to sell his or
her shares (rather than pay for them directly) because our shares trade on the
New York Stock Exchange, a public market where the shares may be readily sold.
If the shareholder does not sell within that ten-day period after we give the
instruction to sell, the shareholder is considered to have sold his or her
shares at the average New York Stock Exchange closing price of our shares of
common stock during that ten-day period.
A HA-LO shareholder who properly demands for payment retains his or her
rights as a HA-LO shareholder until the merger closes. If we have not properly
instructed the dissenting shareholder to sell his or her shares, when the merger
closes we must pay to each dissenter who delivers his or her share certificates
(or other evidence of share ownership) the amount we estimate to be the fair
value of the shares, plus accrued interest, and a written explanation of how we
calculated the interest. The term "fair value" means the value of the shares
immediately before the merger closing excluding any appreciation or depreciation
in anticipation of the merger, unless such exclusion would be inequitable. The
term "interest" means interest from the date of the merger closing until the
date of payment, at the average rate we pay on our principal bank loans or, if
we have no loans, at a rate that is fair and equitable under all the
circumstances.
If the dissenting shareholder does not agree with our estimated fair value
of the shares or the amount of interest due, the shareholder, within 30 days
from the delivery of our statement of fair value, must notify us in writing of
the shareholder's estimated fair value and amount of interest due and demand
payment for the difference between the shareholder's estimate of fair value and
interest due and the amount we paid for the shares (if we elected to pay for the
shares) or the sale proceeds from the shareholder's sale of the shares (if we
instructed the shareholder to sell the shares).
If, within 60 days after our delivery of our estimate of fair value of the
shares and interest due, we and the dissenting shareholder have not agreed in
writing upon the fair value of the shares and interest due, we must either pay
the difference in value demanded by the shareholder, with interest, or file a
petition in the circuit court of the county where either our registered office
or our principal office is located, requesting the court to determine the fair
value of the shares and interest due. This court has full and exclusive
jurisdiction to determine the fair value of the shares. We will make all
dissenters, whether or not residents of Illinois, whose demands remain
unsettled, parties to the proceeding as an action against their shares and all
parties will be served with a copy of the petition. We may serve non-residents
with notice of the proceeding by registered or certified mail or by publication
as provided by law. Our failure to commence an action will not, by itself, limit
or affect the right of the dissenting shareholders to commence an action.
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The court may appoint one or more persons as appraisers to receive evidence
and recommend a fair value amount. The appraisers have the power described in
the order appointing them, or in any amendment to it. Each dissenter who is a
party to the proceeding is entitled to judgment for the amount, if any, by which
the court finds that the fair value of his shares, plus interest, exceeds the
amount we paid or the proceeds of sale by the shareholder, whichever amount
applies.
The court will calculate the proceeding's costs, including the reasonable
compensation and expenses of any appraisers the court has appointed. Generally,
the court will not include the fees and expenses of attorneys and experts for
the parties in this calculation. If the court determines the fair value of the
shares to be significantly greater than the value we estimated to be the fair
value, then we may be required to pay some or all of these calculated costs.
Similarly, if the court determines the fair value of the shares to be
significantly greater than the value a dissenter estimated to be the fair value,
then that dissenter may be required to pay some or all of these costs. However,
the court may also charge the fees and expenses of attorneys and experts for the
parties to the proceeding in amounts the court finds equitable:
- against us (and in favor of any or all dissenters) if the court finds that
we did not substantially comply with the requirements of the IBCA, or
- against either us or a dissenter (and in favor of any other party) if the
court finds that the charged party acted arbitrarily, vexatiously, or not
in good faith with respect to the rights the IBCA provides.
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THE MERGER
GENERAL
The Agreement and Plan of Merger and Plan of Reorganization, dated as of
January 17, 2000, as amended, by and among HA-LO, Starbelly.com and HA-LO
Industries, Inc., a Delaware corporation (our "merger subsidiary"), is the legal
document that governs the merger transactions described in this proxy statement.
The merger agreement provides for the merger of Starbelly.com with and into our
merger subsidiary, as a result of which our merger subsidiary will survive the
merger under the new name "Starbelly.com, Inc.," and Starbelly.com will cease
its separate existence. For a description of the merger agreement, see "The
Merger Agreement" (page 63).
If we complete the merger, Starbelly.com stockholders will receive
approximately $240 million, which amount we will pay as follows:
(1) paying $19 million in cash (less Starbelly.com's merger expenses in
excess of $500,000);
(2) paying the balance by issuing:
(a) 17 million shares of HA-LO common stock valued in the merger
agreement at $170 million; and
(b) 5.1 million shares of HA-LO preferred convertible stock valued in the
merger agreement at $51 million.
The consideration we will pay to complete the merger includes the HA-LO common
stock and HA-LO preferred stock we will issue upon exercise of Starbelly.com's
outstanding stock options, which will be assumed by HALO and will entitle the
holder to receive upon exercise the same number of shares of HA-LO common stock
and HA-LO convertible preferred stock as such holder would have received in the
merger if the option had been exercised immediately prior to the merger.
The formula establishing the number of shares of HA-LO common stock valued
in the merger agreement at $170 million and the number of shares of HA-LO
convertible preferred stock valued in the merger agreement at $51 million was
based on the lower of $10.00 or the average closing price of HA-LO common stock
on the New York Stock Exchange for each trading day over a 25-day period
consisting of the trading days during the 15 calendar days prior to the
execution of the merger agreement and the trading days during the 10 calendar
days following execution of the merger agreement. Since the average closing
price during the measurement period was $10.05, the number of shares of our
common stock (17 million) and of our convertible preferred stock (5.1 million)
issuable in the merger was based on a $10.00 per share price.
You will continue to own your shares after the merger. Immediately after the
merger, pre-merger shareholders of HA-LO will own approximately 69% of the
outstanding common stock, and the former stockholders of Starbelly.com will own
approximately 31% of the outstanding common stock (assuming all of the
convertible preferred shares are converted into common stock and all assumed
options are exercised and all convertible preferred shares issued upon exercise
are converted into common stock).
BACKGROUND OF THE MERGER
During HA-LO's first 25 years of business, from 1972 until 1997, HA-LO's
sole line of business was the traditional sale and distribution of promotional
and related products. In 1997, HA-LO acquired Market USA, a leading
telemarketing company; in 1998, HA-LO acquired a branding identity company
(LAGA) and two well-known companies in the brand marketing and promotion
business (UPSHOT and Siebel Marketing Group). These acquisitions were made as
part of HA-LO's mission to transform itself into a brand marketing organization
and to become more competitive in the new economy.
As HA-LO's product and services mix was changing, and technological and
on-line innovations began to change all businesses, HA-LO management realized
the need to develop an Internet strategy
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to reflect changing economic times. In 1999, the Company formed Upshot Direct, a
company formed to satisfy increasing client demand for complete direct marketing
and database solutions in both online and offline environments. Company
management also began an analysis of ways in which the Company's traditional
promotional products business could be made more efficient and effective by
employing the Internet and other technological advances, whether through
acquisition or internal development.
In August 1999, Linden Nelson, vice chairman of the board of HA-LO,
contacted Bradley Keywell, the co-founder and chief executive officer of
Starbelly.com, to schedule a meeting to discuss the online and offline
promotional products business. Mr. Nelson and Mr. Keywell had been acquainted
professionally and personally for several years.
Mr. Nelson visited the offices of Starbelly.com to meet with Mr. Keywell, at
which time the only substance of the meeting was for Mr. Nelson to learn about
the business of Starbelly.com and see its office and operations. Neither a
transaction nor a business combination between the two companies was discussed
at that meeting.
Shortly thereafter, Mr. Nelson, Jon Sloan, HA-LO's Vice President of
National Accounts, and Tom Hunt, HA-LO's Vice President of Operations, met with
Mr. Keywell, Eric Lefkofsky, the co-founder and president of Starbelly.com, and
other Starbelly.com representatives to begin initial exploration of possible
business relationships.
During the next several weeks, HA-LO and Starbelly.com exchanged certain
information and ideas concerning the others' operations and business strategies.
On October 14, 1999, Mr. Nelson and John Kelley, then the president of
HA-LO's subsidiary, UPSHOT, and other representatives of HA-LO met with
Mr. Keywell and Mr. Lefkofsky, Richard Heise, a director and a representative of
certain principal stockholders of Starbelly.com, and other representatives of
Starbelly.com, to identify potential strategic advantages of combining the
companies. During the meeting, the parties discussed the potential business
synergies and efficiencies that could be realized from the combination. The
parties considered several of these strategic advantages and business synergies
in a combination of the companies to be particularly complimentary, including:
- the fusing of HA-LO's well-established customer base with Starbelly.com's
integrated front-end customer interface and back-end fulfillment
technology;
- HA-LO's well established sales force and Starbelly.com's growing need for
a substantial sales-force;
- HA-LO's desire to decrease reliance upon, and significant expenditures
for, promotional product catalogs and Starbelly.com's ability to market
its products from a relatively low-cost online catalog; and
- HA-LO's experience in international markets and Starbelly.com's desire to
market its products abroad.
Following this meeting, a series of additional meetings were held between
mid-October and early December, 1999 at which representatives of HA-LO and
Starbelly.com further explored the potential benefits of a business combination.
During this period, senior management of HA-LO and members of HA-LO's board of
directors visited Starbelly.com's headquarters to familiarize themselves with
the company's operations and resources.
On December 1, 1999, Mr. Kelley, now president and chief executive officer
of HA-LO, and Lou Weisbach, chairman of the board of HA-LO, interviewed several
investment banking firms after which they selected Credit Suisse First Boston
Corporation to serve as HA-LO's financial advisor in connection with the merger.
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On December 6, 1999, the parties executed a Confidentiality Agreement, dated
as of November 24, 1999, in which each party agreed to maintain the
confidentiality of non-public information furnished by the other.
Throughout this period and through the execution of the merger agreement,
Starbelly.com was not precluded from and continued to pursue additional
financing opportunities, which, if funded, would have made the consummation of
the merger less likely. Starbelly.com also commenced financial analyses relating
to a possible initial public offering. HA-LO also continued its analysis of
pursuing an Internet strategy through internal development or alternative
acquisitions. Starbelly.com and HA-LO did not enter into any exclusivity or
other similar agreements during the pendency of their discussions. In pursuing
alternative acquisitions, HA-LO's management identified those companies which
were developing or had developed an Internet-based solution for the customizable
merchandise market. HA-LO's management, having found that few such companies
existed, made preliminary assessments as to the status and sophistication of the
technology and personnel of these companies. HA-LO management obtained
publicly-available information (including information posted on the Internet
websites of these companies) and information from secondary sources (including
confidential discussions with HA-LO clients familiar with the identified
companies). From these preliminary assessments, management concluded that, when
compared with Starbelly.com, these companies lacked a sufficiently developed
level of technology, management and workforce. Accordingly, your board of
directors did not authorize management to contact any of these companies to
explore possible acquisition opportunities.
During the week of December 5, 1999, representatives of the companies met
and began the process of the preparation of a term sheet regarding a possible
acquisition of Starbelly.com by HA-LO. Between December 6 and December 18, the
principals of the parties held extensive discussions and merger negotiations
continued. A non-binding term sheet was executed on December 18, 1999 and the
initial draft of the merger agreement was circulated on December 29, 1999.
Between December 6, 1999 and January 15, 2000, representatives of HA-LO and
of Starbelly.com performed detailed management due diligence of the other. In
connection with its review, HA-LO retained Ernst & Young to conduct a due
diligence investigation of Starbelly.com's technology capacity and capabilities.
As part of the due diligence investigations conducted by the parties during
this period, Starbelly.com provided to HA-LO extensive information concerning
its business, properties, contracts, customers, litigation, accounting and tax
matters, intellectual property and technology, employees and employee benefit
plans, financial condition, results of operations and prospects. HA-LO provided
to Starbelly.com agreements with respect to prior aquisitions by HA-LO,
documents with respect to liability insurance, leases, employment agreements and
consulting agreements. The information provided by HA-LO included confidential
financial projections which had been prepared by its senior management for
internal use only and not with a view toward public disclosure. The information
provided by Starbelly.com included confidential financial projections which had
been prepared by its management for use in pursuing additional financing
opportunities. HA-LO's and Starbelly.com's projections are based on many
assumptions made by each company's management about future events, many of which
are beyond the control of HA-LO and Starbelly.com. Further, these projections
have not been updated since they were delivered in connection with the parties'
due diligence investigations. There can be no assurance that the results
reflected in these projections will be achieved, and actual results may be
materially different from these projections. See "Cautionary Statement
Concerning Forward-Looking Statements" (page 28).
The HA-LO projections prepared by HA-LO senior management (which do not give
effect to the proposed merger with Starbelly.com) consisted of summary income
statements for 2000, 2001 and 2002, including earnings per share, and revenue,
cash flow, growth rate and margin statistics for 2000 through 2004. The
projected revenues provided by HA-LO were $758.4 million, $821.0 million and
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$891.4 million for 2000, 2001 and 2002, respectively. Pre-tax income was
projected at $19.6 million, $31.2 million and $44.8 million, respectively, for
those periods.
The Starbelly.com projections prepared by Starbelly.com senior management
(which do not give effect to the proposed merger with HA-LO) consisted of
selected income statement data for 2000 and 2001 and balance sheet and cash flow
data for 2000, 2001 and 2002. The projected revenues provided by Starbelly.com
were $15.7 million for 2000 and $70.8 million for 2001. Net losses were
projected at $32.3 million and $34.9 million, respectively, for those periods.
During the last week of December 1999, Michael Linderman, president of
HA-LO's promotional products division, met with Mr. Lefkofsky to discuss sales
and operational matters, and representatives of both parties continued to focus
on issues relating to the integration of HA-LO and Starbelly.com.
On January 6, 2000, a working group meeting attended by representatives of
HA-LO and Starbelly.com was held to discuss various aspects of the proposed
merger, including the terms of the merger agreement and related documents and
strategic and operational issues. HA-LO's legal counsel, Neal, Gerber &
Eisenberg, and its financial advisor, as well as Starbelly.com's legal counsel,
Altheimer & Gray, and its financial advisor, Hambrecht & Quist, LLC, also
attended the meeting.
Negotiations between HA-LO and Starbelly.com continued throughout the next
week. On January 16, 2000 the HA-LO board held a special meeting to evaluate the
merger. At the meeting, members of senior management of HA-LO presented a
comprehensive analysis of the proposed transaction, including an overview of
Starbelly.com and its operations, financial condition and competitive position,
the reasons for and disadvantages of the merger and strategic alternatives to
the proposed combination. Neal, Gerber & Eisenberg reviewed the terms of the
merger agreement. Credit Suisse First Boston made a financial presentation,
which is more fully described below under "The Merger--Opinion of Financial
Advisor of HA-LO" (page 40). During this meeting, Credit Suisse First Boston
advised the board that, subject to its review and satisfaction with the terms of
the final merger agreement and related documents, it was prepared to render its
opinion as to the fairness, from a financial point of view, to HA-LO of the
aggregate merger consideration of $240,000,000. After the meeting concluded,
representatives of HA-LO and Starbelly.com and their respective legal counsel
negotiated final terms and completed the merger agreement and the related
documents.
On January 17, 2000, the HA-LO board held a special telephonic meeting,
reviewed the merger agreement and approved the merger. At the meeting, Neal,
Gerber & Eisenberg summarized material changes to the agreements which had been
agreed to since the previous day's board meeting, and Credit Suisse First Boston
rendered its oral opinion which opinion was confirmed by delivery of a written
opinion dated January 17, 2000, to the effect that, as of the date of the
opinion and based upon and subject to the matters described in the opinion, the
aggregate merger consideration of $240,000,000 was fair, from a financial point
of view, to HA-LO. Officers of HA-LO and Starbelly.com executed the merger
agreement later that day, and, prior to the commencement of trading on
January 18, 2000, HA-LO issued a press release announcing the execution of the
merger agreement.
RECOMMENDATION OF THE HA-LO BOARD AND REASONS FOR THE MERGER
THE HA-LO BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTEREST OF, HA-LO AND THE HA-LO SHAREHOLDERS. ACCORDINGLY, THE HA-LO BOARD
HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR THE MERGER.
The HA-LO board of directors has identified benefits it expects to result
from the merger. The board of directors believes that the merger will include
the following benefits for HA-LO:
- position HA-LO to capitalize on expanding e-commerce markets, especially
Internet- or intranet-based business-to-business markets;
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- enhance HA-LO's customer service through centralization of most customer
service functions using West Telemarketing and Synchrony customer service
software currently used by Starbelly.com to automate order placement,
tracking, invoicing and sourcing;
- rapidly expand, through electronic linkage, HA-LO's offering of
customizable blank products and pre-designed decorations;
- increase HA-LO's productivity through the centralization of order
placement, product catalogs, automatic tracking and invoicing, thus
freeing salespeople from performing routine duties and permitting them to
focus more on customer sales and development;
- build HA-LO's brand recognition in e-commerce markets while enhancing our
reputation as an agent of change and a business leader;
- build HA-LO's promotional products customer base while encouraging repeat
business from existing customers;
- reduce HA-LO's costs to market and fulfill orders for custom-decorated
promotional products;
- infuse HA-LO's organization with new talent and cultural change; and
- increase HA-LO's pricing and marketing flexibility for custom-decorated
promotional products.
We expect to incur non-recurring merger-related costs estimated at
$4.0 million to $4.5 million. The estimate includes direct transaction costs
consisting of legal, financial advisory, accounting, consulting, printing,
mailing, proxy and shareholder meeting fees and expenses. We anticipate
unquantified operational and administrative cost savings following the merger
closing; however, your board of directors views potential revenue growth (on the
basis of the financial projections more particularly described above in
"--Background of the Merger") to be of far greater importance than anticipated
cost savings in its determination to recommend the merger proposal.
When making its determination, the HA-LO board considered, among other
things, the following factors:
- the business, operations, prospects and strategic alliances of each of
HA-LO and Starbelly.com;
- the judgment, advice and analyses of our management with respect to the
strategic, financial and potential operational benefits of the merger,
based in part on the business, financial and legal due diligence
investigations performed on Starbelly.com;
- management's belief that the medium- and long-term trend in the
promotional products distribution industry involves increasing reliance on
Internet- and intranet-based solutions like those in development or
already developed by Starbelly.com;
- unquantified cross-selling opportunities and operating efficiencies that
may result from the merger;
- the advice of counsel that the merger should be tax-free to HA-LO for U.S.
federal income tax purposes;
- the number of shares of our common stock to be issued to the Starbelly.com
stockholders in the merger and upon conversion of the convertible
preferred stock and exercise of the assumed Starbelly.com options;
- the number of shares of convertible preferred stock to be issued in the
merger and upon exercise of the assumed options and the terms of those
shares;
- the terms of the merger agreement; and
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- the opinion of Credit Suisse First Boston to the effect that, as of the
date of the opinion and based upon and subject to the matters described in
the opinion, the aggregate merger consideration of $240,000,000 was fair,
from a financial point of view, to HA-LO. A copy of the Credit Suisse
First Boston opinion is attached as Exhibit B to this proxy statement and
is described below under "--Opinion of Financial Advisor to HA-LO."
In addition to the factors described above, the board of directors of HA-LO
also considered the following negative factors relating to the merger:
- the challenges inherent in combining our operations with those of
Starbelly.com, including the radical departure from our existing business
model and managing potential clashes in the business cultures of our
companies;
- the status of Starbelly.com's technology, some of which is still in the
developmental stage, and therefore may not function as expected;
- the potential departure of sales force personnel;
- the potential of our competitors aggressively recruiting our employees;
- our need to borrow approximately $23.0 million to pay the merger
consideration and merger expenses, provide working capital of
approximately $29.0 million to fund the operations and capital
expenditures of Starbelly.com for the next twelve months and pay the
redemption price of $51.0 million if the holders of the convertible
preferred stock exercise their redemption rights in the thirteenth month
following the closing. The board considered the impact of the additional
interest expense on future profitability, the ability of HA-LO to secure
financing in an amount sufficient to provide the funds needed for these
items and the likelihood of the redemption rights being exercised.
- the substantial debt service obligations relating to the additional
indebtedness we will incur; and
- the dilution of our shareholders' voting interest.
The foregoing discussion of the information and factors considered by your
board of directors is not intended to be exhaustive but includes all important
factors considered by the board. In reaching its determination to approve and
recommend the merger, your board did not assign any relative or specific weights
to the foregoing factors, and individual directors may have given differing
weights to different factors. Your board of directors is unanimous in its
recommendation that HA-LO shareholders vote for the merger.
OPINION OF FINANCIAL ADVISOR TO HA-LO
GENERAL
Credit Suisse First Boston has acted as HA-LO's financial advisor in
connection with the merger. HA-LO selected Credit Suisse First Boston based on
Credit Suisse First Boston's experience, expertise and reputation, and
familiarity with HA-LO's business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, HA-LO requested
that Credit Suisse First Boston evaluate the fairness, from a financial point of
view, to HA-LO of the aggregate merger consideration of $240,000,000. On
January 17, 2000, at a meeting of the HA-LO board of directors held to evaluate
the merger, Credit Suisse First Boston rendered to the HA-LO board of directors
an oral opinion, which opinion was confirmed by delivery of a written opinion
dated January 17, 2000, to the
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<PAGE>
effect that, as of the date of the opinion and based upon and subject to the
matters described in the opinion, the aggregate merger consideration of
$240,000,000 was fair, from a financial point of view, to HA-LO.
The full text of Credit Suisse First Boston's written opinion dated
January 17, 2000 to the HA-LO board of directors, which sets forth the
procedures followed, assumptions made, matters considered and limitations on the
review undertaken, is attached as Exhibit B and is incorporated into this
document by reference. Holders of HA-LO common stock are urged to, and should,
read this opinion carefully and in its entirety. Credit Suisse First Boston's
opinion is addressed to the HA-LO board of directors and relates only to the
fairness of the merger consideration from a financial point of view, does not
address any other aspect of the proposed merger or any related transaction, does
not address the fairness of the merger consideration to the holders of HA-LO
common stock and does not constitute a recommendation to any shareholder as to
any matter relating to the merger. The summary of Credit Suisse First Boston's
opinion in this document is qualified in its entirety by reference to the full
text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, including shareholder agreements entered into
between HA-LO and certain stockholders of Starbelly.com, as well as publicly
available business and financial information relating to HA-LO and available
business and financial information relating to Starbelly.com. Credit Suisse
First Boston also reviewed other information relating to HA-LO and
Starbelly.com, including financial forecasts, provided to or discussed with
Credit Suisse First Boston by HA-LO and Starbelly.com, and met with the
managements of HA-LO and Starbelly.com to discuss the businesses and prospects
of HA-LO and Starbelly.com.
Credit Suisse First Boston also considered financial and stock market data
of HA-LO and financial information of Starbelly.com and compared those data with
similar data for other publicly held companies in businesses it deemed similar
to those of HA-LO and Starbelly.com and considered, to the extent publicly
available, the financial terms of other business combinations and other
transactions which have recently been effected. Credit Suisse First Boston also
considered other information, financial studies, analyses and investigations and
financial, economic and market criteria that it deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. With respect to financial
forecasts, Credit Suisse First Boston was advised, and assumed, that the
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of HA-LO and Starbelly.com
as to the future financial performance of HA-LO and Starbelly.com. In addition,
Credit Suisse First Boston relied upon the assessments of the management of
HA-LO and its advisors as to:
- the potential synergies and other strategic benefits (including the
amount, timing and achievability thereof) anticipated to result from the
merger;
- Starbelly.com's existing technology and products and the validity of, and
risks associated with, Starbelly.com's future products and technology;
- the ability of HA-LO to retain key employees of Starbelly.com; and
- the ability of HA-LO to fund the cash portion of the merger consideration
and the cash needs of HA-LO on an ongoing basis following the merger.
Credit Suisse First Boston assumed, with the consent of the board of
directors of HA-LO, that the merger will be treated as a tax-free reorganization
for federal income tax purposes and that all
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<PAGE>
outstanding Starbelly.com warrants would be exercised for and converted into
shares of Starbelly.com common stock prior to the effective time of the proposed
merger or that Starbelly.com would receive from holders of Starbelly.com
warrants consents to the conversion of Starbelly.com warrants into their
allocated portion of the merger consideration as more fully described in the
merger agreement. In addition, Credit Suisse First Boston assumed that the
stockholders' agreements entered into between HA-LO and certain stockholders of
Starbelly.com in connection with the merger agreement will be in full force and
effect at the time of the consummation of the merger.
Credit Suisse First Boston was not requested to make, and did not make, an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of HA-LO or Starbelly.com, and was not furnished with any evaluations
or appraisals. Credit Suisse First Boston's opinion was necessarily based on
information available to, and financial, economic, market and other conditions
as they existed and could be evaluated by, Credit Suisse First Boston on the
date of its opinion. Credit Suisse First Boston did not express any opinion as
to the actual value of the HA-LO common stock when issued in the merger or the
prices at which the HA-LO common stock will trade after the merger. No other
limitations were imposed on Credit Suisse First Boston with respect to the
investigations made or procedures followed in rendering its opinion.
In preparing its opinion to the HA-LO board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. The summary of Credit Suisse First Boston's
analyses described below is not a complete description of the analyses
underlying Credit Suisse First Boston's opinion. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Credit Suisse First Boston made
qualitative judgments as to the significance and relevance of each analysis and
factor that it considered. Accordingly, Credit Suisse First Boston believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of HA-LO and Starbelly.com.
No company, transaction or business used in Credit Suisse First Boston's
analyses as a comparison is identical to HA-LO or Starbelly.com or the proposed
merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions being analyzed. The estimates contained in
Credit Suisse First Boston's analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by the analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, Credit Suisse First Boston's analyses and estimates are inherently
subject to substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by the HA-LO board of directors in its evaluation of the
proposed merger and should not be viewed as determinative of the views of the
HA-LO board of directors or management with respect to the merger or the merger
consideration.
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<PAGE>
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion and
reviewed with the HA-LO board of directors at a meeting of the board of
directors held on January 16, 2000. The financial analyses summarized below
include information presented in tabular format. In order to fully understand
Credit Suisse First Boston's financial analyses, the tables must be read
together with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses. Considering the data set forth
in the tables below without considering the full narrative description of the
financial analyses, including the methodologies and assumptions underlying the
analyses, could create a misleading or incomplete view of Credit Suisse First
Boston's financial analyses.
STARBELLY.COM
IPO ANALYSIS. Credit Suisse First Boston estimated the present value of
Starbelly.com's fully-distributed equity value assuming an initial public
offering of Starbelly.com on September 30, 2000. Starbelly.com's
fully-distributed equity value was estimated by applying a range of revenue
multiples derived from the following selected publicly traded companies in the
e-commerce enabler and the e-commerce retailer industries, which Credit Suisse
First Boston deemed to be relevant, to projected 2001 revenues for
Starbelly.com:
<TABLE>
<CAPTION>
E-COMMERCE ENABLERS E-COMMERCE RETAILERS
- ------------------------------------- -------------------------------------
<S> <C>
- - Ariba, Inc. - Amazon.com, Inc.
- - Commerce One, Inc. - ebay Inc.
- - BroadVision, Inc. - priceline.com Inc.
- - Liberate Technologies - etoys Inc.
- - VerticalNet, Inc. - Homestore.com, Inc.
- - CheckFree Holdings Corp. - MP3.com Inc.
- - Quest Software, Inc. - Ticketmaster Online-CitySearch,
- - USINTERNETWORKING, INC. Inc.
- - Sterling Commerce, Inc. - drugstore.com Inc.
- - Silknet Software, Inc. - Tickets.com, Inc.
- - Allaire Corporation - PlanetRx.com Inc.
- - pcOrder.com, Inc. - Ashford.com, Inc.
- - Intraware, Inc. - Preview Travel, Inc.
- - Open Market, Inc. - Audible, Inc.
- - Harbinger Corp. - Garden.com, Inc.
- - Digital River, Inc.
- - MessageMedia, Inc.
</TABLE>
Credit Suisse First Boston reviewed, among other things, enterprise values,
calculated as equity value, plus debt, less cash, of the selected companies as
multiples of estimated 2000 and 2001 revenues. Means and medians for e-commerce
enablers and retailers as a group were calculated by considering all of the
selected companies together as one group for purposes of the calculation. This
review indicated the following:
<TABLE>
<CAPTION>
ENTERPRISE VALUES AS MULTIPLES OF
---------------------------------------------------------------------
ESTIMATED 2000 REVENUES ESTIMATED 2001 REVENUES
--------------------------------- ---------------------------------
RANGE MEDIAN MEAN RANGE MEDIAN MEAN
----- ------ ---- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
E-Commerce Enabler Companies........... 3.3x-184.1x 16.2x 42.9x 2.0x-122.7x 10.3x 28.0x
E-Commerce Retailer Companies.......... 1.4x-34.9x 6.2x 10.9x 0.8x-20.8x 3.8x 6.9x
E-Commerce Enablers and Retailers...... 1.4x-184.1x 11.7x 27.5x 0.8x-122.7x 7.4x 18.7x
</TABLE>
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Estimated financial data for the selected companies was based on publicly
available research analysts' estimates. Estimated financial data for
Starbelly.com was based upon Starbelly.com management estimates, adjusted to
reflect the discount customarily applied to management estimates by research
analysts evaluating initial public offerings. Credit Suisse First Boston focused
on enterprise values as multiples of estimated 2001 revenues for purposes of its
IPO analysis because Credit Suisse First Boston assumed that a September 30,
2000 initial public offering of Starbelly.com would be priced based on estimated
2001 revenues for Starbelly.com. This IPO analysis assumed further dilution of
Starbelly.com's current stockholders from a round of venture capital financing
prior to the initial public offering. Credit Suisse First Boston then discounted
the implied fully-distributed equity value to present value using discount rates
ranging from 30% to 50%. This analysis indicated an implied equity reference
range for Starbelly.com of approximately $238.0 million to $378.0 million.
HA-LO
DISCOUNTED CASH FLOW ANALYSIS. Credit Suisse First Boston estimated the
present value of the net operating profit after taxes, plus depreciation and
amortization, less capital expenditures and increases in working capital that
HA-LO could produce on a stand-alone basis over calendar years 2000 through
2004, based on two scenarios. The management case was based on estimates of the
management of HA-LO. The alternative case was based on adjustments to the
management case developed by, or discussed with and reviewed by, HA-LO
management to reflect lower margins and revenue growth than the management case.
Ranges of terminal values were estimated using multiples of terminal year
2004 earnings before interest, taxes, depreciation and amortization, commonly
referred to as EBITDA, of 9.0x to 11.0x. The free cash flows were then
discounted to present value using discount rates of 13.0% to 14.0%.
This analysis indicated the following:
<TABLE>
<CAPTION>
IMPLIED ENTERPRISE VALUE FOR HA-LO (DOLLARS IN MILLIONS)
-----------------------------------------------------------
MANAGEMENT CASE
--------------- ALTERNATIVE CASE
DISCOUNT RATE DISCOUNT RATE
TERMINAL ------------------------- -------------------------
EBITDA MULTIPLE 13.0% 14.0% 13.0% 14.0%
- --------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
9.0x..................................... $522.9 $501.5 $346.7 $332.7
11.0x.................................... $620.4 $594.8 $409.1 $392.5
</TABLE>
SELECTED COMPANIES ANALYSIS. Credit Suisse First Boston compared financial,
operating and stock market data of HA-LO to corresponding data of the following
publicly traded companies in the marketing services industry:
- Caribiner International, Inc.
- Catalina Marketing Corporation
- Cyrk, Inc.
- Equity Marketing, Inc.
- Snyder Communications, Inc.
In addition, Credit Suisse First Boston compared financial, operating and
stock market data of HA-LO to corresponding data of the following publicly
traded companies in the telemarketing industry:
- APAC Customer Services, Inc.
- SITEL Corporation
- TeleSpectrum Worldwide Inc.
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- TeleTech Holdings, Inc.
- West TeleServices Corporation
Credit Suisse First Boston reviewed, among other things, enterprise values,
calculated as equity value, plus net debt, as a multiple of calendar year 1999
and estimated calendar year 2000 sales, EBITDA and earnings before interest and
taxes, commonly known as EBIT.
This review indicated the following:
<TABLE>
<CAPTION>
ENTERPRISE VALUES AS MULTIPLES OF:
---------------------------------------------------------------------------------
1999 ESTIMATED 2000
--------------------------------------- ---------------------------------------
SALES EDITDA EBIT SALES EBITDA EBIT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MARKETING SERVICE
COMPANIES:
Range 0.5x-6.5x 5.6x-19.0x 6.6x-25.5x 0.4x-5.1x 4.7x-15.7x 5.5x-19.9x
Average 2.7x 12.7x 17.4x 2.2x 10.1x 13.3x
TELEMARKETING
COMPANIES:
Range 0.9x-3.0x 8.4x-18.8x 15.9x-23.7x 0.8x-2.6x 5.8x-13.8x 12.3x-17.6x
Average 1.9x 12.5x 21.6x 1.6x 10.5x 15.7x
</TABLE>
All multiples were based on closing stock prices on January 13, 2000.
Estimated financial data for the selected companies was based on publicly
available research analysts' estimates, and estimated financial data for HA-LO
was based upon HA-LO management estimates. Credit Suisse First Boston focused on
enterprise values as multiples of estimated 2000 operating statistics for
purposes of its selected companies analysis because Credit Suisse First Boston
assumed that forward estimated 2000 operating results, rather than historical
1999 operating results, were indicative of the way in which companies in the
marketing services industry generally are valued by the market. Taking into
consideration the overall range of multiples described for the selected
companies implied by the average multiples for the groups of companies for each
operational metric, with particular emphasis on the range of multiples of
estimated calendar year 2000 EBITDA, this analysis indicated an implied
enterprise reference range for HA-LO of approximately $325.0 million to $400.0
million.
None of the selected companies is identical to HA-LO. Accordingly, an
analysis of the results of the Selected Companies Analysis involves complex
considerations of the selected companies and other factors that could affect the
public trading value of HA-LO and the selected companies.
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<PAGE>
SELECTED TRANSACTIONS ANALYSIS. Credit Suisse First Boston analyzed the
purchase prices and implied transaction multiples paid in the following recent
selected transactions in the promotional products, marketing services and
telemarketing industries:
<TABLE>
<CAPTION>
ACQUIROR TARGET
----------------------------------------- -----------------------------------------
<S> <C> <C> <C>
- - NCO Group, Inc. - Compass International Services
Corporation
- - HA-LO - Parsons International S.A.
- - CustomerONE Holding Corporation - LCS Industries, Inc.
- - HA-LO - Premier Promotions & Marketing, Inc.
- - HA-LO - Lipson Associates, Inc.
- - HA-LO - Promotional Marketing LLC
- - AHL Services, Inc. - Gage Marketing Support Service Group and
Adistra, LLC
- - APAC TeleServices, Inc. - ITI Marketing Services, Inc.
- - The Great Universal Stores, P.L.C. - Metromail Corporation
- - Electronic Data Systems Corporation - Neodata Corporation
- - Cyrk, Inc. - Simon Marketing, Inc.
- - Cyrk, Inc. - Tonkin, Inc.
- - HA-LO - Market USA, Inc.
- - Heritage Media Corporation - DIMAC Corporation
</TABLE>
Credit Suisse First Boston compared enterprise values in the selected
transactions as multiples of, among other things, latest twelve months sales,
EBITDA and EBIT and equity values in the selected transactions as a multiple of
latest twelve months net income.
This review indicated the following:
<TABLE>
<CAPTION>
ENTERPRISE VALUES AS EQUITY VALUE AS
MULTIPLES OF MULTIPLE OF
LATEST TWELVE MONTHS LATEST TWELVE MONTHS
------------------------------------------ --------------------
SALES EBITDA EBIT NET INCOME
------------ ------------ ------------ --------------------
<S> <C> <C> <C> <C>
Range............................. 0.6x--2.6x 5.0x--12.8x 6.1x--16.9x 13.3x--21.5x
Mean.............................. 1.6x 9.9x 11.2x 18.6x
Median............................ 1.5x 10.0x 12.6x 21.1x
</TABLE>
All multiples were based on financial information publicly available at the
time of the relevant transaction. Credit Suisse First Boston then applied a
range of selected multiples for the selected transactions of latest twelve
months sales, EBITDA and EBIT to corresponding financial data of HA-LO for
estimated calendar year 2000, based on HA-LO management estimates. Taking into
consideration the range of multiples for the selected transactions implied by
the average multiple for each operational metric, excluding, for each
operational metric, the transaction embodying the lowest multiple, with
particular emphasis on the range of multiples of estimated calendar year 2000
EBITDA, this analysis indicated an implied enterprise reference range for HA-LO
of approximately $360.0 million to $450.0 million.
No company or transaction used in the Selected Transactions Analysis is
identical to HA-LO or the proposed merger. Accordingly, an analysis of the
results of this analysis involves complex considerations of the companies
involved and the transactions and other factors that could affect the
acquisition value of the companies and HA-LO.
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<PAGE>
AGGREGATE REFERENCE RANGE. Based on the valuation methodologies employed in
the analyses described above, with particular emphasis on the "Selected Company
Analysis" for the low end of the reference range and the "Selected Transactions
Analysis" for the high end of the reference range, Credit Suisse First Boston
derived an implied equity reference range for HA-LO of approximately $6.38 to
$8.93 per share. Credit Suisse First Boston derived the implied equity reference
range for HA-LO by subtracting net debt from the enterprise value reference
range implied by the analyses described above, as reflected in the following
table:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C>
Enterprise Value Reference Range........................... $325.0 - $450.0
Less: Net Debt............................................. $12.7
Equity Reference Range..................................... $312.3 - $437.3
Equity Reference Range per Diluted Share................... $6.38 - $8.93
</TABLE>
Credit Suisse First Boston then estimated the implied aggregate value of the
consideration to be paid in the merger, assuming conversion of the HA-LO
convertible preferred stock and, alternatively, redemption of the HA-LO
convertible preferred stock. Based on the average of the stock price for the
HA-LO common stock for the 15 calendar days prior to January 13, 2000 of $8.68
per share, this analysis indicated the following implied aggregate reference
ranges for the merger consideration, as compared to the implied
fully-distributed equity reference range for Starbelly.com on a stand-alone
basis of approximately $238.0 million to $378.0 million:
<TABLE>
<CAPTION>
CONVERSION OF CONVERTIBLE PREFERRED REDEMPTION OF CONVERTIBLE PREFERRED
STOCK INTO HA-LO COMMON STOCK STOCK FOR CASH
----------------------------------- -----------------------------------
<S> <C> <C>
Implied Aggregate Reference
Range for Merger
Consideration.............. $182.0 million to $246.0 million $195.0 million to $245.0 million
</TABLE>
PRO FORMA MERGER ANALYSIS. Credit Suisse First Boston analyzed the
potential pro forma per share effect of the merger on HA-LO's estimated revenue,
EBITDA, EBIT and net income per share for calendar years 2000 to 2002 based on
the Starbelly.com alternative case, the HA-LO management case and the HA-LO
alternative case, after giving effect to synergies anticipated by HA-LO
management to result from the merger. Credit Suisse First Boston assumed that
the HA-LO convertible preferred stock issued as part of the merger consideration
was redeemed for cash or, alternatively, converted into HA-LO common stock.
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<PAGE>
This analysis indicated the following per share accretion (dilution) to
HA-LO's estimated revenue, EBITDA, EBIT and net income for each of estimated
calendar years 2000, 2001 and 2002:
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK REDEEMED FOR CASH
--------------------------------------------------------
HA-LO MANAGEMENT CASE / STARBELLY.COM ALTERNATIVE CASE
--------------------------------------------------------
ESTIMATED 2000 ESTIMATED 2001 ESTIMATED 2002
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue...................................... (32.7)% (16.9)% (2.8)%
EBITDA....................................... (87.9)% (43.9)% 10.3%
EBIT......................................... (295.5)% (173.0)% (64.0)%
Net Income................................... (545.3)% (305.9)% (135.6)%
<CAPTION>
CONVERTIBLE PREFERRED STOCK REDEEMED FOR CASH
--------------------------------------------------------
HA-LO ALTERNATIVE CASE / STARBELLY.COM ALTERNATIVE CASE
--------------------------------------------------------
ESTIMATED 2000 ESTIMATED 2001 ESTIMATED 2002
-------------- -------------- --------------
Revenue. )% (32.7 )% (16.4 )% (0.7
<S> <C> <C> <C>
EBITDA....................................... (87.9)% (48.0)% 25.3%
EBIT......................................... (295.5)% (235.5)% (83.9)%
Net Income................................... (545.3)% (458.1)% (204.7)%
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTED INTO COMMON STOCK
--------------------------------------------------------
HA-LO MANAGEMENT CASE / STARBELLY.COM ALTERNATIVE CASE
--------------------------------------------------------
ESTIMATED 2000 ESTIMATED 2001 ESTIMATED 2002
-------------- -------------- --------------
Revenue. )% (32.7 )% (23.4 )% (10.5
<S> <C> <C> <C>
EBITDA....................................... (87.9)% (48.3)% 1.6%
EBIT......................................... (295.5)% (167.3)% (66.8)%
Net Income................................... (545.3)% (280.0)% (126.3)%
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTED INTO COMMON STOCK
--------------------------------------------------------
HA-LO ALTERNATIVE CASE / STARBELLY.COM ALTERNATIVE CASE
--------------------------------------------------------
ESTIMATED 2000 ESTIMATED 2001 ESTIMATED 2002
-------------- -------------- --------------
Revenue. )% (32.7 )% (23.0 )% (8.6
<S> <C> <C> <C>
EBITDA....................................... (87.9)% (52.1)% 15.5%
EBIT......................................... (295.5)% (224.8)% (85.2)%
Net Income................................... (545.3)% (415.0)% (185.8)%
</TABLE>
The actual results achieved by the combined company may vary from projected
results and the variations may be material.
OTHER FACTORS. In the course of preparing its opinion, Credit Suisse First
Boston also reviewed and considered other information and data, including:
- the recent trading history of the HA-LO common stock;
- the potential pro forma liquidity of HA-LO assuming that the HA-LO
convertible preferred stock issued as part of the merger consideration was
redeemed for cash or, alternatively, converted into HA-LO common stock;
and
- HA-LO's stock price performance relative to the Standard & Poor's MidCap
400 Index; and
- a review of the purchase prices paid in seven selected merger and
acquisition transactions in the e-commerce industry as multiples of latest
12 months sales and EBIT, which reflected, in the case of latest 12 months
sales, a range of multiples of 2.0x to 113.0x with a median of 44.5x and
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a mean of 49.6x and, in the case of latest 12 months EBIT for the one
transaction involving a target company which had positive EBIT and for
which information was publicly available, a multiple of 22.7x. Credit
Suisse First Boston did not consider this review material to its analysis
because latest 12 months sales and EBIT for Starbelly.com were
insignificant.
MISCELLANEOUS. HA-LO has agreed to pay Credit Suisse First Boston for its
financial advisory services upon completion of the merger a total fee equal to
approximately 1.21% of the aggregate value of the purchase price in the merger
of approximately $240 million. It is currently estimated that Credit Suisse
First Boston will receive an aggregate fee of approximately $2.9 million. HA-LO
also has agreed to reimburse Credit Suisse First Boston for its reasonable
out-of-pocket expenses, including fees and expenses of legal counsel and any
other advisor retained by Credit Suisse First Boston, and to indemnify Credit
Suisse First Boston and related parties against liabilities, including
liabilities under the federal securities laws, arising out of its engagement.
Credit Suisse First Boston and its affiliates have in the past provided, and are
currently providing, financial services to HA-LO and its affiliates unrelated to
the proposed merger, for which services Credit Suisse First Boston has received,
and may receive, compensation. Specifically, Credit Suisse First Boston acted as
lead manager for a secondary offering of HA-LO common stock in May 1998, for
which Credit Suisse First Boston received a total fee of approximately $4.6
million. In the ordinary course of business, Credit Suisse First Boston and its
affiliates may actively trade equity securities of HA-LO for their own accounts
and for the accounts of customers and, accordingly, may at any time hold long or
short positions in such securities.
Credit Suisse First Boston has consented to the description of its opinion
and the summary of the analyses performed by it in connection with its opinion
in this document. In giving such consent, Credit Suisse First Boston does not
admit that it comes within the category of persons whose consent is required
under the federal securities laws, or the rules and regulations of the SEC under
those laws, nor does it admit that it is an expert with respect to any part of
this proxy statement within the meaning of the term "experts" as used under
those laws, rules and regulations.
STARBELLY.COM'S REASONS FOR THE MERGER
- Starbelly.com expects that the merger will provide it with the opportunity
to penetrate in a short period of time a broad base of corporate clients
using its Internet solution. Starbelly.com expects the Internet to become
a significant distribution channel for custom-decorated products.
Starbelly.com believes that the synergy created by its Internet solution
and HA-LO's existing customer base will enable it to capture significant
share of the custom-decorated products market. Starbelly.com believes it
is a critical competitive advantage to be the first in the market.
- Starbelly.com also believes that the merger will give Starbelly.com access
to its custom-decorated products market through the largest, in terms of
sales, company in the industry. Starbelly.com strategically chose HA-LO
because of its dominant position in the promotional products market, its
high quality sales force and its high quality relationship with its
customers.
- Starbelly.com believes that HA-LO's sales force has the ability to
influence its customers' purchasing patterns and will greatly assist
Starbelly.com in its efforts to cause those customers to purchase
promotional and other custom-decorated products through the Internet.
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<PAGE>
- Starbelly.com believes that it would require substantial time and talent
to develop the customer base that HA-LO already possesses. Moreover,
Starbelly.com believes that the time required to independently develop
such a customer base could be an impediment to the early market
penetration that Starbelly.com believes is important to obtaining a
significant market share.
MERGER CONSIDERATION
If we complete the merger, Starbelly.com stockholders will receive
approximately $240 million, which amount we will pay as follows:
(1) paying $19 million in cash (less Starbelly.com's merger expenses in
excess of $500,000);
(2) paying the balance by issuing:
(a) 17 million shares of HA-LO common stock valued in the merger
agreement at $170 million; and
(b) 5.1 million shares of HA-LO preferred convertible stock valued in the
merger agreement at $51 million.
The merger consideration includes shares of HA-LO common stock and HA-LO
convertible preferred stock issuable upon exercise of Starbelly.com's
outstanding stock options which will be assumed by HA-LO.
In the merger, holders of Starbelly.com series B preferred stock will
receive cash and shares of HA-LO convertible preferred stock, holders of
Starbelly.com series A preferred stock will receive cash, shares of HA-LO common
stock and shares of HA-LO convertible preferred stock, and holders of
Starbelly.com common stock will receive shares of HA-LO common stock and shares
of HA-LO convertible preferred stock. The aggregate merger consideration will be
allocated among the holders of Starbelly.com common stock and series A and
series B preferred stock based on complicated formulas set forth in the merger
agreement which take into account the relative value of each such class or
series of stock.
You will continue to own your shares after the merger. Immediately after the
merger, pre-merger shareholders of HA-LO will own approximately 69% of the
outstanding common stock, and the former stockholders of Starbelly.com will own
approximately 31% of the outstanding common stock (assuming all of the
convertible preferred shares are converted into common stock and all assumed
options are exercised and all convertible preferred shares issued upon exercise
are converted into common stock).
HA-LO's convertible preferred stock is described below under "Description of
the Convertible Preferred Stock" (page 54).
All outstanding options to purchase Starbelly.com common stock granted to
Starbelly.com employees, directors and consultants will be assumed by HA-LO in
the merger. See "Assumption of Outstanding Starbelly.com Options" (page 57).
EFFECTIVE TIME OF THE MERGER
The merger will be effective at the time a certificate of merger is duly
filed with each of the Secretary of State of Delaware or any later date or time
specified in the certificate of merger. The closing will occur as soon as
possible after all conditions to the merger are satisfied.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Following the merger closing, John R. Kelley, Jr. will remain chief
executive officer of HA-LO, and Bradley Keywell will assume the role of
president. Eric Lefkofsky, Starbelly.com's president, will
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become HA-LO's chief integration officer, focusing on the e-transformation of
the HA-LO Promotional Products group, as well as HA-LO's marketing services
divisions. In addition, it is probable that Mr. Keywell and Mr. Lefkofsky will
become members of your board of directors.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
If the merger is completed, Marshall J. Katz, who is currently a director of
HA-LO, will receive a consulting fee in return for certain consulting services
he has performed for us with respect to the merger. The consulting fee we will
pay is comprised of $200,000 in cash and options to purchase 50,000 shares of
HA-LO common stock at an exercise price of $12.188 per share.
If the merger is completed, Bradley Keywell, Starbelly.com's chief executive
officer, will have the right to designate one person on the board to fill one of
the three vacancies created by the expansion of the board from seven to ten
directors. Eric Lefkofsky, Starbelly.com's president, will have the right to
designate two persons to fill the remaining vacancies. Brad Keywell and his
family hold 100% of the economic interests in Bloomfield Family Limited
Partnership. Eric Lefkofsky and his family hold 100% of the economic interests
in Coventry Family Limited Partnership. Each of Bloomfield Family Limited
Partnership and Coventry Family Limited Partnership own, beneficially and of
record, 7 million shares of Class B common stock of Starbelly.com. Under the
terms of the Merger Agreement and assuming that Starbelly.com's merger expenses
will be approximately $3.32 million, as Starbelly.com currently estimates,
7 million shares of Class B common stock would be converted into
5,272,197 shares of HA-LO common stock and 546,687 shares of HA-LO convertible
preferred stock at the closing of the merger. Assuming conversion of all the
HA-LO preferred stock issued in the merger into HA-LO common stock in accordance
with its terms, the shares of HA-LO stock issued to each of Bloomfield Family
Limited Partnership and to Coventry Family Limited Partnership upon the
consummation of the merger would represent approximately 8.2% of HA-LO's
outstanding capital stock (including shares issuable upon the exercise of stock
options assumed by HA-LO and all shares of preferred stock convertible into
common stock assumed by HA-LO). Based on the conversion formula set forth in the
merger agreement, the shares issued to each of the partnerships would be worth
approximately $58.2 million. To the extent Starbelly.com's expenses associated
with the Merger are in excess of $3.32 million, each of Bloomfield Family
Limited Partnership and Coventry Family Limited Partnership would receive fewer
shares of HA-LO's common and preferred stock, which would represent a lower
percentage of HA-LO common stock outstanding. Neither Mr. Keywell,
Mr. Lefkofsky, Bloomfield Family Limited Partnership nor Coventry Family Limited
Partnership beneficially own, directly or indirectly, any securities of the
registrant.
For a discussion of other agreements entered into or to be entered into
between HA-LO and each of Mr. Keywell, Mr. Lefkofsky, Coventry Partners Family
Limited Partnership and Bloomfield Partners Family Limited Partnership, see "The
Merger Agreement--Other Agreements Related to the Merger Agreement" on page 70.
RESALE OF HA-LO SHARES
The shares of our common and convertible participating preferred stock to be
issued in the merger are being offered in reliance on an exemption from the
registration requirements of the Securities Act of 1933 ("Securities Act") and
various state securities laws. The shares to be issued to the Starbelly.com
stockholders in the merger will be "restricted securities" under Rule 144 of the
Securities Act, and may be resold only if registered or in transactions
permitted by Rule 144 or other exemptions from registration. Under the merger
agreement, we must file a shelf registration statement with the Securities and
Exchange Commission within ten days after the merger closes to register for
public resale a portion of the common stock received the Starbelly.com
stockholders, and we are required to file additional registration statements at
agreed upon times in the future to register additional shares of common stock
for resale received by all of the Starbelly.com stockholders, including common
stock
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issued upon conversion of the convertible preferred stock issued in the merger.
Various Starbelly.com stockholders who will receive 66% of the common stock we
will issue in the merger (assuming all of the convertible preferred shares are
converted into common stock and all assumed options are exercised and all
convertible preferred shares issued upon exercise are converted into common
stock) have agreed to additional restrictions on the resale of HA-LO common
stock and convertible preferred stock under separate agreements with us. See
"The Merger Agreement--Other Covenants and Agreements" (page 66) and "The Merger
Agreement--Other Agreements Related to the Merger Agreement" (page 70).
We have agreed to register for issuance the shares of common stock and
convertible preferred stock issuable upon exercise of outstanding Starbelly.com
options being assumed by HA-LO in the merger, as well as the shares of common
stock issuable upon conversion of such shares of convertible preferred stock.
See "The Merger Agreement--Other Covenants and Agreements" (page 66).
This document does not cover resales of our common stock received by the
Starbelly.com stockholders in the merger, and no person is authorized to make
any use of this document for any resale.
ACCOUNTING TREATMENT
We intend to account for the merger as HA-LO's "purchase" of Starbelly.com.
Accordingly, Starbelly.com's results of operations will be included in our
consolidated results of operations after the completion date of the merger. In
preparing our consolidated financial statements, we will, if appropriate,
establish a new accounting basis for the Starbelly.com assets and liabilities.
After the merger, Starbelly.com's assets will take a new aggregate book value
equal to the merger consideration PLUS Starbelly.com's liabilities PLUS the
merger costs. This new aggregate book value is then allocated first to
Starbelly.com's current assets at fair market value, second to Starbelly.com's
specific intangibles at fair market value, and the remainder to Starbelly.com's
goodwill. We are then required to amortize this goodwill. In particular, we will
record goodwill in an amount equal to substantially all of the merger
consideration and merger expense, and amortize this amount over five years.
After the merger, the goodwill amortization charge will reduce our earnings for
financial reporting purposes over the five-year amortization period.
NEW YORK STOCK EXCHANGE LISTING
We expect to list for trading on the New York Stock Exchange the shares of
HA-LO common stock to be issued in connection with the merger and the shares of
common stock issuable upon conversion of the convertible preferred stock and the
exercise of the assumed options. It is a condition to the closing of the merger
that these shares be authorized for listing upon issuance.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is a summary description of the material United
States federal income tax consequences of the merger. The discussion is based
upon the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury Regulations, judicial decisions and administrative
rulings and practices, all as in effect on the date of this proxy statement, and
all of which are subject to change at any time, possibly with retroactive
effect. Any such change could alter the tax consequences to us, Starbelly.com or
a Starbelly.com stockholder. The discussion does not address the effects of any
state, local or foreign tax laws or any federal tax laws other than federal
income tax laws.
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TREATMENT OF US, OUR SHAREHOLDERS, OUR MERGER SUBSIDIARY AND STARBELLY.COM
We have been advised by our counsel, Neal, Gerber & Eisenberg, that the
merger will be treated for federal income tax purposes as a reorganization under
Section 368(a) of the Code. Accordingly, our existing shareholders will not
recognize any gain or loss as a result of the merger for federal income tax
purposes. Similarly, neither we, nor our merger subsidiary nor Starbelly.com,
each of which is a party to the reorganization, within the meaning of
Section 368(b) of the Code, will recognize any gain or loss as a result of the
merger for federal income tax purposes. In rendering this advice, Neal,
Gerber & Eisenberg relied upon factual representations made by officers of
HA-LO.
TREATMENT OF HOLDERS OF STARBELLY.COM COMMON STOCK
It is a condition to the obligation of Starbelly.com to complete the merger
that it receive an opinion dated the closing date from a law firm retained as
counsel to Starbelly.com, which opinion may be based on such certificates and
letters as are acceptable to that law firm, to the effect that, for federal
income tax purposes, the Starbelly.com stockholders will not recognize income,
gain or loss upon the merger, except to the extent of any cash consideration
actually received or deemed received.
We will not seek a ruling from the Internal Revenue Service regarding the
merger and the advice and opinion of counsel referred to above will not be
binding on the Internal Revenue Service which may disagree with counsel's
conclusions.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
the Antitrust Division of the U.S. Department of Justice and the U.S. Federal
Trade Commission must review transactions such as the merger. The federal
agencies conducting these reviews determine whether the merger complies with
antitrust laws. The Hart-Scott-Rodino Act requires both companies, as well as
Starbelly.com's two largest stockholders, to notify these federal agencies of
the merger. The required waiting period must expire or terminate before the
merger can be completed. Both companies filed the notification reports with the
Antitrust Division and the Federal Trade Commission during the week of
January 31, 2000 and the waiting period with respect to such filings was
terminated by the Federal Trade Commission effective February 14, 2000.
AT ANY TIME BEFORE OR AFTER THE MERGER CLOSES, THE ANTITRUST DIVISION, THE
FEDERAL TRADE COMMISSION, STATE ANTITRUST AUTHORITIES OR A PRIVATE PERSON COULD
SEEK TO ENJOIN THE MERGER OR CAUSE EITHER OF THE COMPANIES TO DIVEST CERTAIN
ASSETS. THE MERGER AGREEMENT CONDITIONS THE MERGER ON THE RECEIPT OF ALL
REQUIRED GOVERNMENTAL CONSENTS AND APPROVALS, INCLUDING EXPIRATION OR
TERMINATION OF THE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ACT.
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DESCRIPTION OF THE CONVERTIBLE PREFERRED STOCK
As a portion of the merger consideration, HA-LO will issue 5.1 million
shares of convertible participating preferred stock, assuming the exercise of
all the assumed stock options.
RANKING
With respect to rights on liquidation, winding-up and dissolution, the
convertible preferred stock ranks senior to the Company's common stock, and in
parity with or senior to all other existing and future classes of capital stock
and series of shares of convertible preferred stock of the Company.
DIVIDENDS AND PARTICIPATION RIGHTS
Except as described below under "--Redemption," no dividends will accrue on
the convertible preferred stock. However, if the Company declares or pays any
dividends on its common stock (whether payable in cash, securities, or other
property), other than dividends payable solely in shares of common stock, the
holders of convertible preferred stock will be entitled to participate in such
dividends, on an as-converted basis, at the same time that the Company declares
and pays such dividends to the holders of its common stock.
LIQUIDATION PREFERENCE
Upon any liquidation, winding-up or dissolution of the Company, before any
distribution or payment is made to any holder of equity securities of the
Company ranking junior to the shares of convertible preferred stock, each holder
of convertible preferred stock will be paid (1) a liquidation preference of
$10.00 per share of convertible preferred stock then owned by such holder, and
(2) such holder's proportionate share (based upon the aggregate number of shares
of common stock then outstanding, assuming conversion of all outstanding shares
of convertible preferred stock) of the amount available for payment to the
holders of our outstanding common stock.
If, upon any liquidation, winding-up or dissolution of the Company, the
assets of the Company are insufficient to pay in full the amount due on the
convertible preferred stock and the amount due on any parity securities, then
such assets will be distributed among the holders of the convertible preferred
stock and the holders of such other parity securities on a ratable basis.
VOTING RIGHTS
The holders of convertible preferred stock will have the right to vote on
all matters on which the holders of the Company's common stock are entitled to
vote. For purposes of such voting, each share of convertible preferred stock
will have the number of votes equal to the number of shares of common stock then
issuable upon conversion of such shares of convertible preferred stock.
PROTECTIVE PROVISIONS
The Company will not, without consent of the holders of at least a majority
of the outstanding shares of convertible preferred stock, voting as a class:
(1) increase the number of authorized shares of convertible preferred stock
or issue any additional shares of convertible preferred stock, except as
contemplated by the terms of the convertible preferred stock;
(2) amend or modify the powers, preferences or rights of the convertible
preferred stock or amend, alter or repeal any of the provisions of the
Company's articles of incorporation or by-laws (including by merger or
similar transaction or otherwise) so as to exchange, reclassify or
eliminate the shares of convertible preferred stock or any part of the
convertible preferred
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stock or otherwise affect adversely the powers, preferences or rights of
the holders of convertible preferred stock; change the designations,
preferences, qualifications, limitations, restrictions, or special or
relative rights of the common stock; divide the shares of such class into
series and fix or authorize the board of directors to fix the variations
in the relative rights and preferences between the shares of such series;
change the shares of such class into the same or a different number of
shares of the same class or another class or classes; create a right of
exchange, of all or any part of the shares of another class into the
shares of such class; cancel or otherwise affect dividends on the shares
of such class which had accumulated but had not been declared; limit or
deny the voting rights of the shares of such class; or
(3) other than the convertible preferred stock, create, authorize, issue or
permit to exist any class of capital stock or series of preferred shares
that ranks senior to or in parity with the shares of convertible
preferred stock with respect to dividend rights or rights on liquidation,
winding-up or dissolution, or reclassify any class or series of any
junior stock into, or authorize any securities exchangeable for,
convertible into or evidencing the right to purchase, any such class or
series.
CONVERSION RIGHTS
Each holder of convertible preferred stock will be entitled, at such
holder's option and at any time prior to redemption, to convert all or any
portion of such holder's shares into shares of the Company's common stock. Each
share of convertible preferred stock will be convertible initially into one
share of the Company's common stock. The conversion price is subject to
adjustment from time to time in order to prevent dilution of the conversion
rights granted in the articles of amendment.
In the event the average closing price of the Company's common stock equals
or exceeds $24.00 per share for ten consecutive trading days, each share of
convertible preferred stock will automatically convert into one share of common
stock or, if the conversion price has been adjusted in accordance with the
anti-dilution provisions, the number of shares as so adjusted.
REDEMPTION
The Company may not redeem the convertible preferred stock at its option.
The holders of the convertible preferred stock, at any time during the
30-day period commencing on the first anniversary of the effective date of the
merger, will have the right to require the Company to redeem all or any part of
their shares at a price per share in cash equal to the liquidation preference of
$10.00 per share, plus any accrued and unpaid dividends. The Company will be
required to effect any redemption for which notice has been timely delivered no
later than 60 days after the Company's receipt of such notice. This redemption
right will terminate and become unexercisable after the last day of the
redemption period (except with respect to any shares of convertible preferred
stock for which the redemption rights have been timely exercised but which have
not yet been redeemed). Any shares of convertible preferred stock which are not
tendered for redemption during the redemption period will remain outstanding
indefinitely and will continue to possess all of the rights, privileges and
restrictions described in this section, except redemption rights.
If the Company defaults on its obligation to redeem any shares of
convertible preferred stock, for so long as the Company is in default, the
shares of convertible preferred stock that the Company failed to redeem will
accrue dividends, at a rate of 8% of the liquidation price per annum on the
$10.00 per share liquidation preference of such shares, beginning on the first
date on which the Company failed to redeem such shares of convertible preferred
stock until the redemption price has been paid in full. The rate at which
dividends accrue will increase by 4% of the liquidation preference per annum on
each six month anniversary of the date of default until the redemption price
(including accrued dividends) has been paid in full.
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In the event of a "change of control," as defined in the articles of
amendment to the Company's articles of incorporation (establishing the
convertible preferred stock), each holder of convertible preferred stock will be
entitled, at such holder's option, to require the Company to redeem all or any
part of their shares at a price per share in cash equal to a redemption price
equal to the greater of (1) the liquidation preference of $10.00 per share, plus
any accrued and unpaid dividends, and (2) the amount that would have been
payable if the holder had exercised his or her conversion immediately prior to
such change of control.
If the Company sells all of the capital stock, or all or substantially all
of the assets of any subsidiary or significant business division of the Company
for consideration consisting, in whole or in part, of cash while any shares of
convertible preferred stock remain outstanding, then the Company is required to
use all of the cash proceeds of such sale to fund the working capital and
general corporate needs of the Company (including repayment of outstanding
indebtedness under the Company's line of credit or other commercial bank loan)
and/or to redeem the maximum possible number of shares of convertible preferred
stock that can be redeemed with such cash proceeds. To the extent that the
Company does not use all of the cash proceeds of any significant sale for
working capital and general corporate purposes within 90 days of a significant
sale, within 15 days after the expiration of such 90-day period, it must deliver
a written purchase offer to all holders of convertible preferred stock then
outstanding and promptly purchase shares from all holders who accept this offer,
pro rata based on the number of shares then held by each at a purchase price per
share equal to the liquidation preference of $10.00 per share, plus any accrued
and unpaid dividends.
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ASSUMPTION OF OUTSTANDING STARBELLY.COM OPTIONS
INTRODUCTION
Starbelly.com currently maintains the 1999 Stock Option Plan for
Starbelly.com employees, directors and consultants. Under this plan, as amended,
and before we complete the merger, Starbelly.com may grant options to purchase
up to an aggregate of 3,355,000 shares of its common stock. As of March 15,
2000, options for 2,894,334 shares were issued and outstanding, 395,000 shares
have been issued for exercised options, and 65,666 shares remain available for
grants. The options issued and outstanding, have a weighted average exercise
price of $1.00 per share and are 11.9% vested.
All employees, including all current directors of Starbelly.com, hold 89.3%
of the total issued and outstanding options as of March 15, 2000, as a group.
Two employees, Simeon Schnapper and Steven Scheyer hold 17.3% and 6.9%,
respectively, of the options issued and outstanding under the plan as of
March 15, 2000. Neither Brad Keywell, Eric Lefkofsky, nor any holders of five
percent or more of Starbelly.com's capital stock holds any options. Under the
merger agreement, HA-LO is required, at the effective time of the merger, to
assume Starbelly.com's obligations under the plan and each option outstanding
under the plan. As a result, each Starbelly.com option will, as of the effective
date of the merger, entitle the holder to receive upon exercise the same number
of shares of HA-LO common stock and of HA-LO convertible preferred stock as such
holder would have received pursuant to the merger agreement if the option had
been exercised immediately prior to the merger. The other terms of each
Starbelly.com option will continue to apply after the merger, except that prior
to the effective time, Starbelly.com may cause up to (1) fifty percent (50%) of
all Starbelly.com's options held by each key employee (as defined in the merger
agreement) to become fully vested at the effective time, and (2) thirty-three
and one-third percent (33 1/3%) of all Starbelly.com options held by each
employee identified by Starbelly.com to become fully vested at the effective
time. In order to assume Starbelly.com's options and its obligations under the
plan, your board of directors has adopted the HA-LO Industries, Inc. Stock
Option Plan for Starbelly.com Employees, Directors and Consultants. After the
merger closes, no new options will be granted under Starbelly.com's plan or the
new HA-LO plan. Approval of the merger is conditioned on approval of the new
HA-LO Stock Option Plan. Your board of directors recommends that shareholders
vote in favor of the adoption of the new HA-LO plan.
PLAN SUMMARY
In the paragraphs that follow, we summarize the material features of the
Starbelly.com plan. As you read this summary, you should bear in mind that, at
the time the merger closes, the Starbelly.com plan will be incorporated into the
new HA-LO plan, and HA-LO will assume Starbelly.com's obligations under the
Starbelly.com plan. The new HA-LO plan will be substantially identical to the
Starbelly.com plan, except that, after the merger closes:
- the options to purchase Starbelly.com common stock outstanding immediately
before the merger will be treated as options to purchase units consisting
of our common stock and our convertible preferred stock (in amounts
calculated consistently with the conversion of shares under the merger
agreement);
- the exercise price for each unit consisting of our common stock and
preferred stock underlying each option under the new HA-LO plan will be
equal to the exercise price of the assumed option to purchase
Starbelly.com class A common stock in effect immediately before the
merger, divided by the fraction equal to the portion of a share of our
common stock to be issued upon conversion of one share of Starbelly.com
class A common stock pursuant to the merger agreement. In this way, the
aggregate exercise price to purchase our common and preferred stock shall
equal the aggregate exercise price to purchase the Starbelly common stock.
For
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example, a person with an option to purchase 100 shares of Starbelly.com
common stock at an exercise price of $1.00 per share will be treated as
having an option to purchase 75 shares of our common stock and 8 shares of
our preferred stock for an aggregate exercise price of $100. Under this
option, $1.33 will purchase one share of our common stock and .10 of a
share of our preferred stock. These amounts assume that Starbelly.com's
merger expenses will be approximately $3.32 million, as Starbelly.com
currently estimates. To the extent expenses exceed that amount, the option
would be exercisable for fewer shares of both classes of stock, and the
exercise price would be proportionately higher; and
- the compensation committee of your board of directors will administer the
new HA-LO plan.
The summary below is neither exhaustive nor definitive, and you should read
the full text of the HA-LO plan which is attached to this proxy statement as
Exhibit D for a complete description.
PURPOSE
The purpose of the plan is to advance the interests of Starbelly.com and its
stockholders by providing an incentive to attract, retain and reward persons
performing services for Starbelly.com and by motivating such persons to
contribute to the growth and profitability of Starbelly.com.
ADMINISTRATION
The plan is administered by Starbelly.com's board of directors. All
questions of interpretation of the plan or of any option granted under the plan
will be determined by the board, and such determinations will be final and
binding upon all persons having an interest in the plan or such option.
With respect to participation by executive officers or directors of
Starbelly.com or any other person whose transactions in Starbelly.com securities
are subject to Section 16 of the Securities Exchange Act of 1934, at any time
that any class of equity security of Starbelly.com is registered pursuant to
Section 12 of that Act, the plan will be administered in compliance with the
requirements of Rule 16b-3 under that Act.
SHARES RESERVED
The maximum number of shares of Starbelly.com common stock that may be
issued under the plan, as amended, is 3,355,000, of which 395,000 shares have
already been issued. If an outstanding option for any reason expires or is
terminated or canceled or if shares of common stock are repurchased by
Starbelly.com under the terms of the plan, the shares allocable to the
unexercised portion of that option or the repurchased shares will again be
available for issuance under the plan.
ELIGIBILITY
Options may be granted to Starbelly.com employees, directors and
consultants.
TERMS OF OPTIONS
Each option is evidenced by an option agreement specifying the number of
shares of common stock covered by the option. Unless otherwise specified by the
board of directors, each option has a term of ten years. The period during which
an option is exercisable may be reduced in the event the optionee's service with
Starbelly.com is terminated as described below.
EXERCISE OF OPTIONS
Options are exercisable at the time or times, or upon the event or events,
and subject to those terms, conditions, performance criteria and restrictions
which are determined by the board of directors
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and set forth in the option agreement evidencing such option. With the exception
of an option granted to an officer, director or consultant, no option may become
exercisable at a rate less than 20% per year over a period of five years from
the effective date of grant of such option, subject to the optionee's continued
service.
Except as otherwise provided, payment of the exercise price for the number
of shares of common stock being purchased pursuant to any option must be made:
- in cash, by check or cash equivalent;
- by tender to Starbelly.com of shares of common stock owned by the optionee
having a fair market value (as determined by Starbelly.com) not less than
the exercise price;
- by the assignment of the proceeds of a sale or loan with respect to some
or all of the shares being acquired upon the exercise of the option;
- by the optionee's promissory note in a form approved by Starbelly.com;
- by such other consideration as may be approved by the board of directors
from time to time to the extent permitted by applicable law; or
- by any combination of these methods.
Starbelly.com reserves the right to establish, decline to approve or
terminate any program or procedures for the exercise of options by means of a
cashless exercise.
OPTION PRICE
The exercise price for each option is established in the discretion of the
board of directors; provided, however, that (1) the exercise price for an
incentive stock option may not be less than the fair market value of a share of
common stock on the effective date of grant of the option, (2) the exercise
price for a nonstatutory stock option may not be less than 85% of the fair
market value of a share of common stock on the effective date of grant of the
option, and (3) no option granted to a ten percent owner optionee will have an
exercise price less than 110% of the fair market value of a share of common
stock on the effective date of grant of the option.
TRANSFERABILITY
During the lifetime of the optionee, an option may be exercised only by the
optionee or the optionee's guardian or legal representative. No option will be
assignable or transferable by the optionee, except by will or by the laws of
descent and distribution.
CHANGE IN CAPITALIZATION
In the event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in the capital
structure of Starbelly.com, appropriate adjustments will be made in the number
and class of shares subject to the plan and to any outstanding options and in
the exercise price of any outstanding options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding options are
exchanged for, converted into, or otherwise become shares of another
corporation, the board of directors may unilaterally amend the outstanding
options to provide that such options are exercisable for shares of such other
corporation.
TERMINATION OF SERVICE
If the optionee's service with Starbelly.com is terminated because of the
disability of the optionee, the option may be exercised by the optionee (or the
optionee's guardian or legal representative) at any time prior to the expiration
of six months following such cessation of service. If the optionee's service
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with Starbelly.com is terminated because of the death of the optionee, the
option may be exercised by the optionee's legal representative at any time prior
to the expiration of six months following such cessation of service. If the
optionee's service with Starbelly.com terminates for any reason, except
disability or death, following such cessation of service, the option may be
exercised by the optionee within thirty days following such cessation of
service. Certain employees have agreements whereby upon termination, there will
be an acceleration of vesting on unvested options. Such acceleration ranges from
30 days to twelve months of additional vesting, in no case extending past the
option expiration date.
OCCURRENCE OF CERTAIN CORPORATE TRANSACTIONS
In the event of a "Change in Control" (as defined in the plan), the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be, may either assume Starbelly.com's
rights and obligations under outstanding options or substitute for outstanding
options substantially equivalent options for the acquiring corporation's stock.
An option will be deemed assumed if, following the Change in Control, the option
confers the right to purchase in accordance with its terms and conditions for
each share of common stock subject to the option immediately prior to the Change
in Control, the consideration (whether stock, cash or other securities or
property) to which a holder of a share of common stock on the effective date of
the Change in Control was entitled. Any option which is neither assumed or
substituted for by the acquiring corporation in connection with the Change in
Control nor exercised as of the date of the Change in Control terminates and
cease to be outstanding effective as of the date of the Change in Control.
LIMITATION ON INCENTIVE STOCK OPTIONS
To the extent that an option designated as an incentive stock option becomes
exercisable by an optionee for the first time during any calendar year for stock
having a fair market value greater than $100,000, the portion of such option
which exceeds such amount will be treated as a nonstatutory stock option.
TERMINATION; AMENDMENT
The board of directors may terminate or, subject to certain limitations,
amend the plan at any time. Generally, no amendment of the plan may adversely
affect any then outstanding option without the consent of the optionee.
CERTAIN TAX MATTERS
Starbelly.com has the right to deduct from the shares of common stock
issuable upon exercise of an option a number of shares having a fair market
value equal to any federal, state, local and foreign taxes required to be
withheld by Starbelly.com upon the exercise of the option. Alternatively,
Starbelly.com may require the optionee to make adequate provision for any such
tax withholding obligations of Starbelly.com arising in connection with the
exercise of the option.
The following is only a summary of the possible effects of federal income
taxation upon the optionee and Starbelly.com with respect to the exercise of
options under the plan. The summary does not purport to be complete and does not
discuss the income tax laws of any state or foreign country in which an optionee
may reside.
NON-STATUTORY OPTIONS
In the case of non-statutory options, no taxable income is recognized upon
grant of such an option. Taxation is deferred until the option is exercised at
which time the excess of (1) the fair market value of the common stock purchased
under the option over (2) the exercise price paid for such shares will be taxed
to the optionee at ordinary income rates, and Starbelly.com will be entitled to
a
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corresponding income tax deduction at that time. Upon subsequent sale of the
purchased shares, any gain or loss would be treated as a sale or exchange of a
capital asset.
INCENTIVE STOCK OPTIONS
In the case of incentive stock options, no taxable income is recognized by
the optionee at the time an incentive stock option is granted, and no taxable
income is generally recognized at the time the option is exercised. The optionee
will, however, recognize taxable income in the year in which the shares
purchased under an incentive stock option are sold in an amount equal to the
difference, if any, between the exercise price of the incentive option stock and
the fair market value of those shares on the date of sale. To the extent any
option designated as an incentive stock option fails the statutory requirements
of such characterization, such option will be treated as a non-statutory stock
option.
For federal income tax purposes, dispositions are divided into two
categories: qualifying and disqualifying. The optionee will make a qualifying
disposition if the sale or other disposition of the option shares is made after
the optionee has held the shares for more than two years after the grant date of
the option and more than one year after the exercise date. If the optionee fails
to satisfy either of these two holding periods, then a disqualifying disposition
will result. If the optionee makes a disqualifying disposition of the purchased
shares, the optionee recognizes ordinary income to the extent of the lesser of
(1) the difference between the disposition price and the exercise price or
(2) the difference between the exercise price and the fair market value of the
stock on the date of exercise. Starbelly.com will be entitled to an income tax
deduction for the taxable year in which such disposition occurs, equal to the
amount by which the fair market value of such shares on the date the option was
exercised exceeded the option price.
COMPARATIVE MARKET PRICE DATA
HA-LO COMMON STOCK
HA-LO's common stock is traded on the New York Stock Exchange under the
symbol "HMK." The following table sets forth, for the periods indicated, the
high and low sales prices of the HA-LO common stock as reported on New York
Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------------------------ ------------------------
<S> <C> <C>
1998 (1)
First Quarter............................................. $25 9/16 $16 5/16
Second Quarter............................................ 23 13/16 19 1/16
Third Quarter............................................. 23 9/16 14 7/8
Fourth Quarter............................................ 25 3/16 14 15/16
1999
First Quarter............................................. 25 7/16 8 9/16
Second Quarter............................................ 14 3/4 9 1/2
Third Quarter............................................. 9 7/8 5 5/16
Fourth Quarter............................................ 9 4 7/16
2000
First Quarter............................................. 12 11/16 6 1/2
Second Quarter (through April 6).......................... 8 5/8 7 1/4
</TABLE>
- ------------------------
(1) All share prices have been adjusted to take into account a 3-for-2 stock
split which was effected on February 19, 1999.
HA-LO has not paid any dividends since its initial public offering in 1992.
On January 14, 2000, the last full trading day prior to the public
announcement of the execution of the merger agreement, the last sale price of
the HA-LO common stock as reported on the New York
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Stock Exchange was $12 3/16. On April 6, 2000, the most recent practicable date
prior to the printing of this proxy statement for which sales price information
was obtainable, the last sale price of the HA-LO common stock as reported on the
New York Stock Exchange was $8 7/16.
On March 27, 2000, there were approximately 429 holders of record of HA-LO
common stock.
STARBELLY.COM COMMON STOCK
Starbelly.com is privately-held and there is, therefore, no established
public trading market for the Starbelly.com common stock. For information
regarding the Starbelly.com common stock, see "Unaudited Comparative Per Share
Data" (page 13) and "Starbelly.com Selected Historical Financial Data"
(page 76).
POST-MERGER DIVIDEND POLICY
After the merger, we intend to retain earnings to finance the expansion of
our businesses. Any future dividends will be at the discretion of your board of
directors and will be determined after consideration of factors such as our
earnings, financial condition, cash flows from operations, current and
anticipated cash needs, expansion plans and any restrictions that may be imposed
under our current and future credit facilities.
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THE MERGER AGREEMENT
THIS DISCUSSION SUMMARIZES THE MATERIAL PROVISIONS OF THE MERGER AGREEMENT.
A COPY OF THE MERGER AGREEMENT IS INCLUDED IN THIS DOCUMENT AS EXHIBIT A. THIS
SUMMARY IS QUALIFIED BY REFERENCE TO THE FULL AGREEMENT, WHICH YOU ARE
ENCOURAGED TO READ.
CLOSING OF THE MERGER
The merger agreement provides that the merger will be completed when the
certificate of merger is filed with the Secretary of State of the State of
Delaware Secretary of State. If our shareholders approve the merger and all
other conditions to the merger are satisfied or waived, the merger is expected
to be completed promptly after our special meeting.
CONSIDERATION TO BE RECEIVED IN THE MERGER
If we complete the merger, Starbelly.com stockholders will receive
approximately $240 million, which amount we will pay by paying $19 million in
cash (less Starbelly.com's merger expenses in excess of $500,000) and paying the
balance by issuing 17 million shares of HA-LO common stock valued in the merger
agreement at $170 million and 5.1 million shares of HA-LO convertible preferred
stock valued in the merger agreement at $51 million. The merger consideration
includes shares of HA-LO common stock and HA-LO convertible preferred stock
issuable upon exercise of Starbelly.com's outstanding stock option which will be
assumed by HA-LO.
The formula establishing the number of shares of HA-LO common stock valued
in the merger agreement at $170 million and the number of shares of HA-LO
convertible preferred stock valued in the merger agreement at $51 million was
based on the lower of $10.00 or the average closing price of HA-LO common stock
on the New York Stock Exchange for each trading day over a 25-day period
consisting of the trading days during the 15 calendar days prior to the
execution of the merger agreement and the trading days during the 10 calendar
days following execution of the merger agreement. Since the average closing
price during the measurement period was $10.05, the number of shares of our
common stock (17 million) and the number of shares of our convertible preferred
stock (5.1 million) issuable in the merger was based on a $10.00 per share
price.
Starbelly.com has common stock, options to purchase common stock, Series A
preferred stock and Series B preferred stock outstanding. Under the terms of the
merger agreement, each class of stock is entitled to a different mix of merger
consideration. Starbelly.com estimates that its merger expenses will be
approximately $3.32 million. Assuming that is the case, each outstanding share
of Starbelly.com stock will be exchanged for (and each option to purchase a
share of Starbelly.com common stock will become an option to purchase) the
following:
<TABLE>
<CAPTION>
CASH AND SECURITIES FOR WHICH
ONE STARBELLY.COM SHARE WILL
BE EXCHANGED (OR ONE
STARBELLY.COM OPTION WILL BE
EXERCISABLE)
-------------------------------
HA-LO HA-LO
NUMBER OF COMMON PREFERRED
TYPE OF STARBELLY.COM STOCK SHARES CASH STOCK STOCK
- --------------------------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Common Stock (and options to purchase Common Stock)..... 19,878,567 -- .75 .08
Series A Preferred...................................... 1,500,000 $1.70 1.35 .14
Series B Preferred...................................... 5,653,711 $2.41 -- .59
</TABLE>
To the extent that the merger expenses exceed $3.32 million, pursuant to the
formula set forth in the merger agreement, the cash paid will be further reduced
by the amount of the expense in excess of that amount. The holders of
Starbelly.com's Series A preferred and Series B preferred stock will receive
less cash, but will receive additional HA-LO common and/or preferred stock to
the extent that their reduction in cash received exceeds their pro rata share of
the additional merger expenses. The
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holders of common stock (and holders of options to purchase common stock) will
receive proportionately less HA-LO common and preferred stock.
Ownership of HA-LO common stock and voting rights after the merger will be
substantially different than ownership and voting before the merger. When
comparing HA-LO's ownership and control after the merger to its ownership and
control before the merger, you should bear in mind that the Starbelly.com
stockholders receiving convertible preferred stock may convert some or all of
these shares into our common stock, and that the holders of Starbelly.com
options may exercise some or all of these options for shares of the Company's
common stock and convertible preferred stock. Moreover, the holders of the
convertible preferred stock are entitled to one vote for each of their preferred
shares when matters are submitted to a vote to the holders of our common stock.
Therefore, the holders of convertible preferred stock exercise to that extent
control over matters submitted to our shareholders even if these holders of
convertible preferred stock do not convert their shares into common stock.
Assuming that former Starbelly.com stockholders convert all their HA-LO
convertible preferred stock and former Starbelly.com optionholders exercise all
assumed stock options and convert the underlying convertible preferred stock,
such persons will own in the aggregate 31% of our common stock and our
pre-merger shareholders will own 69% of the common stock.
NO CONVERSION OF OUR COMMON STOCK
Nothing will happen to your HA-LO shares as a result of the merger. They
will not be converted, and you will not need to surrender them for any exchange.
After the merger, your certificates will represent the same number of shares as
they represented before the merger.
TERMS OF THE MERGER
STARBELLY.COM'S REPRESENTATIONS AND WARRANTIES
In the merger agreement, the parties have made various customary
representations and warranties as to, among other things:
- their corporate organization and compliance with law
- their capitalization
- the enforceability of the merger agreement and the authority of the
parties to enter into the merger agreement
- absence of conflicts
- litigation
- absence of changes in their businesses
- employee benefit matters
- tax matters
- intellectual property rights
- significant contracts
- environmental matters
- related party transactions
Starbelly.com has also made representations and warranties as to, among
other things:
- its business and financial condition
- required approvals or consents to complete the merger
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- financial statements and business records
- real property
- title to its assets
- inventory and warranty matters
- Starbelly.com's ownership of our common stock
- Starbelly.com's website
- year 2000 matters
- Starbelly.com's technology systems
We have also made representations and warranties as to, among other things:
- our proper filing of periodic reports with the Securities and Exchange
Commission
- the non-applicability of the takeover statute contained in the Illinois
Business Corporation Act
- absence of a HA-LO shareholder rights plan
All of these representations and warranties will expire one year after the
merger closes.
CONDITIONS TO THE MERGER
The obligations of the parties to complete the merger are subject to
satisfaction or waiver of certain conditions on or before the closing. These
include:
- our required shareholder approval;
- the absence of a governmental order, law or private action preventing the
transaction or seeking to prevent it;
- receipt of all necessary third party and governmental consents;
- listing on the New York Stock Exchange of our shares to be issued in the
merger;
- the continuing truthfulness of the representations made in the merger
agreement;
- all parties' compliance with the merger agreement's terms;
- receipt of signed employment agreements and non-competition agreements
from certain key employees and stockholders of Starbelly.com; and
- receipt of the escrow agreements (see "--Other Agreements Related to the
Merger Agreement --Escrow Agreements" (page 70)).
Our obligation to close the merger is subject to the satisfaction or waiver
of certain additional conditions on or before the closing. These include:
- payment by Starbelly.com stockholders, board members and employees of
their debts to Starbelly.com;
- Silicon Valley Bank's exercise of its warrant to purchase 28,369 shares of
Starbelly.com Series B Convertible Preferred Stock and conversion of these
preferred shares into shares of Starbelly.com common stock (or, instead of
this warrant exercise and conversion transaction, Silicon Valley Bank's
granting its consent to be treated in the merger as if this warrant
exercise and conversion had taken place); and
- our receipt of indemnification agreements from each of Bradley Keywell,
Starbelly.com's current chief executive officer, and Eric Lefkofsky,
Starbelly.com's current president.
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Starbelly.com's obligation to close the merger is subject to the
satisfaction or waiver of certain additional conditions on or before the
closing. These include:
- receipt of an opinion from its attorneys as to the tax consequences of the
merger to the Starbelly.com stockholders;
- receipt of our agreement to release claims against the officers and
directors of Starbelly.com relating to their actions as officers,
directors and stockholders occurring before the merger closing (but not
including obligations related to the merger agreement and related
agreements);
- filing with the Secretary of State of the State of Illinois our statement
establishing the convertible preferred stock to be issued in the merger;
and
- receipt by the Starbelly.com stockholders of signed registration rights
agreements (see "--Other Agreements Related to the Merger
Agreement--Registration Rights Agreements" (page 71)).
OBLIGATIONS PENDING CLOSING
The merger agreement imposes obligations and restrictions on its parties
pending the transaction. The affirmative obligations for both parties include:
- providing access to each other's business records and management
personnel;
- operating their businesses in the usual manner;
- preserving their business relations;
- maintaining existing insurance policies;
- consulting with each other on operational matters (to the extent legally
permitted); and
- filing tax returns before their due dates.
The merger agreement also restricts the parties to agreed levels of the
following (or prohibits them entirely):
- bonuses and salary increases;
- new employee benefit plans;
- changing Starbelly.com's overall business (prohibited);
- incurrence of new debt;
- capital expenditures;
- dividends and distributions (prohibited);
- changes in capitalization (prohibited);
- acquisitions and mergers (prohibited);
- dispositions of material assets (prohibited);
- amendments to material organizational documents (prohibited); and
- soliciting the sale of Starbelly.com or HA-LO to a third party
(prohibited).
OTHER COVENANTS AND AGREEMENTS
The merger agreement requires the parties to fulfill certain other
obligations that relate to the merger and the issuance of our shares of common
stock and convertible preferred stock, including the following:
- All parties to the merger agreement must make efforts to permit the merger
to be a tax-free reorganization under the Internal Revenue Code.
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- We will register for resale, in four steps, the shares of our common stock
received by the Starbelly.com stockholders in the merger and the shares of
our common stock issuable to the Starbelly.com stockholders upon their
conversion of our convertible preferred stock. These registrations will
occur beginning ten days after the merger closing and will be completed
within two years. See "--Other Agreements Related to the Merger
Agreement--Registration Rights Agreements" (page 71).
- We will also take certain other actions relating to the issuance of our
common stock, as needed, including filing notices for state securities law
compliance and for listing shares of our common stock on the New York
Stock Exchange.
- Each of the Starbelly.com stockholders will enter into a shareholders
agreement with us. See "--Other Agreements Related to the Merger
Agreement--Stockholders' Agreements" (page 70).
- We, Starbelly.com, and Starbelly.com's stockholders will take actions
necessary to complete the merger, including obtaining all required third
party and governmental consents. We will keep each other informed of any
events or conditions that may prevent the merger or any of the other
transactions relating to the merger.
- We and Starbelly.com will cooperate in order to obtain the tax opinion
from Starbelly.com's counsel. See "--Terms of the Merger--Conditions to
the Merger" (page 65)).
- In connection with the merger, we have agreed to give Starbelly.com
pre-merger stockholders the number of directors on the board which is
proportionate to the Starbelly.com stockholder ownership of our common
stock (assuming the conversion of our convertible preferred stock and
exercise of options) in the merger. We have agreed to place three
designees on your board and to amend our bylaws to increase the size of
your board from seven to ten directors. Immediately following the merger,
Bradley Keywell will designate one person to serve on your board and Eric
Lefkofsky will designate two persons to serve on your board.
- We will assume the outstanding options to purchase Starbelly.com common
stock. At the time the merger closes, we will register the shares of
common stock and convertible preferred stock which are issuable upon
exercise of these options. See "Assumption of Outstanding Starbelly.com
Options."
- We agreed to loan Starbelly.com up to an additional $10 million, depending
upon when the merger is completed. Because we did not complete the merger
by March 1, 2000, we extended Starbelly.com an unsecured $5 million loan,
and because we did not close the merger by April 1, 2000, we extended
Starbelly.com another unsecured $5 million loan. These loan amounts are
not a part of the merger consideration, although under certain
circumstances (1) Starbelly.com may not be required to pay back all or a
portion of these loans if we become obligated to pay Starbelly.com
termination fees, and (2) the maturity dates of the loans may be
accelerated if we properly terminate the merger agreement.
- We have agreed to exculpate from liability and indemnify, after the
merger, those persons who are currently Starbelly.com officers, agents,
employees and directors to the same extent that these protections are
afforded by the Starbelly.com certificate of incorporation and by-laws
immediately before the merger closes. This undertaking relates only to
actions which occurred prior to the completion of the merger.
Starbelly.com's governing documents currently provide indemnification
rights for these persons to the extent permitted under Delaware law,
subject to certain limited exceptions. We anticipate that these rights
will not change before the merger closes because, under the merger
agreement, Starbelly.com cannot amend its certificate of incorporation or
by-laws without our prior written consent. HA-LO's governing documents
effectively provide indemnification for its officers, agents, employees
and directors to the extent permitted under Illinois law, subject to
certain limited exceptions. As the Starbelly.com and HA-LO indemnification
protections are substantially similar in all material respects, we do not
expect that there will be, after the merger, material differences between
the indemnification
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protections extended to Starbelly.com's officers, agents, employees and
directors for pre-merger actions, on the one hand, and those extended to
HA-LO's officers, agents, employees and directors, on the other.
- If Starbelly.com requests, we will be required to amend the merger
agreement to provide that Starbelly.com, rather than our merger
subsidiary, will be the surviving entity after the merger.
For a description of other agreements among Starbelly.com, certain
Starbelly.com stockholders and us, see "--Other Agreements Related to the
Merger--Registration Rights Agreements" (page 71), "--Other Agreements Related
to the Merger--Stockholders' Agreements" (page 70) and "--Other Agreements
Related to the Merger--Escrow Agreements" (page 70).
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time before the transaction is
completed:
- by mutual consent of the Starbelly.com board of directors and your board
of directors;
- by your board of directors if Starbelly.com has breached the merger
agreement and the damages we would suffer as a result of this breach would
reasonably be expected to exceed $14 million;
- by their board of directors if we have breached the merger agreement and
the damages Starbelly.com would suffer as a result of this breach would
reasonably be expected to exceed $40 million;
- by either your board of directors or Starbelly.com's board of directors if
any final decision of a governmental authority prohibits concluding the
merger;
- by either party if our shareholders fail to approve at our special meeting
the issuance of our shares in the merger or if the merger transaction is
not completed by April 29, 2000;
- by Starbelly.com if we have not, by February 28, 2000, provided evidence
reasonably satisfactory to Starbelly.com that we have a working capital
credit facility with substantially the same terms as our current facility;
or
- by Starbelly.com if, because of your board of directors' fiduciary duties
to HA-LO shareholders, your board acts upon a proposal to enter into
certain business combinations with someone other than Starbelly.com.
In an amendment to the merger agreement, the parties extended to May 5, 2000
(the "Outside Date") the date by which the merger must be completed.
Starbelly.com extended to April 20, 2000 the date by which HA-LO must provide
evidence reasonably satisfactory to Starbelly.com that we have a working capital
credit facility with substantially the same terms as our current facility. On
April 3, 2000, we established a new credit facility which provides for
borrowings of up to $80 million and is secured by the Company's and its
subsidiaries, domestic assets. Borrowings under the new facility bear interest
based on a defined ratio at either between prime and prime plus 40 basis points
or the London Interbank Offered Rate (LIBOR) plus between 125 and 235 basis
points. The term of this facility is three years. The credit facility condition
was subsequently deleted from the merger agreement in the amendment to the
merger agreement.
The maturity dates for loans we have advanced to Starbelly.com will be
extended for one year if, either:
- we are unable to close the merger by the Outside Date because certain
regulatory approvals or processes have not been completed; or
- we or Starbelly.com have properly terminated the merger agreement (not due
to any breach by Starbelly.com) and Starbelly.com cannot repay these loans
in the ordinary course of their business.
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TERMINATION FEES
We have agreed to pay Starbelly.com for up to $500,000 of merger-related
expenses incurred by Starbelly.com and its stockholders plus their actual
damages up to a maximum of $10 million if:
- our shareholders do not approve the merger, or
- if, because of your board of directors' fiduciary duties to HA-LO
shareholders, your board acts upon a proposal to enter into certain
business combinations with someone other than Starbelly.com, and
Starbelly.com terminates the merger agreement.
We have also agreed that we will reimburse Starbelly.com for merger-related
expenses incurred by Starbelly.com and its stockholders, up to $500,000, if
Starbelly.com terminates the agreement because we materially breach it. Under
this circumstance Starbelly.com's obligations to pay amounts under the loans we
have extended to Starbelly.com would be extended one additional year. If,
however, our breach were to be willful and in bad faith, we would be liable to
Starbelly.com, not only for its expenses up to $500,000, but also for
Starbelly.com's actual damages, up to a maximum of $10 million.
Starbelly.com has agreed to reimburse us for our expenses related to the
merger agreement, up to $500,000, if we terminate the merger agreement because
Starbelly.com materially breaches it. Under this circumstance, Starbelly.com
would be required to pay us, within six months, all amounts outstanding under
the loans we have extended Starbelly.com. If, however, Starbelly.com's breach
were to be willful and in bad faith, Starbelly.com would be liable to us, not
only for expenses up to $500,000, but also for our actual damages, up to a
maximum of $10 million, and Starbelly.com would be immediately required to pay
us all amounts outstanding under the loans we have extended to them.
INDEMNIFICATION
FOR OUR BENEFIT
The merger agreement requires the Starbelly.com stockholders to indemnify us
for claims brought within one year against all losses, expenses (including
reasonable attorneys' fees and expenses) or liabilities arising out of any
breach by Starbelly.com of the merger agreement, up to a maximum of
$25 million. However, we are not entitled to indemnification payments unless our
damages are greater than $5 million, and, if our damages reach this threshold,
we may recover only the portion of our damages which exceeds $5 million. Our
recovery of damages through indemnification is subject to an important
limitation. We can recover our losses only from the escrow accounts holding
$25 million of the merger consideration in the form of shares of our common
stock and convertible preferred stock. These shares will be treated as having
the same value they did at the time of the merger. See "--Other Agreements
Related to the Merger Agreement--Escrow Agreements," below.
FOR THE BENEFIT OF STARBELLY.COM'S STOCKHOLDERS
The merger agreement also provides that we will indemnify the Starbelly.com
stockholders for claims brought within one year against all losses, expenses
(including reasonable attorneys' fees and expenses) or liabilities, arising out
of our breach of the merger agreement, up to a maximum of $29 million. However,
the Starbelly.com stockholders are not entitled to indemnification payments
unless their damages are greater than $15 million, and, if their damages reach
this threshold, Starbelly.com stockholders may recover only the portion of their
damages which exceeds $15 million.
AMENDMENT AND WAIVER
The merger agreement may be amended only by mutual written agreement.
Waivers under the agreement must be in writing.
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OTHER AGREEMENTS RELATED TO THE MERGER AGREEMENT
ESCROW AGREEMENTS
We have entered into separate escrow agreements with (1) five principal
Starbelly.com stockholders and an escrow agent to provide us limited protections
in the event we are entitled to indemnification under the merger agreement and
(2) two principal Starbelly.com stockholders, who will enter into employment
agreements in connection with the merger. Under the first set of escrow
agreements, when we complete the merger, these five principal Starbelly.com
stockholders will deposit $25 million of the merger consideration, consisting of
shares of our common stock and shares of our convertible preferred stock issued
in the merger, with American National Bank and Trust Company of Chicago (the
"Escrow Agent"). The Escrow Agent will hold the escrowed shares as security for
Starbelly.com's indemnification obligations under the merger agreement: if we
have a proper claim for indemnification, we are entitled to recover escrowed
shares with a value equal to our claim. If our claim is disputed, the Escrow
Agent will retain escrowed shares with a value equal to the disputed amount (but
any undisputed portion would be released to us). For purposes of the escrow
agreements, the value of our shares will be equal to their values in the merger.
Unless we have a claim pending one year after the merger closes, all remaining
shares in the escrow will be released to the former principal Starbelly.com
stockholders who originally deposited the shares into escrow.
Under the second set of escrow agreements, Bloomfield Partners Family
Limited Partnership (in which Bradley Keywell owns an economic interest) and
Coventry Partners Family Limited Partnership (in which Eric Lefkofsky owns an
economic interest) will each deposit 20% of their merger consideration (in the
form of HA-LO capital stock) with the Escrow Agent. Bloomfield Partners Family
Limited Partnership will deposit approximately $11.6 million. Coventry Partners
Family Limited Partnership will also deposit approximately $11.6 million. In
each case, these deposits of $11.6 million relate to the value of the merger
consideration pursuant to, and as of the date of, the merger agreement. This
portion of the merger consideration is intended to secure each of Bradley
Keywell's and Eric Lefkofsky's performance of their respective three-year
employment agreements after the merger. See "--Employment Agreements With Key
Executives." If either Mr. Keywell's or Mr. Lefkofsky's employment is terminated
for cause as defined in his respective employment agreement or he terminates his
employment agreement other than for good reason as defined in his respective
employment agreement, Bloomfield Partners (in the case of such event as to
Mr. Keywell) or Coventry Partners (in the case of Mr. Lefkofsky) will forfeit
the escrowed shares escrowed under these agreements. However, we have agreed
that a portion of the escrowed shares will be released to each of Bloomfield
Partners and Coventry Partners each year provided that these events have not
occurred under the applicable employment agreement. The Escrow Agent will
release 100% of the escrowed shares on the third anniversary of the merger
closing, if these events have not occurred before that time.
STOCKHOLDERS' AGREEMENTS
Starbelly.com stockholders with an approximate 94% of the stockholder voting
power have already approved the merger and have entered into separate agreements
with us ("Stockholders' Agreements") restricting these stockholders from
revoking their approval (or agreeing to a competing business combination)
between the date of the merger agreement and the completion of the merger
(unless the merger agreement is earlier terminated and except as Delaware law
may otherwise require). These Stockholders' Agreements also contain customary
investment representations regarding the stockholders' acquisition of our common
stock and convertible preferred stock in the merger.
Of the Starbelly.com stockholders who have executed these agreements,
holders of shares representing 69% of our common stock to be issued in the
merger (assuming conversion of shares of convertible preferred stock but
excluding exercise of assumed options) have agreed, for a period of three years
after the merger closing and subject to certain limitations contained in the
Stockholders'
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Agreements; to refrain from certain transactions involving our capital stock and
management of our company, including:
- future acquisitions of more than 1% of our common stock (assuming the
conversion of convertible preferred stock and the exercise of outstanding
options);
- acting or seeking to control our management, board of directors or
policies; and
- transferring shares of our capital stock to another person who, after the
transfer, would own more than 10% of the voting power of HA-LO.
In addition, the two Starbelly.com stockholders who are also key
Starbelly.com employees, Bradley Keywell and Eric Lefkofsky, have also agreed to
certain restrictive covenants which apply after the merger. Upon the merger
closing, each of Mr. Keywell and Mr. Lefkofsky will enter into separate
five-year agreements restricting them from competing against us, using or
disclosing our proprietary information or soliciting our employees or customers.
REGISTRATION RIGHTS AGREEMENTS
These agreements between HA-LO and each of the Starbelly.com stockholders
specify in greater detail our obligations to register our common stock and
convertible preferred stock for the Starbelly.com stockholders (see "--Other
Covenants and Agreements"). We are required to register for resale, in four
steps, the shares of our common stock received by the Starbelly.com stockholders
in the merger and the shares of our common stock issuable to the Starbelly.com
stockholders upon their conversion of convertible preferred stock. We will
register 25% of these shares within ten days after completion of the merger, an
additional 15% within three months after completion of the merger, an additional
33 1/3% of these shares within nine months after completion of the merger and
the remaining shares within two years after completion of the merger. We are
required to register for resale any shares of our common stock issuable upon
conversion of preferred stock by one of the Starbelly.com stockholders, Chase
Venture Capital Associates, L.P., and for any of its affiliates, within 30 days
after its notice of conversion, to the extent not already registered. We are
responsible for paying expenses relating to the registration, but the
Starbelly.com stockholders are responsible for paying any selling commissions
and attorneys' fees.
Under these agreements, we have also agreed to indemnify a seller or
underwriter of our common stock against all losses, expenses (including
reasonable attorneys' fees and expenses) or liabilities resulting from an untrue
statement (or omission of an important fact) in the resale prospectus for the
registered shares, unless such damages relate to an untrue statement (or
omission of an important fact) that someone else furnished (or neglected to
furnish) us. However, principal Starbelly.com stockholders have agreed to
indemnify us against losses, expenses (including reasonable attorneys' fees and
expenses) or liabilities under the securities laws as a result of an untrue
statement (or omission of an important fact) that they furnished (or neglected
to furnish) to us for the resale prospectus or this proxy statement.
The registration agreements also contain customary investor representations
from the Starbelly.com stockholders.
HA-LO LOANS TO STARBELLY.COM
On January 6, 2000, while negotiating the merger agreement but before the
merger agreement was signed, we loaned Starbelly.com $5 million on an unsecured
basis, and, upon signing the merger agreement, we extended Starbelly.com an
additional unsecured $5 million loan. Under the merger agreement, we extended
Starbelly.com additional unsecured loans of $5 million each on March 1, 2000 and
April 4, 2000 because we did not complete the merger by such dates. These loan
amounts are not a part of the merger consideration, although under certain
circumstances (1) Starbelly.com may not be required to pay back all or a portion
of these loans if we become obligated to pay Starbelly.com
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termination fees, and (2) the maturity dates of the loans may be accelerated if
we properly terminate the merger agreement.
EMPLOYMENT AGREEMENTS WITH KEY EXECUTIVES
At the time the merger closes, we will enter into three-year employment
agreements with each of Bradley Keywell, who will become president of HA-LO, and
Eric Lefkofsky, who will become chief integration officer of HA-LO. Under Mr.
Keywell's agreement, so long as Mr. Keywell's employment agreement is in effect,
he will have a right to request the board of directors to nominate his designee,
and if he does so, our board of directors (within legal limits) is required to
present such designee to our shareholders as nominee for election to the board
of directors. Under Mr. Lefkofsky's agreement, so long as his employment
agreement is in effect, he will have the right to request the board of directors
to nominate and the board of directors (within legal limits) is required to
present two designees to our shareholders as nominee for election to the board
of directors. Under each of these agreements, the key executive agrees to the
following:
- maintain confidentiality;
- assign works made for hire to HA-LO; and
- refrain, during the term of the employment agreement and for two years
afterward, from competing against HA-LO or soliciting its employees or
customers.
If either Messrs. Keywell or Lefkofsky defaults under their respective
agreements, certain shares of HA-LO common stock received as Merger
Consideration in which Mr. Keywell or Mr. Lefkofsky, respectively, hold a
beneficial interest will be forfeited. See "--Escrow Agreements."
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
HA-LO AND STARBELLY.COM PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Condensed Balance Sheet reflects
adjustments computed assuming that the merger had closed as of December 31,
1999. The unaudited Pro Forma Combined Statements of Operations reflect
adjustments computed assuming that the merger had closed on March 22, 1999 (the
date of inception of Starbelly.com), and carried forward through December 31,
1999. Accordingly, the effects of pro forma adjustments on income are not
reflected in retained earnings on the Pro Forma Balance Sheet. The pro forma
information gives effect to the merger under the purchase method of accounting
and to the assumptions and adjustments described in the accompanying notes to
the pro forma combined condensed financial statements.
The pro forma combined condensed financial statements are based on the
historical financial statements of HA-LO and the related notes thereto
incorporated herein by reference and the historical financial statements of
Starbelly.com and the related notes thereto included elsewhere herein. These pro
forma statements are presented for informational purposes only and may not
necessarily be indicative of the results that actually would have occurred had
the merger been consummated at the dates indicated, nor are they necessarily
indicative of future operating results or financial position.
HA-LO AND STARBELLY.COM PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------
PRO FORMA PRO FORMA
HA-LO STARBELLY.COM ADJUSTMENTS COMBINED
-------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................... $650,412 $ 347 $ -- $650,759
Cost of sales--Recurring.................... 424,040 309 -- 424,349
Cost of sales--Non-recurring................ 2,653 -- -- 2,653
-------- ------- -------- --------
Gross Profit.............................. 223,719 38 -- 223,757
Selling expenses............................ 94,280 2,689 -- 96,969
General and administrative expenses......... 125,010 6,051 40,328 (D)(G) 171,389
Non-Recurring Charges....................... 27,347 -- -- 27,347
-------- ------- -------- --------
Loss from operations...................... (22,918) (8,702) (40,328) (71,948)
Other income (expense), net................. 355 129 (1,346)(C) (862)
-------- ------- -------- --------
Loss before taxes......................... (22,563) (8,573) (41,674) (72,810)
Income tax benefit.......................... (9,025) -- (3,968)(F) (12,993)
-------- ------- -------- --------
Net loss for the period..................... $(13,538) (8,573) $(37,706) $(59,817)
======== ======= ======== ========
Net loss per share:
Basic/Diluted............................. $ (0.28) $ (0.51) $ (0.99)
Weighted Average Shares Outstanding:
Basic/Diluted............................. 48,598 16,755 (5,234)(E) 60,119
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements.
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<PAGE>
HA-LO AND STARBELLY.COM PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HA-LO STARBELLY.COM ADJUSTMENTS COMBINED
-------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 10,729 $ 3,341 -- $ 14,070
Short-term investments....................... -- -- -- --
Receivables.................................. 178,712 205 -- 178,917
Inventories.................................. 37,746 43 -- 37,789
Prepaid expenses and deposits................ 17,406 220 -- 17,626
-------- ------- -------- --------
Total current assets....................... 244,593 3,809 -- 248,402
-------- ------- -------- --------
PROPERTY AND EQUIPMENT, NET.................... 37,003 1,855 -- 38,858
-------- ------- -------- --------
OTHER ASSETS:
Intangible assets, net....................... 77,111 -- 219,459 (A) 296,570
Due from related party....................... -- 338 -- 338
Other........................................ 21,596 -- -- 21,596
-------- ------- -------- --------
Total other assets......................... 98,707 338 219,459 318,504
-------- ------- -------- --------
$380,303 $ 6,002 $219,459 $605,764
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt......... $ 984 $ 244 -- $ 1,228
Book overdraft............................... 3,177 -- -- 3,177
Accounts payable............................. 58,729 1,920 -- 60,649
Accrued expenses:
Other...................................... 38,565 2,168 -- 40,733
Restructuring.............................. 3,771 -- -- 3,771
-------- ------- -------- --------
Total current liabilities.................. 105,226 4,332 -- 109,558
LONG-TERM DEBT,
less maturities shown above.................. 21,230 558 23,000 (C) 44,788
-------- ------- -------- --------
ACCRUED RESTRUCTURING EXPENSES................. 11,863 -- -- 11,863
DEFERRED LIABILITIES........................... 5,438 -- -- 5,438
-------- ------- -------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PARTICIPATING PREFERRED
STOCK........................................ -- -- 48,688 (A) 48,688
SHAREHOLDERS' EQUITY:
Preferred stock.............................. -- 7 (7)(B) --
Common stock................................. 214,060 18 147,688 (A) 361,766
Note receivable from stockholder............. -- (10) 10 (B) --
Additional paid-in capital................... -- 9,670 (9,670)(B) --
Contingent purchase consideration............ -- -- (23,429) (23,429)
Other........................................ (3,747) -- 24,606 (A) 20,859
Retained earnings (deficit).................. 26,233 (8,573) 8,573 (B) 26,233
-------- ------- -------- --------
Total shareholders' equity................. 236,546 1,112 147,771 385,429
-------- ------- -------- --------
$380,303 $ 6,002 $219,459 $605,764
======== ======= ======== ========
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements.
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<PAGE>
NOTES TO HA-LO AND STARBELLY.COM PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<S> <C>
(A) The following is a summary of the purchase price and its
components assumed for the pro forma financial statements.
Purchase Price:
Common Stock.............................................. $ 147,706
Convertible participating preferred stock................. 48,688
Value allocated to option plan............................ 24,606
Cash...................................................... 19,000
Cost and fees of acquisition................................ 4,000
Less: Net tangible assets acquired.......................... (1,112)
Less: Contingent purchase consideration..................... (23,429)
---------
Goodwill.................................................... $ 219,459
=========
(B) To eliminate the historical equity accounts of
Starbelly.com.
(C) To record the effects of additional financing incurred
to fund the acquisition and the related interest charges
for the period at an interest rate of 7.5%.
</TABLE>
<TABLE>
<CAPTION>
12/31/99
---------
<S> <C>
Assumed additional debt borrowings (cash plus cost and fees
of acquisition)........................................... $ 23,000
Assumed interest rate....................................... 7.5%
---------
Annual interest expense..................................... 1,725
---------
Percentage of period included............................... 78%
---------
Additional interest expense 3/22/99--12/31/99............... $ 1,346
=========
(D) To record amortization of goodwill over 5 years on a
straight-line basis.
12/31/99
---------
Goodwill.................................................... $ 219,459
Amortization period......................................... 5
---------
Annual Amortization expense................................. 43,892
---------
Percentage of period included............................... 78%
---------
Amortization expense 3/22/99--12/31/99...................... $ 34,236
=========
(E) To adjust the weighted average shares for the shares
issued in the acquisition.
12/31/99
---------
Common stock issued in the transaction...................... 14,771
Percentage of period included............................... 78%
---------
Target adjusted weighted average shares outstanding......... 11,521
Target weighted average shares outstanding from
3/22/99--12/31/99......................................... 16,755
---------
Pro forma share adjustment.................................. (5,234)
=========
(F) To record income tax benefit on proforma adjustments
affecting income.
<CAPTION>
12/31/99
---------
Pro-forma loss before taxes. ) (72,810
<S> <C>
Less: Non-deductible goodwill and deferred compensation
amortization.............................................. 40,328
---------
Taxable loss................................................ (32,482)
Tax rate.................................................... 40.0%
---------
Benefit..................................................... (12,993)
Less: Benefit recorded in HA-LO............................. (9,025)
---------
Pro Forma Adjustment........................................ $ (3,968)
=========
(G) To record compensation expense related to contingent
purchase consideration.
<CAPTION>
12/31/99
---------
Contingent Consideration. $ 23,429
<S> <C>
Amortization period......................................... 3
---------
Annual Amortization expense................................. 7,810
---------
Percentage of period included............................... 78%
---------
Amortization expense 3/22/99--12/31/99...................... $ 6,092
=========
</TABLE>
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<PAGE>
STARBELLY.COM SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for Starbelly.com for the period March 22, 1999 (its date
of inception) to December 31, 1999. The selected financial information for the
period has been derived from the Financial Statements of Starbelly.com, which
have been audited by Arthur Andersen LLP, independent auditors to Starbelly.com,
and from the underlying accounting records of Starbelly.com. Operating results
from the date of inception to December 31, 1999 are not necessarily indicative
of future results.
All information contained in the following tables should be read in
conjunction with "Starbelly.com's Management's Discussion and Analysis of
Financial Condition and Results of Operations" (page 77), "Unaudited Pro Forma
Combined Condensed Financial Information" (page 73) and with the Financial
Statements and related notes of Starbelly.com included herein. Certain amounts
from the statements of operation of Starbelly.com have been reclassified to
conform with the presentation below.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
-------------------------
<S> <C>
INCOME STATEMENT DATA:
Net sales................................................. $ 347
Net loss.................................................. $(8,573)
Diluted loss per share.................................... $ (0.51)
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.............................................. $ 6,002
Working capital........................................... $ (523)
Long-term debt, net of current portion.................... $ --
Stockholders' equity...................................... $ 1,112
</TABLE>
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STARBELLY.COM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Starbelly.com intends to create a leading e-commerce marketplace for the
custom-decorated merchandise industry. Starbelly.com believes that its business
model can redefine the traditional market for customized soft and hard goods
with an interactive marketplace that allows its customers to customize
decorations on any product in real-time from any Internet web browser.
Starbelly.com also believes its offerings will extend the reach of current sales
and marketing channels to not only large corporations, but also small- to
mid-size businesses, associations, smaller promotional product distributors, and
consumers.
Starbelly.com intends to unify key aspects of the custom-decorated
merchandise supply chain through integrated fulfillment systems. These systems
will ultimately act together as a single efficient interface between the
end-user and the other elements of the supply chain, such as blank merchandise
suppliers, decorators, customer service representatives and shippers. Starbelly
intends to remove several links in the traditional supply chain, providing its
customers with exceptional convenience, a simplified customizing and ordering
process, faster delivery, lower costs and enhanced customer experience. In
addition, by accessing the national distributor network directly, Starbelly.com
is establishing a virtual distribution network with key distributors that
provides it with just-in-time inventory of a large selection of hard and soft
goods thereby minimizing the inventory requirements for both Starbelly.com and
its customers.
Starbelly.com was incorporated in Delaware on March 22, 1999. Its primary
activities since inception have been raising equity capital to fund operations;
developing and refining its business model; and recruiting and hiring employees
in technology, sales and marketing, operations, and administration. To date,
Starbelly.com has not realized significant revenues and only a small percentage
of such revenues have been generated through the Internet.
RESULTS OF OPERATIONS
Due to Starbelly.com's limited operating history, it believes that its
results of operations are not overly meaningful and should not be relied upon as
an indication of future performance. The results of operations are for the
period from inception, March 22, 1999, through December 31, 1999.
NET SALES. Since inception, Starbelly.com has been in the development stage
and has recognized approximately $347,000 of sales. Substantially all such sales
prior to October 1, 1999 were generated by traditional off-line means.
Starbelly.com's first StarStores came on-line in October 1999 and Internet sales
represented approximately 1% of its sales in the fourth quarter 1999. Net sales
relate to the sale of custom-decorated merchandise to business customers.
Starbelly.com's three largest customers, NFL Properties, Inc., Quaker Oats
Company, and Jim Beam Brands, Co. accounted for approximately 17.3%, 12.9%, and
7.7% of net sales for the period, respectively.
COST OF SALES. Starbelly.com's cost of sales for the period was
approximately $309,000, resulting in a gross profit margin of approximately 11%.
Cost of sales includes the cost of blank product, decoration, and freight and
handling. Starbelly.com's gross profit margin was negatively impacted during the
period by charges incurred to re-decorate products that were initially
incorrectly decorated ($16,600) and COD charges ($4,600) representing
approximately 7.0% of Starbelly.com's total cost of sales. COD charges resulted
from the fact that, due to its limited operating history, Starbelly.com did not
have open credit terms with some of its suppliers. Without the re-decoration and
COD charges, Starbelly.com's gross margin would have been approximately 18.0%.
SALES, MARKETING AND OPERATIONS EXPENSES. Starbelly.com incurred
approximately $2,689,000 of sales, marketing and operations expenses during the
period. These expenses are comprised mainly of
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compensation and benefits for personnel engaged in sales, marketing,
merchandising, business development, and operations; certain consulting costs;
advertising and promotion activities; and other miscellaneous sales and
marketing activities. Starbelly.com expects to incur substantial expenses in
this area in the future as it expands its sales and business development
efforts, builds out its operating infrastructure, and continues to build brand
name recognition through advertising and promotional activities.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Starbelly.com incurred approximately
$3,258,000 of technology and development expenses during the period. These
expenses are comprised primarily of compensation and benefits for personnel
engaged in the design and development of Starbelly.com's website and the
maintenance and support of Starbelly.com's internal systems and infrastructure;
and consulting expenses related to development of Starbelly.com's technology
strategy and website. Starbelly.com believes that it will be necessary to
continue to invest heavily in technology and development to remain competitive.
GENERAL AND ADMINISTRATIVE EXPENSES. Starbelly.com incurred approximately
$2,791,000 of general and administrative expenses during the period. These
expenses are comprised primarily of compensation and benefits for executive and
administrative personnel, facilities, professional services and other general
corporate activities. Starbelly.com believes that its general and administrative
expenses will grow substantially as it expands its infrastructure to support its
business.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Starbelly.com has financed its operations primarily
through the private placement of equity securities, raising approximately
$9.5 million through December 31, 1999. At December 31, 1999, Starbelly.com had
approximately $3.3 million in cash and cash equivalents. Starbelly.com has had
significant negative cash flows from operating activities since inception.
Net cash used in operating activities for the period totaled approximately
$4.9 million. Cash used in operating activities consisted primarily of net
operating losses, increases in accounts receivable, due from related party, and
prepaid expenses, which were partially offset by increases in accounts payable
and accrued expenses.
Net cash used in investing activities for the period totaled approximately
$2.1 million and consisted primarily of capital expenditures for computer and
technology equipment, purchased software, and other equipment.
Net cash provided by financing activities for the period totaled
approximately $10.4 million, comprised primarily from the proceeds from the
private sale of convertible preferred stock. Starbelly.com also borrowed
approximately $848,000 from a bank as an equipment loan.
Starbelly.com believes it will require substantial additional working
capital to continue to fund the growth of its business. Starbelly.com believes
its sale to HA-LO Industries, Inc. will allow it to have the available working
capital to fund the growth of its business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, Accounting for the
Costs of Computer Software Developed for Internal Use. SOP 98-1 requires
entities to capitalize some of the costs related to internal-use software once
the applicable criteria have been met. Starbelly.com has adopted SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, Reporting for the Costs of
Start-Up Activities. SOP 98-5 requires that all start-up costs related to new
operations be expensed as incurred. Starbelly.com has adopted SOP 98-5, which
did not have a material impact on its financial statements.
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<PAGE>
THE BUSINESS OF STARBELLY.COM
GENERAL
Starbelly.com intends to create a leading business-to-business e-commerce
marketplace for the custom-decorated merchandise industry. The
business-to-business e-commerce marketplace facilitates transactions between
users that either utilize the goods or services acquired to produce additional
goods or services, or sell such goods or services directly to consumers via the
Internet or otherwise. This is in contrast to the business-to-consumer
e-commerce marketplace that facilitates transactions between businesses and
traditional "retail" consumers through the Internet medium. Starbelly.com
intends to redefine the traditional market for customized soft and hard goods
with an interactive marketplace that allows its customers to customize
decorations on any product in real-time from any Internet web browser.
Starbelly.com coordinates key aspects of the custom-decorated merchandise
supply chain through integrated and automatic fulfillment systems. These
fulfillment systems act together as a single interface between the end-user and
the suppliers to the industry, such as blank suppliers, decorators, customer
service representatives, offsite producers and shippers. Starbelly.com's systems
are geared to eliminate several links in the traditional supply chain, providing
its customers with exceptional convenience, a simplified customizing and
ordering process, faster delivery, status tracking, lower costs and a more
enjoyable customer experience. In addition, by accessing the national
distribution network directly, Starbelly.com is developing a virtual
distribution network with key distributors that provides it with inventory on a
just-in-time basis of a large selection of soft and hard goods, minimizing
inventory requirements for Starbelly.com and Starbelly.com's customers.
DISTRIBUTION CHANNELS
Starbelly.com intends to implement its custom-decorated merchandise
marketplace so as to provide multiple customized interfaces for four different
distribution channels. The custom-decorated merchandise marketplace includes
those industries which create, sell or otherwise produce promotional products,
marketing services, and advertising specialties, including novelty items and
uniforms. The customized interfaces to which Starbelly.com refers are four
separately designed e-commerce mediums which facilitate order placement for
these four distribution channels: (1) business-to-business,
(2) business-to-consumer, (3) Internet properties, and (4) promotional product
distribution. Each of these customized interfaces is being developed for
Starbelly.com's Web site and StarStores (Starbelly.com's virtual storefront for
its customers). StarStores are customized Web interfaces that are linked to a
customer's Web site which function as online catalogs that can be customized and
adapted to the customer's specific needs. These StarStores present a compelling
affiliate model for Starbelly.com, meaning that they enhance Starbelly.com's
ability to promote the branded identity of its customers with greater
efficiency. Starbelly.com builds StarStores for customers. These are located on
Starbelly.com's servers and are designed to require limited user maintenance.
Starbelly.com currently has agreements with over 100 businesses to create
customized StarStores and as of March 15, 2000 has deployed over 30 of these
StarStores. Starbelly.com believes its Web site, Starbelly.com, will be
accessible to customers by June 1, 2000. The Web site will be customized for
both private password secured access and general public access.
In management's estimate, Starbelly.com plans to provide these customized
interfaces for all four of its distribution channels by June 1, 2000, without
facing any significant technological obstacles, requiring any additional
contracts or commercial relationships or incurring any inordinate expenses.
However, Starbelly.com management does believe additional usability testing
needs to be completed and can be completed prior to the anticipated availability
date of June 1, 2000. Starbelly.com will test its integrated fulfillment system
against its internal Quality Assurance program the week of April 7, 2000, which
will test for functionality and usability. By April 30, 2000, Starbelly.com
believes it will have commenced more expansive trials, including principally its
system's password protection features, with
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select audiences, which it expects to complete by May 30, 2000. Starbelly.com
expects that its Web site will become publicly available by June 1, 2000, but
has not determined when it will officially launch its public access to its Web
site, or promote it aggressively.
As discussed above, Starbelly.com targets its marketing efforts on four
distribution channels:
BUSINESS-TO-BUSINESS. Starbelly.com intends to offer multiple solutions to
meet the diverse needs of participants in the business-to-business market.
First, Starbelly.com intends to provide businesses with a password protected
private version of Starbelly.com for their promotional product needs including
storing and policing the use of their logos. Starbelly.com and its customers can
store digital copies of logos on Starbelly.com's password protected site. The
site will secure the logos so that they only are accessible by individuals
possessing the relevant passwords so that, for example, non-authorized parties
will not have access to a company's trademarked logo. This site will also use
digital asset management system software which will regulate and govern the
manner in which a customer's logo may be applied to merchandise. For instance,
customers providing the logo will be able to limit the number, size, type or
color of the product to which their digital logos can be applied and also
establish limits as to size, color and other matters with respect to the manner
of presentation of the logo itself. Starbelly.com believes that the customer's
ability to limit the use of their logos in this manner will be important to
them. Second, customers will be able to access Starbelly.com's marketplace
through a private, customized Starbelly.com interface for the procurement of
uniforms. Starbelly.com believes that that will permit certain customers to sell
in the business-to-business market while maintaining very little inventory and
customize their marketing efforts for specific regions or other criteria. Third,
Starbelly.com intends to provide hosted StarStores for its business customers
that reside on an intranet or extranet and provide a customized "company store"
that carries selected merchandise chosen by Starbelly.com's customer.
Starbelly.com has developed over thirty StarStores since October 1999 and
intends to continue to implement StarStores because it believes that is an
effective marketing strategy. Finally, Starbelly.com intends to enable its
customers to market custom created promotional/incentive products to their
customers using selections from Starbelly.com's marketplace.
INTERNET PROPERTIES. Starbelly.com intends to provide content sites,
community sites and commerce sites on the Web with virtual StarStores offering
merchandise featuring these sites' own brands or logos with virtually no
inventory commitments for those sites. In addition, Starbelly.com can offer high
traffic Web sites, such as portals and community sites, the ability to offer the
full Starbelly.com site on their Web site with Starbelly.com providing the
hosting and fulfillment. This function is expected to be available June 1, 2000
after additional usability testing is completed.
PROMOTIONAL PRODUCT DISTRIBUTORS. Starbelly.com is designed to make
available to the fragmented network of over 17,000 small- to medium-sized
promotional product distributors their own private label versions of
Starbelly.com. This will provide participating distributors with an Internet
presence and access to Starbelly.com's automated fulfillment system, which would
be expected to facilitate business development for those distributors.
Starbelly.com's role in sales on these sites will be invisible to the purchasers
from these distributors. It is anticipated that pricing by Starbelly.com would
include a portion of the revenue generated from orders on those sites.
Starbelly.com expects to implement this marketing strategy, similarly to the way
it implemented the StarStores strategy which it will continue to implement to
effectively create captive markets.
BUSINESS-TO-CONSUMER. Starbelly.com plans to offer consumers the ability to
interactively customize and design products on Starbelly.com's Web site by
June 1, 2000. The Starbelly.com Web site will offer consumers access to an
extensive library of blank products, as well as a database of images that can be
used to decorate the products. Consumers will also be able to store their own
images to be used for decoration. In addition, Starbelly.com intends to offer
templates that provide their customers with ideas and graphic options to assist
them in designing a product from blanks, as well as offer predesigned
merchandise selected in anticipation of consumer tastes or buying trends during
or for certain seasons,
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holidays or special events. However, additional usability testing needs to be
completed prior to the anticipated availability date.
TARGET CUSTOMERS
Starbelly.com's target market consists of all companies, groups and
associations that are engaged in promoting their brands or identities through
the application of their brands to physical merchandise. For example, brand
managers for beverages, food, products, financial services, manufactured
products, consumer and business-to-business services, and team sponsors will be
able to design or select a product designed by Starbelly.com through the
Internet and place an order for any quantity of items selected. Additionally,
team sponsors, universities, colleges, national fraternities and sororities and
other groups may also lodge their logos, or other identity with Starbelly.com's
Web site and permit ordering by authorized individuals. These are essentially
the same target customers as Starbelly.com's "bricks-and-mortar" competitors.
Starbelly.com plans to use the Internet to provide more services to a larger
audience, particularly to smaller enterprises, than existing service providers.
ORDER FULFILLMENT
Starbelly.com has developed an integrated fulfillment system which can be
used to coordinate and track each stage in the process of the supply of
promotional products, including preparation, manufacture, distribution, and
ultimate delivery of the end product, other than the supply of blank product.
Starbelly.com primarily relies on its automated fulfillment system designed to
integrate the front-end customer interface system with the back-end production
system. The front-end customer interface system receives and processes order
placement through the specially designed web page for the distribution channel
through which the order is placed. The back-end production system fulfills
orders through automated production scheduling, tracking and delivery of both
blanks and products with Starbelly.com's suppliers. Starbelly.com believes that
its automated fulfillment system provides a main advantage over its competitors.
Starbelly.com directly performs or has established relationships with key
suppliers at each stage of the process. As a result, it intends to provide its
customers with a one-stop source for their custom-decorated merchandise.
Starbelly.com generally does not (and plans not to) own the decoration
machines or employ or manage the people operating them. Starbelly.com intends to
require its contract suppliers (which include, for example, embroiderers and
screen press operators) to use Starbelly.com's production automation systems and
quality control procedures and be connected by the Internet to Starbelly.com.
Through these systems, Starbelly.com will be able to monitor and schedule its
suppliers' production of Starbelly.com ordered products. Starbelly.com has
entered into more than thirty contractual relationships with suppliers to
implement its production automation systems and quality control procedures.
Starbelly.com has developed non-exclusive relationships with approximately 45
blank suppliers, including soft goods distributors and hard goods suppliers and
is actively seeking to develop more of such relationships with other
distributors and suppliers. Starbelly.com does not believe that any of these
relationships which provide Starbelly.com with preferred pricing terms but are
non-exclusive with respect to the supplier and Starbelly.com are material to its
business.
In certain cases, Starbelly.com may aim to establish a relationship with
selected soft goods suppliers where Starbelly.com would provide on-site
decorating facilities at the distribution warehouses of the supplier. The
decorating facilities would provide decoration services for products that are
sold on Starbelly.com's Web site and other sites maintained by Starbelly.com,
and the supplier would agree that Starbelly.com will be the exclusive supplier
of decorated goods that the supplier sells. Starbelly.com currently has an
agreement with Broder Bros., a large soft goods distributor, to establish a
relationship of this type and is in the process of establishing this
relationship at one of that distributor's distribution warehouses.
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When fully operational, Starbelly.com anticipates that its proprietary
technology will provide real-time tracking of orders at any stage within the
production process. Starbelly.com believes that access to such real time
information from its suppliers will strengthen its relationships with those
suppliers. Starbelly.com believes that its fulfillment system is flexible and
scalable and will allow it to control the supply chain while minimizing capital
expenditures.
Starbelly.com intends to align its relationships and asset structure (Web
site, StarStore arrangements, integrated and automated fulfillment system and
customized interfaces for the four target distribution channels) with respect to
soft goods to coordinate the entire production and fulfillment process. In doing
so, Starbelly.com expects to realize significant economies of scale and cost
savings that it will be able to pass on to its customers. With respect to hard
goods, however, suppliers with which Starbelly.com has placed orders
traditionally stock the inventory, control the pre-press steps and decorate the
products. Starbelly.com has access to over 2,500 of these hard goods
distributors who provide it with a one-stop supply of fully-decorated goods and
a large, virtual inventory of hard goods. As of March 15, Starbelly.com has
ordered products through over 100 of these suppliers and distributors.
Management believes that blank soft goods are, and will continue to be,
available on economical terms. This expectation of availability of blanks on
economical terms is supported by commercial experiences of both Starbelly.com
and HA-LO. As of March 15, 2000 orders processed by Starbelly.com since
inception were comprised of approximately 40% hard goods and 60% soft goods.
Starbelly.com intends to further streamline the production process by giving
its customers greater control over the design of their products. In the
traditional offline process, advertising specialty companies work with
decorators before the outsourced decoration process can begin. This model tends
to result in numerous meetings and cost mark-ups, in addition to a three to six
week delivery time. In contrast, under Starbelly.com's model, customers will use
the multiple interfaces to its StarStores and Starbelly.com Web site to select
their blanks, create their designs and approve online samples all with mouse
clicks. This will enable the customer to complete the pre-press and approval
process before the initial order is placed and would reduce, and in some cases
eliminate, the pre-press errors that can occur in the offline process.
ADVANTAGES TO STARBELLY.COM'S MARKETPLACE SOLUTIONS
Starbelly.com's marketplace solutions are the (1) four customized web site
interfaces, (2) StarStores arrangements and (3) its Web site, all used in
conjunction with Starbelly.com's integrated and automated fulfillment system.
The marketplace solutions are intended to or are designed to provide the
following key benefits:
"CLICKS AND MORTAR" INFRASTRUCTURE. Starbelly.com intends to combine the
interactive advantages of the Internet, its integrated production, tracking and
delivery software and access to significant decorating capacity to provide a
customer focused solution to its customers' needs. Starbelly.com's relationships
with its current decoration suppliers provide committed capacity to decorate
30,000 screenprint units per day and 10,000 embroidered units per day.
Management believes these capacities may be expanded readily to the extent
needed to meet increased customer demand.
VIRTUAL INVENTORY. Starbelly.com's access to distributors provides it and
its customers with just-in-time inventory capabilities. For this reason,
Starbelly.com and its customers should be able to minimize their inventories of
decorated products.
BRAND VARIETY. The blank product market includes some of the most
recognizable brands. The broad selection of blank products accessible to
Starbelly.com provides its customers with access to the brands that enable its
customers to make these brands their own through customization. In addition,
Starbelly.com plans to enhance its own brand through association with these
recognizable brands.
INTERACTIVE AND CUSTOMIZED DECORATION. Customers will be able to design
their own products in real-time with the results of their customization
presented immediately online. This process not only
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pushes the design power and accountability to Starbelly.com's customers but also
eliminates the time-consuming pre-press aspects of the traditional supply chain.
NO MINIMUM ORDER SIZE. Starbelly.com's fulfillment infrastructure,
including its Internet site and its automated production system, which currently
provides integrated process of selecting the product to be decorated and the
method and content of the decoration, permits customers to generally order in
any quantity, including a single piece, which deviates from the traditional
sourcing system that requires larger orders.
As discussed above, Starbelly.com has software in place to monitor the
production process and has established extensive relationships with suppliers,
decorators and other providers of goods and services through the process from
purchase of "blank" goods to delivery of the finished goods.
SIGNIFICANTLY LOWER PRICES RELATIVE TO TRADITIONAL PROVIDERS. Starbelly.com
believes that due to favorable pricing from its network of distributors and its
ability to deal directly with suppliers through the Internet, it is able to
purchase goods and services at prices which are generally less than those which
must be paid by most off-line providers who often purchase products from
commissioned distributors.
CUSTOMERIZATION.-TM- Rather than a salesperson-driven business model,
Starbelly.com's marketplaces are designed to be buyer-focused. Starbelly.com's
buyers "pull" the entire manufacturing process, meaning that once an order is
placed, the manufacturing process is triggered. Starbelly.com believes that its
interactive, dynamic user experience that includes "cutting-edge" customization
technology, will result in adoption and loyalty among its customer groups.
DIGITAL ASSET MANAGEMENT CAPABILITIES. Starbelly.com stores its customers'
digital artwork and maintains a database such that it is easily accessible at
any time. In addition, Starbelly.com allows its customers to determine the
business constraints around which their valuable brands may be used for
decorated products, thereby providing the proper "policing" of its customers'
digital assets.
PRODUCT CATEGORIES AND BRANDS
Starbelly.com offers a large selection of soft and hard goods in its
custom-decorated merchandise marketplace. These include:
<TABLE>
<CAPTION>
SELECTED LIST OF SOFT GOODS OFFERED SELECTED LIST OF HARD GOODS OFFERED
- -------------------------------------------- --------------------------------------------
<S> <C> <C> <C>
T-shirts Windwear Leather Items Pottery
Polo shirts Uniforms Paperweights Pins/Pendants
Sweatshirts Robes Awards Magnets
Hats Towels Food Products Sunglasses
Polar Fleece Sheeting Candy/Gum Coolers
Jackets/Movers Outerwear Children's Furniture Calendars
Button-down shirts Corporate Uniforms Mugs Computer Items
Denim Jackets Aprons Plates Golf Balls
Windbreakers Cooking Mits Crystal Beverage Holders
Baby Clothes Bags/Luggage Frames Handy Knives
Hunting Clothes Umbrellas Clocks Toys
Sweaters Briefcase/Folios Pens/Pencils Luggage Tags
Scarves Mouse Pads
</TABLE>
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Through the broad-based distribution market for blanks, Starbelly.com also
offers its customers access to a wide range of well-known brands for soft and
hard goods. Starbelly.com has not generated any international sales thus far.
However, through its Internet site, Starbelly.com products are accessible to
customers worldwide. Starbelly.com has made arrangements with shipping companies
to provide for international delivery of products. Starbelly.com intends to
offer through its Web site blanks of the following brands:
SELECTED LIST OF BRANDS OFFERED
<TABLE>
<S> <C>
Champion Jerzees
Hanes Gildan
Lee Munsingwear
Columbia Sportswear Jonathan Corey
Fruit of the Loom Outer Banks
Cross Creek Spaulding
Russell Athletic Arrow
Country Cottons Timberline Colorado
Gerber Childrenswear Fieldcrest Cannon
Weatherproof Bic pens
Bill Blass Cross pens
Eastpak Waterford
Patagonia Swiss Army
Rawlings Golden Bear
Antigua Bike
Port Authority Bickies
London Fog Anvil
Van Heusen New Era
</TABLE>
TECHNOLOGY
Starbelly.com is developing its front-end interactive customization, its
digital asset management and its back-end fulfillment technology to handle a
high volume, complex supply chain. The key components of its technology include:
ARCHITECTURE
Starbelly.com's underlying architecture not only addresses structure and
behavior but has been designed to address usage, functionality, performance,
resilience, reuse, comprehensibility, economic and technology constraints and
trade-offs, and aesthetic concerns. Starbelly.com has followed proven design
methodologies to create a reliable and adaptable architecture.
The Starbelly.com network provides online sales and procurement solutions
for the customized apparel industry. Starbelly.com's technology is based on thin
client architecture which means the applications are hosted on Starbelly.com's
servers, accessed through user's Internet browsers and are highly scalable to
support growth in transactions and offerings. This allows users to access
Starbelly.com's system with no special software other than their browsers on
their computers. This allows access to Starbelly.com's system without the need
to obtain or install new software and permits
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faster operation, as large software programs need not be down loaded by the end
user, and the end users benefit from the additional computing power of the host
computer.
Starbelly.com's production data center is currently located at a data center
of Level 3, a Tier I provider, in Chicago, Illinois. This data center provides
24 hours-a-day, 7 days-a-week system support and connectivity to all major
Internet backbones and provides bandwidth via redundant high-speed connections.
SALES AND MARKETING
Starbelly.com's sales and marketing approach is designed to establish broad
business, affinity group and consumer recognition of Starbelly.com and its
custom-decorated merchandise marketplace. Starbelly.com intends to foster
customer relationships whereby its customers rely on its marketplace and
integrated fulfillment system for their custom-decorated merchandise needs.
Starbelly.com sells its business-to-business marketplace solutions through its
direct sales force and its lead generation campaigns. Access to Starbelly.com's
interfaces and integrated fulfillment system permits its sales force to become
more productive by reducing the time and energy they must expend sourcing,
tracking, monitoring, and fulfilling orders through automation of those
processes. Starbelly.com's direct sales force segments the business-to-business
market into four vertical segments to provide increased focus and customer
service capabilities. These segments are corporate sales, entertainment sales,
Internet content sales and retail sales.
Starbelly.com intends to continue to aggressively promote its brand name to
access business-to-business opportunities as well as drive traffic to
Starbelly.com by combining traditional offline strategies, including public
relations, print and radio advertising, with online marketing vehicles such as
banner advertising and strategic partnerships with relevant Web sites and
portals. Starbelly.com believes that by establishing partnerships with many of
the leading portals, it will succeed in building a large and diverse customer
base that utilizes its fulfillment engine on a private label basis to purchase
products. Starbelly.com has established strategic relationships with several
leading Internet companies, including procurement portals such as Ariba,
Intelisys, Purchase Pro, and Concur Technologies. Additionally, in
September 1999, Starbelly.com entered into a contract with Yahoo!, providing for
Internet based audio and video transmissions (commonly known as web casts) to
promote Starbelly.com and the services and products provided by it on Yahoo!'s
Web site. The contract runs for a period of two years, although either party can
terminate the agreement in certain periods prior to the 6 month or 18 month
anniversary of the agreement. Starbelly.com has indicated to Yahoo! in one of
those periods that it may wish to renegotiate the terms of the agreement in
connection with the proposed merger. As of March 15, 2000, Starbelly.com had a
sales organization of 42 people, comprising sales, marketing, and merchandising
personnel, many of whom have experience in the custom-decorated merchandise
industry. Companies at which Starbelly.com's sales team has gained experience
include HA-LO, Cyrk and Group II Communications.
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CUSTOMERS
Starbelly.com's three largest customers in terms of sales for the period
ended December 31, 1999, NFL Properties, Inc., Quaker Oats Company and Jim Beam
Brands, Co. accounted for 17.3%, 12.9% and 7.7% of net sales, respectively. A
selected list of other Starbelly.com customers includes:
<TABLE>
<S> <C>
Art.com Lettuce Entertain You Enterprises
Arthur Andersen Starbucks
Chase Manhattan Bank MarchFirst
Chevron Young Presidents Organization
Foote, Cone & Belding
Harris Bank
</TABLE>
COMPETITION
Electronic commerce generally, and the online custom-decorated merchandise
market specifically, are new, rapidly evolving and intensely competitive, and
Starbelly.com expects such competition to intensify in the future. Currently,
Starbelly.com competes with a broad range of companies including traditional
custom-decorated merchandise retailers, direct retailers (E.G., L.L. Bean and
Land's End), promotional product firms (E.G., HA-LO and Cyrk), advertising
agencies, and apparel or hard goods manufacturers who sell direct to consumers.
These competitors sell most of their products through direct sales forces or
mail-order catalogs.
While Starbelly.com does not believe that it has any direct online
competition in the custom-decorated merchandise market that combines an
interactive marketplace and integrated fulfillment system, there are several Web
sites focused on electronic commerce opportunities in this area. These include
companies like iPrint.com, imagex.com and MadeToOrder.com that could expand
their offerings to compete more directly with Starbelly.com. As the market for
online custom-decorated merchandise grows, other companies, including
established retailers and distributors, are likely to develop online services
that compete directly with Starbelly.com's services.
OTHER INFORMATION
FACILITIES AND EMPLOYEES
Starbelly.com's headquarters are located in Chicago, Illinois, at a location
where Starbelly.com leases approximately 25,000 square feet of space. As of
March 15, 2000, Starbelly.com had 174 employees, including 9 in general
management, 78 in technology, 42 in sales and marketing and 45 in finance and
operations. Starbelly.com also employs an additional 31 full-time contract
employees.
INTELLECTUAL PROPERTY
Starbelly.com relies on a combination of copyright, trade secret trademark,
confidentiality procedures and contractual provisions to protect its proprietary
rights in its products and technology. Starbelly.com generally enters into
confidentiality agreements with its employees and consultants and limits access
to, and distribution of, its proprietary information. Starbelly.com maintains
trademarks, to identify the source of its products, development tools and
service offerings and relies upon trademark laws to protect its proprietary
rights in these marks.
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YOUR BOARD OF DIRECTORS AFTER THE MERGER
At the time of the merger, your board of directors will be increased from
seven to ten directors. All seven persons who are members of your board of
directors immediately before the merger will continue to serve as directors
immediately after the merger. Your board will then fill the three vacancies
created by the board expansion with persons requested to be nominated by Bradley
Keywell, Starbelly.com's chief executive officer, and Eric Lefkofsky,
Starbelly.com's president. We anticipate that Mr. Keywell and Mr. Lefkofsky will
request nomination of themselves to fill two of the three vacant positions on
your board, but they have not yet advised HA-LO whom they intend to request be
nominated to fill the vacancies.
Bradley A. Keywell, age 30, co-founder of Starbelly.com, has been a director
and the chief executive officer of Starbelly.com since its inception on
March 22, 1999. Upon completing the merger, Mr. Keywell will serve as president
of HA-LO and, under an employment agreement, will have the right to nominate a
director to serve on the HA-LO board for a period of time. In addition, since
August 1994, Mr. Keywell has served as director and president of Brandon Apparel
Group, Inc., Chicago, Illinois, which is a manufacturer and marketer of licensed
apparel.
Eric Lefkofsky, age 30, co-founder of Starbelly.com, has been a director and
the chairman of the board, secretary and treasurer of Starbelly.com since its
inception on March 22, 1999. Upon completion of the merger, Mr. Lefkofsky will
serve as chief integration officer of HA-LO and, under an employment agreement,
will have the right to nominate two directors to serve on the board for a period
of time. In addition, since August 1994, Mr. Lefkofsky has served as director
and chief executive officer of Brandon Apparel Group, Inc., Chicago, Illinois.
STOCK OWNERSHIP
The following table sets forth, as of March 27, 2000, certain information
concerning the beneficial ownership of our common stock by (1) our directors,
and (2) all directors and executive officers as a group. Unless otherwise
indicated, each person has sole investment and voting power (or shares such
powers with his or her spouse) with respect to the shares shown as beneficially
owned by that person. No other person or entity beneficially owns 5% or more of
our common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES APPROXIMATE
BENEFICIALLY OWNED APPROXIMATE PERCENT OF CLASS
NAME AND ADDRESS(1) ON MARCH 27, 2000 PERCENT OF CLASS AS ADJUSTED(2)
- ------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
Lou Weisbach................................... 3,403,203(3) 6.8% 4.7%
Linden D. Nelson............................... 3,121,926(4) 6.3% 4.4%
John R. Kelley, Jr............................. 804,492(5) 1.6% 1.1%
Seymour N. Okner............................... 684,454(6) 1.4% *
Marshall J. Katz............................... 454,772(7) * *
Thomas Herskovits.............................. 123,846(8) * *
Brian Hermelin................................. 15,012 * *
All Directors and Executive Officers, as a
group (14 persons)........................... 8,950,815(9) 17.5% 12.2%
</TABLE>
- ------------------------
(1) The address of each executive officer and director of the Company is in care
of the Company, 5980 West Touhy Avenue, Niles, Illinois 60714.
(2) Adjusted to give effect to the issuance in the merger and upon exercise of
the assumed options of 17 million shares of our common stock and
5.1 million shares of our convertible preferred stock.
(3) Includes 806,251 shares subject to immediately exercisable options held by
Mr. Weisbach, and 2,196,602 shares owned by the Lou Weisbach Revocable
Trust. Excludes 127,500 shares held in
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trust for the benefit of Mr. Weisbach's wife and 76,780 shares held in
trusts for the benefit of Mr. Weisbach's children, over which Mr. Weisbach
has no sole or shared powers to vote or dispose.
(4) Includes 43,372 shares owned by Maple Lane Acquisition Limited Liability
Company ("Maple Lane"), of which Mr. Nelson is the managing member; 131,250
shares owned by Mr. Nelson's wife; 78,300 shares held by a charitable
foundation of which Mr. Nelson is President; and 485,739 shares subject to
immediately exercisable options. Excludes 262,500 shares held in trusts for
the benefit of Mr. Nelson's children, over which Mr. Nelson has no voting or
dispositive powers.
(5) Includes 20,834 shares subject to immediately exercisable options.
(6) Includes 45,000 shares subject to immediately exercisable options held by
Mr. Okner, 529,241 shares owned by the Seymour N. Okner Revocable Trust,
99,667 shares held by a charitable foundation of which Mr. Okner is the
President, and 46 shares held by Mr. Okner's spouse. Excludes shares held in
trusts for the benefit of two of Mr. Okner's children, over which Mr. Okner
has no sole or shared powers to vote or dispose and in which Mr. Okner's
spouse is a trustee.
(7) Includes 451,172 shares subject to immediately exercisable options held by
Mr. Katz.
(8) Includes 32,718 shares held jointly with Mr. Herskovits' wife; 11,250 shares
owned by Mr. Herskovits' minor son; and 71,253 shares subject to options
held by Mr. Herskovits that are exercisable during the Measurement Period.
(9) Includes 2,178,829 shares subject to immediately exercisable options.
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO INCREASE
AUTHORIZED CAPITAL STOCK
Your board of directors believes that it is in the best interests of HA-LO
to amend Article Four of HA-LO's articles of incorporation to increase the
number of shares of its common stock that the Company is authorized to issue
from 100 million shares to 250 million shares and the number of shares of
preferred stock that the Company is authorized to issue from 10 million shares
to 20 million shares. The text of the proposed amendment is attached as
Exhibit E to this proxy statement.
As of March 27, 2000, 48,954,836 shares of our common stock were issued and
outstanding, 9,000,000 shares of our common stock were reserved for issuance
upon the exercise of options granted and to be granted under the 1997 Stock
Plan, 5,834,822 shares of our common stock were reserved for issuance upon the
exercise of options granted and to be granted under HA-LO's 1992 stock option
plan, and 755,473 shares of common stock were reserved for issuance upon the
exercise of other options and warrants we have granted. If the merger is
completed, 17 million shares of our common stock will be issued in the merger or
reserved for issuance upon exercise of the Starbelly.com stock options being
assumed by HA-LO and an additional 5.1 million shares will be reserved for
issuance upon the conversion of the convertible preferred stock to be issued in
the merger.
As of March 27, 2000, no shares of our convertible preferred stock were
outstanding. If the merger is completed, an aggregate 5.1 million shares of
convertible preferred stock will be issued in the merger or reserved for
issuance upon exercise of the assumed Starbelly.com stock options.
If approved, the increased number of authorized shares of common stock and
preferred stock will be available for your board to issue for purposes and
consideration as your board of directors may approve. Subject to the approval of
an amendment to the Company's articles of incorporation to permit the board to
provide for the issuance of preferred stock without shareholder approval as
described below, no further vote of holders of our common stock will be required
for such issuance, except as provided under Illinois law, the rules of the New
York Stock Exchange (or the securities exchange
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where our capital stock may in the future be listed) or as may otherwise be
agreed to by the Company. See "Description of the Convertible Preferred
Stock--Protective Provisions" (page 54). The availability of additional shares
of common stock and preferred stock for issue, without the delay and expense of
obtaining the approval of shareholders at a special meeting, will afford us
greater flexibility in acting upon proposed transactions. Other than the shares
of common stock and convertible preferred stock to be issued in the merger and
shares reserved for issuance as described above, we currently have no specific
plans or arrangements to issue additional common or preferred stock; however,
from time to time we have explored various acquisition opportunities.
Nevertheless, your board of directors may consider the advisability of issuing
preferred stock after the completion of the merger in order to provide funds to
repay a portion of the indebtedness incurred in connection with the merger, for
working capital or for other corporate purposes. Your board of directors
believes that the availability of additional common stock and preferred stock
will afford HA-LO increased flexibility should appropriate opportunities arise.
The additional shares of common stock for which we are seeking your
authorization would be identical to the shares of common stock now authorized.
Holders of our common stock do not have preemptive rights to subscribe for
additional securities which may we may issued in the future. The additional
shares of preferred stock for which we are seeking your authorization would be
issued in such series with such dividend rates, liquidation preferences, terms
of redemption, sinking fund provisions, conversion rights and voting rights as
may be established by your board of directors without further approval of
holders of common stock if the proposed amendment described below under
"Proposed Amendment to the Company's Articles of Incorporation Relating to the
Issuance of Preferred Stock" is approved.
You should be aware that the additional shares of common stock and preferred
stock for which we are seeking your authorization would be available for your
board of directors to issue and could be used for purposes that some might
consider to be in defense of a potential takeover threat. We would be able to
sell these shares to purchasers who might side with your board of directors in
opposing a takeover bid which your board determines not to be in the best
interests of HA-LO and its shareholders. Issuing new shares could discourage
persons seeking to gain control of HA-LO in other ways as well. In the event
someone tries to take over HA-LO by purchasing a substantial amount of our
common stock or convertible preferred stock, and if this person acquired this
stock intending to effect a merger, a sale of all or any part of our assets, or
a similar transaction, our issuance of new shares could be used to dilute the
stock ownership of such person.
Neither this amendment nor the proposed amendment described below under
"Proposed Amendment to the Company's Articles of Incorporation Relating to the
Issuance of Preferred Stock" is directed at any specific effort to obtain
control of HA-LO that we know of. Your board of directors does not currently
intend to solicit a shareholder vote on any other proposal relating to a
possible takeover of HA-LO. However, your board of directors intends to study
developments in this area, and, if additional anti-takeover measures are deemed
desirable, your board will adopt, or propose to our shareholders to adopt, such
additional measures.
Approval of this proposal requires the affirmative vote of persons who hold
a majority of the outstanding shares of our common stock. Broker non-votes and
abstentions will count as votes cast AGAINST this proposal. Your board believes
that the proposed increase in the number of authorized shares is in the best
interests of HA-LO and its shareholders and unanimously recommends that
shareholders vote FOR the proposed amendment. If the merger is approved, the
merger will be completed even if this proposal to amend our articles of
incorporation is not approved.
89
<PAGE>
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION RELATING TO THE
ISSUANCE OF PREFERRED STOCK
Your board of directors is authorized to provide from time to time for the
issuance of up to 10 million shares (20 million shares if the preceding proposal
is approved) of preferred stock in one or more series and to fix the
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations, restrictions and privileges of each series
of preferred stock, including the serial designation and authorized number of
shares, the dividend rates, liquidation preferences, terms of redemption,
sinking fund provisions, conversion rights and voting rights. Although the
company's articles of incorporation purport to enable your board to take these
actions without shareholder approval, the articles of incorporation also provide
that if preferred stock is issued as a class, then your board of directors is to
determine liquidation and dividend rights by filing articles of amendment to the
articles of incorporation prior to the issuance of any shares of the "preferred
class." Because under Illinois law the adoption of an amendment to the articles
of incorporation requires shareholder approval, the inclusion of this provision
in our articles of incorporation effectively negates the power which would
otherwise be vested in your board to provide for the issuance of preferred stock
without shareholder action.
In order to increase the flexibility of the board of directors and enable it
to provide for the issuance of preferred stock without the significant delay and
expense which would result from having to obtain prior shareholder approval,
your board has adopted, subject to shareholder approval, an amendment to Article
Four of HA-LO's articles of incorporation to delete the requirement that
liquidation and dividend rights be determined through an amendment to the
articles of incorporation. The text of the proposed amendment is attached as
Exhibit E to this proxy statement. If this proposal is approved, no further vote
of HA-LO shareholders will be required to fix the terms of and issue shares of
preferred stock, except as required under Illinois law, the rules of the New
York Stock Exchange (or the securities exchange where our capital stock may in
the future be listed) or as may otherwise be agreed to by the Company. See,
however, "Description of the Convertible Preferred Stock--Protective Provisions"
(page 54).
The issuance of preferred stock, while providing the board of directors with
flexibility in connection with possible acquisitions, financings or other
corporate purposes, may have the effect, as described above, of delaying,
deferring or preventing a change of control of the Company. Except for the
issuance of convertible preferred stock pursuant to the merger agreement and
upon exercise of assumed stock options, the Company has no present plans to
issue any shares of preferred stock. See, however, "Proposed Amendment to the
Company's Articles of Incorporation to Increase Authorized Capital Stock."
Approval of this proposal requires the affirmative vote of persons who hold
a majority of the outstanding shares of our common stock. Broker non-votes and
abstentions will count as votes AGAINST this proposal. Your board believes that
the proposed amendment is in the best interests of HA-LO and its shareholders
and unanimously recommends that shareholders vote FOR the proposed amendment. If
the merger is approved, the merger will be completed even if this proposal to
amend our articles of incorporation is not approved.
PROPOSED POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL MEETING
Your board of directors may determine that it will recommend that the
special meeting scheduled for May 3, 2000 be postponed or adjourned. One reason
for this action would be to allow additional time for management to solicit
proxies in support of the merger or the other proposals at the meeting. Approval
of this action by our shareholders would require the affirmative vote of a
majority of the shares represented at the meeting in person or by proxy. An
abstention or failure to vote on this proposal will NOT count as votes against
this proposal. Your board of directors recommends a vote FOR adoption of the
proposal to postpone or adjourn the special meeting if requested by your board
of directors.
90
<PAGE>
SUBMISSION OF FUTURE SHAREHOLDER PROPOSALS
The 2000 Annual Meeting of Shareholders is presently scheduled to be held on
or about June 9, 2000. Any proposals of shareholders intended to be personally
presented at such meeting were to have been received by the Secretary of HA-LO
for inclusion in HA-LO's proxy statement for the annual meeting and form of
proxy by November 30, 1999. Any proposals of shareholders intended to be
personally presented at such meeting (but not to be included in HA-LO's proxy
statement or form of proxy) were to have been received by the Secretary of HA-LO
by February 13, 2000.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy our filed reports, statements or
other information at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our public filings are also
available from commercial document retrieval services and at the Internet World
Wide Web site maintained by the SEC at "http://www.sec.gov." Reports, proxy
statements and other information about us also may be inspected at the NASD's
offices at 1735 K Street, Washington, D.C. 20006.
As allowed by SEC rules, this proxy statement does not contain all the
information you can find in the Registration Statement or its exhibits.
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important business and financial
information by referring you to another document separately filed with the SEC.
The information incorporated by reference is deemed to be part of this proxy
statement, except for any information superseded by information contained
directly in the proxy statement. This proxy statement incorporates by reference
the following documents previously filed by us with the SEC. These documents
contain important information about our company and its business and finances.
<TABLE>
<CAPTION>
SEC FILINGS PERIOD
- ----------- ------
<S> <C>
Annual Report on Form 10-K................... Year ended December 31, 1999
Current Report on Form 8-K................... Dated January 21, 2000
Current Report on Form 8-K................... Dated March 23, 1999
Description of common stock contained in
Registration Statement, and amendments and
reports updating this description............ Dated October 20, 1992
</TABLE>
We are also incorporating by reference additional documents we may file with
the SEC between the date of this proxy statement and the date of our special
meeting.
If you are one of our shareholders, we may have sent you some of the
documents incorporated by reference, but you can still obtain those documents
through us, or the SEC, or the SEC's Internet World Wide Web site described
above. Documents incorporated by reference are available from us without charge,
excluding their exhibits unless specifically incorporated by reference as an
exhibit to
91
<PAGE>
this proxy statement. Documents incorporated by reference in this proxy
statement may be obtained from us upon request in writing or by telephone at the
following address and phone number:
HA-LO Industries, Inc.
5980 West Touhy Avenue
Niles, Illinois 60714
Attention: Gregory J. Kilrea
Telephone: (847) 647-2300
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM US, PLEASE DO SO BY APRIL 21,
2000 TO RECEIVE THEM BEFORE THE SPECIAL MEETING. Requested documents will be
mailed to you by first-class mail, or other equally prompt means, within one
business day after we receive your request.
You should rely only on the information contained or incorporated by
reference in this proxy statement to vote your shares at the special meeting. We
have not authorized anyone to provide you with information that is different
from that contained in this proxy statement. This proxy statement is dated
April 12, 2000. You should not assume that the information contained in the
proxy statement is accurate as of any other date, and neither the mailing of
this proxy statement to our shareholders nor the issuance of our common stock in
the merger shall create any contrary implication.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Starbelly.com, Inc.
Report of Independent Accountants......................... F-2
Balance Sheet as of December 31, 1999..................... F-3
Statement of Operation for the Period from March 22, 1999
(Date of Inception), to December 31, 1999............... F-4
Statement of Stockholders' Equity for the Period from
March 22, 1999 (Date of Inception), to December 31,
1999.................................................... F-5
Statement of Cash Flows for the Period from March 22, 1999
(Date of Inception), to December 31, 1999............... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Starbelly.com, Inc.:
We have audited the accompanying balance sheet of STARBELLY.COM, INC. (a
Delaware corporation in the development stage) as of December 31, 1999, and the
related statements of operations, stockholders' equity and cash flows for the
period from March 22, 1999 (date of inception), to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the U.S. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Starbelly.com, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
period from March 22, 1999 (date of inception), to December 31, 1999, in
conformity with generally accepted accounting principles in the U.S.
Arthur Andersen LLP
Chicago, Illinois
March 2, 2000
F-2
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $3,341,451
Accounts receivable, less allowance for doubtful accounts
of $20,000.............................................. 204,539
Inventory................................................. 42,681
Prepaid expenses and other current assets................. 219,987
----------
Total current assets................................ 3,808,658
----------
PROPERTY AND EQUIPMENT, AT COST............................. 2,134,494
Less- Accumulated depreciation............................ (279,282)
----------
Property and equipment, net......................... 1,855,212
----------
DUE FROM RELATED PARTY...................................... 337,948
----------
Total assets........................................ $6,001,818
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,920,059
Current portion of long-term debt......................... 243,947
Accrued expenses.......................................... 2,167,815
----------
Total current liabilities........................... 4,331,821
----------
LONG-TERM DEBT, net of current portion...................... 558,354
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A; $.001 par value;
1,500,000 shares authorized; 1,500,000 shares issued and
outstanding............................................. 1,500
Convertible preferred stock, Series B; $.001 par value;
5,653,711 shares authorized; 5,653,711 shares issued and
outstanding............................................. 5,654
Common stock, Class A; $.001 par value; 3,105,000 shares
authorized; 395,000 shares issued and outstanding....... 395
Common stock, Class B; $.001 par value; 36,895,000 shares
authorized; 16,500,000 shares issued and outstanding.... 16,500
Note receivable from stockholder.......................... (10,000)
Additional paid-in capital................................ 9,670,339
Accumulated deficit....................................... (8,572,745)
----------
Total stockholders' equity.......................... 1,111,643
----------
Total liabilities and stockholders' equity.......... $6,001,818
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 22, 1999 (DATE OF INCEPTION), TO DECEMBER 31, 1999
<TABLE>
<S> <C>
NET SALES................................................... $ 346,960
COST OF SALES............................................... 309,311
-----------
Gross profit........................................ 37,649
-----------
OPERATING EXPENSES:
Sales, marketing and operations........................... 2,689,237
Technology and development................................ 3,258,220
General and administrative................................ 2,791,770
-----------
Total operating expenses............................ 8,739,227
-----------
INTEREST INCOME............................................. 128,833
-----------
Loss before taxes................................... (8,572,745)
INCOME TAXES................................................ --
-----------
Net loss.................................................. $(8,572,745)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 22, 1999 (DATE OF INCEPTION), TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------
COMMON STOCK, SERIES A, SERIES B,
PAR VALUE $.001, PAR VALUE $.001, PAR VALUE $.001,
40,000,000 SHARES 1,500,000 SHARES 5,653,711 SHARES
AUTHORIZED AUTHORIZED AUTHORIZED
---------------------------------- -------------------- --------------------
CLASS A, CLASS B,
3,105,000 36,895,000 ADDITIONAL
SHARES SHARES PAR PAR PAR PAID-IN
AUTHORIZED AUTHORIZED VALUE SHARES VALUE SHARES VALUE CAPITAL
---------- ---------- -------- --------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 22, 1999
Issuance of Class B common
stock................... 16,500,000 16,500 (8,250)
Issuance of Series A
preferred stock......... 1,500,000 1,500 1,498,500
Issuance of Series B
preferred stock......... 5,653,711 5,654 7,994,346
Issuance of warrants...... 10,987
Exercise of Class A common
stock options........... 395,000 395 101,355
Compensation and other
noncash expense related
to stock transactions... 73,401
Net loss for period.......
------- ---------- ------- --------- ------ --------- ------ ----------
BALANCE, December 31,
1999...................... 395,000 16,500,000 $16,895 1,500,000 $1,500 5,653,711 $5,654 $9,670,339
======= ========== ======= ========= ====== ========= ====== ==========
<CAPTION>
NOTE
RECEIVABLE
FROM ACCUMULATED
STOCKHOLDER DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, March 22, 1999
Issuance of Class B common
stock................... 8,250
Issuance of Series A
preferred stock......... 1,500,000
Issuance of Series B
preferred stock......... 8,000,000
Issuance of warrants...... 10,987
Exercise of Class A common
stock options........... (10,000) 91,750
Compensation and other
noncash expense related
to stock transactions... 73,401
Net loss for period....... (8,572,745) (8,572,745)
-------- ----------- -----------
BALANCE, December 31,
1999...................... $(10,000) $(8,572,745) $ 1,111,643
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 22, 1999 (DATE OF INCEPTION), TO DECEMBER 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(8,572,745)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation............................................ 279,282
Compensation and other noncash expense related to stock
transactions.......................................... 73,401
Changes in assets and liabilities-
Accounts receivable................................... (204,539)
Inventory............................................. (42,681)
Prepaid expenses and other current assets............. 209,000
Due from related party................................ (337,948)
Accounts payable...................................... 1,920,059
Accrued expenses...................................... 2,167,815
-----------
Net cash used in operating activities............... (4,926,356)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,134,494)
-----------
Net cash used in investing activities............... (2,134,494)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 8,250
Proceeds from issuance of preferred stock................. 9,500,000
Exercise of common stock options.......................... 91,750
Proceeds from equipment loan.............................. 848,242
Payments of principal on equipment loan................... (45,941)
-----------
Net cash provided by financing activities........... 10,402,301
-----------
NET INCREASE IN CASH........................................ 3,341,451
CASH AND CASH EQUIVALENTS, beginning of period.............. --
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,341,451
===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of note receivable in connection with exercise of
options................................................. $ 10,000
Exchange of note receivable for common stock.............. $ 250,000
Issuance of warrants in connection with equipment loan
financing............................................... $ 10,987
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
DESCRIPTION OF BUSINESS
Starbelly.com, Inc. (the "Company"), f/k/a The Zebra.com, is a Delaware
corporation which was incorporated on March 22, 1999, and is a development stage
company. The Company has a calendar year-end. Its primary activities since
inception have been to raise equity capital to finance operations and to develop
an Internet-based business solution for the custom-decorated merchandise
industry, which includes promotional and ad specialty products and casual
uniforms.
The Company has incurred significant losses since inception and expects to
continue to incur substantial losses. The net loss was $8,572,745 for the period
ended December 31, 1999. The Company expects to continue to incur significant
expenses related to marketplace development, technology, sales and marketing and
administration. Significant revenue will need to be generated to achieve and
maintain profitability. There can be no assurance that the Company will be able
to generate sufficient revenues to achieve or sustain profitability in the
future. If profitability is reached, the Company may not be able to sustain or
increase profitability. As further discussed in Note 9, on January 17, 2000, the
Company signed a definitive stock purchase agreement agreeing to be acquired by
Ha-Lo Industries, Inc. The Company anticipates that the transaction will close
in April and the acquiring company intends to fund the Company's operations
through 2000.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments purchased
with original maturities of three months or less. Cash and cash equivalents are
recorded at cost, which approximates fair value due to the short maturity of
these instruments.
TRADE ACCOUNTS RECEIVABLE
For the period ended December 31, 1999, the Company charged approximately
$20,000 to trade allowance for doubtful accounts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method at rates adequate to depreciate the cost of applicable
assets over their expected useful lives. Repairs and maintenance are charged to
expense as incurred. Gains or losses resulting from sales or
F-7
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
retirements are recorded as incurred, at which time related costs and
accumulated depreciation are removed from the accounts. The estimated useful
lives are as follows:
<TABLE>
<CAPTION>
USEFUL
ASSET DESCRIPTION LIFE
- ----------------- ---------
<S> <C>
Computer equipment and software............................. 2-3 years
Furniture and office equipment.............................. 5 years
Production equipment........................................ 10 years
Leasehold improvements...................................... 3 years
=========
</TABLE>
FINANCIAL INSTRUMENTS
The carrying value for current assets and current liabilities reasonably
approximates fair value due to the short maturity of these items.
The financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit cash
investments to short-term, low-risk investments. With respect to trade
receivables, the Company grants unsecured credit to its customers. Management
believes that its accounts receivable credit risk is limited as these customers
are geographically dispersed and are in numerous different industries.
Additionally, the Company establishes accounts receivable allowances based upon
factors relating to the credit risk of specific customers and other information.
Two customers accounted for approximately 17.3% and 12.9% of the Company's sales
for the period ended December 31, 1999. Revenue generated for the two largest
customers was approximately $60,000 and $45,000, respectively.
REVENUE RECOGNITION
The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to the customers.
COST OF SALES
Cost of sales consists primarily of merchandise sold to customers including
product cost, decoration cost and freight and handling charges.
SALES, MARKETING AND OPERATIONS COSTS
Sales, marketing and operations costs consist primarily of advertising and
promotional expenditures, operations facility expenses and payroll and related
expenses for personnel engaged in marketing, operations, sales and customer
service. Advertising expenditures are expensed as incurred. The Company's
advertising to date has related primarily to building brand awareness, including
primarily print advertising and promotions. Total advertising and promotion
costs for the period ended December 31, 1999, was $1,041,000.
F-8
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
TECHNOLOGY AND DEVELOPMENT COSTS
The Company has adopted Statement of Position ("SOP") No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which provides guidance on the accounting for the cost of computer software
developed or obtained for internal use. Costs incurred in the development of the
Company's main web site and related applications to be used in connection with
the Company's services have been expensed to operations as incurred as the rapid
pace of technological change results in an estimated useful life of one year or
less. These costs consist primarily of payroll and related expenses and
consultant costs. The Company incurred technology and development costs of
approximately $3,258,220 for the period ended December 31, 1999. No significant
costs were capitalized for the period ended December 31, 1999.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. A valuation
allowance has been provided to offset deferred tax assets, which consists
primarily of net operating losses. At December 31, 1999, the deferred tax asset
and offsetting valuation allowance amount to approximately $3,260,000. The
Company has net operating losses for both federal and state tax purposes of
approximately $8,276,000 expiring during 2015. The net operating losses can be
carried forward to offset future taxable income. Utilization of the above
carryforwards may be subject to the utilization limits, which may inhibit the
Company's ability to use carryforwards in the future.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements with
employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the measurement date, between the estimated fair value of
the Company's stock and the exercise price of options to purchase that stock.
The compensation expense is amortized on a straight-line basis over the vesting
period of the options.
The Company accounts for stock-based compensation arrangements with
nonemployees in accordance with SFAS No. 123. SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. Under the
fair value based method, compensation cost is measured at the grant date based
on the value of the award, which is calculated using an option pricing model,
and is recognized over the service period, which is usually the vesting period.
F-9
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
SEGMENT INFORMATION
The Company identifies its operating segments based on business activities
and management responsibility. The Company operates in a single business segment
and has no significant international sales.
START-UP COSTS
In accordance with SOP No. 98-5, "Reporting on the Costs of Start-up
Activities," the Company has expensed all start-up costs, including organization
costs, as incurred.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999, consisted of the following:
<TABLE>
<S> <C>
Computer equipment and software............................. $1,507,527
Furniture and office equipment.............................. 224,248
Production Equipment........................................ 125,188
Leasehold improvements...................................... 277,531
----------
$2,134,494
Less- Accumulated depreciation.............................. (279,282)
----------
Property and equipment, net............................. $1,855,212
==========
</TABLE>
3. DEBT
On September 16, 1999, the Company entered into a Loan and Security
Agreement ("Agreement") with a bank for a committed equipment line up to a
maximum of $1,250,000 that terminates on May 31, 2000. Each equipment advance is
limited to $500,000 until the Company reports monthly revenue of at least
$100,000. The limit will be increased to $1,000,000 when the Company reports
monthly revenue of $200,000. The maximum number of equipment advances is five.
Eligible equipment under the equipment line includes computer equipment, office
equipment and furnishings. Each equipment advance will be considered a separate
borrowing and will have a separate payment schedule and interest rate as
determined by the bank at the time of the equipment advance. Principal and
interest payments are due monthly on the first day of the month following the
funding date and the interest rate will be equal to the bank's basic rate. The
repayment period on each equipment advance is 36 months. The Company is required
to grant the bank a first priority continuing security interest in all presently
existing and later acquired equipment financed under an equipment advance. The
Agreement contains various nonfinancial covenants. The Company borrowed
approximately $848,000 of equipment advances on November 1, 1999. As of
December 31, 1999, the balance due is $802,301. In conjunction with the
Agreement, the Company issued the bank a warrant to purchase 28,369 shares of
Series B preferred stock with an exercise price of $1.41 per share. The warrant
expires in September, 2006. The warrants were valued using the Black-Scholes
option pricing model (see Note 8). The Company borrowed the remaining amount of
approximately $402,000 on the equipment line during March 2000.
F-10
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
As of December 31, 1999, long-term debt consists of the following:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Note payable, due November, 2002, payable in monthly
installments of $26,821, including interest at 11.25%,
collateralized by certain equipment....................... $ 802,301
Less- Current maturities.................................... (243,947)
---------
Long-term debt.............................................. $ 558,354
=========
</TABLE>
The aggregate maturities of principal are as follows:
<TABLE>
<S> <C>
2000........................................................ $243,947
2001........................................................ 272,840
2002........................................................ 285,514
--------
Total................................................. $802,301
========
</TABLE>
4. 401(K) SAVINGS PLAN
The Company has a savings plan ("401(k) Plan") which qualifies as a defined
contribution arrangement under Section 401 (a), 401(k) and 501(a) of the
Internal Revenue Code. Under the 401(k) Plan, participating employees may defer
a percentage (not to exceed 15%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
payroll of the Company are eligible to participate in the 401(k) Plan.
5. COMMITMENTS AND CONTINGENCIES
The Company is, at times, subject to pending and threatened legal action and
proceedings. Management believes that the outcome of such actions or proceedings
is not expected to have a material adverse effect on the financial position or
results of operations of the Company.
During November, 1999, the Company entered into a sublease agreement related
to its main operating facility. It is a three-year agreement which can be
terminated by the Company with six month's notice. The amount of rent is
determined based on the percentage of space used by the Company. The Company
does not anticipate that its monthly rent will exceed $30,000 per month pursuant
to the agreement.
6. RELATED-PARTY TRANSACTIONS
On May 10, 1999, the Company entered into a Supply and Services Agreement
(the "Agreement") with a company that is owned by the founding stockholders of
the Company. The Agreement calls for the provision of decoration services by the
Company to the related party, among other shared services and facilities.
Pursuant to the Agreement, the Company has billed for these decoration services.
Amounts billed have been reflected net of payroll and facilities provided to the
Company by the related party, as well as a software license granted to the
Company by the related party. At December 31, 1999, the net amount due from the
related party is $337,948.
F-11
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
No amounts billed by the Company to the related party have been reflected as
revenue since the relationship pursuant to the Agreement has been determined to
be an agency relationship rather than a principal relationship. Reflected in the
Company's statement of operations within general and administrative operating
expense is approximately $304,000 of payroll and facility expense provided to
the Company by the related party. The payroll expenses are allocated to the
Company based on estimates of the percentage of time these employees provided
services to the Company. The facility expenses are allocated to the Company
based on the percentage of space used by the Company. Management believes that
this amount approximates the fair market value of such services and facilities.
On November 15, 1999, the Agreement was terminated.
The Company also has supply and service agreements with two contract
decorators which operate their businesses in the same facility as the Company.
Certain of the owners of these two companies have been granted Company stock
options with exercise prices equivalent to those granted to Company employees.
As further discussed in Note 8, expense is recognized for these nonemployees, as
determined by a Black-Scholes option pricing model, over the respective vesting
periods.
The Company's primary legal counsel owns 10,000 shares of Class A common
stock and a partner in this firm also owns 10,000 shares. Total legal expense
for the period ended December 31, 1999 for this firm was approximately $383,000
and approximately $262,000 has not been paid as of December 31, 1999.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company was incorporated on March 22, 1999. A total of 8,250,000
founders shares of Class B common stock were issued for consideration of $8,250.
During June, 1999, a one-for-one stock dividend was declared and distributed to
the common stockholders. The effect of this stock dividend is reflected in the
accompanying financial statements.
The Class A common stock is non-voting while the Class B common stock is
voting.
PREFERRED STOCK
On May 10, 1999, the Company issued 1,500,000 shares of Series A preferred
stock at a price of $1.00 per share. The holders of Series A preferred stock are
entitled to receive dividends of 6% per share per annum, payable quarterly, if
declared. The dividend is only payable after all Series B preferred stock
dividends are paid. Upon liquidation, after Series B preferred stock holders are
paid their liquidation preference, Series A preferred stock holders are entitled
to a liquidation preference of the per share price plus declared and unpaid
dividends prior to any distribution. If the amount payable to common stock
holders on liquidation would exceed the amounts paid to holders of Series A
preferred stock on account of their liquidation preferences, the Series A
preferred stock automatically converts to Class B common stock at its conversion
rate. Shares of Series A preferred stock may be converted into Class B common
stock at any time upon a holder's request. All shares of Series A preferred
stock will be converted into Class B common stock upon the first to occur of the
consent of a majority of holders of Series A preferred stock and Series B
preferred stock voting together in a single
F-12
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
class, or upon the consummation of an initial public offering at a price per
share equal to $1.50 per share of Series A preferred stock resulting in
aggregate cash proceeds to the Company of at least $10 million. The aggregate
conversion price of the shares is determined by dividing the purchase price of
the Series A preferred stock by the conversion price ($.50 per share as of
December 31, 1999). The conversion price is subject to adjustment on any
subdivision or stock dividend paid on account of the common stock and was
adjusted based on the stock dividend previously described. In addition, the
conversion price is subject to a proportional adjustment to the extent the
consideration actually received for future issuances of stock are less than the
conversion price of the Series A preferred stock, other than certain issuances,
as defined. Holders of Series A preferred stock have no preemptive rights.
Holders of Series A preferred stock have limited piggy-back registration rights.
Holders of Series A preferred stock are entitled to voting rights as if their
conversion rights had been exercised.
On July 29, 1999, the Company issued 5,653,711 shares of Series B preferred
stock at a price of $1.41 per share. The holders of Series B preferred stock are
entitled to receive dividends of 6% per share per annum, if declared. Upon
liquidation, Series B preferred stock holders are entitled to a liquidation
preference of the per share price plus declared and unpaid dividends prior to
any distribution, including the liquidation preference on account of the
Series A preferred stock. Shares of Series B preferred stock may be converted
into Class B common stock at any time upon a holder's request. All shares of
Series A preferred stock will be converted into Class B common stock upon the
first to occur of the consent of a majority of holders of Series A preferred
stock and Series B preferred stock voting together in a single class, or upon
the consummation of an initial public offering at a price per share equal to
three times the issue price of the Series B preferred stock resulting in
aggregate cash proceeds to the Company of at least $20 million. The aggregate
conversion price of the shares is determined by dividing the purchase price of
the Series B preferred stock by the conversion price ($1.41 per share as of
December 31, 1999). The conversion price is subject to adjustment on any
subdivision or stock dividend paid on account of the common stock. In addition,
the conversion price is subject to a proportional adjustment to the extent the
consideration actually received for future issuances of stock are less than the
lower of the conversion price of the Series B preferred stock or the then-market
value of the Series B preferred stock, other than certain issuances, as defined.
Holders of Series B preferred stock have preemptive rights to the extent
necessary to maintain fully diluted ownership of the Company on issuances of
stock by the Company, other than certain specified issuances. Holders of
Series B preferred stock have been granted certain registration rights. Holders
of Series B preferred stock are entitled to voting rights as if their conversion
rights had been exercised.
8. STOCK OPTION PLANS
In June, 1999, the Board of Directors adopted the 1999 Stock Plan (the
"Plan"). The Plan provides for 3,105,000 shares of Class A common stock to be
granted. Under the terms of the Plan, options may be granted to employees,
consultants and directors. Options granted to consultants are valued by the
Company using a Black-Scholes option pricing model, with such value recorded as
expense over the term of the service provided. Typically, options granted to
employees vest over four years, 25% after the first year, ratably each quarter
over the remaining three years, and generally expire ten years from the date of
grant. Shares issued under the Plan may be subject to a right of refusal,
repurchase options or other conditions and restrictions as determined by the
Board of Directors. By way of example, certain options granted by the Company
are immediately exercisable. The Company has a right to repurchase any unvested
shares from the employee upon termination at the price paid by
F-13
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
the employee upon exercise. Unvested shares are typically held in escrow. At
December 31, 1999, of the 395,000 shares of Class A common stock outstanding,
issued pursuant to exercise of stock options, 25,000 of such shares are unvested
shares which can be subject to repurchase.
In October, 1999, an executive who had previously owned 1,000,000 shares of
common stock via the exercise of stock options left the Company. In
consideration for these shares the Company had received a $250,000 note
receivable from the executive. In connection with the departure, the Company
repurchased 675,000 shares at the original exercise price which were
subsequently retired. The effect of this transaction is shown net on the
Statement of Stockholders' Equity. Additionally, the Company accelerated a
portion of a deferred signing bonus and agreed to remit certain tax
withholdings. The impact of this was a charge to operations in October of
approximately $140,000. All amounts to be remitted by the Company to the
employee were applied to the note receivable. No amounts were due from the
executive at December 31, 1999.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-
EXERCISE AVERAGE
NUMBER PRICE PER EXERCISE
OF SHARES SHARE PRICE
---------- ----------- ---------
<S> <C> <C> <C>
Outstanding at inception, March 22, 1999.................... -- $ -- $ --
Granted................................................... 2,999,584 .01 to 1.00 .73
Canceled.................................................. (80,500) 1.00 1.00
Exercised................................................. (1,070,000) .01 to .25 .24
---------- ----------- ----
Outstanding at December 31, 1999............................ 1,849,084 1.00 1.00
========== =========== ====
</TABLE>
At December 31, 1999, 153,542 options are exercisable, all of which have an
exercise price of $1.00. Subsequent to December 31, 1999, the Company granted
approximately 944,000 additional stock options, all of which have an exercise
price of $1.00 per share. To the extent that the exercise price of these options
is less than the fair market value of the underlying common stock, as determined
by the Company, compensation expense will result and will be recorded over the
vesting period of the related stock options. Total compensation expense of
$6,250 is included in the Statement of Operations for the period ended
December 31, 1999, relating to stock based employee compensation awards. During
the period the Company granted 1,458,250 options which had exercise prices less
than the fair market value of the underlying stock. These options had a weighted
average exercise price of $.45 per share and a weighted average fair value at
grant date of $.55 per share. The remaining options granted during the period
were granted at fair value. The weighted-average grant-date fair value for all
options granted during the period ended December 31, 1999 was $.29.
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using the minimum value method, which
utilizes a near-zero volatility factor. The remaining assumptions were an
expected life of five years, a risk-free interest rate of 5.0% and no dividend
yield.
The option valuation method requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded
F-14
<PAGE>
STARBELLY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
options, and because the change in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
method does not necessarily provide a reliable single measure of the employee
stock options. The effects of applying SFAS No. 123 in the pro forma disclosure
are not indicative of future amounts and additional awards in future years are
anticipated.
If the Company recognized employee stock-related compensation expense in
accordance with SFAS No. 123 under the minimum value method, its net loss for
the period ended December 31, 1999, would have been approximately $32,000
higher.
From time to time, the Company grants stock options to nonemployees,
principally consultants, independent contractors and advisors. The Company
accounts for these option grants pursuant to the provisions of SFAS No. 123.
Approximately $67,200 of compensation expense was recorded during the period
ended December 31, 1999, related to these options.
In conjunction with its loan agreement, the Company issued the bank a
warrant to purchase 28,369 shares of Series B preferred stock at $1.41 per share
(see Note 3). The warrant expires in September, 2006. The Company accounted for
this warrant in accordance with SFAS No. 123. The fair value of the warrant was
calculated at the date of grant using the Black-Scholes option pricing model
with the following assumptions: weighted-average risk-free interest rate of 5%,
a dividend yield of 0% and a weighted-average expected life of the warrant of
seven years. The fair value of the warrants was approximately $11,000 and was
included in prepaid expenses on the accompanying balance sheet. The expense will
be amortized over the term of the equipment advances. For the period ended
December 31, 1999, the Company amortized approximately $1,221.
In connection with the closing of the transaction discussed in Note 9, the
Company intends to cause 50% of outstanding options to become fully vested at
the effective date of the transaction for certain employees and 33 1/3% of
outstanding options for all other employees.
9. SUBSEQUENT EVENTS
On January 17, 2000, the Company signed a definitive stock purchase
agreement agreeing to be acquired by Ha-Lo Industries, Inc., a leading provider
of promotional and ad specialty products and marketing services. The purchase
price is $240 million, composed of cash, preferred stock and common stock. The
Company's Board of Directors and stockholders have approved the transaction. The
stockholders of Ha-Lo Industries, Inc. are expected to vote on the transaction
in April, 2000. It is anticipated that the transaction will close in April,
2000.
In conjunction with this transaction, Ha-Lo Industries, Inc. will make
certain specified loans to the Company whether or not the transaction closes.
Subsequent to December 31, 1999, the Company received three separate $5 million
loans from Ha-Lo Industries, Inc. In addition, the agreement stipulates certain
breakup fees and other matters if the transaction does not close.
F-15
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
AND PLAN OF REORGANIZATION
BY AND AMONG
HA-LO INDUSTRIES, INC.,
STARBELLY.COM, INC.,
AND
HA-LO INDUSTRIES, INC.
<PAGE>
THIS AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION dated as
of January 17, 2000 (this "AGREEMENT") is by and among HA-LO Industries, Inc.,
an Illinois corporation ("Acquiror"), HA-LO Industries, Inc., a Delaware
corporation ("ACQUIROR SUB"), and Starbelly.com, Inc., a Delaware corporation
f/k/a TheZebra.com, Inc. (the "COMPANY").
W I T N E S S E T H:
WHEREAS, the Company has been formed for the purpose of and is in the
start-up phase of preparing to engage in the business of the development, sale,
marketing and distribution of advertising specialty, premium and promotional
products and other products and services primarily through the Internet;
WHEREAS, the stockholders set forth on Section 3.03(a) of the Company
Disclosure Schedules are all of the stockholders of the Company (each, a
"STOCKHOLDER" and collectively the "STOCKHOLDERS");
WHEREAS, upon the terms and subject to the conditions of this Agreement
and in accordance with the Delaware General Corporation Law of the State of
Delaware (the "DGCL" or "DELAWARE LAW") the Company will merge with and into
Acquiror Sub, a wholly-owned subsidiary of Acquiror (the "MERGER");
WHEREAS, the Board of Directors and Stockholders of the Company have
determined that the Merger is in the best interest of the Company and its
stockholders, and have approved and adopted this Agreement and consented to the
transactions contemplated hereby;
WHEREAS, the Board of Directors of Acquiror has determined that the
Merger and the transactions contemplated hereby are in the best interests of
Acquiror and its shareholders and has determined to submit and recommend the
Merger and the issuance of Acquiror Common Stock and Acquiror Series A
Convertible Preferred Stock in connection therewith (the "SHARE ISSUANCE") to
its shareholders for their approval to the extent such approval is required by
law or the rules of The New York Stock Exchange ("NYSE");
WHEREAS, the Board of Directors and sole stockholder of Acquiror Sub
have determined that the Merger is in the best interests of Acquiror Sub and its
stockholder, and have approved and adopted this Agreement and consented to the
transactions contemplated hereby; and
WHEREAS, the parties hereto intend for the Merger to qualify, for
federal income tax purposes, as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties agree as follows:
ARTICLE I
THE MERGER TRANSACTION
SECTION 1.01 THE MERGER. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with Delaware Law
and this Agreement, at the "Effective Time" (as hereafter defined), the
Company shall be merged with Acquiror Sub. As a result of the Merger, the
separate corporate existence of the Company shall cease and Acquiror Sub
shall continue as the surviving corporation of the Merger (hereafter, the
"SURVIVING CORPORATION").
SECTION 1.02 EFFECTIVE TIME. At the Closing , the parties shall
cause the Merger to be consummated by filing of a certificate of merger (the
"CERTIFICATE OF MERGER") with the Delaware Secretary of State in such form as
required by, and executed in accordance with, the relevant provisions of
Delaware Law (the date and time of such filing is the "EFFECTIVE TIME").
<PAGE>
SECTION 1.03 EFFECT OF THE MERGER. At the Effective Time, the
effect of the Merger shall be as provided in the applicable provisions of
Delaware Law and this Agreement. Without limiting the generality of those
laws, and subject to their provisions, at the Effective Time, all the
properties, rights, privileges, powers and franchises of Acquiror Sub and the
Company shall vest in the Surviving Corporation, and all debts, liabilities
and duties of Acquiror Sub and the Company shall become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 1.04 CERTIFICATE OF INCORPORATION; BYLAWS. At the
Effective Time, the Certificate of Incorporation and Bylaws of Acquiror Sub
shall be the Certificate of Incorporation and Bylaws of the Surviving
Corporation. Subject to the limitations in this Agreement, Acquiror reserves
the right, exercisable in its sole discretion on and after the Effective
Time, to amend, or cause to be amended, the Certificate of Incorporation and
Bylaws of the Surviving Corporation.
SECTION 1.05 DIRECTORS AND OFFICERS. At the Effective Time, the
officers and directors of the Surviving Corporation shall be the officers and
directors of the Company immediately prior to the Effective Time, and until
their respective successors are duly elected or appointed and qualified.
SECTION 1.06 TAKING NECESSARY ACTION; FURTHER ACTION. The
parties shall each use reasonable efforts to take all actions as may be
necessary or appropriate to effectuate the Merger as soon as possible
consistent with the terms and conditions of this Agreement. If, at any time
following the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement or to vest the Surviving Corporation
with full right, title and possession to all properties, rights, privileges,
immunities, powers and franchises of its constituent corporations, the
directors and officers of the Surviving Corporation are fully authorized, in
the name of each constituent corporation, to take, and shall take, all such
lawful and necessary action, to carry out the purposes of this Agreement.
SECTION 1.07 THE CLOSING. The closing of the transactions
contemplated by this Agreement will take place at the offices of Neal, Gerber
& Eisenberg, Chicago, Illinois, and will be effective at the Effective Time.
On the terms and subject to the conditions of this Agreement and provided
that this Agreement has not been terminated pursuant to Article VIII, the
closing of the Merger (the "CLOSING") will take place at 10:00 a.m., local
time in Chicago, Illinois, on the date which is the third business day to
occur on or after the satisfaction of the conditions set forth in Section
7.1, provided that if all conditions set forth in Article VII are not
fulfilled or waived on such third business day, then the Closing shall be
automatically extended from time to time until the first subsequent business
day on which all such conditions are so satisfied or waived, subject to
Section 8.01(e), unless another date or place is agreed to in writing by the
parties. The date on which the Closing occurs is referred to herein as the
"CLOSING DATE." At the Closing, (a) Acquiror shall deliver, and each
Stockholder will be entitled to receive, upon surrender to Acquiror of
certificates representing shares of Company Common Stock or shares of Company
Preferred Stock, as the case may be, for cancellation, certificates
representing the number of shares of Acquiror Common Stock and/or Acquiror
Series A Preferred Stock that such Stockholder is entitled to receive
pursuant to Section 2.01 hereof, and (b) the parties shall execute and
deliver or make the deliveries set forth in Sections 7.01 and 7.02 hereof. In
the event any certificate representing shares of Company Common Stock or
shares of Company Preferred Stock shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
certificate to be lost, stolen or destroyed and, if reasonably required by
Acquiror, the posting by such Person of a bond in such amount as Acquiror may
determine is reasonably necessary as indemnity against any claim that may be
made against it with respect to such certificate, Acquiror will issue in
exchange for such lost, stolen or destroyed certificate the shares of
Acquiror Common Stock and/or Acquiror Series A Preferred Stock and any cash
in lieu of fractional shares deliverable in respect thereof pursuant to this
Agreement.
-2-
<PAGE>
ARTICLE II
EXCHANGE OF CERTIFICATES
SECTION 2.01 MERGER CONSIDERATION.
(a) (i) At the Effective Time, by virtue of the
Merger, Acquiror shall pay to the Stockholders Two Hundred and Forty Million
Dollars ($240,000,000) (the "MERGER CONSIDERATION"), payable by the
assumption of the Company Options pursuant to Section 6.13 and as follows:
(A) Nineteen Million Dollars ($19,000,000) in cash MINUS
Expenses of the Stockholders and the Company in
excess of $500,000 pursuant to section 8.03(a) hereof
(the "CASH CONSIDERATION");
(B) Shares of Acquiror's Series A Convertible Preferred
Stock, without par value ("ACQUIROR SERIES A
PREFERRED STOCK"), valued at its liquidation value,
with an aggregate liquidation value of Fifty-One
Million Dollars ($51,000,000) (the "PREFERRED STOCK
CONSIDERATION"); and
(C) Shares of Acquiror's common stock, without par value
("ACQUIROR COMMON STOCK"), valued at the Acquiror
Share Price, with an aggregate value of the Merger
Consideration, MINUS Seventy Million Dollars
($70,000,000).
Provided, however, that, at the Effective Time, Merger
Consideration valued at $25,000,000 (the "CAP"), shall be withheld from
the Escrowed Stockholders and held pursuant to the Escrow Agreements
referred to in Section 2.04 hereof;
(ii) "ACQUIROR SHARE PRICE" or "SHARE VALUE"
shall mean the lesser of (A) $10.00, or (B) the average
closing price of the Acquiror Common Stock as reported on
the NYSE for all trading days during the twenty-five (25)
day period which consists of the fifteen (15) calendar days
prior to the date hereof and the ten (10) calendar days
following the date hereof; provided, however, that if such
average closing price of the Acquiror Common Stock is less
than $6.00, then Acquiror Share Price shall mean $6.00;
(iii) "SERIES B PORTION" shall mean the Merger
Consideration multiplied by a fraction, the numerator of which
equals the number of shares of the Company's Series B
Preferred Stock, $.001 par value per share ("COMPANY SERIES B
PREFERRED STOCK") outstanding immediately prior to the
Effective Time multiplied by the number of shares of Company
Common Stock into which each share of Company Series B
Preferred is then convertible and the denominator of which
equals the total number of shares of the Company's Common
Stock (whether Company Class A Common Stock or Company Class B
Common Stock) (collectively, the "COMPANY COMMON STOCK"),
outstanding immediately prior to the Effective Time assuming
the exercise and/or conversion of the Silicon Warrant and all
Company Options (whether or not then exercisable) then
outstanding and the conversion of all Company Preferred Stock
(including, without limitation, the Company Series A Preferred
Stock and Series B Preferred Stock) into Company Common Stock
prior to the Effective Time (such denominator, the "COMPANY
FULLY DILUTED SHARES");
(iv) "SERIES A PORTION" shall mean the Merger
Consideration multiplied by a fraction, the numerator of which
is equal to the number of shares of the Company's Series A
Preferred Stock, $.001 par value per share ("COMPANY SERIES A
PREFERRED STOCK") outstanding immediately prior to the
Effective Time multiplied by the number of shares of Company
Common Stock into which each share of Company Series A
Preferred Stock is then convertible, and the denominator of
which equals the Company Fully Diluted Shares;
-3-
<PAGE>
(v) "COMMON STOCK PORTION" shall mean the Merger
Consideration multiplied by a fraction, the numerator of which
equal the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time and the denominator of
which equals the Company Fully Diluted Shares.
(b) EFFECT ON COMPANY STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of any holder
of shares of the Company Common Stock, the Company's Preferred Stock,
$.001 par value per share ("COMPANY PREFERRED STOCK"), Acquiror Common
Stock or Acquiror Sub Stock:
(i) CANCELLATION OF TREASURY STOCK AND
COMPANY-OWNED STOCK. Each share of Company Common Stock or
Company Preferred Stock that is owned by the Company shall
automatically be cancelled and retired and shall cease to
exist, and no consideration shall be delivered in exchange
therefor; provided, however, that any shares of Company
Common Stock or Company Preferred Stock (A) held by the
Company for the account of another individual or entity
("Person"), (B) as to which the Company is or may be
required to act as a fiduciary or in a similar capacity or
(C) the cancellation of which would violate any legal duties
or obligations of the Company, in each case shall not be
cancelled but, instead, shall be treated as set forth in
Section 2.01(b)(ii).
(ii) CONVERSION OF COMPANY SERIES B PREFERRED
STOCK. The issued and outstanding shares of the Company
Series B Preferred Stock (other than shares to be cancelled
in accordance with Section 2.01(a)(i)) shall be converted
into the right to receive, in the aggregate, the Series B
Portion, payable as follows: (A) cash in an amount equal to
the Cash Consideration multiplied by a fraction, the
numerator of which is sixteen (16) and the denominator of
which is nineteen (19) (the "SERIES B CASH AMOUNT") plus (B)
shares of Acquiror Series A Preferred Stock with an
aggregate liquidation value of an amount (the "SERIES B
PREFERRED STOCK AMOUNT") equal to the Series B Portion MINUS
the Series B Cash Amount. Each issued and outstanding share
of Company Series B Preferred Stock shall be entitled to its
pro rata share of the Series B Portion, based upon the total
shares of Company Series B Preferred Stock outstanding at
the Effective Time.
(iii) CONVERSION OF COMPANY SERIES A PREFERRED
STOCK. The issued and outstanding shares of Company Series A
Preferred Stock (other than shares to be cancelled in
accordance with Section 2.01(a)(i)) shall be converted into
the right to receive, in the aggregate, an amount equal to
the Series A Portion, payable as follows: (A) cash in an
amount equal to the Cash Consideration multiplied by a
fraction, the numerator of which is three (3) and the
denominator of which is nineteen (19) (the "SERIES A CASH
AMOUNT"), (B) shares of Acquiror Series A Preferred Stock
with an aggregate liquidation value as described in the next
sentence (the "SERIES A PREFERRED STOCK AMOUNT"), and (C)
Shares of Acquiror Common Stock with an aggregate value,
valued at the Acquiror Share Price, of the Series A Portion
MINUS the Series A Cash Amount MINUS the Series A Preferred
Stock Amount. The Series A Preferred Stock Amount shall
equal the product of (x) the Preferred Stock Consideration
MINUS the Series B Preferred Stock Amount multiplied by (y)
a fraction, the numerator of which is the Series A Portion
MINUS the Series A Cash Amount and the denominator of which
is which is the Merger Consideration MINUS the Series B
Portion MINUS the Series A Cash Amount. Each issued and
outstanding share of Company Series A Preferred Stock shall
be entitled to its pro rata share of the Series A Portion
based upon the total number of shares of Company Series A
Preferred Stock outstanding at the Effective Time.
(iv) CONVERSION OF COMPANY COMMON STOCK. The
issued and outstanding shares of Company Common Stock (other
than shares to be canceled in accordance with Section
2.01(a)(i)) shall be converted into the right to receive, in
the aggregate an amount equal to the Common Stock Portion,
payable as follows: (A) shares of Acquiror Series A
Preferred Stock with an aggregate liquidation value as
described in the next sentence (the "COMMON PREFERRED STOCK
AMOUNT"), and (B) shares of Acquiror Common Stock, with an
aggregate value, valued at the Acquiror Share Price, of the
Common Stock Portion MINUS the Common Preferred Stock
Amount. The Common
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Preferred Stock Amount equals the product of (x) the
Preferred Stock Consideration MINUS the Series B Preferred
Stock Amount MINUS the Series A Preferred Stock Amount
multiplied by (y) a fraction, the numerator of which is the
number of shares of Common Stock outstanding and the
denominator of which is the difference between Company Fully
Diluted Shares and the number of shares of Common Stock
issuable upon the conversion of the Preferred Shares
outstanding as of the Effective Time. Each issued and
outstanding share of Company Common Stock shall be entitled
to its pro rata share of the Common Stock Portion, based
upon the total number of shares of Company Common Stock
outstanding at the Effective Time.
(v) CERTIFICATES. Certificates, if any,
previously representing Company Common Stock or Company
Preferred Stock shall, together with such duly executed
documents and other instruments of transfer as may
reasonably be required by Acquiror, upon presentment be
immediately exchanged for certificates representing whole
shares of Acquiror Common Stock and/or Acquiror Series A
Preferred Stock, as applicable, issued in consideration
therefor, without interest. All shares of Acquiror Common
Stock and/or Acquiror Series A Preferred Stock, as
applicable, issued upon conversion of shares of Company
Common Stock and Company Preferred Stock in accordance with
the terms of this Agreement shall be deemed to have been
issued in full satisfaction of all rights pertaining to such
shares of Company Common Stock and Company Preferred Stock
and to have been issued and outstanding as of the Effective
Time.
(c) ACQUIROR SUB STOCK. Each issued and outstanding
share of common stock, no par value, of Acquiror Sub ("ACQUIROR SUB
STOCK") shall be converted into one share of the common stock, no
par value, of the Surviving Corporation ("SURVIVOR STOCK").
Certificates, if any, previously representing Acquiror Sub Stock
shall, together with such duly executed documents and other
instruments of transfer as may reasonably be required by Acquiror,
upon presentment be immediately exchanged for certificates
representing whole shares of Survivor Stock issued in consideration
therefor, without interest.
(d) ACKNOWLEDGEMENT. The parties hereto agree and
acknowledge that, notwithstanding anything to the contrary contained
in this Section 2.01, each of (i) the Series B Portion, the Series A
Portion and the Common Stock Portion, and (ii) the aggregate of the
cash paid and the value of the shares of Acquiror's Series A
Preferred Stock and Common Stock issued pursuant to Sections
2.01(b)(ii), (iii) and (iv), as such value is determined pursuant to
such Sections, must equal the Merger Consisderation MINUS the sum of
(A) the Expenses of the Stockholders and the Company in excess of
$500,000 pursuant to Section 8.03(a) hereof and (B) the aggregate
value of Acquiror Common Stock and Acquiror Series A Preferred Stock
which would be issued on exercise of all Adjusted Options
outstanding at the Effective Time, valued in accordance with this
Section 2.01, less the aggregate exercise price of such Adjusted
Options.
SECTION 2.02 STOCK TRANSFER BOOKS. On and as of the Effective
Time, the transfer books of the Company shall be closed and thereafter, and
except as provided in Sections 2.03 and 7.02(j), there shall be no further
registration of transfers of interests in the Company on the records of the
Company.
SECTION 2.03 OTHER COMPANY SECURITIES AND OPTIONS. As of the
Effective Time, each outstanding share of common, preferred or convertible
capital stock other than the shares of Company Common Stock and Company
Preferred Stock ("OTHER COMPANY SECURITIES"), together with all options and
warrants (other than the Company Options and the Silicon Warrant) or other
rights, agreements, arrangements or commitments (collectively, the "OTHER
COMPANY OPTIONS") to sell or purchase shares of Company Common Stock, Company
Preferred Stock or Other Company Securities, whether written, oral,
authorized, outstanding, issued, unissued, vested or unvested, shall be
cancelled and terminated, and of no further force or effect. Prior to the
Effective Time, except as provided in Section 2.03 of the Company Disclosure
Schedules, the Company shall use all reasonable efforts to take all corporate
and/or other action necessary to effectuate the cancellation and termination
of all Other Company Securities and Other Company Options.
SECTION 2.04 ESCROW AGREEMENTS. Twenty-Five Million Dollars
($25,000,000) of the Merger Consideration, in the form of Acquiror Common
Stock and Acquiror Series A Preferred Stock and valued in
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accordance with Section 2.01, rounded up to the nearest whole share (the
"ESCROW SHARES") will be deposited and held in escrow in accordance with
separate Escrow Agreements in the form of EXHIBIT A attached hereto (the
"ESCROW AGREEMENTS") with the Stockholders listed on Section 2.04 of the
Company Disclosure Schedules (the "ESCROWED STOCKHOLDERS") as the sole source
of indemnification payments that may become due to Acquiror under Article IX.
The Escrow Shares will be deposited pursuant to the Escrow Agreements from
the Escrowed Stockholders in the percentages set forth on Section 2.04 of the
Company Disclosure Schedules.
SECTION 2.05 EMPLOYMENT ESCROW AGREEMENTS. Twenty percent (20%)
of the Merger Consideration in value (determined in accordance with Section
2.01, received by each of the Stockholders listed on Section 2.05 of the
Company Disclosures Schedules, will be deposited and held in escrow in
accordance with separate Employment Escrow Agreements in the form of EXHIBIT
A-1 attached hereto. Such deposits will be in the form of Acquiror Common
Stock, rounded up to the nearest whole share.
SECTION 2.06 DISSENTING SHARES. Any holder of shares of Company
Common Stock or Company Preferred Stock that are outstanding on the record
date for the determination of which holders will be entitled to vote for or
against the Merger who did not vote such shares in favor of the Merger
("DISSENTING SHARES") will be entitled to exercise dissenters' rights
pursuant to Section 262 of the DGCL with respect to such Dissenting Shares,
provided that such holder meets all requirements of the DGCL with respect to
such Dissenting Shares, and will not be entitled to receive any Merger
Consideration, unless otherwise provided by the DGCL or agreed in writing by
Acquiror. The Company, the Surviving Corporation and Acquiror, as applicable,
will, after consultation with one another, give such notices with respect to
dissenters' rights as may be required by the DGCL and other applicable law as
soon as practicable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The term "COMPANY ADVERSE EFFECT," as used in this Agreement, shall
mean any change or event that, individually or when taken together with all
other such changes or events, would reasonably be considered to be materially
adverse to the financial condition, business, business prospects or results
of operations of the Company, taken as a whole; provided, however, the
occurrence of any change or event (i) described in any Section of the Company
Disclosure Schedules attached to this Agreement (the "COMPANY DISCLOSURE
SCHEDULES"), (ii) resulting from the entry into this Agreement or the
transactions contemplated hereby or the public announcement thereof (in
accordance with Section 6.09 hereof), or (iii) resulting from or arising in
connection with (A) any occurrence or condition affecting any of the online,
e-commerce, promotional or decorated products industries generally, (B) any
changes in economic, market, regulatory, banking, monetary, political or
other similar conditions or (C) any occurrence or condition affecting the
Internet (or any particular portion thereof) generally, shall not,
individually or in the aggregate, constitute a Company Adverse Effect.
The term "SUBSIDIARY" (or its plural) as used in this Agreement with
respect to the Company, Stockholders, Acquiror, Acquiror Sub or any other
entity, shall mean any corporation, partnership, limited liability company,
limited liability partnership, joint venture or other entity of which the
Company, Stockholders, Acquiror, Acquiror Sub or other entity, as the case
may be (either alone or through or together with any other subsidiary), owns,
directly or indirectly, a majority of the stock or other equity interests
generally entitled to vote for the election of the board of directors or
other governing body of such corporation or other entity.
For purposes of this Article III, and as generally applied to the
Company, the term "KNOWLEDGE" means the actual knowledge, upon due inquiry of
Brad Keywell ("BRAD"), Eric Lefkofsky ("ERIC") (each, a "PRINCIPAL EXECUTIVE"
and together, the "PRINCIPAL EXECUTIVES") and each of Rick Surkamer, Jennifer
MacLean, Steven Scheyer, Simeon Schnapper and Jim Johnson (collectively, the
"KEY EMPLOYEES").
The Company represents and warrants, as of the date of this
Agreement, to Acquiror and Acquiror Sub that, except as specifically
described in the Company Disclosure Schedules, the statements contained in
this Article III are true and correct with respect to the Company and its
business. Any disclosure set forth on any particular Section of the Company
Disclosure Schedules shall be deemed disclosed in reference to all Sections
of the Company
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Disclosure Schedules to which such disclosure may be reasonably applicable.
SECTION 3.01 ORGANIZATION AND QUALIFICATION; EQUITY
INVESTMENTS. The Company is a corporation, duly organized, validly existing
and in good standing under the laws of the State of Delaware. Except as set
forth on Section 3.01 of the Company Disclosure Schedules, the Company does
not own, directly or indirectly, five percent (5%) or more of the voting
stock or other equity interests in another Person. The Company possesses all
requisite corporate power and corporate authority to own, lease and operate
its properties and/or to carry on its business as it is now being conducted,
and is duly qualified and in good standing to do business in each
jurisdiction in which the nature of the business conducted by the Company or
the ownership or leasing of its properties makes such qualification
necessary, other than where the failure to do so would not have a Company
Adverse Effect. The Company was duly incorporated on March 22, 1999; no
predecessor Person conducted the business of the Company.
SECTION 3.02 CERTIFICATE OF INCORPORATION; BYLAWS. The Company
has furnished to Acquiror complete and correct copies of its Certificate of
Incorporation and Bylaws, as amended or restated. The Company is not in
violation of any provision of its Certificate of Incorporation or Bylaws.
SECTION 3.03 CAPITALIZATION OF THE COMPANY.
(a) As of January 16, 2000, the authorized capital
stock of the Company consists solely of:
(i) 40,000,000 duly authorized shares of
Company Common Stock, consisting of 36,895,000 shares of
Class B (voting) Common Stock ("COMPANY CLASS B COMMON
STOCK") and 3,105,000 shares of Class A (non-voting) Common
Stock ("COMPANY CLASS A COMMON STOCK"), of which:
(A) 16,500,000 shares of Company
Class B Common Stock are issued and outstanding,
all of which are held of record and beneficially
by the Persons and in the amounts set forth on
Section 3.03(a) of the Company Disclosure
Schedules;
(B) 3,105,000 shares of Company
Class A Common Stock have been duly and validly
reserved for issuance under the 1999 Stock Option
Plan of the Company (the "PLAN"), of which 395,000
shares are outstanding pursuant to the exercise of
such options, ______ shares are subject to
outstanding options and _______ shares are not
subject to any outstanding options; such options
are held of record by the Persons and in the
amounts set forth on Section 3.03(a) of the
Company Disclosure Schedules (the "COMPANY
OPTIONS"); and
(C) 8,682,080 shares of Class B
Common Stock are duly and validly reserved for
issuance upon the conversion of the Company Series
A Preferred Stock and the Company Series B
Preferred Stock and for issuance upon exercise of
the Silicon Warrant.
(ii) 7,153,711 duly authorized shares of Company
Preferred Stock of which:
(A) 1,500,000 shares are designated
as Company Series A Preferred Stock, all of which
are issued and outstanding, and all of which are
held of record and beneficially by the Persons and
in the amounts set forth on Section 3.03(a) of the
Company Disclosure Schedules; and
(B) 5,653,711 shares are designated
as Company Series B Preferred Stock, of which
5,653,711 are issued and outstanding, and which
are held of record by the Persons and in the
amounts set forth on Section 3.03(a) of the
Company Disclosure Schedules.
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<PAGE>
(b) No Other Company Securities are issued and
outstanding. Section 3.03(b) of the Company Disclosure Schedules
contains a list of all outstanding warrants, options, agreements,
convertible securities (other than Company Preferred Stock and the
Silicon Warrant) and other commitments pursuant to which the Company
is or may become obligated to issue, sell or otherwise transfer any
Company Common Stock or Company Preferred Stock, which list names
all Persons entitled to receive such Company Common Stock or Company
Preferred Stock and sets forth the shares of Company Common Stock or
Company Preferred Stock required to be issued thereunder. Except as
described in Section 3.03(b) of the Company Disclosure Schedules, no
shares of Company Common Stock or Company Preferred Stock are held
in treasury or are reserved for any other purpose.
(c) All outstanding shares of Company Common Stock and
Company Preferred Stock are, and as of the Effective Time will be,
duly authorized, validly issued, fully paid and non-assessable, and
not subject to preemptive rights created by statute, the Company's
Certificate of Incorporation or Bylaws, or, except as set forth in
Section 3.03(c) of the Company Disclosure Schedules, any agreement
as to which the Company is party or by which it is bound.
(d) Except as disclosed in Section 3.03(b) of the
Company Disclosure Schedules, there are no Other Company Options
obligating the Company to register for sale any capital stock or
other equity interests in the Company. Except as disclosed in
Section 3.03(d) of the Company Disclosure Schedules, as of the date
of this Agreement there are no obligations, contingent or otherwise,
of the Company to (x) repurchase, redeem or otherwise acquire any
Company Common Stock or Company Preferred Stock, or (y) provide
funds to, or make any material investment in (in the form of a loan,
capital contribution or otherwise), or provide any guarantee with
respect to the obligations of, any Person.
(e) The Stockholders hold of record all of the
outstanding shares of Company Common Stock and Company Preferred
Stock. To the knowledge of the Company, all shares of the Company
Common Stock and the Company Preferred Stock are free and clear of
all liabilities, liens, charges, security interests, adverse claims,
pledges, restrictions, encumbrances and demands whatsoever. To the
knowledge of the Company, no other Person has any right, title or
interest in or to such shares of Company Common Stock or Company
Preferred Stock, whether by reason of any purchase agreement, Law,
option, assignment, contract (written or oral) or otherwise. Neither
the Company nor, to the knowledge of the Company, any Stockholder
has entered into, issued or given, or agreed to enter into, issue or
give, any person other than Acquiror or Acquiror Sub an option,
warrant, right, put, or call relating to, or any security
convertible into, any shares of Company Common Stock or Company
Preferred Stock or any such convertible security. For the purposes
of this Agreement, the terms "LAW" or "LAWS" shall mean any foreign,
U.S. federal, state, provincial, local or municipal law, statute,
rule, ordinance, regulation, order, writ, injunction, judgment or
decree.
(f) All issued Company Common Stock and Company
Preferred Stock has been issued in transactions exempt from
registration under the the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (the "SECURITIES
ACT"), and the rules and regulations promulgated thereunder, and all
applicable state securities or blue sky laws and the rules and
regulations thereunder ("BLUE SKY LAWS"), and the Company has not
violated the Securities Act or any Blue Sky Laws in connection with
the issuance of any such stock.
SECTION 3.04 AUTHORITY. The Company possesses the requisite
corporate power and corporate authority to execute and deliver this
Agreement, including the Exhibits attached hereto, to perform its obligations
under this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Company and
the consummation by the Company of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action,
including the approval by the Company's Stockholders and directors, and no
other proceedings on the part of the Company are necessary to authorize this
Agreement or to consummate the transactions contemplated by this Agreement.
This Agreement has been duly executed and delivered by the Company, and
assuming the due authorization, execution and delivery by Acquiror and
Acquiror Sub, constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms and conditions.
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<PAGE>
SECTION 3.05 NO CONFLICTS; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the Company
will not: (i) conflict with or violate the Company's Certificate of
Incorporation or Bylaws, (ii) subject to (x) obtaining the consents,
authorizations, approvals and permits of, and making filings with or
notifications to, any governmental or regulatory authority, domestic or
foreign (collectively, "GOVERNMENTAL ENTITIES"), pursuant to the
applicable requirements of Laws, including but not limited to the
Securities Act, the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder (the "EXCHANGE ACT"),
Blue Sky Laws, the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder (the "HSR
ACT") (including, without limitation, with respect to the acquisition
by any Stockholder of shares of Acquiror Common Stock or Acquiror
Series A Preferred Stock in the Merger), the Code, and the filing and
recordation of appropriate merger documents as required by Delaware Law
and (y) obtaining the consents, approvals, authorizations or permits
described in Section 3.05(b) of the Company Disclosure Schedules,
conflict with or violate any laws applicable to the Company or by which
any of its properties is bound or affected; or (iii) except as set
forth in Section 3.05(b) of the Company Disclosure Schedules, result in
any breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the
properties or assets of the Company pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company is a
party or by which the Company or any of its properties is bound or
affected.
(b) The execution and delivery of this Agreement by
the Company does not require, and neither the performance nor
compliance with the terms hereof by the Company requires, any consent,
approval, authorization or permit of, or filing with or notification
to, any Governmental Entities or other Persons, except for (i)
applicable requirements, if any, of the Securities Act, the Exchange
Act, Blue Sky Laws, the HSR Act (including, without limitation, with
respect to the acquisition by any Stockholder of shares of Acquiror
Common Stock or Acquiror Series A Preferred Stock in the Merger), the
NYSE and the Code, (ii) the consents, approvals, authorizations or
permits described in Section 3.05(b) of the Company Disclosure
Schedules, (iii) any consent or approval required for an assignment of
a contract or agreement by operation of law pursuant to the Merger (and
not required expressly under such contract or agreement upon a change
of control or merger) and (iv) the filing and recordation of
appropriate merger documents as required by Delaware Law.
SECTION 3.06 PERMITS; COMPLIANCE. The Company is in possession
of all material franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consnets, certificates, approvals and
orders necessary for the Company to own, lease and operate its properties or
to carry on its business as it is now being conducted (each, a "COMPANY
PERMIT") and no suspension, revocation or cancellation of any such Company
Permit is pending or, to the knowledge of the Company, threatened. The
Company is not operating in material conflict with, or in material default or
violation of (i) any Law applicable to the Company or by which its properties
are bound or affected, or (ii) any Company Permit. Each Company Permit
material to the operations of the Company is listed in Section 3.06 to the
Company Disclosure Schedules.
SECTION 3.07 FINANCIAL STATEMENTS.
(a) Except as disclosed in Section 3.07(a) of the Company
Disclosure Schedules, the unaudited Balance Sheets, Income Statements,
Statements of Cash Flow and Statements of Equity of the Company as at
and for the calendar eleven (11) month period ended November 30, 1999
(collectively, the "COMPANY FINANCIAL STATEMENTS") delivered to
Acquiror prior to the date of this Agreement (i) have been prepared
from, and are in agreement with, the books, records and accounts of the
Company, (ii) fairly present in all material respects the financial
position of the Company as of the dates thereof, and (iii) fairly
present, in all material respects, the results of operations of the
Company for the periods indicated; PROVIDED, HOWEVER, the Company
Financial Statements are subject to normal or recurring adjustments at
the Company's fiscal year-end, have not necessarily been prepared in
accordance with United States generally
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accepted accounting principles and standards ("GAAP") and do not
contain footnotes and other presentation items that would be
required by GAAP.
(b) The Company has no liabilities or indebtedness of any
nature whatsoever, except for (i) liabilities and indebtedness set
forth in the Balance Sheets included in the Company Financial
Statements dated November 30, 1999 (the "MOST RECENT STATEMENTS"), (ii)
liabilities and indebtedness which have arisen after the date of the
Most Recent Statements in the ordinary course of business of the
Company, (iii) liabilities and indebtedness set forth in Section
3.07(b) of the Company Disclosure Schedules, (iv) liabilities and
indebtedness incurred in connection with the transaction contemplated
herein, and (v) except as otherwise set forth in this Section 3.07(b),
any such liability or indebtedness in each case less than $100,000, and
less than $1,000,000 in aggregate liabilities or indebtedness.
SECTION 3.08 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in Section 3.08 of the Company Disclosure Schedules, since the
incorporation of the Company, (i) there has not been, and the Company has no
knowledge of any facts that are not reflected in the Most Recent Statements
and are reasonably likely to result in, any event or events causing a Company
Adverse Effect, and (ii) to the date of this Agreement, there has not been
any material change by the Company in its accounting methods, principles or
practices except any such change after the date of this Agreement mandated by
a change in GAAP.
SECTION 3.09 ABSENCE OF LITIGATION.
(a) There are no claims, actions, suits, litigation,
proceedings, arbitrations or investigations of any kind affecting the
Company, at law or in equity (including actions or proceedings seeking
injunctive relief), which are pending or, to the knowledge of the
Company, threatened. There is no action pending or, to the knowledge of
the Company, threatened seeking to enjoin or restrain the Merger or any
of the transactions contemplated by this Agreement.
(b) Except as set forth in Section 3.09(b) of the Company
Disclosure Schedules, the Company is not subject to any continuing
order of, consent decree, settlement agreement or other similar written
agreement with any Governmental Entity, or any judgment, order, writ,
injunction, decree or award of any Governmental Entity or arbitrator,
including, without limitation, cease-and-desist orders.
SECTION 3.10 CONTRACTS; NO DEFAULT.
(a) Section 3.10(a) of the Company Disclosure
Schedules lists the following written undischarged contracts of the
Company:
(i) any written arrangement (or group of
related written arrangements) for the lease of tangible personal
property or real property from or to third parties with annual
payments exceeding $50,000 or with a term exceeding one year;
(ii) any written arrangement concerning a
partnership, limited liability company, distributorship, agency,
marketing agreement or joint venture;
(iii) contracts under which the Company
has created, incurred, assumed, or guaranteed (or may create, incur,
assume, or guarantee) indebtedness for borrowed money in excess of
$50,000;
(iv) contracts which relate to inventory
purchases or capital expenditures involving an expenditure (or
series thereof) in excess of Fifty Thousand Dollars ($50,000),
performance of which by both parties has not been completed;
(v) contracts which relate to bonus and
incentive plans or similar plans providing for the payment of
bonuses, commissions, incentive compensation or similar result-based
remuneration to service providers to the Company other than
employees;
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<PAGE>
(vi) contracts with any labor union or
contract for the employment of any officer, individual employee or
other Person on a full-time, part-time or consulting basis, and any
written material contract for the engagement of any consultants or
independent contractors;
(vii) contracts which by their terms limit
the right of any employee of the Company to engage in, or to compete
with the Company in, any business conducted by the Company prior to
the Effective Time; and contracts which by their terms limit the
right of the Company or, to the knowledge of the Company, any
employee of the Company to engage in, or to compete with any Person
(other than the Company) in, any business conducted by the Company
prior to the Effective Time;
(viii) other than purchase orders entered
into in the ordinary course of the Company's business, all contracts
of more than $50,000 under which the work by the Company is not yet
complete or under which the Company otherwise has on-going
obligations in excess of $50,000;
(ix) contracts with any Stockholder or
any of their respective Affiliates with respect to which the
consequences of a default or termination would reasonably be
expected to have a Company Adverse Effect;
(x) contracts which constitute a
guaranty of any obligation for borrowed money or other financial
obligation, other than endorsements made for collection in the
Company's ordinary course of business, or any agreement with respect
to the lending or investing of funds to or in other Persons;
(xi) other than contracts for the sale
and purchase of inventory entered into in the Company's ordinary
course of business, any contract or group of related contracts with
the same party (or group of related parties) for or relating to the
purchase or sale of products or services under which the undelivered
balance of products and services has a selling price in excess of
$250,000;
(xii) any other contract or group of
related contracts with the same party requiring payments after the
date hereof to or by the Company of more than $250,000;
(xiii) any agreement with any employee, the
benefits of which are contingent or the terms of which are
materially altered upon the occurrence of a transaction of the
nature contemplated by this Agreement involving the Company;
(xiv) any agreement or plan the benefits
of which will be increased or accelerated by the occurrence of the
transactions contemplated by this Agreement;
(xv) any other written arrangement or
group of related written arrangements not entered into in the
Company's ordinary course of business the breach, default or
termination of which would have a Company Adverse Effect;
(xvi) any written arrangement or contract
to which the Company is a party which is capable of being terminated
by the other party expressly upon the occurrence of a transaction of
the nature contemplated by this Agreement;
(xvii) any contract which cannot readily be
fulfilled or performed by the Company on time without express
penalty or without extraordinary expenditure of money, which penalty
or expenditure would reasonably be expected to have a Company
Adverse Effect;
(xviii) concern a lease or agreement
relating in any manner to real estate; or
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(ixx) relate to royalty or licensing
contracts, or contracts requiring similar payments (including
software license agreements) involving, or which may reasonably in
the future involve, an amount in excess of Fifty Thousand Dollars
($50,000) annually.
(b) The Company has made available to Acquiror a
correct and complete copy of each agreement (including all
amendments thereto) listed in Section 3.10(a) of the Company
Disclosure Schedules. With respect to each agreement so listed (A)
the agreement is legal, valid, binding, enforceable, and in full
force and effect; (B) the agreement (excluding agreements requiring
consent or approval for an assignment by operation of law pursuant
to the Merger (and not expressly requiring consent or approval upon
a change of control or merger)) will continue to be legal, valid,
binding, and enforceable and in full force and effect on identical
terms immediately after the Effective Time at the terms in effect
immediately prior to the Effective Time; (C) neither the Company
nor, to the knowledge of the Company, any other party to the
arrangement, is in material breach or default (including, with
respect to any express or implied warranty), and no event has
occurred which with notice or lapse of time or both would constitute
a material breach or default or permit termination, modification, or
acceleration thereunder, except in each case for any breaches,
defaults, terminations, modifications or accelerations which have
been cured or waived or breaches, defaults, terminations,
modifications or accelerations which are not reasonably likely to
result in a Company Adverse Effect; and (D) to the Company's
knowledge, no party has repudiated any provision of any such
arrangement. Except as set forth on Section 3.10(b) of the Company
Disclosure Schedules, the Company is not a party to any legally
binding verbal contract which, if reduced to written form, would be
required to be listed in the Company Disclosure Schedules under the
terms of this Section 3.10.
(c) For the purpose of this Agreement, (i) the term
"AFFILIATE," means (x) any Person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned Person, and (y) with respect
to a Principal Executive, also such Principal Executive's spouse,
children and descendants, and the respective spouses of each, or a
trust for the benefit of any such Person, (ii) the term "CONTROL"
(including the terms "controlled by" and "under common control with")
means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock or as
trustee or executor, by contract or credit arrangement or otherwise,
and (iii) the term "CONTRACTS" means the contracts and agreements
required to be listed in Sections 3.10(a) and 3.10(b) of the Company
Disclosure Schedules.
SECTION 3.11 EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) Section 3.11(a) of the Company Disclosure
Schedules sets forth all pension, retirement, savings, disability,
medical, dental, health, life (including any individual life
insurance policy as to which the Company is owner, beneficiary or
both of such policy), death benefit, group insurance, profit
sharing, deferred compensation, stock option, bonus, incentive,
vacation pay, severance pay, "cafeteria" or "flexible benefit"
plans, or other employee benefit plans, trusts, arrangements,
contracts, agreements, policies or commitments (including without
limitation, any employee pension benefit plan as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and any employee welfare benefit plan as defined
in Section 3(1) of ERISA), under which current or former employees
of the Company or its "Plan Affiliates" are entitled to participate
by reason of their employment with the Company or its Plan
Affiliates, whether or not any of the foregoing is funded, and
whether insured or self-funded, to which the Company is a party or a
sponsor or a fiduciary thereof or by which the Company (or any of
its rights, properties or assets) is bound, or (ii) with respect to
which the Company could reasonably expect to have any liability
(whether or not such plan, trust, arrangement, contract, agreement,
policy or commitment is still in effect or frozen as to benefits or
assets) (collectively, the "EMPLOYEE BENEFIT PLANS").
(b) For purposes of this Agreement, the term "PLAN
AFFILIATE" shall mean any trade or business (whether or not
incorporated) that is part of the same controlled group, or under
common control with, or part of an affiliated service group that
includes, the Company or Acquiror, as applicable, within the meaning
of Section 414(b), (c), (m) or (o) of the Code.
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(c) As used in this Agreement, "PENSION PLAN" means any
Employee Benefit Plan which is an employee pension benefit plan as
defined in ERISA, or is otherwise a pension, savings or retirement plan
or a plan of deferred compensation, and the term "WELFARE PLAN" means
any Employee Benefit Plan which is not a Pension Plan.
(d) With respect to the Employee Benefit Plans:
(i) there are no Employee Benefit Plans
which are multiemployer plans as defined in Section 3(37)
of ERISA, and the Company has not (A) incurred nor
reasonably expects to incur, any direct or indirect
liability under or by operation of Title IV of ERISA, or
(B) failed to make any contribution when due as required by
Section 412 of the Code;
(ii) there are no Employee Benefit Plans
which promise or provide health or life benefits to
retirees or former employees of the Company other than as
required by Part 6 of Subtitle B of Title I of ERISA or
Section 4980 of the Code or other applicable state
continuation coverage law, or otherwise as identified in
Section 3.11(d) of the Company Disclosure Schedules;
(iii) except as disclosed in Section
3.11(d) of the Company Disclosure Schedules, each Employee
Benefit Plan has at all times been operated and
administered in material compliance with the applicable
requirements of ERISA, the Code and any other applicable
law (including regulations and rulings thereunder), and its
terms;
(iv) each Pension Plan identified in
Section 3.11(a) of the Company Disclosure Schedules has
received a favorable determination letter from the Internal
Revenue Service ("IRS") stating that such Plan is qualified
under Section 401(a) of the Code, meets all the
requirements of the Code and that any trust or trusts
associated with the plan are tax exempt under Section
501(a) of the Code. Any trust or trusts associated with
such Pension Plans are tax exempt under Section 501(a) of
the Code. To the knowledge of the Company, there is no
reason why the tax-qualified or registered status of any
such Pension Plan should be revoked, whether retroactively
or prospectively, by any Governmental Entity pursuant to
applicable Laws. All amendments to the Pension Plans which
were required to be made through the date hereof and the
Effective Time under Section 401(a) of the Code subsequent
to the issuance of each such Plan's determination letter
have been made, including all amendments required to be
made by each respective date by the Tax Reform Act of 1986,
and any other Laws or legislation affecting such Employee
Benefit Plans;
(v) to the knowledge of the Company, no
actual or threatened disputes, lawsuits, claims (other than
routine claims for benefits), investigations, audits or
complaints to, or by, any person or Governmental Entity
have been filed or are pending with respect to any Employee
Benefit Plan or its sponsor, or such sponsor's subsidiaries
or Plan Affiliates, in connection with any Employee Benefit
Plan, or the fiduciaries responsible for such Employee
Benefit Plan, and to the knowledge of the Company, no state
of facts or conditions exist which reasonably could be
expected to subject such Company to any material liability
(other than routine claims for benefits) in accordance with
the terms of such Employee Pension Plan or pursuant to
applicable Laws;
(vi) except as disclosed in Section
3.11(d) of the Company Disclosure Schedules, the following
clauses are true with respect to each Employee Benefit Plan:
(A) all material filings required by ERISA,
the Code or any other applicable Laws, have been
timely filed and all material notices and disclosures
to Plan participants required by same have been
timely provided;
(B) the Company has not made, nor has it
committed to make, whether in writing or orally, any
representation, payment, contribution or award to or
under any Employee Benefit Plan (other than as
required by its terms, the Code or ERISA;
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(C) all contributions and payments made or
accrued with respect to each Employee Benefit Plan
required to be disclosed in Section 3.11(a) of the
Company Disclosure Schedules are deductible in full
under the Code. All contributions, premiums or
payments required to be made with respect to each
such Employee Benefit Plan have been or will
hereafter be made on or before their due date(s):
(D) except as disclosed in Section 3.11(d)
of the Company Disclosure Schedules, with respect to
each Employee Benefit Plan maintained with respect to
employees of the Company, the Company has delivered
to Acquiror true and complete copies of the following
documents:
(1) plan documents, subsequent plan
amendments, and any and all other documents
that establish or describe the existence of
the plan, trust, arrangement, contract,
policy or commitment;
(2) summary plan descriptions and
summaries of material amendments and
modifications;
(3) the most recent tax-qualified
determination letters received from, or
applications pending with, the IRS with
respect to Pension Plans;
(4) the three most recent annual
information returns (if applicable),
including related schedules and audited
financial statements and opinions of
independent certified public accountants,
for each Employee Benefit Plan filed on IRS
Form 5500 for Employee Benefit Plans adopted
by the Company; and
(5) all related trust agreements,
insurance contracts or other funding
agreements that implement each such Employee
Benefit Plan.
(vii) at no time has the Company adopted any
Pension Plan which is or could become subject to Title IV of
ERISA or the funding standards of Section 412 of the Code. The
Company has not incurred any liability to, or adopted any
Employee Benefit Plan or other arrangement which may expose it
to liability of any nature whatsoever, to (i) the Pension
Benefit Guarantee Corporation under Title IV or Section 502 of
ERISA, or (ii) the IRS under Chapter 43 of the Code;
(viii) with respect to each Employee
Benefit Plan, there has not occurred, and no person or
entity is contractually bound to enter into, any nonexempt
"prohibited transaction" within the meaning of Section 4975
of the Code or Section 406 of ERISA, or any other
transaction contrary to the terms of such Employee Benefit
Plan which could result in material liability to the
Company.
(e) The Company has complied in all material respects
with the provisions of ERISA and the Code with respect to each
Pension Plan and Welfare Plan heretofore adopted or currently in
effect for the benefit of its employees. Each Employee Benefit Plan
described in Section 3.11(a) of the Company Disclosure Schedules
may, by its express terms, be amended or terminated, in whole or in
part.
(f) Except as disclosed in Section 3.11(f) of the
Company Disclosure Schedules, no payment that is owed or may become
due (pursuant to any agreement with the Company existing prior to
the Effective Time) to any director, officer, employee or agent of
the Company shall result in the imposition of, tax under Section
280G or 4999 of the Code, nor is the Company obligated, orally or in
writing, to "gross up" or otherwise compensate any such person due
to the imposition of an excise or similar tax on payments made to
such person by the Company.
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(g) Except as disclosed in Section 3.11(g) of the
Company Disclosure Schedules or as expressly provided by the terms
of this Agreement, the consummation of the transactions contemplated
by this Agreement will not accelerate or terminate, nor does there
exist any basis for the acceleration or termination of, (i) benefits
payable to employees of or other compensated personnel at the
Company under any Employee Benefit Plan, Welfare Plan, or other
plan, arrangement, contract or agreement, written or oral, (ii) a
participant's vesting credits or years of service under any Pension
Plan or Welfare Plan, or (iii) accruals with respect to any other
benefits or amounts reserved under any such plan or arrangement.
(h) Section 3.11(h) of the Company Disclosure
Schedules lists, as of the date of this Agreement, all collective
bargaining or other labor union contracts to which the Company is a
party and which is applicable to persons employed by the Company.
There is no pending or, to the knowledge of the Company, threatened,
labor dispute, strike or work stoppage against the Company which may
materially interfere with the business activities of the Company,
its revenues, profits, cash flows, or other results of operations.
The Company has no knowledge of the commission of any unfair labor
practices in connection with the operation of the Company business,
and there is not now pending or, to the knowledge of the Company,
threatened, any charge, complaint or other proceeding against the
Company by the National Labor Relations Board, or comparable
Governmental Entities.
(i) At no time has any Plan Affiliate adopted any
Pension Plan which is or could become subject to Title IV of ERISA
or the funding standards of Section 412 of the Code or contributed
or been obligated to contribute to any multiemployer plans as
defined in Section 3(37) of ERISA.
SECTION 3.12 TAXES.
(a) (i) Except as disclosed in Section 3.12(a) of
the Company Disclosure Schedules, all material Returns in
respect of Taxes required to be filed prior to the date
hereof with respect to the Company have been or will be
timely filed (including extensions).
(ii) Except as disclosed in Section 3.12(a) of
the Company Disclosure Schedules, all Taxes of the Company
due prior to the date hereof, whether or not shown on the
Returns, have been or will be timely paid by the party to
whom chargeable and all payments of estimated Taxes
required to be made with respect to the Company under the
Code or any comparable provision of foreign, federal,
state, provincial or local Law have been made on the basis
of the applicable party's good faith estimate of the
required installments.
(iii) Except as disclosed in Section 3.12(a) of
the Company Disclosure Schedules, all Returns filed by the
Company (or, in cases where amended Returns have been
filed, such Returns (as amended) are true, correct and
complete in all material respects.
(iv) All Taxes required to have been withheld
and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, Stockholder or
other third party by the Company have been withheld and, to
the extent required, paid to the relevant taxing authority.
(v) No material adjustment relating to any
Return has been proposed in writing by any Tax authority,
except proposed adjustments that have been resolved prior
to the date hereof.
(vi) There are no outstanding subpoenas or
requests for information to which the Company has received
notice with respect to any Return of the Company, or the
Taxes reflected on such Returns.
(vii) There are no Tax liens on any assets of
the Company other than liens for Taxes not yet due or
payable or being contested in good faith.
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(viii) Except as disclosed on Section
3.12(a) to the Company Disclosure Schedules, the Company
has not been at any time a member or shareholder of any
partnership, limited liability company, corporation or
joint venture or the holder of a beneficial interest in any
trust for any period for which the statute of limitations
for any Tax potentially applicable as a result of such
membership or holding has not expired.
(ix) Except as disclosed on Section
3.12(a) to the Company Disclosure Schedules and as
expressly set forth by the terms of this Agreement, neither
the Company nor any of its subsidiaries were a party to any
agreement, contract, or arrangement that would result,
separately or in the aggregate, in the payment of any
"excess parachute payments" within the meaning of Section
280G of the Code by reason of the Merger.
(x) All material Taxes required to be
withheld, collected or deposited by the Company during any
taxable period for which the statute of limitations on an
assessment remains open have been timely withheld,
collected or deposited and to the extent required, have
been paid to the relevant Tax authority.
(b) (i) Except as expressly provided in this
subdivision (i), the Company does not have any material
income reportable for a period ending after the Effective
Time but attributable to an installment sale occurring in
or a change in accounting method made for a period ending
at or prior to the Effective Time which resulted in a
deferred reporting of income from such transaction or from
such change in accounting method (other than a deferred
intercompany transaction).
(ii) No written Tax sharing or allocation
agreement exists involving the Company.
(iii) Except as disclosed on Section
3.12(b) of the Company Disclosure Schedules, the Company
does not have any unused net operating loss, unused net
capital loss, unused credit, unused foreign tax credit, or
excess charitable contribution for federal income tax
purposes as of the Effective Time.
(c) For purposes of this Agreement, "TAX" or "TAXES"
shall mean any and all taxes, payable to any foreign, federal,
state, provincial, local or foreign governmental entity or taxing
authority or agency, including, without limitation,
(i) income, franchise, net worth, profits,
gross receipts, minimum, alternative minimum, estimated, ad
valorem, value added, sales, use, goods and services, real or
personal property, capital stock, license, payroll,
withholding, FICA, FUTA, disability, employment, social
security, Medicare, workers compensation, unemployment
compensation, utility, severance, production, excise, stamp,
occupation, premiums, windfall profits, transfer and gains
taxes;
(ii) customs duties, imposts, charges,
levies or other similar assessments of any kind; and
(iii) interest, penalties and additions to
tax imposed with respect thereto.
As used herein, the term "RETURNS" shall mean any and all returns,
reports, information returns and information statements with respect to
Taxes required to be filed with the IRS or any U.S. state or any other
governmental entity or tax authority or agency, whether domestic or
foreign, including, without limitation, consolidated and combined
Returns. For the purpose of this Section 3.12, references to the
Company and its subsidiaries shall include former subsidiaries of the
Company for periods during which such entities were owned, directly or
indirectly, by the Company.
SECTION 3.13 INTELLECTUAL PROPERTY RIGHTS. Except as set forth
in Section 3.13 of the Company Disclosure Schedules or in the last sentence
of this Section 3.13, the Company owns or possesses the right or license
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to use all patents, trademarks, service marks, trade names, domain names,
slogans, trade secrets and other tangible or intangible proprietary
confidential information (including scientific and technical information,
design processes, operating processes, schematics, procedures, formulae, data
processing techniques, software, the specialized information and technology
embodied in communications program materials, software documentation and
other program and system designs), which it has used or currently uses (the
"INTELLECTUAL PROPERTY") without any known conflict or alleged conflict with,
or infringement of, the rights of others, and the Company's public use of any
of such Intellectual Property which the Company is currently using internally
and which it currently intends to commence using publicly shall not conflict
with, or infringe upon, the rights of others. All Intellectual Property owned
by the Company is referred to herein as the "OWNED INTELLECTUAL PROPERTY."
All Intellectual Property currently licensed to the Company is referred to
herein as the "LICENSED INTELLECTUAL PROPERTY." Section 3.13 of the Company
Disclosure Schedules identifies (i) all Owned Intellectual Property
consisting of issued domestic and foreign patents and patent applications
pending, patent applications in process, domain name registrations, common
law trademarks which are material to the Company's business as currently
operated or as planned to be operated with such trademarks which the Company
is currently using internally and currently intends to commence using
publicly, domestic and foreign trademark registrations and trademark
registration applications, copyright registrations, copyright registration
applications, common law service marks which are material to the Company's
business as currently operated or as planned to be operated with such
trademarks which the Company is currently using internally and currently
intends to commence using publicly, service mark registrations, service mark
registration applications and written know-how agreements, and rights
acquired through litigation, and (ii) all of the material Licensed
Intellectual Property (other than computer software which is generally
commercially available). Except as set forth in Section 3.13 of the Company
Disclosure Schedules, the agreements for Licensed Intellectual Property
(including computer software) are in full force and effect; the rights of the
Company thereunder are free and clear of all adverse claims, options, liens,
charges, security interests and encumbrances; and no defaults exist
thereunder. The Company has not been served with any notice or summons
regarding any interference, opposition or cancellation proceedings or
infringement suits, nor to the knowledge of the Company or any of Nancy
Dugan, Paul Ivsin, Nick Antista and Hugo Toledo (the "Additional IT
Personnel") has the Company received any threat of such action, with respect
to any Intellectual Property. To the knowledge of the Company and the
Additional IT Personnel, the Company has not been charged with infringing any
patent, copyright, trademark right or other intellectual property right of
any person, and neither the Company nor any of the Additional IT Personnel
has any knowledge of any third party's use of any Intellectual Property in a
manner that infringes upon the rights of the Company or any third party. The
Intellectual Property comprises all of the intellectual property rights and
licenses pertaining thereto necessary for the Company to conduct its business
as formerly operated, and as currently planned to be operated, except for
such licenses and intellectual property rights set forth in Section 3.13 of
the Company Disclosure Schedules. The Company has not taken or allowed there
to be taken any action to cause any of the material Intellectual Property to
be abandoned, or failed to take such action necessary to prevent such
material Intellectual Property from being abandoned. Section 3.13 of the
Company Disclosure Schedules identifies all parties (other than the Company's
employees) who have created any portion of the Owned Intellectual Property,
and the Company has obtained from each of such persons a valid and
enforceable written assignment of any and all rights which they would
otherwise have in the Owned Intellectual Property. The Company has obtained
written agreements or other adequate assurances from all of its current and
former employees and from each third party with whom it has shared any of its
confidential proprietary information, pursuant to which such employees and
other third parties have acknowledged that such information is confidential
proprietary information of the Company and have undertaken to maintain such
information as confidential in accordance with the terms thereof.
Notwithstanding any other provision of this Section 3.13 to the contrary, the
Company shall not be deemed to be in breach of any of its representations or
warranties set forth in this Section 3.13 as a result of any use which may be
made of the trademark STARBELLY at any time following the Effective Time, and
the terms of this Section 3.13 shall be applicable to the trademark STARBELLY
solely with respect to the use thereof prior to the Effective Time.
SECTION 3.14 CERTAIN BUSINESS PRACTICES AND REGULATIONS.
Neither the Company nor any of its executive officers or directors has, to
the knowledge of the Company, (i) made or agreed to make any contribution,
payment or gift to any customer, client, supplier, governmental official,
employee or agent where either the contribution, payment or gift or the
purpose thereof was illegal under any applicable law, (ii) fraudulently
established or maintained any unrecorded fund or asset for any purpose or
knowingly made any false entries on its books and records for any reason, or
(iii) made or agreed to make any contribution, or reimbursed any political
gift or contribution made by any other person, to any candidate for foreign,
federal, state, provincial or local public office in violation under any
applicable law.
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SECTION 3.15 REAL PROPERTY. The Company owns no real property.
Section 3.15(1) to the Company Disclosure Schedules sets forth a complete
description of all real property leased by the Company as of the date of this
Agreement ("REAL PROPERTY"). The Company has furnished Acquiror or its
counsel true and complete copies of (i) the most recent lease with respect to
each parcel of Real Property, and (ii) a written description of each oral
contract, arrangement or understanding relating to Real Property. Except as
set forth in Section 3.15(2) to the Company Disclosure Schedules:
(a) There is no condemnation proceeding or eminent
domain proceeding pending or, to the knowledge of the Company,
threatened, against any Real Property.
(b) The Company does not have any interest in, or any
right or obligation to acquire any interest in, any real property
other than Real Property.
(c) The rental set forth in each lease for Real
Property is the actual rental being paid, and there are no separate
agreements or understandings with respect to the same not set forth
in Section 3.15(2) to the Company Disclosure Schedules.
(d) The Company and any Affiliate which is lessee
under a lease for Real Property has, as of the date hereof, and
shall have at the Effective Time, the full right to exercise any and
all renewal options contained therein.
(e) There are no written or oral contracts between the
Company or any Affiliate and any third party relating to any claim
by such third party of any right to all or any part of the interest
of the Company or Affiliate in any Real Property.
(f) All security deposits required under leases for
Real Property have been made and no forfeiture with respect thereto
has been claimed by any of the lessors.
(g) Each Real Property is subject to a binding written
lease which is in full force and effect and neither the Company nor,
to the Company's knowledge, any other party to such lease is in
breach of any term thereunder.
(h) The premises with respect to each lease referenced
in subparagraph (f) above is in a state of good repair and as of the
date hereof and at the Effective Time, there will be no accrued
obligation of the tenant thereunder for maintenance or repair of the
premises which had not yet been performed.
SECTION 3.16 ENVIRONMENTAL REPRESENTATIONS. The Company is in
material compliance with, and does not have any material liability applicable
under any Environmental Law, and to the knowledge of the Company, the Real
Property has not been used by any other person in violation of, any
Environmental Laws. For purposes of this Agreement, the term "ENVIRONMENTAL
LAWS" shall mean all foreign, federal, state, and local laws specifically
relating to protection of the environment, or to protection of the public
health from releases into the environment of hazardous substances, pollutants
or contaminants, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
the Resource Conservation and Recovery Act of 1976, as amended, and U.S.
state tort laws and common laws.
SECTION 3.17 BROKERS. Except for matters disclosed in Section
3.17 of the Company Disclosure Schedules, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
SECTION 3.18 TITLE TO ASSETS. Except for matters disclosed in
Section 3.18 of the Company Disclosure Schedules, the Company is the owner of
and has good and valid title to, or in the case of leased property has a
valid leasehold interest in, all of its properties and assets, including
those assets and properties reflected in the Company Financial Statements,
free and clear of all liens, claims or encumbrances.
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SECTION 3.19 RELATED PARTY TRANSACTIONS. To the knowledge of
the Company and except for any interests disclosed on Section 3.19 of the
Company Disclosure Schedules, neither the Company nor either Principal
Executive has any material direct interest in any material supplier, customer
or client of the Company or in any person from whom or to whom the Company
leases any material property, or in any other person, firm or entity with
whom the Company transacts material business of any nature. Section 3.19 to
the Company Disclosure Schedules identifies and describes all material
contracts to which the Company is a party and to which any Principal
Executive is directly also a party.
SECTION 3.20 OFFICERS AND DIRECTORS. Section 3.20 to the
Company Disclosure Schedules sets forth a list of the names and addresses of
all executive officers and directors of the Company as of the date hereof.
SECTION 3.21 POWERS OF ATTORNEY. Except as set forth in Section
3.21 of the Company Disclosure Schedules, the Company has not given a power
of attorney (irrevocable or otherwise) to any person or entity for any
purpose whatsoever, which is currently valid and in effect.
SECTION 3.22 INFORMATION SUPPLIED. None of the information
supplied or to be supplied by the Company specifically for inclusion in the
Proxy Statement will, on the date such Proxy Statement is first mailed to
Acquiror's shareholders or at the time of the Shareholders Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be state therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
SECTION 3.23 OWNERSHIP OF ACQUIROR COMMON STOCK. Except as set
forth on Section 3.23 of the Company Disclosure Schedules, as of the date
hereof, neither the Company nor, to the knowledge of the Company, any
Principal Executive or his Affiliates (i) beneficially owns (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, or (ii) is party
to any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, in each case, shares of Acquiror Common
Stock.
SECTION 3.24 THE COMPANY'S WEBSITE. The Company's Internet
website (the "WEBSITE") is a reasonably stable, secure and redundant website
with regard to both bandwidth and server needs, taking into account all facts
and circumstances. The current capacity of the Website is sufficient to
permit reasonable access by at least 500 simultaneous users, and the Website
has been designed and developed such that its capacity may readily be
expanded to address currently projected increases in the Website's average
daily number of users. At all times following the date on which the Website
is complete, operational and accessible from the Internet (the "Website
Launch Date") the Website will be capable of being operational and accessible
from the Internet as described above no less than ninety-eight percent (98%)
of the time, measured with respect to semiannual periods commencing at the
Effective Time, and determined without regard to periods when the Website is
not operational and accessible from the Internet due to (i) the Company's
development efforts and upgrades, or (ii) viruses transmitted over the
Internet, failures of systems controlled by third parties such as Ameritech
Corp. or Level 3, Inc., or other causes beyond the reasonable control of the
Company (it being understood and agreed that the Website is intended to be
operational and accessible from the Internet 24 hours per day, and not merely
during business hours). The Company has prepared and implemented a reasonable
disaster recovery contingency plan pursuant to which the Company or its
designee will be able to restore the Website and recover the database of
information collected by the Company with respect to users of the Website
within a reasonably prompt period following any fire or other disaster which
may occur at the Company's facilities.
SECTION 3.25 THE YEAR 2000 PROBLEM. Except as set forth in
Section 3.25 of the Company Disclosure Schedules:
(a) None of the computer systems owned or operated by the
Company or by any third party on behalf of the Company, and no
machinery, equipment, fixtures, inventory or other system which is
owned, leased or operated by the Company or by any third party on
behalf of the Company and controlled by one or more computer processors
(collectively, the "COMPUTER SYSTEMS") will result in a material
failure or disruption of any of the Company's business, operations,
financial reporting, tax reporting, inventory management, accounts
receivable systems, accounts payable systems, invoicing, delivery,
personnel
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management or records, benefits records or administration, or any
other records or systems as a result of being incapable of
recognizing and correctly calculating dates on or after January 1,
2000, or unable to perform any of its intended functions in a proper
and efficient manner as a result of its use with data containing any
date on or after January 1, 2000 (the "YEAR 2000 PROBLEM")
(b) Section 3.25 of the Company Disclosure Schedules
contains a true, correct and complete list of all written studies,
audits, surveys, reports and investigations conducted by or on
behalf of the Company with respect to the Year 2000 Problem.
SECTION 3.26 TECHNOLOGY SYSTEMS. The Company's integrated
fulfillment systems used for inventory and production management and control,
its StoreBuilder software systems, its product information databases, its
online product configurator, its online catalog/ordering system, its computer
hardware and network systems and its security systems (collectively, the
"Technology Systems") are reasonably stable, secure and redundant with regard
to processing power, bandwidth and data storage capacity, taking into account
all facts and circumstances. The Technology Systems are adequate to perform
their intended functions for the Company assuming (i) 500 simultaneous users
of the Website, and (ii) order processing and fulfillment at the volumes
currently projected by the Company for calendar year 2000 as reflected on
Section 3.13 of the Company Disclosure Schedules, and are scalable to support
substantial growth in the numbers of such visitors, order submissions and
order fulfillments. Without limiting the generality of the foregoing, the
Technology Systems have the following characteristics and are currently
capable of performing the following functions:
(a) receiving and processing customer orders from the
Website and affiliate websites;
(b) providing feedback to customer on order receipt;
(c) providing order status information to the customer;
(d) establishing an order database that can be used to
drive operations;
(e) internally tracking order status from submission
through steps of operations to product delivery;
(f) evaluating the orders received so that they can be
fulfilled;
(g) providing information to generate purchase orders
and production orders in accordance with blank garment needs and
artist/production assignments and schedules;
(h) establishing and maintaining a master image database;
(i) receiving images uploaded from customers for review,
enabling improvement for production purposes, and updating a master
image database;
(j) supplying quality digital images from a master image
database that can ultimately and efficiently be used in production;
(k) processing credit card transactions for payment
receipt/transfer of funds to the Company;
(l) processing purchase orders to be billed as accounts
receivable;
(m) establishing and maintaining a customer database that
supports customer service and marketing efforts; and
(n) preserving and protecting the security of the
Technology Systems, including without limitation the Website and
affiliate websites which are hosted on the Company's servers, and
preserving and protecting the confidentiality of all transactions
processed using the Technology Systems, using
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passwords, firewalls and other methods which are reasonable taking
into account all facts and circumstances.
SECTION 3.27 LIMITATION ON WARRANTIES. Notwithstanding anything
to the contrary contained in this Agreement, the Company makes no implied
warranty of any kind whatsoever, and makes no representation with respect to
(i) any matter not expressly set forth in this Article III, or (ii) the
future profitability, future earnings or other future performance of the
Company. ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUIROR SUB
The term "ACQUIROR ADVERSE EFFECT" as used in this Agreement shall
mean any change or event that, individually or when taken together with all
other such changes or events, would reasonably be considered to be materially
adverse to the financial condition, business, business prospects or results
of operations of Acquiror or any of its subsidiaries, taken as a whole;
provided, however, that a decline in the market value of Acquiror Common
Stock in and of itself shall not constitute an Acquiror Adverse Effect, and
the occurrence of any change or event (i) described in any Section of the
Acquiror Disclosure Schedules attached to this Agreement (the "ACQUIROR
DISCLOSURE SCHEDULES"), (ii) resulting from the entry into this Agreement or
the transactions contemplated hereby or the public announcement thereof (in
accordance with Section 6.09 hereof), or (iii) resulting from or arising in
connection with (A) any occurrence or condition affecting any of the online,
e-commerce, promotional or decorated products industries generally, (B) any
changes in economic, market, regulatory, banking, monetary, political or
other similar conditions or (C) any occurrence or condition affecting the
Internet (or any particular portion thereof) generally, shall not,
individually or in the aggregate, constitute an Acquiror Adverse Effect.
Acquiror and Acquiror Sub, jointly and severally, represent and
warrant, as of the date of this Agreement, to the Company that, except as set
forth on the Acquiror Disclosure Schedules (and making reference to the
particular section of this Agreement to which exception is being taken), the
statements contained in this Article IV are true and correct with respect to
Acquiror and Acquiror Sub, and their respective businesses. Any disclosure
set forth on any particular Section of the Acquiror Disclosure Schedules
shall be deemed disclosed in reference to all Sections of the Acquiror
Disclosure Schedules to which such disclosure may be reasonably applicable.
SECTION 4.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each
of Acquiror and Acquiror Sub is a corporation, duly incorporated, validly
existing and in good standing under the Laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as it is now being
conducted and each of Acquiror and Acquiror Sub is duly qualified and in good
standing to do business in each jurisdiction in which the nature of the
business conducted by it or the ownership or leasing of its properties makes
such qualification necessary, other than where the failure to do so would not
have an Acquiror Adverse Effect.
SECTION 4.02 ARTICLES OF INCORPORATION; BYLAWS. Acquiror has
furnished to the Company a complete and correct copy of its Articles of
Incorporation and Bylaws, as amended or restated, and a complete and correct
copy of the Certificate of Incorporation and Bylaws, as amended or restated,
of Acquiror Sub. Neither Acquiror nor Acquiror Sub is in violation of any of
the provisions of its Articles of Incorporation or Certificate of
Incorporation, as applicable, or its Bylaws.
SECTION 4.03 CAPITALIZATION OF ACQUIROR AND ACQUIROR SUB.
(a) The authorized capital stock of Acquiror consists of
100,000,000 shares of Acquiror Common Stock, of which 48,724,790 were
issued and outstanding as of January 14, 2000, and 10,000,000 shares of
Preferred Stock, no par value ("ACQUIROR PREFERRED STOCK"), none of
which are issued and outstanding. The authorized capital stock of
Acquiror Sub consists of 1,000 shares of Common Stock, no par value per
share ("ACQUIROR SUB COMMON STOCK"), of which, as of the date of this
Agreement, 1,000 shares are issued and outstanding. On the date of this
Agreement, all issued and outstanding shares of
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Acquiror Common Stock and Acquiror Sub Common Stock are, and at the
Effective Time all issued and outstanding shares of Acquiror Common
Stock, Acquiror Series A Preferred Stock and Acquiror Sub Common
Stock will be, duly authorized, validly issued, fully paid and
non-assessable. Acquiror is the record holder of all issued and
outstanding shares of Acquiror Sub Common Stock, and such shares are
owned by Acquiror free and clear of any and all security interests,
liens, claims, pledges, agreements, limitations on Acquiror's voting
rights, charges or other encumbrances of any nature whatsoever.
(b) 9,000,000 shares of Acquiror Common Stock have
been duly and validly reserved for issuance under the HA-LO
Industries, Inc. 1997 Stock Plan (Amended and Restated) of Acquiror
(the "1997 ACQUIROR PLAN"), of which, as of December 31, 1999,
shares are outstanding pursuant to the exercise of such options,
7,491,056 shares are subject to outstanding options and 1,242,469
shares are not subject to any outstanding options; 5,834,822 shares
of Acquiror Common Stock have been duly and validly reserved for
issuance under the HA-LO Industries, Inc. Stock Plan of Acquiror
(together with the 1997 Acquiror Plan, the "ACQUIROR PLANS"), of
which, as of December 31, 1999, shares are outstanding pursuant to
the exercise of such options, 2,807,765 shares are subject to
outstanding options, 832,727 shares are not subject to any
outstanding options, 269,056 shares are subject to outstanding
options issued outside of the Acquiror Plans, and 486,417 shares are
subject to outstanding warrants held by Montgomery Ward & Co.,
Incorporated (all such options are the "ACQUIROR OPTIONS"); and
(c) Except as set forth on Section 4.03(c) of the
Acquiror Disclosure Schedules, no shares of common, preferred or
convertible capital stock (other than the shares of Acquiror Common
Stock, Acquiror Sub Common Stock and Acquiror Preferred Stock),
options (other than the Acquiror Options), warrants or other rights,
agreements, arrangements or commitments to sell or purchase shares
of Acquiror Common Stock, Acquiror Sub Common Stock or Acquiror
Preferred Stock from Acquiror or Acquiror Sub are issued or
outstanding. Section 4.03(c) of the Acquiror Disclosure Schedules
contains a list of all outstanding warrants, options (other than
Acquiror Options), agreements, convertible securities and other
commitments pursuant to which Acquiror or Acquiror Sub is or may
become obligated to issue, sell or otherwise transfer any Acquiror
Common Stock, Acquiror Sub Common Stock or Acquiror Preferred Stock,
which list names all Persons entitled to receive such Acquiror
Common Stock, Acquiror Sub Common Stock or Acquiror Preferred Stock
and sets forth the shares of Acquiror Common Stock, Acquiror Sub
Common Stock or Acquiror Preferred Stock required to be issued
thereunder. Except for Acquiror Options and as described in Section
4.03(c) of the Acquiror Disclosure Schedules, no shares of Acquiror
Common Stock, Acquiror Sub Common Stock or Acquiror Preferred Stock
are held in treasury or are reserved for any other purpose.
(d) All outstanding shares of Acquiror Common Stock
and Acquiror Sub Common Stock are, and as of the Effective Time will
be, duly authorized, validly issued, fully paid and non-assessable,
and not subject to preemptive rights created by statute, Acquiror's
Articles of Incorporation or Bylaws, or Acquiror Sub's Certificate
of Incorporation or Bylaws or, except as set forth in Section
4.03(d) of the Acquiror Disclosure Schedules, any agreement as to
which Acquiror or Acquiror Sub is party or by which it is bound.
(e) Except as disclosed in Section 4.03(e) of the
Acquiror Disclosure Schedules, other than Acquiror Options, there
are no options outstanding obligating Acquiror or Acquiror Sub to
register for sale any capital stock or other equity interests in
Acquiror or Acquiror Sub. Except as disclosed in Section 4.03(e) of
the Acquiror Disclosure Schedules, as of the date of this Agreement
there are no obligations, contingent or otherwise, of Acquiror or
Acquiror Sub to (x) repurchase, redeem or otherwise acquire any
Acquiror Common Stock, Acquiror Sub Common Stock or Acquiror
Preferred Stock, or (y) provide funds to, or make any material
investment in (in the form of a loan, capital contribution or
otherwise), or provide any guarantee with respect to the obligations
of, any Person (other than subsidiaries of Acquiror).
SECTION 4.04 AUTHORITY.
(a) Each of Acquiror and Acquiror Sub has the
requisite corporate power and corporate authority to enter into this
Agreement and, subject to the approval of the Share Issuance by
affirmative vote of the holders of a majority of the shares of
Acquiror Common Stock present and entitled to vote at the
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Shareholders Meeting, to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement by
Acquiror and Acquiror Sub, and the consummation by Acquiror and
Acquiror Sub of the transactions contemplated by this Agreement,
have been duly authorized by all necessary corporate action (other
than the Shareholder Approval) and no other proceedings on the part
of Acquiror or Acquiror Sub (other than the Shareholders Meeting)
are necessary to authorize this Agreement or to consummate the
transactions contemplated by this Agreement. This Agreement has been
duly executed and delivered by Acquiror and Acquiror Sub and,
assuming the due authorization, execution and delivery by the
Company, constitutes the legal, valid and binding obligations of
Acquiror and Acquiror Sub enforceable in accordance with its terms
and conditions.
(b) The Board of Directors of Acquiror (a) has
declared as advisable and fair to and in the best interests of
Acquiror and its shareholders and resolved to recommend to its
shareholders (i) the Merger and (ii) the Share Issuance, and (b) has
approved this Agreement and all agreements and transactions
contemplated hereby and thereby.
SECTION 4.05 NO CONFLICT; REQUIRED FILINGS AND CONSENTS; OTHER
MATTERS.
(a) The execution and delivery of this Agreement by
Acquiror and Acquiror Sub do not, and the performance of this
Agreement by Acquiror and Acquiror Sub, will not (i) conflict with
or violate the Articles, By-Laws or equivalent organizational
documents of Acquiror or Acquiror Sub, (ii) subject to (x) obtaining
the consents, approvals, authorizations and permits of, and making
filings or notifications to, any Governmental Entities pursuant to
the applicable requirements, if any, of Laws, including but not
limited to the Securities Act, the Exchange Act, Blue Sky Laws, the
HSR Act (including, without limitation, with respect to the
acquisition by any Stockholder of shares of Acquiror Common Stock or
Acquiror Series A Preferred Stock in the Merger), the NYSE, the Code
and the filing and recordation of appropriate merger documents as
required by Delaware Law, and (y) obtaining the consents, approvals,
authorizations or permits described in Section 4.05(b) of the
Acquiror Disclosure Schedules, conflict with or violate any Laws
applicable to Acquiror or Acquiror Sub or by which any of their
respective properties is bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance
on any of the properties or assets of Acquiror or Acquiror Sub
pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or
obligation to which Acquiror or Acquiror Sub is a party or by which
Acquiror or Acquiror Sub or any of their respective properties is
bound or affected, except for any such conflicts or violations
described in clause (ii), or breaches or defaults described in
clause (iii) that would not have an Acquiror Adverse Effect.
(b) The execution and delivery of this Agreement by
Acquiror and Acquiror Sub do not, and neither the performance nor
compliance with the terms hereof, by Acquiror and Acquiror Sub
requires any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Entities or other
persons, except for (i) applicable requirements, if any, of the
Securities Act, the Exchange Act, Blue Sky Laws, the HSR Act
(including, without limitation, with respect to the acquisition by
any Stockholder of shares of Acquiror Common Stock or Acquiror
Series A Preferred Stock in the Merger), the NYSE and the Code, (ii)
the consents, approvals, authorizations or permits described in
Section 4.05(b) of the Acquiror Disclosure Schedules, and (iii) the
filing and recordation of appropriate merger documents as required
by Delaware Law.
SECTION 4.06 SECURITIES REPORTS; FINANCIAL STATEMENTS.
(a) Since December 31, 1997, Acquiror and its
subsidiaries have timely filed (x) all forms, reports, statements,
registration statements and other documents required to be filed (or
filed by reference) with (i) the Securities and Exchange Commission
(the "COMMISSION"), including without limitation, (A) all Annual
Reports on Form 10-K, (B) all Quarterly Reports on Form 10-Q, (C)
all Proxy Statements relating to meetings of shareholders, (D) all
required current reports on Form 8-K, (E) all other reports and
registration statements, and (F) all amendments and supplements to
all such reports and registration
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statements, and (ii) any applicable state securities authorities,
and (y) all forms, reports, statements and other documents required
to be filed with any other applicable federal or state regulatory
authorities, except where failure to file any such forms, reports,
statements and other documents under this clause (y) would not have
an Acquiror Adverse Effect (all such forms, reports, statements,
registration statements and other documents referred to in this
Subsection (a) are, collectively, "ACQUIROR REPORTS").
(b) The Acquiror Reports complied as of their
respective dates in all material respects with the then applicable
requirements of the Securities Act and the Exchange. As of their
respective dates, the Acquiror Reports did not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made,
not misleading. Except as disclosed in Section 4.06(b) of the
Acquiror Disclosure Schedules, each of Acquiror's consolidated
financial statements (including any notes to such financial
statements) included within the Acquiror Reports (i) has been
prepared in all material respects in accordance with the published
rules and regulations of GAAP and the Commission applied on a
consistent basis throughout the periods involved, and (ii) fairly
present in all material respects, the consolidated financial
position of Acquiror as of the respective dates thereof and the
consolidated results of operations and cash flows for the periods
indicated; provided, however, the interim financial statements of
Acquiror may (x) be subject to normal or recurring adjustments at
Acquiror's fiscal year-end, (y) not necessarily be indicative of
results for a full-fiscal year, and (z) contain pro-forma financial
information which is not necessarily indicative of Acquiror's
consolidated financial position.
(c) Acquiror has no liabilities or indebtedness of any
nature whatsoever, except for (i) liabilities and indebtedness set
forth in Acquiror Reports filed prior to January 1, 2000, (ii)
liabilities and indebtedness which have arisen after September 30,
1999 in the ordinary course of business of Acquiror, (iii)
liabilities and indebtedness set forth in Section 4.06(c) of the
Acquiror Disclosure Schedules, (iv) liabilities and indebtedness
incurred in connection with the transaction contemplated herein, and
(v) except as otherwise set forth in this Section 4.06(c), any such
liability in each case less than $1,000,000 or less than $10,000,000
in aggregate liabilities.
SECTION 4.07 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
disclosed in the Acquiror Disclosure Schedules, since September 30, 1999, (i)
there has not been, and Acquiror has no knowledge of any facts that are
reasonably likely to result in, any event or events causing an Acquiror
Adverse Effect, and (ii) to the date of this Agreement, there has not been
any material change by Acquiror in its accounting methods, principles or
practices except any such change after the date of this Agreement mandated by
a change in GAAP.
SECTION 4.08 ABSENCE OF LITIGATION.
(a) Except as set forth in an Acquiror Report filed
with the Commission prior to the date hereof, there is no claim,
action, suit, litigation, proceeding, arbitration, or, to the
knowledge of Acquiror, investigation of any kind affecting Acquiror
or any of its subsidiaries, at law or in equity (including actions
or proceedings seeking injunctive relief), pending or, to the
knowledge of Acquiror, threatened, except for claims, actions,
suits, litigations, proceedings, arbitrations or investigations
which cannot reasonably be expected to have an Acquiror Adverse
Effect. There is no action pending or, to the best knowledge of the
Acquiror or Acquiror Sub, threatened seeking to enjoin or restrain
the Merger or any transaction contemplated by the Merger.
(b) Except as set forth in an Acquiror Report filed
with the Commission prior to the date hereof, neither Acquiror nor
any of its subsidiaries is subject to any continuing order of,
consent decree, settlement agreement or other similar written
agreement with, or, to the knowledge of Acquiror, continuing
investigation by, any Governmental Entity, or any judgment, order,
writ, injunction, decree or award of any Governmental Entity or
arbitrator, including, without limitation, cease-and-desist or other
orders, except for such matters which cannot reasonably be expected
to have an Acquiror Adverse Effect.
SECTION 4.09 OWNERSHIP OF ACQUIROR SUB. All of the outstanding
capital stock of Acquiror Sub is owned directly by Acquiror.
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SECTION 4.10 BROKERS. Except as disclosed in Section 4.10 of
the Acquiror Disclosure Schedules, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Acquiror.
SECTION 4.11 INFORMATION SUPPLIED. The Proxy Statement will
not, on the date such Proxy Statement is first mailed to Acquiror's
shareholders and at the time of the Shareholders Meeting contain any untrue
statement of a material fact or omit to state any material fact required to
be state therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
SECTION 4.12 OPINION OF FINANCIAL ADVISOR. The Board of
Directors of Acquiror has received the opinion of Credit Suisse First Boston
Corporation, dated the date hereof, to the effect that, as of such date, the
Merger Consideration is fair to Acquiror from a financial point of view.
SECTION 4.13 VOTING REQUIREMENTS. The affirmative vote of the
holders of a majority of the shares of Acquiror Common Stock present and
entitled to vote at the Shareholders Meeting is the only vote of the holders
of any class or series of Acquiror's capital stock necessary to approve the
Merger, the Share Issuance and the transactions contemplated hereby.
SECTION 4.14 NO PRIOR ACTIVITIES. Acquiror Sub has not
incurred, directly or indirectly, any liabilities or obligations, except
those incurred in connection with its incorporation or with the negotiation
of this Agreement and consummation of the transactions contemplated hereby.
Acquiror Sub has not engaged, directly or indirectly, in any business or
activity of any type or kind, or entered into any agreement or arrangement
with any person or entity, or become subject to or bound by any obligation or
undertaking, that is not contemplated by or in connection with this Agreement
and the transactions contemplated hereby.
SECTION 4.15 ERISA COMPLIANCE.
(a) Except as disclosed in the Acquiror Reports, with
respect to any collective bargaining agreement or any material
bonus, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other plan, arrangement or understanding
providing benefits to any current or former employee, officer or
director of Acquiror or any of its wholly-owned subsidiaries
(collectively, the "ACQUIROR BENEFIT PLANS"), no event has occurred
and, to the knowledge of Acquiror, there exists no condition or set
of circumstances, in connection with which Acquiror or any of its
subsidiaries could be subject to any liability that individually or
in the aggregate would have an Acquiror Adverse Effect under ERISA,
the Code or any other applicable Law.
(b) Except as disclosed in the Acquiror Reports, each
Acquiror Benefit Plan has been administered in accordance with its
terms, except for any failures so to administer any Acquiror Benefit
Plan that individually or in the aggregate would not reasonably be
expected to have an Acquiror Adverse Effect. Acquiror, its
subsidiaries and all of the Acquiror Benefit Plans are in compliance
with the applicable provisions of ERISA, the Code and all other
applicable laws and the terms of all applicable collective
bargaining agreements, except for any failures to be in such
compliance that individually or in the aggregate would not
reasonably be expected to have an Acquiror Adverse Effect. Each
Acquiror Benefit Plan that is intended to be qualified under Section
401(a) or 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified and each trust
established in connection with any Acquiror Benefit Plan that is
intended to be exempt from federal income taxation under Section
501(a) of the Code has received a determination letter from the IRS
that such trust is so exempt. To the knowledge of Acquiror, no fact
or event has occurred since that date of any determination letter
from the IRS which is reasonably likely to affect adversely the
qualified status of any such Acquiror Benefit Plan or the exempt
status of any such trust, except for any occurrence that
individually or in the aggregate would not reasonably be expected to
have an Acquiror Adverse Effect.
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(c) Except as any of the following either individually
or in the aggregate would not reasonably be expected to have an
Acquiror Adverse Effect or as disclosed in the Acquiror Reports, (x)
neither Acquiror nor any Plan Affiliate of Acquiror has incurred any
liability under Title IV of ERISA and no condition exists that
presents a risk to Acquiror or any Plan Affiliate of Acquiror of
incurring any such liability (other than liability for benefits or
premiums to the Pension Benefit Guaranty Corporation arising in the
ordinary course), (y) no Acquiror Benefit Plan has incurred an
"accumulated funding deficiency" (within the meaning of Section 302
of ERISA or Section 412 of the Code) whether or not waived and (z)
to the knowledge of Acquiror, there are not any facts or
circumstances that would materially change the funded status of any
Acquiror Benefit Plan that is a "defined benefit" plan (as defined
in Section 3(35) of ERISA) since the date of the most recent
actuarial report for such plan. No Acquiror Benefit Plan is a "multi
employer plan" within the meaning of Section 3(37) of ERISA.
(d) Neither Acquiror nor any of its subsidiaries is a
party to any collective bargaining or other labor union contract
applicable to persons employed by Acquiror or any of its
subsidiaries and no collective bargaining agreement is being
negotiated by Acquiror or any of its subsidiaries, in each case that
is material to Acquiror and its subsidiaries taken as a whole. As of
the date of this Agreement, there is no labor dispute, strike or
work stoppage against Acquiror or any of its subsidiaries pending
or, to the knowledge of Acquiror, threatened which may interfere
with the respective business activities of Acquiror or any of its
subsidiaries, except where such dispute, strike or work stoppage
individually or in the aggregate would not reasonably be expected to
have an Acquiror Adverse Effect. As of the date of this Agreement,
to the knowledge of Acquiror, none of Acquiror, any of its
subsidiaries or any of their respective representatives or employees
has committed any unfair labor practice in connection with the
operation of the respective businesses of Acquiror or any of its
subsidiaries, and there is no charge or complaint against Acquiror
or any of its subsidiaries by the National Labor Relations Board or
any comparable governmental agency pending or threatened in writing,
except for any occurrence that individually or in the aggregate
would not reasonably be expected to have an Acquiror Adverse Effect.
(e) No Acquiror Benefit Plan provides medical benefits
(whether or not insured) with respect to current or former employees
after retirement or other termination of service the cost of which
is material to Acquiror and its subsidiaries taken as a whole.
(f) No amounts payable under the Acquiror Benefit
Plans solely as a result of the consummation of the transactions
contemplated by this Agreement will fail to be deductible for
federal income tax purposes by virtue of Section 280G of the Code.
The consummation of the transactions contemplated by this Agreement
will not, either alone or in combination with another event, (A)
entitle any current or former employee, officer or director of
Acquiror or any Plan Affiliate of Acquiror to severance pay,
unemployment compensation or any other payment, except as expressly
provided in this Agreement, (B) accelerate the time of payment or
vesting, or increase the amount of compensation due any such
employee, officer or director or (C) constitute a "change of
control" under any Acquiror Benefit Plan, and Acquiror and its board
of directors have taken all required actions to effect the foregoing.
SECTION 4.16 TAXES.
(a) Except as disclosed in the Acquiror Reports, each
of Acquiror and its subsidiaries has filed all material Returns and
reports required to be filed by it and all such Returns and reports
are complete and correct in all material respects, or requests for
extensions to file such Returns or reports have been timely filed,
granted and have not expired, except to the extent that such
failures to file, to be complete or correct or to have extensions
granted that remain in effect individually or in the aggregate would
not have an Acquiror Adverse Effect. Acquiror and each of its
subsidiaries has paid (or Acquiror has paid on its behalf) all Taxes
shown as due on such Returns, and the most recent financial
statements contained in the Acquiror Reports reflect an adequate
reserve for all taxes payable by Acquiror and its subsidiaries for
all taxable periods and portions thereof accrued through the date of
such financial statements.
(b) Except as disclosed in the Acquiror Reports, no
deficiencies for any taxes have been proposed, asserted or assessed
against Acquiror or any of its subsidiaries that are not adequately
reserved
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for, except for deficiencies that individually or in the aggregate
would not have an Acquiror Adverse Effect.
(c) Neither Acquiror nor any of its subsidiaries has
taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a)
of the Code.
SECTION 4.17 STATE TAKEOVER STATUTE; SHAREHOLDERS' RIGHTS
PLANS. The Board of Directors of Acquiror has approved the terms of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby and, assuming the accuracy of the Company's
representation and warranty contained in Section 3.23, such approval
constitutes approval of the Merger and the other transactions contemplated by
this Agreement by the Acquiror Board of Directors under Section 5/7.85 of the
Illinois Business Corporation Act of 1983, as amended, and represents all the
actions necessary to ensure that the super majority voting requirement of
Section 5/7.85 of the Illinois Business Corporation Act of 1983, as amended,
does not apply to the Company or the Stockholders in connection with the
Merger and the other transactions contemplated by this Agreement. To the
knowledge of Acquiror, no other state takeover statute is applicable to the
Merger or the other transactions contemplated by this Agreement. Acquiror has
not adopted and does not have in effect any shareholders rights plan, and
Acquiror's board of directors has not approved any such plan and has not
authorized submission of any such plan for shareholder approval.
SECTION 4.18 INTELLECTUAL PROPERTY.
(a) Except as disclosed in the Acquiror Reports,
Acquiror and its subsidiaries own or have a valid license to use all
trademarks, service marks and trade names (including any
registrations or applications for registration of any of the
foregoing) (collectively, the "Acquiror Intellectual Property")
necessary to carry on its business substantially as currently
conducted, except for such Acquiror Intellectual property the
failure of which to own or validly license individually or in the
aggregate would not reasonably be expected to have an Acquiror
Adverse Effect. Neither Acquiror nor any such subsidiary has
received any notice of infringement of or conflict with, and, to
Acquiror's knowledge, there are no infringements of or conflicts
with, the rights of others with respect to the use of any Acquiror
Intellectual property that individually or in the aggregate, in
either such case, would reasonably be expected to have an Acquiror
Adverse Effect.
(b) The consummation of the Merger and the other
transactions contemplated by this Agreement will not result in the
loss by Acquiror of any rights to use computer and telecommunication
software including source and object code and documentation and any
other media (including, without limitation, manuals, journals and
reference books) necessary to carry on its business substantially as
currently conducted and the loss of which would have an Acquiror
Adverse Effect.
SECTION 4.19 CERTAIN CONTRACTS. Except as set forth in Section
4.19 of the Acquiror Disclosure Schedule, the Acquiror Reports or as
permitted pursuant to Sections 5.03 and 5.04, neither Acquiror nor any of its
subsidiaries is a party to or bound by (i) any "material contract" (as such
term is defined in Item 601(b)(10) of Regulation S-K of the Commission) or
any written undisclosed material contracts of Acquiror or Acquiror Sub to
lease real property (except for any such contracts copies of which have been
made available to the Company) or (ii) any non-competition agreement or any
other agreement or obligation which purports to limit in any material respect
the manner in which, or the localities in which, all or any substantial
portion of the business of Acquiror and its subsidiaries, taken as a whole,
is or would be conducted. Section 4.19 of the Acquiror Disclosure Schedules
sets forth all ongoing written agreements between Acquiror (or any of its
subsidiaries) and each of John R. Kelley, Jr., Lou Weisbach and Linden D.
Nelson.
SECTION 4.20 ENVIRONMENTAL MATTERS. Except as would not,
individually or in the aggregate, have an Acquiror Adverse Effect or as
disclosed in the Acquiror Reports filed and publicly available prior to the
date of this Agreement, Acquiror and its subsidiaries are in material
compliance with, and do not have any material liability applicable under any
Environmental Law, and to the knowledge of Acquiror and Acquiror Sub, the
real
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property owned or leased by Acquiror or its subsidiaries has not been used by
any other person in violation of, any Environmental Laws.
SECTION 4.21 RELATED PARTY TRANSACTIONS. To the knowledge of
Acquiror and except for any interests disclosed on Section 4.21 of the
Acquiror Disclosure Schedules or as disclosed in the Acquiror Reports,
neither Acquiror nor any of its directors or executive officers, have any
material direct interest in any material supplier, customer or client of
Acquiror or in any person from whom or to whom Acquiror leases any material
property, or in any other person, firm or entity with whom Acquiror transacts
material business of any nature. Section 4.21 to the Acquiror Disclosure
Schedules or the Acquiror Reports identify and describe all material
contracts to which Acquiror is a party and to which any director or executive
officer is directly also a party.
SECTION 4.22 CERTAIN BUSINESS PRACTICES AND REGULATIONS.
Neither Acquiror nor any of its executive officers or directors has, to the
knowledge of Acquiror, (i) made or agreed to make any contribution, payment
or gift to any customer, client, supplier, governmental official, employee or
agent where either the contribution, payment or gift or the purpose thereof
was illegal under any applicable law, (ii) fraudulently established or
maintained any unrecorded fund or asset for any purpose or knowingly made any
false entries on its books and records for any reason, or (iii) made or
agreed to make any contribution, or reimbursed any political gift or
contribution made by any other person, to any candidate for foreign, federal,
state, provincial or local public office in violation under any applicable
law.
SECTION 4.23 LIMITATION ON WARRANTIES. Notwithstanding anything
to the contrary contained in this Agreement, Acquiror and Acquiror Sub make
no implied warranty of any kind whatsoever, and make no representation with
respect to (i) any matter not expressly set forth in this Article IV, or (ii)
the future profitability, future earnings or other future performance of
Acquiror or Acquiror Sub. ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE ARE EXPRESSLY EXCLUDED.
ARTICLE V
COVENANTS RELATING TO THE CONDUCT OF THE COMPANY BUSINESS
SECTION 5.01 AFFIRMATIVE COVENANTS OF THE COMPANY. The Company
hereby covenants and agrees with Acquiror and Acquiror Sub that, prior to the
Effective Time, unless otherwise expressly contemplated by this Agreement or
consented to, in writing, by Acquiror, which consent shall not be
unreasonably withheld, the Company shall, subject to the limitations
contained in this Agreement:
(a) Operate its business in the usual and ordinary
course, consistent with its reasonable past practice and that
certain Confidential Private Placement Memorandum of the Company,
dated November 1999 (the "OFFERING MEMO");
(b) Subject to the limitations contained in this
Agreement, use reasonable best efforts to preserve intact its
business organization and assets, maintain its material rights and
franchises, retain the services of its officers, key employees and
managers, and maintain existing good relationships with its material
customers, clients, vendors and suppliers, all consistent with the
Offering Memo;
(c) Use reasonable efforts to keep in full force and
effect all liability insurance and bonds comparable in amount and
scope of coverage to that currently maintained.
(d) Subject to applicable law, confer with Acquiror
from time-to-time at Acquiror's reasonable request to report on all
reasonable operational matters.
(e) File its federal and state income tax Returns, and
all required state and local income and franchise tax Returns for
the fiscal tax year coinciding with or ending in 1999 (if
applicable), on or before the due date for filing such Returns
(including extensions).
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SECTION 5.02 NEGATIVE COVENANTS OF THE COMPANY. Except as
expressly contemplated by this Agreement, as set forth on Section 5.02 to the
Company Disclosure Schedules or as otherwise consented to in writing by
Acquiror, which consent shall not be unreasonably withheld, from the date of
this Agreement until the Effective Time, the Company shall not do any of the
following:
(a) Except as consistent with the past practice of the
Company or as contemplated by the Offering Memo or that is
reasonably appropriate to consummate the Merger, (i) increase the
compensation or any commission payable or to become payable to any
director, officer, employee or independent contractor, except for
increases in salary, bonuses or wages payable or to become payable
to employees or independent contractors who are not directors or
officers, (ii) grant any severance or termination pay or enter into
any severance agreement with, any director, officer or employee,
(iii) enter into any employment agreement of any nature whatsoever
with any director, officer or employee that would extend beyond the
Effective Time, except on an at-will basis, or (iv) establish,
adopt, enter into or amend any employee benefit plan, except as may
be required to comply with applicable Law (provided that the actions
under clauses (i), (ii) and (iii) shall only require notice to, and
not consent by, Acquiror);
(b) Except as contemplated by the Offering Memo or as
contemplated by the Merger, make any material change in the overall
nature of its business;
(c) Make (or commit to make) capital expenditures in
an amount which exceeds One Million Dollars ($1,000,000) or to the
extent that such expenditures do not relate to the conduct of the
Company's business consistent with the Offering Memo and the
Company's past practice;
(d) Declare or pay, or agree to declare or pay, any
dividend on, or make any other distribution in respect of,
outstanding Company Common Stock, Company Preferred Stock, Other
Company Securities, Company Options or Other Company Options;
(e) (i) Redeem, purchase or otherwise acquire any of
its capital stock or any securities or obligations convertible into
or exchangeable for any of its capital stock, or any options,
warrants or conversion or other rights to acquire any of its capital
stock or any such securities or obligations, (ii) effect any
reorganization or recapitalization, or (iii) split, combine or
reclassify any of its capital stock or issue or authorize the
issuance of any other securities in lieu of or in substitution for
shares of its capital stock;
(f) Except pursuant to the Plan, issue, deliver,
award, grant or sell, or authorize the issuance, delivery, award,
grant or sale of (including the grant of any security interests,
liens, claims, pledges, limitations in voting rights, charges or
other encumbrances), any shares of any class of its capital stock
(including shares held in treasury), any securities convertible into
or exercisable or exchangeable for any such shares, or any rights,
warrants or options to acquire any such shares, or amend or
otherwise modify the terms of any such rights, warrants or options,
the effect of which shall be to make such terms more favorable to
the holders thereof (including without limitation the acceleration
of the vesting of any options other than as contemplated by this
Agreement);
(g) Acquire or agree to acquire, by merging or
consolidating with, by purchasing a controlling equity interest in
or all or substantially all of the assets of, or by any other
manner, any material business;
(h) Sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, or agree to sell, lease, exchange,
mortgage, pledge, transfer or otherwise dispose of, its material
assets to the extent not consistent with its past practice;
(i) Adopt any amendments to its Certificate of
Incorporation or Bylaws;
(j) Incur any liability or any obligation for borrowed
money or purchase money indebtedness, whether or not evidenced by a
contract, note, bond, debenture or similar instrument, other
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than liabilities and obligations up to One Million Dollars
($1,000,000) which relate to the conduct of the Company's business
consistent with the Offering Memo and the Company's past practice;
(k) Agree in writing or otherwise to do any of the
foregoing unless the terms of such agreement are terminable upon
closing of the Merger contemplated in this Agreement;
(l) (i) perform any act which, if performed,
would prevent or excuse the performance of this Agreement by the
Company, or (ii) fail to perform any act which, if omitted to be
performed, would prevent or excuse the performance of this Agreement
by the Company; or
(m) Initiate, solicit, continue or encourage
(including by way of furnishing any information or assistance in
connection with) any inquiries or the making of any offer that
constitutes, or may reasonably be expected to lead to, any
"Competing Transaction" (as such term is defined below), or enter
into discussions or negotiations with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction
or enter into any agreement with respect to a Competing Transaction.
The Company shall promptly notify Acquiror if any such inquiries or
proposals are received by the Company or by any of its officers,
directors, financial advisors, attorneys, accountants or other
representatives. For purposes of this Agreement, the term "COMPETING
TRANSACTION" shall mean any of the following involving the Company
(other than the Merger): (i) any merger, consolidation, exchange,
material business combination, or other similar material
transaction; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of all or substantially all of the
assets of the Company in a single transaction or series of related
transactions; (iii) any sale of or exchange for any outstanding
capital stock or equity of the Company; or (iv) any agreement to, or
announcement by the Company of a proposal, plan or intention, to do
any of the foregoing.
SECTION 5.03 AFFIRMATIVE COVENANTS OF ACQUIROR. Acquiror hereby
covenants and agrees with the Company that, prior to the Effective Time, unless
otherwise expressly contemplated by this Agreement or consented to, in writing,
by the Company, which consent shall not be unreasonably withheld, Acquiror
shall, subject to the limitations contained in this Agreement:
(a) Operate its business in the usual and ordinary
course, consistent with its reasonable past practice and its 2000
budget, a copy of which has been provided to the Company (the
"BUDGET");
(b) Subject to the limitations contained in this
Agreement, use reasonable best efforts to preserve intact its
business organization and assets, maintain its material rights and
franchises, retain the services of its officers, key employees and
managers, and maintain existing good relationships with its material
customers, clients, vendors and suppliers, all consistent with the
Budget;
(c) Use reasonable efforts to keep in full force and
effect all liability insurance and bonds comparable in amount and
scope of coverage to that currently maintained.
(d) Subject to applicable law, confer with the Company
from time-to-time at the Company's reasonable request to report on
all reasonable operational matters.
(e) File its federal and state income tax Returns, and
all required state and local income and franchise tax Returns for
the fiscal tax year coinciding with or ending in 1999 (if
applicable), on or before the due date for filing such Returns
(including extensions).
SECTION 5.04 NEGATIVE COVENANTS OF ACQUIROR AND ACQUIROR SUB.
Except as expressly contemplated by this Agreement or disclosed in the
Acquiror Disclosure Schedules or otherwise consented to in writing by the
Company, which consent shall not be unreasonably withheld, from the date of
this Agreement to the Effective Time, Acquiror shall not (and shall not
permit the Acquiror Sub to) and Acquiror Sub shall not:
(a) Except as consistent with the past practice of
Acquiror or as contemplated by the Budget or that is reasonably
appropriate to consummate the Merger, (i) increase the compensation
or any
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commission payable or to become payable to any director, officer,
employee or independent contractor, except for increases in salary,
bonuses or wages payable or to become payable to employees or
independent contractors who are not directors or officers, (ii)
grant any severance or termination pay or enter into any severance
agreement with, any director, officer or employee, (iii) enter into
any employment agreement of any nature whatsoever with any director,
officer or employee that would extend beyond the Effective Time,
except on an at-will basis, or (iv) establish, adopt, enter into or
amend any employee benefit plan, except as may be required to comply
with applicable Law (provided that the actions under clauses (i),
(ii) and (iii) shall only require notice to, and not consent by, the
Company);
(b) Except as contemplated by the Budget or as
contemplated by the Merger, make any material change in the overall
nature of its business.
(c) Declare or pay, or agree to declare or pay, any
dividend on, or make any other distribution in respect of,
outstanding Acquiror Common Stock, Acquiror Sub Common Stock or
Acquiror Options;
(d) Make (or commit to make) capital expenditures in
an amount which exceeds Ten Million Dollars ($10,000,000) or to the
extent that such expenditures do not relate to the conduct of
Acquiror's business consistent with its past practice;
(e) (i) Redeem, purchase or otherwise acquire any of
its capital stock or any securities or obligations convertible into
or exchangeable for any of its capital stock, or any options,
warrants or conversion or other rights to acquire any of its capital
stock or any such securities or obligations, (ii) effect any
reorganization or recapitalization, or (iii) split, combine or
reclassify any of its capital stock or issue or authorize the
issuance of any other securities in lieu of or in substitution for
shares of its capital stock;
(f) Except pursuant to the Acquiror Plans or as
permitted by Section 5.04(g) hereof, issue, deliver, award, grant or
sell, or authorize the issuance, delivery, award, grant or sale of
(including the grant of any security interests, liens, claims,
pledges, limitations in voting rights, charges or other
encumbrances), any shares of any class of its capital stock
(including shares held in treasury), any securities convertible into
or exercisable or exchangeable for any such shares, or any rights,
warrants or options to acquire any such shares, or amend or
otherwise modify the terms of any such rights, warrants or options,
the effect of which shall be to make such terms more favorable to
the holders thereof;
(g) Acquire or agree to acquire, by merging or
consolidating with, by purchasing a controlling equity interest in
or all or substantially all of the assets of, or by any other
manner, any material business, except for such acquisitions made in
the ordinary course of business consistent with past practice with
the consideration equal to less than Five Million Dollars
($5,000,000) for any such transaction;
(h) Sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, or agree to sell, lease, exchange,
mortgage, pledge, transfer or otherwise dispose of, its material
assets, other than in the ordinary course of business consistent
with past practice;
(i) Other than as contemplated by this Agreement,
adopt any amendments to its Articles or Certificate of
Incorporation, as applicable, or Bylaws;
(j) Other than in connection with the financing of the
transactions contemplated by this Agreement and the effect thereof
on Acquiror's budget, incur any liability or any obligation for
borrowed money or purchase money indebtedness, whether or not
evidenced by a contract, note, bond, debenture or similar instrument
other than liabilities and obligations up to Twenty Five Million
Dollars ($25,000,000) to the extent that they relate to the conduct
of Acquiror's business in the ordinary course of business and
consistent with past practice;
(k) Agree in writing or otherwise to do any of the
foregoing unless the terms of such agreement are terminable upon
closing of the Merger contemplated in this Agreement;
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(l) (i) perform any act which, if performed,
would prevent or excuse the performance of this Agreement by
Acquiror or Acquiror Sub, or (ii) fail to perform any act which, if
omitted to be performed, would prevent or excuse the performance of
this Agreement by Acquiror or Acquiror Sub; or
(m) Initiate, solicit, continue or encourage
(including by way of furnishing any information or assistance in
connection with) any inquiries or the making of any offer that
constitutes, or may reasonably be expected to lead to, any "Acquiror
Competing Transaction" (as such term is defined below), or enter
into discussions or negotiations with any person or entity in
furtherance of such inquiries or to obtain an Acquiror Competing
Transaction or enter into any agreement with respect to an Acquiror
Competing Transaction. Acquiror shall promptly notify the Company if
any such inquiries or proposals are received by Acquiror, by any
material subsidiary of Acquiror or by any of its or their officers,
directors, financial advisors, attorneys, accountants or other
representatives. For purposes of this Agreement, the term "ACQUIROR
COMPETING TRANSACTION") shall mean any of the following involving
Acquiror or any material subsidiary of Acquiror (other than the
Merger): (i) except as required by Acquiror's Board of Directors'
fiduciary duties, as advised in writing by counsel to Acquiror, any
merger, consolidation, exchange, material business combination, or
other similar material transaction (except with respect to
transactions permitted pursuant to Section 5.04(g)); (ii) except as
required by Acquiror's Board of Directors' fiduciary duties, as
advised in writing by counsel to Acquiror, any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of all or
substantially all of the assets of Acquiror in a single transaction
or series of related transactions; (iii) except as required by
Acquiror's Board of Directors' fiduciary duties, as advised in
writing by counsel to Acquiror, any sale of or exchange for
(including, without limitation, by merger or tender offer) all of
the outstanding capital stock or equity of Acquiror; or (iv) any
agreement to, or announcement by Acquiror of a proposal, plan or
intention, to do any of the foregoing. If Acquiror shall exercise
its rights with respect to fiduciary duties, a copy of such opinion
shall be furnished to the Company three (3) business days prior to
taking any action required by such fiduciary duties.
SECTION 5.05 ACCESS AND INFORMATION.
(a) Upon reasonable prior notice from Acquiror, the
Company shall afford to Acquiror and its officers, employees,
accountants, consultants, legal counsel and other representatives,
reasonable access during business hours to (i) the properties and
locations at which the Company is conducting business activities,
(ii) the managers, officers and management personnel of the Company
at all such locations, and (iii) all information (including, if
available, original documents and Returns) concerning the business,
properties, contracts, records and personnel of the Company. The
Company shall permit Acquiror to make copies of such books, records
and other documents as Acquiror reasonably considers necessary or
appropriate for the purpose of familiarizing itself with the
business, properties, contracts, records and personnel of the
Company, and/or for obtaining any approvals, consents, licenses or
permits for the transactions contemplated by this Agreement.
(b) Upon reasonable prior notice from the Company,
Acquiror shall afford to the Company and its officers, employees,
accountants, consultants, legal counsel and other representatives,
reasonable access during business hours to (i) the properties and
locations at which Acquiror is conducting substantially all of its
business activities, (ii) the managers, officers and management
personnel of Acquiror at all such locations, and (iii) all
information (including, if available, original documents and
Returns) concerning the business, properties, contracts, records and
personnel of Acquiror. Acquiror shall permit the Company to make
copies of such books, records and other documents as the Company
reasonably considers necessary or appropriate for the purpose of
familiarizing itself with the business, properties, contracts,
records and personnel of Acquiror, and/or for obtaining any
approvals, consents, licenses or permits for the transactions
contemplated by this Agreement.
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ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01 TAX TREATMENT. All parties shall use reasonable
efforts to cause the Merger to qualify, and shall not knowingly take any
actions which could prevent the merger from qualifying as a reorganization
and from having each of the parties to this Agreement from being parties to
such reorganization within the meaning of Section 368 of the Code. Following
the Effective Time, neither the Surviving Corporation, Acquiror nor any of
their Affiliates shall take any action, cause any action to be taken, fail to
take any action or cause any action to fail to be taken, which action or
failure to act could cause the Merger to fail to qualify as a reorganization
under Section 368(a) of the Code.
SECTION 6.02 STOCKHOLDER AGREEMENTS. Shares of Acquiror Common
Stock and Acquiror Series A Preferred Stock are being issued by Acquiror to
the Stockholders under the Merger in reliance upon the representations,
warranties and agreements of the Stockholders set forth in a Stockholder
Agreement in the form of EXHIBIT B attached hereto (each, a "STOCKHOLDER
AGREEMENT").
SECTION 6.03 STEP REGISTRATION OF ACQUIROR COMMON STOCK. Within
ten (10) days following the Effective Time, Acquiror shall effect the
registration for resale of twenty-five percent (25%) of the Acquiror Common
Stock issued to the Stockholders in the Merger or underlying shares of
Acquiror Series A Preferred Stock issued to the Stockholders in the Merger.
Acquiror further agrees that (i) it shall effect the registration for resale
of an additional fifteen percent (15%) of the original total number of shares
of Acquiror Common Stock issued in the Merger or underlying shares of
Acquiror Series A Preferred Stock issued to the Stockholders in the Merger on
or prior to the last day of the three (3) month period beginning at the
Effective Time, (ii) it shall effect the registration for resale of an
additional thirty-three and one-third percent (33 1/3%) of the original total
number of shares of Acquiror Common Stock issued in the Merger or underlying
shares of Acquiror Series A Preferred Stock issued in the Merger on or prior
to the last day of the nine (9) month period beginning at the Effective Time,
and (iv) it shall effect the registration for resale of the balance of such
shares of Acquiror Common Stock or Acquiror Common Stock underlying shares of
Acquiror Series A Preferred Stock issued hereunder which have not been
registered for resale under the Securities Act ("UNREGISTERED SHARES")
(including the Escrow Shares, which shares shall be the last shares of
Acquiror Common Stock registered under this Section 6.03) on or prior to the
second anniversary of the Effective Time, to the extent such shares are then
owned by the Stockholders; Acquiror shall use all reasonable efforts to
effect the registration of the shares for resale under the Securities Act, by
performing the obligations set forth in those Registration Rights Agreements,
to be entered into prior to the Effective Time between Acquiror and various
Stockholders listed on Schedule 6.03, the form of which is attached hereto as
EXHIBIT C (the "REGISTRATION RIGHTS AGREEMENTS"). No Stockholder shall
receive the registration rights provided in this Section 6.03 until such
Stockholder has executed and delivered to Acquiror a Registration Rights
Agreement. Registration of the Escrow Shares shall not affect the terms of
the Escrow Agreements or otherwise constitute a release of such shares from
escrow. Each such shareholder listed on Schedule 6.03 shall be entitled to
enter into its own registration rights agreement with Acquiror. Any
stockholders not listed on Schedule 6.03 shall be entitled to enter into a
registration rights agreement in form and substance substantially similar to
the Registration Rights Agreement.
SECTION 6.04 PREPARATION OF ACQUIROR'S PROXY STATEMENT;
SHAREHOLDERS MEETING.
(a) As soon as practicable following the date of this
Agreement, Acquiror shall prepare and file with the Commission and
cause to be cleared a proxy statement (the "PROXY STATEMENT") in
connection with the submission of the Share Issuance and the Merger to
Acquiror's shareholders for their approval (the "SHAREHOLDER
APPROVAL"). Acquiror shall cause the Proxy Statement to be mailed to
Acquiror's shareholders as soon as practicable after its review, if
any, by the Commission. Acquiror will advise the Company, promptly
after it receives notice thereof, of the time when the Proxy Statement
or any amendment thereto has been filed, of any request by the
Commission or its staff for amendment of the Proxy Statement, if any,
or comments thereon and responses thereto or requests by the Commission
or its staff for additional information. Drafts of the Proxy Statement
and any amendments shall be provided to the Company and its counsel not
less than three business days prior to filing and all filings shall be
subject to the reasonable approval of the Company and its counsel. Each
of the Company and Acquiror agrees that
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the information provided by it for inclusion in the Proxy Statement,
and each amendment or supplement thereto, at the time of mailing
thereof and at the time of the meeting of shareholders of Acquiror,
will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading. If at any time prior to the
Effective Time, any information relating to Acquiror or the Company,
or any of their respective Affiliates, officers or directors, should
be discovered by Acquiror or the Company which should be set forth
in an amendment to the Proxy Statement, so that such document would
not include any misstatement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the
other party hereto and an appropriate amendment describing such
information shall be promptly filed with the Commission and, to the
extent required by Law, disseminated to Acquiror's shareholders.
(b) Acquiror shall, as soon as possible following the
date of this Agreement, duly call, give notice of, convene and hold
a meeting of its shareholders (the "SHAREHOLDERS MEETING") for the
purpose of obtaining the Shareholder Approval and shall, through its
board of directors (if not in breach of their fiduciary duties),
recommend to its shareholders the approval and adoption of this
Agreement, the Merger, the Share Issuance and the other agreements
and transactions contemplated hereby.
(c) Acquiror will use its best efforts to hold the
Shareholders Meeting as soon as possible after the date hereof.
(d) Acquiror will use its best efforts to obtain the
Shareholder Approval and to list the Acquiror Common Stock to be
issued in the Merger or issuable upon the conversion of Acquiror
Series A Preferred Stock with the NYSE.
SECTION 6.05 RATIFICATION OF COMPANY APPROVAL. On the date
hereof, the Company shall have provided Acquiror with documents, in such form
and substance as reasonably requested by Acquiror, executed by the
Stockholders listed on Section 6.05 of the Company Disclosure Schedules (the
"PRINCIPAL STOCKHOLDERS") and directors of the Company, affirming and
ratifying their approval of and consent to the Merger and the other
transactions contemplated hereunder.
SECTION 6.06 APPROPRIATE ACTION; CONSENTS; FILINGS.
(a) The Company and Acquiror shall use all reasonable
efforts to (i) take, or cause to be taken, all appropriate action,
and do, or cause to be done, all things necessary, proper or
advisable under applicable Laws or otherwise to consummate and make
effective the transactions contemplated by this Agreement as
promptly as practicable, (ii) obtain from any Governmental Entities
any consents, licenses, permits, waivers, approvals, authorizations
or orders required to be obtained or made by the Company or Acquiror
or any of their respective subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated herein, including,
without limitation, the Merger, and (iii) make all necessary
filings, and thereafter make any other required submissions, with
respect to this Agreement and the Merger required under (A) the
Securities Act and the Exchange Act, and any other applicable
securities Laws, (B) the HSR Act (including, without limitation,
with respect to the acquisition by any Stockholder of shares of
Acquiror Common Stock or Acquiror Series A Preferred Stock in the
Merger), and (C) any other applicable Law; provided, however, that
the Company and Acquiror shall cooperate with each other in
connection with the making of all such filings, including providing
copies of all such documents to the non-filing party and its
advisors prior to filing and, if requested, to accept all reasonable
additions, deletions or changes suggested in connection therewith,
and the Company, Acquiror and Acquiror Sub shall not respond to any
regulatory authority without the consent of the other parties
hereto. The Company and Acquiror shall (and the Company shall cause
the Principal Executives to) furnish to each other all information
required for any application or other filing to be made pursuant to
the rules and regulations of any applicable Law (including, if so
requested by Acquiror, all information required to be included in
the Resale Prospectus or a proxy statement) in connection with the
transactions contemplated by this Agreement.
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(b) The Company and Acquiror shall give (or shall
cause their respective subsidiaries or Affiliates to give) (and the
Company shall cause the Principal Executives to give) any notices to
third parties, and use, and cause their respective subsidiaries to
use, all reasonable efforts to obtain any third party consents
required to prevent a Company Adverse Effect from occurring prior to
or after the Effective Time or an Acquiror Adverse Effect from
occurring prior to or after the Effective Time (collectively,
"MATERIAL CONSENTS").
(c) From the date of this Agreement until the
Effective Time, the Company shall promptly notify Acquiror in
writing of any pending or, to the knowledge of the Company,
threatened action, proceeding or investigation by any Governmental
Entity or any other person (i) challenging or seeking damages in
connection with the Merger and conversion of the Company Common
Stock and/or Company Preferred Stock into Acquiror Common Stock
and/or Acquiror Series A Preferred Stock pursuant to the Merger, or
(ii) seeking to restrain or prohibit the consummation of the Merger,
the other transactions contemplated under this Agreement, or
otherwise limit the right of Acquiror or its subsidiaries to own or
operate all or any portion of the businesses or assets of the
Company or the Surviving Corporation, which in either case is
reasonably likely to have a Company Adverse Effect prior to or after
the Effective Time, or an Acquiror Adverse Effect after the
Effective Time.
(d) From the date of this Agreement until the
Effective Time, Acquiror shall promptly notify the Company in
writing of any pending or, to the knowledge of Acquiror, threatened
action, proceeding or investigation by any Governmental Entity or
any other person (i) challenging or seeking damages in connection
with the Merger or the conversion of the Company Common Stock and/or
Company Preferred Stock into Acquiror Common Stock and/or Acquiror
Series A Preferred Stock pursuant to the Merger, or (ii) seeking to
restrain or prohibit the consummation of the Merger or the other
transactions contemplated under this Agreement, or in either case
reasonably likely to have an Acquiror Adverse Effect prior to the
Effective Time.
(e) Each of Acquiror and the Company shall cooperate
with each other in obtaining the Tax Opinion. In connection
therewith, each of Acquiror and the Company shall deliver to
Altheimer & Gray (or other nationally recognized counsel selected by
the Company) customary representation letters in form and substance
reasonably satisfactory to such counsel and the Company and Acquiror
shall use reasonable efforts to obtain any representation letters
from appropriate stockholders and shall deliver any such letters
obtained to Altheimer & Gray.
SECTION 6.07 UPDATE DISCLOSURE; BREACHES. From and after the
date of this Agreement until the Effective Time, the Company, on the one
hand, and Acquiror and Acquiror Sub, on the other hand, shall promptly notify
the other by written update to its Disclosure Schedules of (i) the occurrence
or non-occurrence of any event the occurrence or non-occurrence of which
would be likely to cause any condition to the obligations of any party to
effect the Merger and the other transactions contemplated by this Agreement
not to be satisfied, or (ii) the failure of the Company or Acquiror or
Acquiror Sub, as the case may be, to comply with or satisfy any covenant or
agreement to be complied with or satisfied by it pursuant to this Agreement
which would be likely to result in any condition to the obligations of any
party to effect the Merger and the other transactions contemplated by this
Agreement not to be satisfied; provided, however, that, except as otherwise
provided in this Agreement, the delivery of any notice pursuant to this
Section 6.07 shall not be deemed to cure any breach of any representation or
warranty requiring disclosure of such matter prior to the date of this
Agreement, or otherwise limit or affect the remedies available hereunder to
the party receiving such notice.
SECTION 6.08 PUBLIC ANNOUNCEMENTS. Subject to applicable Law,
each of Acquiror and the Company shall obtain the other party's prior
approval (which shall not be unreasonably withheld) of the contents of all
public announcements (including press releases) with respect to the Merger or
this Agreement. The Company and Acquiror acknowledge and agrees that any such
press release or other public announcement respecting the Merger or this
Agreement shall be disseminated only in coordination between the Company and
Acquiror.
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SECTION 6.09 OBLIGATIONS OF ACQUIROR SUB. Acquiror shall, for
the benefit of the Company and its Stockholders, take all reasonable action
necessary to cause Acquiror Sub to perform its obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth
in this Agreement.
SECTION 6.10 CERTIFICATES. Each certificate representing
Unregistered Shares owned by a Stockholder shall bear legends substantially
as follows:
(a) All certificates representing Acquiror Common
Stock and Acquiror Series A Preferred Stock shall bear a legend
reading substantially as follows:
"The securities represented by this certificate were issued in
a private placement, without registration under the Securities
Act of 1933 and in reliance on the holder's representation
that such securities were being acquired for investment and
not for resale. No transfer of such securities may be made on
the books of the issuer unless accompanied by an opinion of
counsel reasonably satisfactory to the issuer, that such
transfer may properly be made without registration under the
Securities Act of 1933 or that such securities have been so
registered under a registration statement which is in effect
at the date of such transfer."
(b) Certificates delivered under the Escrow Agreements
shall also bear the following endorsement:
"The securities represented by this certificate are also
subject to restrictions on transfer and to the rights of
issuer and issuer's affiliate, to cancel such securities, on
the terms and conditions set forth in an Agreement and Plan of
Merger and Plan of Reorganization dated as of January __, 2000
and an Escrow Agreement, dated as of ___________, 2000, a copy
of each of which may be obtained from the issuer or from the
holder of this certificate. No transfer of such securities
will be made on the books of issuer unless accompanied by
evidence of compliance with the terms of such agreements."
These legends shall be the only ones appearing on the
certificates. The legend in (a) shall be removed by Acquiror upon
request made on or after the second anniversary of the Effective Time
and shall also be removed in connection with the resale of shares of
Acquiror Common Stock pursuant to the Registration Rights Agreements.
Upon release of any such certificates from the Escrow Agreements, the
legend set forth in Section 6.10(b) shall be removed.
SECTION 6.11 ACQUIROR BOARD REPRESENTATION. At the Effective
Time, the Board of Directors of Acquiror shall be reconstituted so that it is
no more than eleven (11) members and so that it contains as members such
number of directors as designated by the Principal Executives (the "BOARD
DESIGNEES"), rounded up to the next whole number, as shall cause such Board
Designees to represent that portion of the Board of Directors of Acquiror
equal to the product of the total number of directors on such Board (giving
effect to the directors elected pursuant to this sentence) multiplied by the
percentage that the aggregate number of shares of Acquiror Common Stock to be
issued pursuant to this Agreement (or issuable upon conversion of Acquiror
Series A Preferred Stock to be issued pursuant to this Agreement) and to be
beneficially owned by the Stockholders bears to the total number of shares of
Acquiror Common Stock to be outstanding at the Effective Time or then
issuable upon conversion of Acquiror Series A Preferred Stock to be then
outstanding. In order to satisfy its obligations hereunder, Acquiror further
agrees prior to the Effective Time to amend its Bylaws and to take such other
action as reasonably requested by the Company.
SECTION 6.12 STANDSTILL AGREEMENTS; CONFIDENTIALITY AGREEMENTS.
During the period from the date hereof through the Effective Time, the
Company may not terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement to which it is a party (other than
the Letter of Confidentiality pursuant to its terms or by written agreement
of the parties thereto). During such period, the Company shall enforce, to
the fullest extent permitted under applicable Law, the provisions of any such
agreement, including by reasonable efforts to obtain injunctions to prevent
any breaches of such agreements and to enforce specifically the terms and
provisions thereof in any court of the United States of America or of any
state having jurisdiction.
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SECTION 6.13 COMPANY OPTIONS UNDER THE PLAN.
(a) As of the Effective Time, (i) each outstanding
Company Option shall be assumed by Acquiror and become and represent
an option (an "ADJUSTED OPTION") to purchase (A) the number of
shares of Acquiror Common Stock decreased to the nearest whole
share, determined by multiplying (I) the number of shares of
Acquiror Common Stock to be issued upon conversion of one share of
Company Common Stock pursuant to Section 2.01(b)(iv) of this
Agreement by (II) a fraction (the "Option Number") the numerator of
which is one and the denominator is the number of shares of Acquiror
Common Stock to be issued upon conversion of one share of Company
Common Stock pursuant to Section 2.01(b)(iv) of this Agreement, and
(B) the number of shares of Series Preferred Stock to be issued upon
conversion on one share of Company Common Stock pursuant to Section
2.01(b)(iv) of this Agreement by the Option Number, at an exercise
price per Adjusted Option equal to the exercise price for each such
Company Stock Option, divided by the Option Number (rounded down to
the nearest whole cent), and all references in each such option to
the Company shall be deemed to refer to Acquiror, where appropriate;
provided, however, that the adjustments provided in this clause (i)
with respect to any options which are "incentive stock options" (as
defined in Section 422 of the Code) or which are described in
Section 423 of the Code, shall be effected in a manner consistent
with the requirements of Section 424(a) of the Code, and (ii)
Acquiror shall assume the obligations of the Company under the Plan.
The other terms of each Adjusted Option, and the plans or agreements
under which they were issued, shall continue to apply in accordance
with their terms. The date of grant of each Adjusted Option shall be
the date on which the corresponding Company Option was granted.
(b) The Company and Acquiror agree that the Plan shall
be amended, to the extent necessary, to reflect the transactions
contemplated by this Agreement, including, but not limited to the
conversion of shares of Company Class A Common Stock held or to be
awarded or paid pursuant to the Plan, into shares of Acquiror Common
Stock on a basis consistent with the transactions contemplated by
this Agreement. The Company and Acquiror agree to submit the
amendments to the Plan to their respective stockholders, if such
submission is determined to be necessary by counsel to the Company
or Acquiror after consultation with one another; provided, however
that such approval shall not be a condition to the consummation of
the Merger.
(c) Acquiror shall (i) reserve for issuance the number
of shares of Acquiror Common Stock that will become subject to the
Plan and (ii) issue or cause to be issued the appropriate number of
shares of Acquiror Common Stock pursuant to the Plan, upon the
exercise or maturation of rights existing thereunder on the
Effective Time or thereafter granted or awarded. No later than the
Effective Time, Acquiror shall prepare and file with the Commission
a registration statement on Form S-8 (or other appropriate form)
registering a number of shares of Acquiror Common Stock necessary to
fulfill Acquiror's obligations under this Section 6.13(c). Such
registration statement shall be kept effective and the current
status of the prospectus required thereby shall be maintained for at
least as long as Adjusted Options remain outstanding.
(d) As soon as practicable after the Effective Time,
Acquiror shall deliver to the holders of Company Options appropriate
notices setting forth such holders' rights pursuant to the Plan and
the agreements evidencing the grants of such Company Options and
that such Company Options and the related agreements shall be
assumed by Acquiror and shall continue in effect on the same terms
and conditions (subject to the adjustments required by this Section
after giving effect to the Merger); provided that Acquiror shall
make good faith efforts to so deliver such notices on the same day
as the Effective Time.
(e) Prior to the Effective Time, the Company may cause
(i) fifty percent (50%) of all Company Options held by each Key
Employee to become fully vested at the Effective Time (and the
remainder of such employee's Company Options shall vest on the date
they would have otherwise vested absent such accelerated vesting),
and (ii) thirty-three and one-third percent (33 1/3%) of all Company
Options held by each employee of the Company (other than the
Principal Executives or Key Employees) to
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become fully vested at the Effective Time (and the remainder of such
employee's Company Options shall vest on the date they would have
otherwise vested absent such accelerated vesting).
(f) Between the date hereof and the Effective Time,
the Company will prohibit (in accordance with the terms of the Plan)
exercises of Company Options to the extent that the issuance
hereunder of the Merger Consideration would not be excempt from the
Securities Act.
SECTION 6.14 CONDITIONAL FUNDING.
(a) If the Effective Time shall not occur on or prior
to March 1, 2000 (and Acquiror possesses no right to terminate this
Agreement under Article VIII), Acquiror shall on such date make an
unsecured loan to the Company in immediately available funds in the
amount of $5,000,000, with the Company's repayment obligation solely
evidenced by a subordinated note substantially in the form of
EXHIBIT D attached hereto.
(b) If the Effective Time shall not occur on or prior
to April 1, 2000 (and Acquiror possesses no right to terminate this
Agreement under Article VIII), Acquiror shall on such date make an
unsecured loan to the Company in immediately available funds in the
amount of $5,000,000, with the Company's repayment obligation solely
evidenced by a subordinated note substantially in the form of
EXHIBIT D attached hereto.
(c) Any funding under Section 6.14(b) shall be in
addition to any funding pursuant to Section 6.14(a). The Company
shall not be required to issue any note to Acquiror in respect of a
loan under Sections 6.14(a) or (b) until Acquiror has initiated the
funding of such loans in immediately available funds. For the
purposes of this Agreement, "FUNDING NOTES" shall mean the notes
referenced in this Section 6.14.
SECTION 6.15 EMPLOYEE AND RELATED MATTERS.
(a) For a period of one year following the Effective
Time, Acquiror shall provide the Company's employees with
retirement, health, welfare and other employee benefits that are
substantially equivalent to, and no less favorable than, those
provided to Acquiror's employees who are similarly situated. To the
extent that service is relevant for eligibility and vesting (and,
solely for purposes of calculating entitlement to vacation and sick
days, benefit accruals) under any retirement plan, employee benefit
plan, program or arrangement established or maintained by Acquiror
or any of its subsidiaries for the benefit of employees located in
the United States of Acquiror and any of its subsidiaries; such
plan, program or arrangement shall (i) credit Company employees for
service on or prior to the Effective Time with the Company, (ii)
credit any pre-existing conditions, to the same extent eligible for
coverage under a Company Benefit Plan and (iii) recognize, for
purposes of annual deductible and out-of-pocket limits under its
medical and dental plans, deductible and out-of-pocket expenses paid
by the Company's employees in the calendar year in which the
Effective Time occurs.
(b) For a period of three years following the
Effective Time, other than as approved by the Principal Executives,
Acquiror shall not relocate the Key Employees or the technology
department to a location other than the Company's present location
or a location connected to the UPSHOT division of Acquiror.
SECTION 6.16 INDEMNIFICATION.
(a) From and after the Effective Time, the Surviving
Corporation shall, and Acquiror shall cause the Surviving Corporation
to, provide exculpation and indemnification for each Person who is now
or has been at any time prior to the date hereof or who becomes prior
to the Effective Time, an officer, agent, employee or director of the
Company (the "COMPANY INDEMNIFIED PARTIES") which is the same as the
exculpation and indemnification provided to the Company Indemnified
Parties by the Company immediately prior to the Effective Time in its
Certificate of Incorporation and Bylaws, as in effect on the
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date hereof; provided, that such exculpation and indemnification
covers actions on or prior to the Effective Time, including, without
limitation, all transactions contemplated by this Agreement (or that
limitation of the indemnification obligations of the Escrowed
Stockholders under Article IX hereof and excluding actions (other
than with respect to appraisal rights pursuant to applicable
Delaware Law) brought by Stockholders who did not vote for, or
submit their written consent to approve, the Merger).
(b) In the event that the Acquiror or Surviving
Corporation or any of their respective successors or assigns (i)
consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all
of its properties and assets to any Person, then, and in each such
case, the successors and assigns of such entity shall assume the
obligations set forth in this Section 6.16, which obligations are
expressly intended to be for the irrevocable benefit of, and shall
be enforceable by, each director and officer covered hereby.
(c) Acquiror guarantees, unconditionally and
absolutely, the performance of Surviving Corporation's and Acquiror
Sub's obligations under this Section 6.16.
(d) Acquiror shall cause to be maintained (to the
extent commercially available) in effect for not less than six years
from the Effective Time policies of directors' and officers'
liability insurance, for the benefit of directors and officers of
the Company prior to the Effective Time, with respect to matters
occurring prior to the Effective Time in amounts and on a basis not
less favorable than Acquiror provides for its officers and directors.
(e) Each of the Company Indemnified Parties shall be
entitled to enforce the covenants contained in this Section 6.16 and
Acquiror and Acquiror Sub acknowledge and agree that each Company
Indemnified Party would suffer irreparable harm and that no adequate
remedy at law exists for a breach of such covenants and such Company
Indemnified Party shall be entitled to injunctive relief and
specific performance in the event of any breach of any provision in
this Section 6.16. This Section 6.16 is intended for the irrevocable
benefit of, and to grant third party rights to, the Company
Indemnified Parties and their successors, assigns and heirs and
shall be binding on all successors and assigns of Acquiror and
Acquiror Sub, including without limitation the Surviving Corporation.
SECTION 6.17 COMMITMENT LOANS; FACILITY.
(a) Simultaneously herewith or on the next busineess
day hereafter, Acquiror shall make an unsecured loan to the Company
in immediately available funds in the amount of $5,000,000, with the
Company's repayment obligation solely evidenced by a subordinated
note substantially in the form of EXHIBIT D attached hereto (such
note, together with that certain unsecured loan in the amount of
$5,000,000 made by Acquiror to the Company pursuant to that certain
Promissory Note, dated January 6, 2000, are referenced hereinafter
as the "COMMITMENT NOTES"). Acquiror and Acquiror Sub agree and
acknowledge that such loan shall in no way reduce, modify or offset
all or any portion of the Merger Consideration or the rights or
remedies of the Company or the Stockholders whether under or at law
or in equity.
(b) On or prior to February 28, 2000, Acquiror shall
provide evidence reasonably satisfactory to the Company that
Acquiror has a working capital facility with substantially the same
terms as its current facility (the "FACILITY").
SECTION 6.18 LISTING. Acquiror agrees to authorize for listing
on the NYSE the shares of Acquiror Common Stock comprising the Merger
Consideration (including shares of Acquiror Common Stock issuable upon
conversion of Acquiror Series A Preferred Stock), and those required to be
reserved for issuance upon exercise of Adjusted Options assumed in connection
with the Merger, by filing with the NYSE a Supplemental Listing Application
(or such other form as may be required by the NYSE) in a timely manner prior
to the Closing or otherwise in accordance with the rules and regulations of
the NYSE.
SECTION 6.19 STRUCTURE OF MERGER. The parties hereto
acknowledge that, at the written request of the Company, the parties shall
amend this Agreement for the purpose of restructuring the Merger so that the
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Company is the "Surviving Corporation" hereunder. Any such amendment shall
contain appropriate modifications to the provisions of this Agreement as if
such restructured Merger were originally the form of Merger contemplated by
this Agreement. Any such request shall be made at least ten (10) business
days prior to the Effective Time and only if this Agreement has not been
terminated pursuant to Article VIII hereof.
SECTION 6.20 CERTAIN RESOLUTIONS. Prior to the consummation of
the Merger, and as a condition to the Company's obligations to close the
Merger, Acquiror agrees to take all actions reasonably necessary to secure an
exemption from Section 16(b) of the Securities Exchange Act of 1934, pursuant
to Rule 16b-3 under that Act, for all acquisitions, dispositions and
reacquisitions of equity securities of Acquiror to occur directly or
indirectly as a result of the Merger, pursuant to the Merger Agreement, the
related Escrow Agreements or otherwise, by each of the following persons (or
any entities in which they hold interest) who will become directors or
officers of Acquiror at the time the Merger is consummated; (provided,
however, that the foregoing agreement shall not limit Acquiror's rights or
remedies under the Merger Agreement, the related Escrow Agreements or other
agreements contemplated thereby): Bradley Keywell, Eric Lefkofsky, Stephen
Murray, and Richard Heise.
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01 CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS
AGREEMENT. The respective obligations of each party to effect the Merger and
the other transactions contemplated by this Agreement shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions,
any or all of which may be waived, in whole or in part, to the extent
permitted by applicable Law:
(a) NO ACTION OR PROCEEDING. No order of a court or an
administrative agency shall be in effect which enjoins, restrains,
conditions or prohibits the consummation of the transactions
contemplated by this Agreement, and no Governmental Entity shall
have commenced litigation to enjoin, restrain, or prevent
consummation of the transactions contemplated by this Agreement.
(b) CONSENTS. All material approvals and Material
Consents shall have been obtained from any and all Governmental
Entities whose approval or consent is necessary to the authorization
of this Agreement or the consummation of the Merger and where the
failure to obtain such approval or consent would have an Acquiror
Significant Adverse Effect or a Company Significant Adverse Effect.
The applicable waiting periods, if any, together with any extensions
thereof, under the HSR Act shall have expired or been terminated
(including, without limitation, with respect to the acquisition of
Acquiror Common Stock or Acquiror Series A Preferred Stock by any
Stockholder of the Company).
(c) NYSE LISTING. The shares of Acquiror Common Stock
issuable to the Stockholders as contemplated by this Agreement
(including shares of Acquiror Common Stock issuable upon conversion
of Acquiror Series A Preferred Stock issuable to the Stockholders as
contemplated by this Agreement), shall have been approved for
listing on the NYSE, subject to official notice of issuance.
SECTION 7.02 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR
AND ACQUIROR SUB. The obligations of Acquiror and Acquiror Sub to effect the
Merger and the other transactions contemplated in this Agreement are also
subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects, except
where the failure to be so true and correct would not have a Company
Significant Adverse Effect, in each case as though made on and as of
the Effective Time, and Acquiror shall have received a certificate
of the Chief Executive Officer (acting in such capacity) of the
Company to that effect (which certificate shall be included in
EXHIBIT E hereto).
(b) AGREEMENTS AND COVENANTS; OTHER MATTERS. The
Company shall have performed or complied in all material respects
with all material agreements and covenants required by this
Agreement to
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be performed or complied with by it on or prior to the Effective
Time, and Acquiror shall have received a certificate of the Chief
Executive Officer (acting in such capacity) of the Company to that
effect (which certificate shall be included in EXHIBIT E hereto).
(c) EMPLOYMENT AND OTHER AGREEMENTS. Acquiror, on
behalf of the Surviving Corporation, shall have received from (i)
Brad, an executed Employment Agreement in the form of EXHIBIT F
hereto (the "BRAD EMPLOYMENT AGREEMENT"), and (ii) Eric, an executed
Employment Agreement in the form of EXHIBIT G hereto (the "ERIC
EMPLOYMENT AGREEMENT"), and all such Employment Agreements shall be
in full force or become effective at and as of the Effective Time
(the Company hereby acknowledges and agrees that the execution of
the Employment Agreements by each Principal Executive and their
respective promises to perform their obligations therein are a
material inducement to the execution and performance by Acquiror and
Acquiror Sub of their respective obligations herein). In addition,
Acquiror shall have received from each Principal Executive an
executed Agreement and Covenant Against Unfair Competition, in the
form of EXHIBIT H hereto.
(d) STOCKHOLDER AND DIRECTOR RESOLUTIONS; CERTIFICATE
OF INCORPORATION AND BYLAWS. Acquiror shall have received (i)
resolutions of the Company's Stockholders and directors, dated on or
prior to the date hereof, and certified by the Company's Chief
Executive Officer, acting in such capacity, approving, ratifying and
confirming the consummation of the Merger and other transactions
contemplated by this Agreement, and (ii) copies of the Certificate
of Incorporation and Bylaws of the Company certified by the
Company's Chief Executive Officer, acting in such capacity, as being
the true Certificate of Incorporation and Bylaws of the Company as
of the Effective Date.
(e) OTHER DOCUMENTS AND INSTRUMENTS. Acquiror shall
have received such other certificates, instruments and other
documents reasonably required to effectuate the transactions
contemplated hereby, or to confirm to Acquiror the effectiveness
thereof.
(f) SATISFACTION OF DEBTS. The Principal Stockholders
and all other officers and directors of the Company, together with
their spouses, blood relations and affiliates, shall have taken
reasonable efforts to pay in full, with interest if applicable, all
of their outstanding indebtedness to the Company, whether or not
then due.
(g) CERTIFICATES OF GOOD STANDING. Acquiror shall have
received Certificates of Good Standing from the Secretary of State
of Delaware and Illinois with respect to the Company dated within
four (4) days of the Effective Time.
(h) SHAREHOLDER APPROVAL. The Shareholder Approval
shall have been obtained.
(i) ESCROW AGREEMENTS. Acquiror shall have received
from the Escrowed Stockholders executed Escrow Agreements.
(j) EXERCISE OF WARRANT. Acquiror shall have received
evidence reasonably satisfactory to Acquiror demonstrating that
Silicon Valley Bank ("SVB") has either (A) exercised that certain
Warrant to Purchase Stock, issued to Silicon Valley Bank by the
Company on September 16, 1999 (the "SILICON WARRANT"), for shares of
Company Series B Preferred Stock in accordance with its terms and
converted such Company Series B Preferred Stock into Company Class B
Common Stock or (B) consented to treat such Warrant as if so
exercised and converted immediately prior to the Merger such that in
the Merger SVB receives the Merger Consideration to be received by
holders of Company Common Stock as provided in Section 2.01(a)
hereof.
(k) SIDE LETTER. Acquiror shall have received from
each Principal Executive a side letter in the form of EXHIBIT I
attached hereto, whereby such Principal Executive agrees to
indemnify Acquiror and the Surviving Corporation for liabilities
incurred as a result of the conduct of Persons (other than the
Company, Acquiror, Acquiror Sub and interest therein) owned,
directly or indirectly, by such Principal Executive.
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SECTION 7.03 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The
obligations of the Company to effect the Merger and the other transactions
contemplated in this Agreement are also subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of Acquiror and Acquiror Sub
contained in this Agreement shall be true and correct in all
material respects, except where the failure to be so true and
correct would not have an Acquiror Significant Adverse Effect, in
each case as though made on and as of the Effective Time, and the
Company shall have received a certificate of the Chief Financial
Officer of Acquiror and Acquiror Sub to that effect (which
certificate shall be included in EXHIBIT E hereto).
(b) AGREEMENTS AND COVENANTS. Acquiror and its
subsidiaries shall have performed or complied in all material
respects with all material agreements and covenants required by this
Agreement to be performed or complied with by them on or prior to
the Effective Time, and the Company shall have received a
certificate of the Chief Financial Officer of Acquiror and Acquiror
Sub to that effect (which certificate shall be included in EXHIBIT E
hereto).
(c) EMPLOYMENT AND NONCOMPETITION AGREEMENTS. Each
Principal Executive entering into an Employment Agreement and an
Agreement and Covenant Against Unfair Competition with Acquiror
and/or the Surviving Corporation shall have received an executed
counterpart thereof from Acquiror and/or the Surviving Corporation.
(d) ESCROW AGREEMENTS. The Escrowed Stockholders shall
have received from Acquiror and Acquiror Sub executed Escrow
Agreements.
(e) CERTIFICATES OF GOOD STANDING. The Company shall
have received Certificates of Good Standing from the Secretary of
State of Delaware and Illinois with respect to Acquiror and Acquiror
Sub dated within four (4) days of the Effective Time.
(f) TAX OPINION. The Company shall have received an
opinion dated the Closing Date from Altheimer & Gray (or other
nationally recognized counsel selected by the Company ) (the "TAX
OPINION"), which may be based upon such certificates and letters
dated the Closing Date as are acceptable to such counsel, to the
effect that, the merger will qualify as a reorganization within the
meaning of Code Section 368(a) and each of the parties to this
Agreement shall be a party to such reorganization and therefore, for
federal income tax purposes, the Stockholders shall recognize no
income, gain or loss upon the Merger except to the extent of any
cash consideration actually received or deemed received.
(g) ACQUIROR RELEASES. Each of the Principal
Executives shall have received from Acquiror a Release of Claims in
the form of EXHIBIT J attached hereto.
(h) ACQUIROR SERIES A PREFERRED STOCK. Acquiror shall
have filed with the Secretary of State of the State of Illinois a
Statement of Resolution Establishing Series (or an Amendment to its
Articles of Incorporation), which shall designate the Acquiror
Series A Convertible Preferred Stock in accordance with the terms
set forth on EXHIBIT K attached hereto.
(i) OTHER DOCUMENTS AND INSTRUMENTS. The Company shall
have received such other certificates, instruments and other
documents reasonably required to effectuate the transactions
contemplated hereby, or to confirm the effectiveness thereof.
(j) REGISTRATION RIGHTS AGREEMENT. Each Stockholder
executing a Registration Rights Agreement pursuant to Section 6.03
hereof shall have received an executed counterpart Registration
Rights Agreement from Acquiror.
(k) The Shareholder Approval shall have been received.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01 TERMINATION. Subject to Section 8.02 and 8.03
hereof, this Agreement and the Merger may be terminated at any time prior to
the Effective Time in the following manner:
(a) by mutual consent of Acquiror and the Company;
(b) by Acquiror, if (i) (A)there has been a material
breach by the Company of any material covenant or agreement on its
part to be performed under this Agreement, and such breach is not
cured within thirty (30) days (or such earlier time one day before
this Agreement may be terminated pursuant to paragraph (e) below)
following receipt by the Company of written notice thereof from
Acquiror (or is not capable of cure), or (B) any one or more of the
representations and warranties of the Company contained in Article
III of this Agreement is in material breach and such breach is not
cured within thirty (30) days (or such earlier time one day before
this Agreement may be terminated pursuant to paragraph (e) below)
following receipt by the Company of written notice thereof from
Acquiror (or is not capable of cure), and (ii) the aggregate
potential Damages which would reasonably be likely to be sustained,
directly or indirectly, by Acquiror as a result of such breach
exceed Fourteen Million Dollars ($14,000,000) (a "COMPANY
SIGNIFICANT ADVERSE EFFECT");
(c) by the Company, if (i) (A) there has been a
material breach by Acquiror or Acquiror Sub of any material covenant
or agreement on either of their part to be performed under this
Agreement, and such breach is not cured within thirty (30) days (or
such earlier time one day before this Agreement may be terminated
pursuant to paragraph (e) below) following receipt by Acquiror of
written notice thereof from the Company (or is not capable of cure),
or (B) any one or more of the representations and warranties of
Acquiror or Acquiror Sub contained in Article IV of this Agreement
is in material breach and such breach is not cured within thirty
(30) days (or such earlier time one day before this Agreement may be
terminated pursuant to paragraph (e) below) following receipt by
Acquiror of written notice thereof from the Company (or is not
capable of cure), and (ii) (other than with respect to payment of
the Merger Consideration in which case this clause (ii) shall not
apply) the aggregate potential Damages which would reasonably be
likely to be sustained, directly or indirectly, by the Company as a
result of such breach exceed Forty Million Dollars ($40,000,000) (an
"ACQUIROR SIGNIFICANT ADVERSE EFFECT");
(d) by Acquiror or the Company if any decree,
permanent injunction, judgment, order or other action by any court
of competent jurisdiction or any Governmental Entity preventing or
prohibiting consummation of the Merger shall have become final and
nonappealable; or
(e) by Acquiror or the Company if (i) the Shareholder
Approval shall not have been obtained at the Shareholders Meeting
duly convened therefor or at any adjournment or postponement
thereof, or (ii) the Merger shall not have been consummated on or
prior to April 15, 2000 (the "OUTSIDE DATE"); PROVIDED, HOWEVER,
that, at the request of any party, the Outside Date shall be
automatically extended until April 29, 2000.
(f) by the Company (i) if, by February 28, 2000,
Acquiror has not renewed the Facility, or (ii) if Acquiror takes
action pursuant to its fiduarciary duties as contemplated by Section
5.04(m) in connection with an Acquiror Competing Transaction.
SECTION 8.02 EFFECT OF TERMINATION. Except as provided in
Section 8.03, upon the proper termination of this Agreement in accordance
with the provisions of Section 8.01 hereof, this Agreement shall be null and
void, and all other rights and obligations of Acquiror, Acquiror Sub, the
Company, and the Stockholders under this Agreement shall forthwith cease and
have no further force or effect; provided that the provisions of Sections
6.14 and 6.17 shall remain in full force and effect and the payments made
pursuant thereto shall continue to be governed by the terms thereof and, to
the extent applicable, any notes delivered pursuant thereto. In the event of
the termination of this Agreement as provided in Section 8.01, each party, if
so requested by the other party, will return
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promptly every document furnished to it by or on behalf of the other party in
connection with the transaction contemplated hereby, whether so obtained
before or after the execution of this Agreement, and any copies thereof
(except for copies of documents publicly available) which may have been made,
and will cause its representatives and any representatives of financial
institutions and investors and others to whom such documents were furnished
promptly to return such documents and any copies thereof any of them may have
made. The obligation of that certain Letter of Confidentiality, dated
November 24, 1999 (the "LETTER OF CONFIDENTIALITY"), by and between the
Company and Acquiror, shall terminate upon any termination of this Agreement.
This Section 8.02 shall survive any termination of this Agreement.
SECTION 8.03 FEES AND EXPENSES; OTHER MATTERS.
(a) Except as specifically provided in subsections (c)
and (d), below, all "Expenses" (as hereafter defined) incurred by
the parties hereto shall be borne solely and entirely by the party
which has incurred the same in the event this Agreement is
terminated; provided, however, that if the Merger becomes effective,
up to $500,000 of the accounting and legal Expenses of the
Stockholders and the Company shall be paid by the Company or, at the
Company's option, by Acquiror in cash, and any Expenses above such
amount shall reduce the payment of the Cash Consideration in
accordance with Section 2.01 hereto. Notwithstanding anything herein
to the contrary, Expenses may be paid by a party at any time prior
to the Effective Time, and if so paid prior to the Effective Time
shall nonethless be taken into account in calculating such $500,000
of Expenses.
(b) As used in this Agreement, the term "EXPENSES"
shall include all out-of-pocket expenses and disbursements
(including, without limitation, all fees and expenses of counsel,
accountants, experts and consultants to a party hereto and its
affiliates) incurred by a party or on its behalf or on behalf of its
stockholders or Affiliates in connection with or related to the
authorization, preparation, negotiation and execution of this
Agreement, the preparation of the Proxy Statement and all other
matters related to the closing of the transactions contemplated
herein.
(c) (i) The Company agrees that if Acquiror shall
terminate this Agreement pursuant to Section 8.01(b) and without
fault of its own, the Company shall, on the Payment Date , jointly
and severally pay to Acquiror an amount equal to the sum of
Acquiror's and Acquiror Sub's Expenses incurred in connection with
this Agreement up to a maximum of $500,000.
(ii) Acquiror agrees that if the Company
shall terminate this Agreement pursuant to Section 8.01(c) and
without fault of its own, Acquiror shall, on the Payment Date, pay
to the Company an amount equal to the sum of the Company's Expenses
incurred in connection with this Agreement up to a maximum of
$500,000.
(iii) Acquiror agrees that if either Acquiror
or the Company shall terminate this Agreement pursuant to Sections
8.01(e)(i) or the Company shall terminate this Agreement pursuant to
8.01(f), Acquiror shall, on the Payment Date, pay to the Company the
sum of the Company's Expenses incurred in connection with this
Agreement up to a maximum of $500,000 and aggregate actual Damages
sustained, directly or indirectly, by the Company as a result of
such termination, not to exceed Ten Million Dollars ($10,000,000)
(payment of which Damages shall, to the extent of outstanding
indebtedness of the Company under the Commitment Notes, be satisfied
by set-off against such outstanding indebtedness under the
Commitment Notes).
(d) The parties hereto agree that, in the event of a
termination of this Agreement pursuant to Section 8.01, the only
relief and remedy available to either party therefor and the maximum
monetary liability of either party therefor shall be as provided in
this Section 8.03.
(e) Any demand for the payment of Expenses shall
itemize in reasonable detail all qualifying disbursements and
accruals, and notwithstanding one party's payment of another party's
Expenses, the party incurring such items may update and/or
supplement its demand at any time and from time to time, until the
expiration of sixty (60) days from the date of the initial demand.
All Expenses owing in
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accordance with this Section 8.03 shall be made by wire transfer of
immediately available funds to an account designated by the party so
entitled to receive payment therefor and shall be made not later
than two (2) business days after delivery by one party to the other
of demand and proper itemization thereof ("PAYMENT DATE").
(f) (i) The Company agrees that (A) it shall
promptly pay to Acquiror the aggregate actual Damages sustained,
directly or indirectly, by Acquiror, not to exceed Ten Million
Dollars ($10,000,000) and (B) all outstanding Funding Notes and
Commitment Notes shall become due and immediately payable, if
Acquiror shall terminate this Agreement pursuant to Section 8.01(b)
under circumstances in which the Company's breach of this Agreement
giving rise to such right of termination by Acquiror was a bad
faith, intentional and willful and material breach of this
Agreement, made with knowledge and understanding that the action or
inaction, as the case made be, giving rise to such breach would in
fact constitute such an intentional and willful and material breach.
(ii) The Company agrees that all outstanding
Funding Notes and Commitment Notes shall become due and payable (at
the 11% default interest rate set forth therein) within six (6)
months after Acquiror's termination of this Agreement pursuant to
Section 8.01(b) under circumstances in which the Company's breach of
this Agreement giving rise to such right of termination by Acquiror
was not in bad faith or willful (to the degree set forth in
subsection (i) above.
(g) (i) Acquiror agrees that it shall promptly
pay to the Company the aggregate actual Damages sustained, directly
or indirectly, by the Company, not to exceed Ten Million Dollars
($10,000,000), (which payment shall, to the extent of the
outstanding indebtedness under the Commitment Notes, be satisfied by
Acquiror's set-off against the outstanding indebtedness owed by the
Company under the Commitment Notes) if the Company shall terminate
this Agreement pursuant to Section 8.01(c) under circumstances in
which Acquiror's breach of this Agreement giving rise to such right
of termination by the Company was a bad faith, intentional and
willful and material breach of this Agreement, made with knowledge
and understanding that the action or inaction, as the case made be,
giving rise to such breach would in fact constitute such an
intentional and willful and material breach.
(ii) Acquiror agrees that the respective
maturity dates of the outstanding Commitment Notes and Funding Notes
shall be extended by one (1) year if the Company's termination of
this Agreement pursuant to Section 8.01(c) occurs under
circumstances in which Acquiror's breach of this Agreement giving
rise to such right of termination by the Company was not in bad
faith or willful (to the degree set forth in subsection (i) above);
provided that mandatory prepayment provisions under the terms of
such notes shall remain in effect.
(h) The parties hereto also agree that, in the event
of a termination of this Agreement pursuant to Section 8.01(e)(ii),
which termination results from delays caused by the Commission's
review of the Proxy Statement or by review under the HSR Act, the
respective maturity dates of the Commitment Notes and Funding Notes
shall be extended by one (1) year. Unless already extended pursuant
to the previous sentence or accelerated pursuant to this Article
VIII, the respective maturity dates of the Commitment Notes and
Funding Notes shall be extended by one year if (i) this Agreement
has been properly terminated pursuant to Section 8.01, (ii) the
Company is not a breaching party of this Agreement and (iii) the
Company is not able to repay its indebtedness reflected in any such
note in the ordinary course of its business; provided that mandatory
prepayment provisions under the terms of such notes shall remain in
effect.
ARTICLE IX
INDEMNIFICATION MATTERS
SECTION 9.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS. Notwithstanding the closing of the Merger, the
representations and warranties of the Company, Acquiror and Acquiror Sub
contained in this Agreement and in any certificate delivered hereunder shall
survive the Effective
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Time (the "SURVIVAL PERIOD") until the expiration of one (1) year following
the Effective Time. The covenants and agreements contained herein to be
performed or complied with on or prior to the Effective Time shall expire at
the Effective Time. The covenants and agreements contained herein to be
performed or complied with after the Effective Time and the parties'
liabilities in respect of a breach thereof (other than the covenant to
indemnify against breaches of the representations and warranties of the
parties), shall survive the Effective Time until such covenants and
agreements have been performed or complied with, or until they shall have
expired in accordance with their respective terms.
SECTION 9.02 INDEMNIFICATION PROVISIONS FOR THE BENEFIT OF ACQUIROR.
From and after the Effective Time, Acquiror and the Surviving Corporation
shall be indemnified and saved harmless from and against any and all costs,
expenses, losses, damages and liabilities (including reasonable legal and
other professional fees and costs of investigation) (collectively, "DAMAGES")
incurred or suffered directly or indirectly by Acquiror or the Surviving
Corporation and proximately resulting from the breach of any one or more of
the representations or warranties contained in this Agreement and in any
certificate delivered hereunder or covenants or agreements of the Company
made in this Agreement and in any certificate delivered hereunder; payment
thereof shall be made only by the delivery to Acquiror of shares of Acquiror
Common Stock or shares of Acquiror Series A Preferred Stock pursuant to the
Escrow Agreements. Except as provided in Section 9.03 hereof, such
indemnification and all Damages due to Acquiror or Acquiror Sub under this
Agreement shall be subject to the following limitations:
(a) in valuing the Acquiror Common Stock (including
shares of Acquiror Common Stock issuable upon conversion of Acquiror
Series A Preferred Stock), for purposes of payment of any
indemnification obligation under this Section 9.02(a), such shares
of Acquiror Common Stock shall in all events be valued at the Share
Value; in valuing the Acquiror Series A Preferred Stock for payment
of any indemnification obligation under this Section 9.02(a), such
Shares of Acquiror Series A Preferred Stock shall in all events be
valued at Liquidation Value (as such terms defined is the
Certificate of Designation set forth on Exhibit K hereto). Any such
set-off against the Acquiror Common Stock or Acquiror Series A
Preferred Stock shall be treated as a reduction of the Merger
Consideration received by the Stockholders in the Merger, and any
and all Returns filed in connection with the Merger after such
set-off shall so reflect; and
(b) Acquiror shall not be entitled to any recovery
under this Section 9.02 unless a claim for indemnification is made
within the one (1) year period immediately following the Effective
Time.
(c) Acquiror shall not be entitled to recover under
this Section 9.02 until the total amount which Acquiror would
recover under Section 9.02, but for this paragraph, exceeds Five
Million Dollars ($5,000,000), and then such Indemnitee shall be
entitled to recover only for the excess over Five Million Dollars
($5,000,000);
(d) Acquiror shall not be entitled to recover:
(i) with respect to consequential damages of
any kind, damages consisting of business interruption or lost
profits (regardless of the characterization thereof), damages
computed on a multiple of revenues or earnings or projected revenue
or earnings or any similar basis, or with respect to punitive
damages;
(ii) to the extent the aggregate claims under
this Section 9.02 exceed the Cap; or
(iii) to the extent the subject matter of the
claim is covered by insurance (including title insurance) held by
the Company, the Surviving Corporation or Acquiror.
SECTION 9.03 OTHER PROVISIONS. Anything in this Agreement to
the contrary notwithstanding, following the Effective Time, any and all
claims for indemnification by Acquiror pursuant to Section 9.02 hereof shall
be enforceable solely to the extent of the Escrow Shares in the escrow
accounts to be established under and governed in accordance with the Escrow
Agreements referenced in Section 2.04. The shares of Acquiror Common Stock
and Acquiror Series A Preferred Stock held in such Escrow Agreements
referenced in Section 2.04 shall be
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deemed to secure Acquiror and Acquiror Sub's rights to indemnification
hereunder and shall be Acquiror's and Acquiror Sub's sole recourse for any
claims for indemnification under Section 9.02 hereof.
SECTION 9.04 ACQUIROR'S INDEMNIFICATION. From and after the
Effective Time, Acquiror covenants and agrees to indemnify and save harmless
all Stockholders from and against any and all Damages incurred or suffered
directly or indirectly by them and proximately resulting from or attributable
to the breach of any one or more of the representations or warranties or
covenants or agreements of Acquiror or Acquiror Sub made in this Agreement.
Such indemnification by Acquiror and all Damages due to Stockholders or the
Company under this Agreement shall be subject to the following limitations:
(a) the Stockholders shall not be entitled to any
recovery under this Section 9.04 unless a claim for indemnification
is made within the one (1) year period immediately following the
Effective Time.
(b) the Stockholders shall not be entitled to recover
under this Section 9.04 until the total amount which all
Stockholders would recover under Section 9.04, but for this
paragraph, exceeds Fifteen Million Dollars ($15,000,000), and then
such Indemnitees shall be entitled to recover only for the excess
over Fifteen Million Dollars ($15,000,000);
(c) the Stockholders shall not be entitled to recover:
(i) with respect to consequential damages of
any kind, damages consisting of business interruption or lost
profits (regardless of the characterization thereof), damages
computed on a multiple of revenues or earnings or projected revenue
or earnings or any similar basis, or with respect to punitive
damages; or
(ii) to the extent the aggregate claims under
this Section 9.04 exceed Twenty Nine Million Dollars ($29,000,000).
SECTION 9.05 INDEMNIFICATION PROCEDURES.
(a) In the event that any party hereto (which, for the
purposes of this Section 9.05, includes all Stockholders) shall
sustain or incur any Damages in respect of which indemnification may
be sought by such party pursuant to this Agreement, the party to be
indemnified hereunder (the "Indemnitee") shall assert a claim for
indemnification, prior to the expiration of the applicable
indemnification period by serving written notice on the party
providing indemnification (the "Indemnitor"), stating the nature and
basis of such claim.
(b) In case any party has received actual notice of
any claim asserted by a third party or any action or administrative
or other proceeding in respect of which claim, action or proceeding
such party believes, in good faith, indemnity properly may be sought
against the other party pursuant to this Agreement, the Indemnitee
shall, within twenty (20) days of receiving such notice, give notice
thereof in writing to the Indemnitor, but failure to give such
notice within such time period shall relieve the Indemnitor of its
indemnification obligation only to the extent of actual prejudice
resulting therefrom. Within fifteen (15) days after receipt of
notice of such claim, action or proceeding, the Indemnitor may give
the Indemnitee written notice of its election to conduct the defense
of such claim, action or proceeding; provided, however, that the
Indemnitee shall have the right to participate in the defense
thereof, but such participation shall be solely at the expense of
the Indemnitee, without a right of further reimbursement. Until the
Indemnitee has received notice of the Indemnitor's election whether
to defend any claim, action or proceeding, the Indemnitee shall take
reasonable steps to defend (but may not settle) such claim, action
or proceeding. If the Indemnitor has not so notified the Indemnitee
in writing within the time hereinabove provided of its election to
conduct the defense of such claim, action or proceeding, the
Indemnitee shall conduct the defense of any such claim, action or
proceeding; provided that the Indemnitee shall not at any time
settle, compromise or satisfy any such claim, action or proceeding
without the written consent of the Indemnitor. Any such settlement,
compromise or satisfaction made by the Indemnitee with the
Indemnitor's consent of, or any such final judgment or decree
entered in, any claim, action or
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proceeding defended only by the Indemnitee shall be binding upon the
Indemnitor. The Indemnitor with respect to such Damages shall be
subrogated to the right of action, if at all, of the Indemnitee
against any other person arising from the matter from which the
claim for Damages has arisen.
SECTION 9.06 INDEMNIFICATION EXCLUSIVE REMEDY. Indemnification
pursuant to the provisions of this Article IX shall be the exclusive remedy
of the parties for any misrepresentation or breach of any warranty or
covenant contained herein or in any closing certificate required hereunder or
for any state of facts which could be deemed to constitute such a breach if
properly asserted. Without limiting the generality of the preceding sentence,
no legal action sounding in tort or strict liability may be maintained by any
party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01 NOTICES. All notices and other communications
given or made pursuant to this Agreement shall be in writing and shall be
deemed to have been duly given or made, and shall be effective upon receipt,
if delivered personally, or the next business day if sent by reputable
overnight courier to the parties at the following addresses (or at such other
address for a party as shall be specified by like changes of address) or sent
by electronic transmission to the telecopier number specified below (with a
copy sent by overnight courier or delivered as provided hereinabove):
If to Acquiror or Acquiror Sub:
HA-LO Industries, Inc.
5980 West Touhy Avenue
Niles, Illinois 60714
Attention: Gregory J. Kilrea, CFO
Facsimile number: 847.647.4970
with a copy to:
Barry J. Shkolnik
Neal, Gerber & Eisenberg
Two N. LaSalle Street
Suite 2100
Chicago, Illinois 60602
Facsimile number: 312.269.1747
If to the Company:
Starbelly.com, Inc.
1225 W. Morse Avenue
Chicago, Illinois 60626
Attention: Eric Lefkofsky
Facsimile number: 773.262.6694
with a copy to:
Peter H. Lieberman
Altheimer & Gray
10 South Wacker Drive
Chicago, Illinois 60606
Facsimile number: 312.715.4800
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SECTION 10.02 AMENDMENT. This Agreement may only be amended by
the parties hereto by an instrument in writing signed by all of such parties.
SECTION 10.03 WAIVER. Any party may (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive in writing any inaccuracies in the representations and warranties of
the other party contained in this Agreement or in any document delivered
pursuant to this Agreement, and (iii) waive compliance by the other party
with any of the agreements or conditions contained in this Agreement. Any
such extension or waiver shall only be valid if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
SECTION 10.04 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. As used herein, "including"
means "including, without limitation."
SECTION 10.05 SEVERABILITY. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by a court
of competent jurisdiction, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect. Upon such
determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties 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 to the end that transactions
contemplated hereby are fulfilled to the extent possible. In the event the
parties are unable to agree upon any such modification, this Agreement shall
remain in full force and effect without the deleted provision.
SECTION 10.06 ENTIRE AGREEMENT. This Agreement (together with
the Exhibits, and the Company Disclosure Schedules and Acquiror Disclosure
Schedules and the other documents delivered pursuant hereto), constitutes the
entire agreement of the parties and supersede all prior agreements and
undertakings, both written and oral, between the parties, or any of them,
with respect to the subject matter hereof, except for the Letter of
Confidentiality (which shall remain in full force and effect in accordance
with the terms and conditions contained therein, notwithstanding anything
contained in this Agreement which can be construed to the contrary; such
Letter of Confidentiality shall be deemed void at the Effective Time) and,
except as otherwise expressly provided herein, is not intended to confer upon
any other Person any rights or remedies hereunder. The inclusion of any item
in the Company Disclosure Schedules or the Acquiror Disclosure Schedules
shall not be deemed evidence of the materiality of such item for purposes of
this Agreement. The parties make no representations or warranties to each
other, except as contained in this Agreement, and any and all prior
representations and warranties made by any party or its representatives,
whether orally or in writing, shall be deemed to have been merged into this
Agreement, it being intended that no such prior representations or warranties
shall survive the execution and delivery of this Agreement. Acquiror and
Acquiror Sub acknowledge that they have conducted an independent
investigation of the financial condition, assets (including, without
limitation, the Company's Intellectual Property and the Company's website),
liabilities, properties, results of operations and prospects of the Company
in making its determination as to the propriety of the transactions
contemplated by this Agreement and the agreements ancillary hereto, and in
entering into this Agreement, have relied solely on the results of said
investigation and on the representations and warranties of the Company
expressly contained in this Agreement. The Company acknowledges that it has
conducted an independent investigation of the financial condition, assets,
liabilities, properties, results of operations and prospects of Acquiror in
making its determination as to the propriety of the transactions contemplated
by this Agreement and the agreements ancillary hereto, and in entering into
this Agreement, have relied solely on the results of said investigation and
on the representations and warranties of Acquiror expressly contained in this
Agreement.
SECTION 10.07 SPECIFIC PERFORMANCE. Notwithstanding any termination
right granted in Article VIII, in the event of the nonfulfillment of any
condition to a party's closing obligations, in the alternative, such party
may elect to do one of the following: (i) proceed to close despite the
nonfulfillment of any closing condition, it being understood that
consummation of the Closing shall not be deemed a waiver of a breach of any
representation, warranty or covenant and of such party's rights and remedies
with respect thereto to the extent that such party shall have knowledge of
such breach and the Closing shall nonetheless occur; (ii) decline to close,
terminate this Agreement as provided in Article VIII, and thereafter seek
damages to the extent, but only to the extent, permitted in Article VIII; or
(iii) seek specific performance of the obligations of the other party. Each
party hereby agrees that in the event of any breach by such party of this
Agreement, the remedies available to the other party at law would be
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inadequate and that such party's obligations under this Agreement may be
specifically enforced. The parties hereto recognize and agree that in the
event that, in breach of this Agreement, a party refuses to consummate the
Merger, money damages would be inadequate and the other party would have no
adequate remedy at law. Accordingly, the parties hereto agree that such a
party shall have the right, in addition to any other rights and remedies
existing in its favor, to enforce its rights and the other parties'
obligations under this Agreement by an action or actions for specific
performance, injunctive and/or equitable relief, without proof of actual
damages and without posting a bond or other security, in order to enforce or
prevent any violations (whether anticipatory, continuing or future) of this
Agreement. The rights granted under this Section 10.07 shall be in addition
to any other remedies available pursuant to this Agreement.
SECTION 10.08 ASSIGNMENT. This Agreement shall not be assigned
by operation of law or otherwise without the written consent of all parties
hereto.
SECTION 10.09 PARTIES IN INTEREST. This Agreement shall be
binding upon and inure solely to the benefit of each party, and nothing in
this Agreement, express or implied, other than the right to receive the
consideration payable in the Merger pursuant to Article II and the rights
under Sections 6.01, 6.03 and 6.16, is intended to or shall confer upon any
other Person any right, benefit or remedy of any nature whatsoever under or
by reason of this Agreement.
SECTION 10.10 GOVERNING LAW. Except to the extent that Delaware
Law governs the Merger, this Agreement shall be governed by and construed in
accordance with the Laws of the State of Illinois, regardless of the Laws
that might otherwise govern under applicable principles of conflicts of law.
SECTION 10.11 COUNTERPARTS. This Agreement may be executed in
or more counterparts, and by the different parties hereto in separate
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 agreement.
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<PAGE>
IN WITNESS THEREOF, Acquiror, Acquiror Sub and the Company have
caused this Agreement to be executed as of the date first written above, in
the case of each corporate entity, by their respective officers duly
authorized.
HA-LO INDUSTRIES, INC., an Illinois
corporation
By: /S/ JOHN R. KELLEY
--------------------------------
John R. Kelley, President
HA-LO INDUSTRIES, INC., a Delaware corporation
By: /S/ GREG KILREA
--------------------------------
Greg Kilrea, President
STARBELLY.COM, INC., a Delaware corporation
By: /S/ BRADLEY KEYWELL
--------------------------------
Bradley Keywell, Chief Executive Officer
- 51 -
<PAGE>
AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER
AND PLAN OF REORGANIZATION
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AND PLAN OF
REORGANIZATION (this "AMENDMENT") is made and entered into as of April 10,
2000 by and among by and among HA-LO Industries, Inc., an Illinois
corporation ("ACQUIROR"), HA-LO Industries, Inc., a Delaware corporation
("ACQUIROR SUB"), and Starbelly.com, Inc., a Delaware corporation f/k/a
TheZebra.com, Inc. (the "COMPANY").
RECITALS
WHEREAS, Acquiror, Acquiror Sub and the Company are parties to that
certain Agreement and Plan of Merger and Plan of Reorganization dated as of
January 17, 2000 (the "MERGER AGREEMENT") and desire to amend the Merger
Agreement in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual promises and agreements
of the parties hereto, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to such terms in the Merger
Agreement.
2. AMENDMENTS TO SECTION 2.01(a)(i). Section 2.01(a)(i) of the Merger
Agreement is deleted in its entirety and the following is hereby substituted
therefor as Section 2.01(a)(i) of the Merger Agreement:
"(a)(i) At the Effective Time, by virtue of the Merger, Acquiror shall
pay to (or for the benefit of) the Stockholders, or reserve for the
benefit of the holders of the Company Options pursuant to Section 6.13,
Two Hundred and Forty Million Dollars ($240,000,000), payable as follows:
(A) Nineteen Million Dollars ($19,000,000) in cash MINUS Expenses of
the Stockholders and the Company in excess of $500,000 pursuant to
section 8.03(a) hereof (the "CASH CONSIDERATION");
(B) Shares of Acquiror's Series A Convertible Preferred Stock, without
par value ("ACQUIROR SERIES A PREFERRED STOCK"), valued at its
liquidation value, with an aggregate liquidation value of Fifty-One
Million Dollars ($51,000,000) (the "PREFERRED STOCK CONSIDERATION"); and
(C) Shares of Acquiror's common stock, without par value ("ACQUIROR
COMMON STOCK"), valued at the Acquiror Share Price, with an aggregate
<PAGE>
value of One Hundred Seventy Million Dollars ($170,000,000) (together
with the Cash Consideration and the Preferred Stock Consideration, the
"MERGER CONSIDERATION").
Provided, however, that, at the Effective Time, Merger Consideration
valued at $25,000,000 (the "CAP"), shall be withheld from the Escrowed
Stockholders and held pursuant to the Escrow Agreements referred to in
Section 2.04 hereof;"
3. AMENDMENTS TO SECTION 2.01(d). Section 2.01(d) of the Merger
Agreement is deleted in its entirety and the following is hereby substituted
therefor as Section 2.01(d) of the Merger Agreement:
"(d) ACKNOWLEDGEMENT. The parties hereto agree and acknowledge that,
notwithstanding anything to the contrary contained in this Section 2.01,
each of (i) the Series B Portion, the Series A Portion and the Common
Stock Portion, and (ii) the aggregate of the cash paid and the value of
the shares of Acquiror Series A Preferred Stock and Acquiror Common
Stock issued pursuant to Sections 2.01(b)(ii), (iii) and (iv), as such
value is determined pursuant to such Sections, must equal Two Hundred
Forty Million Dollars ($240,000,000) MINUS the sum of (A) the Expenses
of the Stockholders and the Company in excess of $500,000 pursuant to
Section 8.03(a) hereof and (B) the aggregate value of Acquiror Common
Stock and Acquiror Series A Preferred Stock which would be issued on
exercise of all Adjusted Options outstanding at the Effective Time,
valued in accordance with this Section 2.01."
4. AMENDMENTS TO SECTION 6.11. Section 6.11 of the Merger Agreement is
deleted in its entirety and the following is hereby substituted therefor as
Section 6.11 of the Merger Agreement:
"Section 6.11. ACQUIROR BOARD REPRESENTATION. At the Effective
Time, the Board of Directors of Acquiror shall be reconstituted so that
it is no more than eleven (11) members and so that it contains as
members two directors designated by Eric and one director designated by
Brad. In order to satisfy its obligations hereunder, Acquiror further
agrees prior to the Effective Time to amend its Bylaws and to take such
other action as reasonably requested by the Company."
5. AMENDMENTS TO SECTION 6.13. Section 6.13 of the Merger Agreement is
deleted in its entirety and the following is hereby substituted therefor as
Section 6.13 of the Merger Agreement:
"Section 6.13 COMPANY OPTIONS UNDER THE PLAN.
(a) As of the Effective Time, Acquiror shall assume the obligations of
the Company under the Plan and each outstanding Company Option shall be
assumed by Acquiror and become and represent an option (an "ADJUSTED
OPTION") to purchase:
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<PAGE>
(i) the number of shares of Acquiror Common Stock (such number,
before rounding, is the "ADJUSTED OPTION NUMBER"), decreased to the
nearest whole share, determined by multiplying (A) the number of shares
of Company Common Stock subject to such Company Option immediately prior
to the Effective Time by (B) the portion (the "COMMON STOCK FRACTION")
of a share of Acquiror Common Stock to be issued upon conversion of one
share of Company Common Stock pursuant to Section 2.01(b)(iv) of this
Agreement; and
(ii) the number of shares of Acquiror Series A Preferred Stock, or
portion thereof, determined by multiplying (A) the Adjusted Option
Number by (B) a fraction, the numerator of which is the portion of a
share of Acquiror Series A Preferred Stock to be issued upon conversion
of one share of Company Common Stock pursuant to Section 2.01(b)(iv) of
this Agreement and the denominator of which is the Common Stock
Fraction.
Each Adjusted Option shall be exercisable at an exercise price per share of
Acquiror Common Stock subject thereto (decreased to the nearest whole cent)
equal to (1) the exercise price per share of Company Common Stock subject to
the corresponding Company Option immediately prior to the Effective Time, (2)
divided by the Common Stock Fraction. All references to the Company in each
Company Option shall be deemed, in the corresponding Adjusted Option, to
refer to Acquiror, where appropriate. Notwithstanding the foregoing, the
adjustments provided in this Section 6.13(a) with respect to any Company
Options that are "incentive stock options" (as defined in Section 422 of the
Code) or which are described in Section 423 of the Code, shall be effected in
a manner consistent with the requirements of Section 424(a) of the Code. The
other terms of each Adjusted Option, and the plans or agreements under which
they were issued, shall continue to apply in accordance with their terms.
The date of grant of each Adjusted Option shall be the date on which the
corresponding Company Option was granted.
(b) The Company and Acquiror agree that the Plan shall be amended,
to the extent necessary, to reflect the transactions contemplated by
this Agreement, including, but not limited to the conversion of shares
of Company Class Common Stock held or to be awarded or paid pursuant
to the Plan, into shares of Acquiror Common Stock and Acquiror Series A
Preferred on a basis consistent with the transactions contemplated by
this Agreement. The Company and Acquiror agree to submit the amendments
to the Plan and the new plan under which Acquiror will assume the
obligations of the Company under the Plan to their respective
stockholders, if such submission is determined to be necessary by
counsel to the Company or Acquiror after consultation with one another;
provided, however that such approval shall not be a condition to the
consummation of the Merger.
(c) Acquiror shall (i) reserve for issuance the number of shares of
Acquiror Common Stock and Acquiror Series A Preferred Stock that will
become subject to the Plan and (ii) issue or cause to be issued the
appropriate number of shares of Acquiror Common Stock and Acquiror
Series A Preferred Stock
-3-
<PAGE>
pursuant to the Plan, upon the exercise or maturation of rights existing
thereunder on the Effective Time or thereafter granted or awarded. No
later than the Effective Time, Acquiror shall prepare and file with the
Commission a registration statement on Form S-8 (or other appropriate
form) registering a number of shares of Acquiror Common Stock and
Acquiror Series A Preferred Stock necessary to fulfill Acquiror's
obligations under this Section 6.13(c). Such registration statement
shall be kept effective and the current status of the prospectus
required thereby shall be maintained for at least as long as Adjusted
Options remain outstanding.
(d) As soon as practicable after the Effective Time, Acquiror shall
deliver to the holders of Company Options appropriate notices setting
forth such holders' rights pursuant to the Plan and the agreements
evidencing the grants of such Company Options and that such Company
Options and the related agreements shall be assumed by Acquiror and
shall continue in effect on the same terms and conditions (subject to
the adjustments required by this Section after giving effect to the
Merger); provided that Acquiror shall make good faith efforts to so
deliver such notices on the same day as the Effective Time.
(e) Prior to the Effective Time, the Company may cause (i) fifty
percent (50%) of all Company Options held by each Key Employee to become
fully vested at the Effective Time (and the remainder of each such
employee's Company Options shall vest on the date they would have
otherwise vested absent such accelerated vesting), and (ii) thirty-three
and one-third percent (33 1/3%) of all Company Options held by each
employee of the Company identified by the Company (other than the
Principal Executives or Key Employees) to become fully vested at the
Effective Time (and the remainder of each such employee's Company
Options shall vest on the date they would have otherwise vested absent
such accelerated vesting).
(f) Between the date hereof and the Effective Time, the Company
will prohibit (in accordance with the terms of the Plan) exercises of
Company Options to the extent that the issuance hereunder of the Merger
Consideration would not be exempt from the Securities Act."
6. AMENDMENTS TO SECTION 6.17(b). Section 6.17(b) of the Merger
Agreement is deleted in its entirety and the following is substituted
therefore:
"(b)Intentionally Omitted."
7. AMENDMENTS TO SECTION 8.01 (d), (e) and (f). The word "or" at the
end of Section 8.01(d) of the Merger Agreement is deleted and Sections
8.01(e) and (f) of the Merger Agreement are deleted in their entirety and the
following is substituted therefore as Sections 8.01(e) and (f) of the Merger
Agreement:
"(e) by Acquiror or the Company if (i) the Shareholder Approval
shall
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<PAGE>
not have been obtained at the Shareholders Meeting duly convened
therefor or at any adjournment or postponement thereof, or (ii) the Merger
shall not have been consummated on or prior to May 5, 2000 (the "OUTSIDE
DATE"); or
(f) by the Company if Acquiror takes action pursuant to its
fiduciary duties as contemplated by Section 5.04(m) in connection with
an Acquiror Competing Transaction."
8. INTERPRETATION WITH THE MERGER AGREEMENT. Except as and to the extent
modified by this Amendment, the terms and provisions of the Merger Agreement
are hereby ratified and confirmed for all purposes and in all respects.
9. SEVERABILITY. If any term or other provision of this Amendment is
invalid, illegal or incapable of being enforced by a court of competent
jurisdiction, all other conditions and provisions of this Amendment shall
nevertheless remain in full force and effect. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to modify this Amendment
so as to effect the original intent of the parties as closely as possible in
an acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible. In the event the parties are unable to
agree upon any such modification, this Amendment shall remain in full force
and effect without the deleted provision.
10. MODIFICATION; WAIVER. No modification of or amendment to this Amendment
shall be deemed effective unless it is in writing and signed by a duly
authorized representative of each of the parties hereto.
11. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the Laws of the State of Illinois, regardless of the Laws
that might otherwise govern under applicable principles of conflicts of law.
12. COUNTERPARTS. This Amendment may be executed in or more counterparts, and
by the different parties hereto in separate 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 agreement.
13. BINDING ON SUCCESSORS. This Amendment is binding upon and inures to the
benefit of the parties hereto and their respective legal representatives,
successors, and permitted assignees.
14. NOTICES. Any notice required to be given pursuant to this Amendment shall
be in writing and shall be given or made in accordance with the notice
provisions of the Merger Agreement.
[Remainder of page intentionally blank]
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<PAGE>
IN WITNESS WHEREOF, Acquiror, Acquiror Sub and the Company have caused this
Agreement to be executed as of the date first written above, in the case of
each corporate entity, by their respective officers duly authorized.
HA-LO INDUSTRIES, INC., an Illinois corporation
By: /s/ John R. Kelley, Jr.
Its: President and Chief Executive Officer
HA-LO INDUSTRIES, INC., a Delaware corporation
By: /s/ John R. Kelley, Jr.
Its: Chief Executive Officer
STARBELLY.COM, INC., a Delaware corporation
By: /s/ Eric Lefkofsky
Its: President
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<PAGE>
[LOGO]
EXHIBIT B
January 17, 2000
Board of Directors
HA-LO Industries, Inc.
5980 Touhy Avenue
Niles, Illinois 60714
Members of the Board:
You have asked us to advise you with respect to the fairness to HA-LO
Industries, Inc., an Illinois corporation ("HA-LO"), from a financial point of
view of the Merger Consideration (as defined below) set forth in an Agreement
and Plan of Merger and Plan of Reorganization, dated as of January 17, 2000 (the
"Merger Agreement"), by and among HA-LO, HA-LO Industries, Inc., a Delaware
corporation and a wholly owned subsidiary of HA-LO ("Merger Sub"), and
Starbelly.com, Inc., a Delaware corporation f/k/a TheZebra.com, Inc.,
("Starbelly"). As more fully described in the Merger Agreement, Starbelly will
be merged with and into Merger Sub (the "Merger") pursuant to which HA-LO will
(i) acquire all outstanding shares of the common stock, par value $0.001 per
share, of Starbelly (the "Starbelly Common Stock") and preferred stock, par
value $0.001 per share, of Starbelly (the "Starbelly Preferred Stock"),
(ii) acquire all outstanding warrants to purchase shares of Starbelly Common
Stock (the "Starbelly Warrants") and (iii) assume all obligations relating to
outstanding options to purchase shares of Starbelly Common Stock, in exchange
for aggregate consideration of $240,000,000 (the "Merger Consideration"),
consisting of cash, shares of common stock, without par value, of HA-LO ("HA-LO
Common Stock"), shares of Series A Convertible Preferred Stock, without par
value, of HA-LO and options to purchase HA-LO Common Stock. The Merger Agreement
also contemplates the exercise and conversion of all outstanding Starbelly
Warrants into shares of Starbelly Common Stock prior to the effective time of
the Merger or the receipt from holders of Starbelly Warrants of consents to the
conversion of Starbelly Warrants into their allocated portion of the Merger
Consideration as more fully described in the Merger Agreement (the
"Conversion").
In arriving at our opinion, we have reviewed the Merger Agreement and
certain related documents, including stockholder agreements entered into between
HA-LO and certain stockholders of Starbelly (the "Stockholder Agreements"),
certain publicly available business and financial information relating to HA-LO
and certain available business and financial information relating to Starbelly.
We have also reviewed certain other information relating to HA-LO and Starbelly,
including financial forecasts, provided to or discussed with us by HA-LO and
Starbelly, and have met with the managements of HA-LO and Starbelly to discuss
the businesses and prospects of HA-LO and Starbelly. We have also considered
certain financial and stock market data of HA-LO and certain financial
information of Starbelly, and we have compared those data with similar data for
publicly held companies in businesses similar to HA-LO and Starbelly, and we
have considered, to the extent publicly available, the financial terms of
certain other business combinations and other transactions which have recently
been effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which we
deemed relevant.
1
<PAGE>
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts, we have been advised, and have assumed, that
such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of HA-LO and
Starbelly as to the future financial performance of HA-LO and Starbelly. In
addition, we have relied upon the assessments of the management of HA-LO and its
advisors as to (i) the potential synergies and other strategic benefits
(including the amount, timing and achievability thereof) anticipated to result
from the Merger, (ii) Starbelly's existing technology and products and the
validity of, and risks associated with, Starbelly's future products and
technology, (iii) the ability of HA-LO to retain key employees of Starbelly and
(iv) the ability of HA-LO to fund the cash portion of the Merger Consideration
and the cash needs of HA-LO on an ongoing basis following the Merger. We have
assumed, with your consent, that the Merger will be treated as a tax-free
reorganization for federal income tax purposes and that the Conversion will
occur in all material respects as contemplated by the Merger Agreement. In
addition, we have assumed that the Stockholder Agreements will be in full force
and effect at the time of the consummation of the Merger. We have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of HA-LO or Starbelly, nor
have we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon information available to us, and financial, economic,
market and other conditions as they exist and can be evaluated, on the date
hereof. We are not expressing any opinion as to the actual value of the HA-LO
Common Stock when issued pursuant to the Merger or the prices at which the HA-LO
Common Stock will trade subsequent to the Merger.
We have acted as financial advisor to HA-LO in connection with the Merger
and will receive a fee for such services, a significant portion of which is
contingent upon the consummation of the Merger. Credit Suisse First Boston and
its affiliates have in the past provided financial services to HA-LO and certain
of its affiliates unrelated to the proposed Merger, for which services we have
received compensation. In the ordinary course of business, Credit Suisse First
Boston and its affiliates may actively trade the debt and equity securities of
HA-LO for their own accounts and for the accounts of customers and, accordingly,
may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of HA-LO in connection with its evaluation of the Merger, does not
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to any matter relating to the Merger, and is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration is fair to HA-LO from a financial point of
view.
<TABLE>
<S> <C> <C>
Very truly yours,
/s/ CREDIT SUISSE FIRST BOSTON CORPORATION
CREDIT SUISSE FIRST BOSTON CORPORATION
</TABLE>
2
<PAGE>
EXHIBIT C
Section 805 ILCS 5/11.65. Right to dissent
Sec. 11.65. Right to dissent. (a) A shareholder of a corporation is
entitled to dissent from, and obtain payment for his or her shares in the
event of any of the following corporate actions:
(1) consummation of a plan of merger or consolidation or a plan of share
exchange to which the corporation is a party if (i) shareholder authorization
is required for the merger or consolidation or the share exchange by Section
11.20 [805 ILCS 5/11.20] or the articles of incorporation or (ii) the
corporation is a subsidiary that is merged with its parent or another
subsidiary under Section 11.30 [805 ILCS 5/11.30];
(2) consummation of a sale, lease or exchange of all, or substantially all,
of the property and assets of the corporation other than in the usual and
regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of such
shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to such
shares; or
(4) any other corporate action taken pursuant to a shareholder vote if the
articles of incorporation, by-laws, or a resolution of the board of directors
provide that shareholders are entitled to dissent and obtain payment for
their shares in accordance with the procedures set forth in Section 11.70
[805 ILCS 5/11.70] or as may be otherwise provided in the articles, by-laws
or resolution.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this Section may not challenge the corporate action creating his
or her entitlement unless the action is fraudulent with respect to the
shareholder or the corporation or constitutes a breach of a fiduciary duty
owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer than
all the shares recorded in such person's name only if such person dissents
with respect to all shares beneficially owned by any one person and notifies
the corporation in writing of the name and address of each person on whose
behalf the record owner asserts dissenters' rights. The rights of a partial
dissenter are determined as if the shares as to which dissent is made and the
other shares were recorded in the names of different shareholders. A
beneficial owner of shares who is not the record owner may assert dissenters'
rights as to shares held on such person's behalf only if the beneficial owner
C-1
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submits to the corporation the record owner's written consent to the dissent
before or at the same time the beneficial owner asserts dissenters' rights.
C-2
<PAGE>
Section 805 ILCS 5/11.70. Procedure to Dissent
Sec. 11.70. Procedure to Dissent. (a) If the corporate action giving
rise to the right to dissent is to be approved at a meeting of shareholders,
the notice of meeting shall inform the shareholders of their right to dissent
and the procedure to dissent. If, prior to the meeting, the corporation
furnishes to the shareholders material information with respect to the
transaction that will objectively enable a shareholder to vote on the
transaction and to determine whether or not to exercise dissenters' rights, a
shareholder may assert dissenters' rights only if the shareholder delivers to
the corporation before the vote is taken a written demand for payment for his
or her shares if the proposed action is consummated, and the shareholder does
not vote in favor of the proposed action.
(b) If the corporate action giving rise to the right to dissent is not to be
approved at a meeting of shareholders, the notice to shareholders describing
the action taken under Section 11.30 or Section 7.10
[805 ILCS 5/11.30 or 805 ILCS 5/7.10] shall inform the shareholders of their
right to dissent and the procedure to dissent. If, prior to or concurrently
with the notice, the corporation furnishes to the shareholders material
information with respect to the transaction that will objectively enable a
shareholder to determine whether or not to exercise dissenters' rights, a
shareholder may assert dissenter's rights only if he or she delivers to the
corporation within 30 days from the date of mailing the notice a written
demand for payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving rise
to the right to dissent is effective or 30 days after the shareholder
delivers to the corporation the written demand for payment, whichever is
later, the corporation shall send each shareholder who has delivered a
written demand for payment a statement setting forth the opinion of the
corporation as to the estimated fair value of the shares, the corporation's
latest balance sheet as of the end of a fiscal year ending not earlier than
16 months before the delivery of the statement, together with the statement
of income for that year and the latest available interim financial
statements, and either a commitment to pay for the shares of the dissenting
shareholder at the estimated fair value thereof upon transmittal to the
corporation of the certificate or certificates, or other evidence of
ownership, with respect to the shares, or instructions to the dissenting
shareholder to sell his or her shares within 10 days after delivery of the
corporation's statement to the shareholder. The corporation may instruct the
shareholder to sell only if there is a public market for the shares at which
the shares may be readily sold. If the shareholder does not sell within that
10 day period after being so instructed by the corporation, for purposes of
this Section the shareholder shall be deemed to have sold his or her shares
at the average closing price of the shares, if listed on a national exchange,
or the average of the bid and asked price with respect to the shares quoted
by a principal market maker, if not listed on a national exchange, during
that 10 day period.
(d) A shareholder who makes written demand for payment under this Section
retains all other rights of a shareholder until those rights are cancelled or
modified by the consummation of the proposed corporate action. Upon
consummation of that action, the corporation shall pay to each dissenter who
transmits to the corporation the certificate or other evidence of ownership
of the shares the amount the corporation estimates to be the fair value of
the shares, plus accrued interest, accompanied by a written explanation of
how the interest was calculated.
C-3
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(e) If the shareholder does not agree with the opinion of the corporation as
to the estimated fair value of the shares or the amount of interest due, the
shareholder, within 30 days from the delivery of the corporation's statement
of value, shall notify the corporation in writing of the shareholder's
estimated fair value and amount of interest due and demand payment for the
difference between the shareholder's estimate of fair value and interest due
and the amount of the payment by the corporation or the proceeds of sale by
the shareholder, whichever is applicable because of the procedure for which
the corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the shareholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting shareholder have not agreed in writing upon
the fair value of the shares and interest due, the corporation shall either
pay the difference in value demanded by the shareholder, with interest, or
file a petition in the circuit court of the county in which either the
registered office or the principal office of the corporation is located,
requesting the court to determine the fair value of the shares and interest
due. The corporation shall make all dissenters, whether or not residents of
this State, whose demands remain unsettled parties to the proceeding as an
action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law. Failure of the corporation to commence an
action pursuant to this Section shall not limit or affect the right of the
dissenting shareholders to otherwise commence an action as permitted by law.
(g) The jurisdiction of the court in which the proceeding is commenced under
subsection (f) by a corporation is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the power
described in the order appointing them, or in any amendment to it.
(h) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds that the fair value of his
or her shares, plus interest, exceeds the amount paid by the corporation or
the proceeds of sale by the shareholder, whichever amount is applicable.
(i) The court, in a proceeding commenced under subsection (f), shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of the appraisers, if any, appointed by the court under
subsection (g), but shall exclude the fees and expenses of counsel and
experts for the respective parties. If the fair value of the shares as
determined by the court materially exceeds the amount which the corporation
estimated to be the fair value of the shares or if no estimate was made in
accordance with subsection (c), then all or any part of the costs may be
assessed against the corporation. If the amount which any dissenter estimated
to be the fair value of the shares materially exceeds the fair value of the
shares as determined by the court, then all or any part of the costs may be
assessed against that dissenter. The court may also assess the fees and
expenses of counsel and experts for the respective parties, in amounts the
court finds equitable, as follows:
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(1) Against the corporation and in favor of any or all dissenters if the
court finds that the corporation did not substantially comply with the
requirements of subsections (a), (b), (c), (d), or (f).
(2) Against either the corporation or a dissenter and in favor of any other
party if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Section.
If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated and that the fees
for those services should not be assessed against the corporation, the court
may award to that counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who are benefited. Except as otherwise provided in
this Section, the practice, procedure, judgment and costs shall be governed
by the Code of Civil Procedure [735 ILCS 5/1-101 et seq.].
(j) As used in this Section:
(1) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the consummation of the corporate action to
which the dissenter objects excluding any appreciation or depreciation in
anticipation of the corporate action, unless exclusion would be inequitable.
(2) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
<PAGE>
EXHIBIT D
HA-LO INDUSTRIES, INC.
STOCK OPTION PLAN FOR STARBELLY
EMPLOYEES, DIRECTORS AND CONSULTANTS
WHEREAS, HA-LO INDUSTRIES, INC., an Illinois corporation (the
"Company"), HA-LO INDUSTRIES, INC., a Delaware corporation and a wholly-owned
subsidiary of the Company ("Merger Sub"), and STARBELLY.COM, INC., a Delaware
corporation ("Starbelly"), have entered into an Agreement and Plan of
Reorganization dated as of January 17, 2000 (the "Plan of Reorganization") which
contemplates, among other things, (i) the merger of Starbelly with and into
Merger Sub (the "Merger") and (ii) the assumption by the Company of all
outstanding options granted pursuant to the Starbelly.com, Inc. 1999 Stock
Option Plan, as amended, which is attached hereto as Exhibit A and by reference
made a part hereof (the "Starbelly Plan");
WHEREAS, at a meeting held on ________, 2000, the Company's
shareholders approved the Merger and certain related matters; and
WHEREAS, the Merger was consummated on _________, 2000.
ACCORDINGLY, subject to the following terms and conditions, the Company
does hereby agree to the following:
1. The Company hereby assumes the Starbelly Plan and all options
outstanding thereunder immediately prior to the effective time (the "Effective
Time") of the Merger (the "Assumed Options"). The Assumed Options are held of
record by the persons and in the amounts set forth on Schedule 1 hereto.
2. From and after the Effective Time, each Assumed Option shall be
deemed to be an option (an "Adjusted Option") to acquire (a) that number of
shares of the Company's Common Stock, decreased to the nearest whole share,
equal to the product of (i) the number of shares of Starbelly Class A Common
Stock for which such Assumed Option was exercisable immediately prior to the
Effective Time and (ii) __________ (the number of shares of Company Common Stock
into which each share of Starbelly Class B Common Stock is convertible pursuant
to the Plan of Reorganization) (the "Common Stock Portion"), and (b) that number
of shares of the Company's Series A Convertible Preferred Stock equal to the
product of (i) the number of shares of Starbelly Class A Common Stock for which
such Assumed Option was exercisable immediately prior to the Effective Time and
(ii) ________ (the number of shares of Company Series A Convertible Preferred
Stock into which each share of Starbelly Class B Common Stock is convertible
pursuant to the Plan of Reorganization). For ease of exercise, each Adjusted
Option shall be exercisable only by reference to the shares of Company Common
Stock subject thereto; the corresponding shares of the Company's Series A
Convertible Preferred Stock will be exercised therewith accordingly. The
exercise price per share of Company Common Stock subject to each Adjusted
Option, decreased to the nearest whole cent, shall be equal to the exercise
price per share of Starbelly Class A Common Stock subject to the
corresponding
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Assumed Option immediately prior to the Effective Time, divided by the Common
Stock Portion.
3. Subject to the adjustments described in the immediately preceding
paragraph, each of the Adjusted Options shall continue to be evidenced by the
option agreements previously entered into by Starbelly and the persons to whom
options are granted pursuant to the Starbelly Plan (the "Option Agreements").
4. Subject to the terms hereof, the Company hereby assumes all of
Starbelly's rights and obligations under each of the Option Agreements.
5. The Company will administer the Adjusted Options in accordance with
the terms of this HA-LO Industries, Inc. Stock Option Plan for Starbelly
Employees, Directors and Consultants (the "Plan for Starbelly Employees"),
which, with respect to each Adjusted Option, shall be substantially similar to
the terms of the Starbelly Plan.
6. The Compensation Committee of the Board of Directors of the Company
is appointed, directed and authorized to administer and interpret the terms of
the Plan for Starbelly Employees.
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Exhibit A
STARBELLY.COM, INC.
1999 STOCK OPTION PLAN
(As Amended Through April, 2000)
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Starbelly.com, Inc. 1999 Stock Option
Plan (the "PLAN") is hereby established effective as of June 18, 1999.
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Participating Company Group and its stockholders by providing
an incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986,
as amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or
other committee of the Board duly appointed to administer the Plan and having
such powers as shall be specified by the Board. Unless the powers of the
Committee have been specifically limited, the Committee shall have all of the
powers of the Board granted herein, including, without limitation, the power to
amend or terminate the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law.
(d) "COMPANY" means Starbelly.com, Inc., a Delaware
corporation, or any successor corporation thereto.
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(e) "CONSULTANT" means any person, including an
advisor, engaged by a Participating Company to render services other than as an
Employee or a Director.
(f) "DIRECTOR" means a member of the Board or of the
board of directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee,
in the opinion of a qualified physician acceptable to the Company, to perform
the major duties of the Optionee's position with the Participating Company Group
because of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an
employee (including an officer or a Director who is also treated as an employee)
in the records of a Participating Company and, with respect to any Incentive
Stock Option granted to such person, who is an employee for purposes of Section
422 of the Code; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the
value of a share of Stock or other property as determined by the Board, in its
discretion, or by the Company, in its discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on
a national or regional securities exchange or market system, the Fair Market
Value of a share of Stock shall be the closing price of a share of Stock (or the
mean of the closing bid and asked prices of a share of Stock if the Stock is so
quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap
Market or such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in THE WALL STREET
JOURNAL or such other source as the Company deems reliable. If the relevant date
does not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in its
discretion.
(ii) If, on such date, there is no public
market for the Stock, the Fair Market Value of a share of Stock shall be as
determined by the Board in good faith without regard to any restriction other
than a restriction which, by its terms, will never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option intended
to be (as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of the
Company or any other person whose transactions in Stock are subject to Section
16 of the Exchange Act.
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(m) "NONSTATUTORY STOCK OPTION" means an Option not
intended to be (as set forth in the Option Agreement) or which does not qualify
as an Incentive Stock Option.
(n) "OPTION" means a right to purchase Stock (subject
to adjustment as provided in Section 4.2) pursuant to the terms and conditions
of the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(o) "OPTION AGREEMENT" means a written agreement,
including any related form of stock option grant agreement, between the Company
and an Optionee setting forth the terms, conditions and restrictions of the
Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "OPTIONEE" means a person who has been granted
one or more Options.
(q) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point
in time, all corporations collectively which are then Participating Companies.
(t) "RULE 16b-3" means Rule 16b-3 under the Exchange
Act, as amended from time to time, or any successor rule or regulation.
(u) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(v) "SERVICE" means an Optionee's employment or
service with the Participating Company Group, whether in the capacity of an
Employee, a Director or a Consultant. The Optionee's Service shall not be deemed
to have terminated merely because of a change in the capacity in which the
Optionee renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
an Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionee's Service shall be deemed to have terminated unless
the Optionee's right to return to Service with the Participating Company Group
is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining vesting under the
Optionee's Option Agreement. The Optionee's Service shall be deemed to have
terminated either upon an actual termination of Service or upon the corporation
for which the Optionee performs Service ceasing to be a Participating Company.
Subject to the foregoing, the Company, in its discretion, shall determine
whether the Optionee's Service has terminated and the effective date of such
termination.
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(w) "STOCK" means the Class A (nonvoting) Common
Stock of the Company, as adjusted from time to time in accordance with Section
4.2.
(x) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
(y) "TEN PERCENT OWNER OPTIONEE" means an Optionee
who, at the time an Option is granted to the Optionee, owns stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of a Participating Company within the meaning of Section 422(b)(6) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board. All questions of interpretation of the Plan or of any
Option shall be determined by the Board, and such determinations shall be final
and binding upon all persons having an interest in the Plan or such Option.
3.2 AUTHORITY OF OFFICERS. Any officer of a Participating
Company shall have the authority to act on behalf of the Company with respect to
any matter, right, obligation, determination or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
determination or election.
3.3 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.4 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its discretion:
(a) to determine the persons to whom, and the time or
times at which, Options shall be granted and the number of shares of Stock to be
subject to each Option;
(b) to designate Options as Incentive Stock Options
or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of
Stock or other property;
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(d) to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction of
any tax withholding obligation arising in connection with the Option or such
shares, including by the withholding or delivery of shares of stock, (iv) the
timing, terms and conditions of the exercisability of the Option or the vesting
of any shares acquired upon the exercise thereof, (v) the time of the expiration
of the Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel, renew, reprice
or otherwise adjust the exercise price of, or grant a new Option in substitution
for, any Option or to waive any restrictions or conditions applicable to any
Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines
and policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be three million three hundred and fifty-five
thousand (3,355,000) and shall consist of authorized but unissued or reacquired
shares of Stock or any combination thereof. If an outstanding Option for any
reason expires or is terminated or canceled or if shares of Stock are acquired
upon the exercise of an Option subject to a Company repurchase option and are
repurchased by the Company at the Optionee's exercise price, the shares of Stock
allocable to the unexercised portion of such Option or such repurchased shares
of Stock shall again be available for issuance under the Plan. Notwithstanding
the foregoing, at any such time as the offer and sale of securities pursuant to
the Plan is subject to compliance with Section 260.140.45 of Title 10 of
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the California Code of Regulations ("SECTION 260.140.45"), the total number
of shares of Stock issuable upon the exercise of all outstanding Options
(together with options outstanding under any other stock option plan of the
Company) and the total number of shares provided for under any stock bonus or
similar plan of the Company shall not exceed thirty percent (30%) (or such
other higher percentage limitation as may be approved by the stockholders of
the Company pursuant to Section 260.140.45) of the then outstanding shares of
the Company as calculated in accordance with the conditions and exclusions of
Section 260.140.45.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "NEW SHARES"), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded down to the nearest whole number, and in no event
may the exercise price of any Option be decreased to an amount less than the par
value, if any, of the stock subject to the Option. The adjustments determined by
the Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only
to Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "Employees," "Consultants" and "Directors" shall include prospective
Employees, prospective Consultants and prospective Directors to whom Options are
granted in connection with written offers of an employment or other service
relationships with the Participating Company Group. Eligible persons may be
granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an
Employee on the effective date of the grant of an Option to such person may
be granted only a Nonstatutory Stock Option. An Incentive Stock Option
granted to a prospective Employee upon the condition that such person become
an Employee shall be deemed granted effective on the date such person
commences Service with a Participating Company, with an exercise price
determined as of such date in accordance with Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portions
of such options which exceed such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, options designated as Incentive
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<PAGE>
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the
time the option with respect to such stock is granted. If the Code is amended
to provide for a different limitation from that set forth in this Section
5.3, such different limitation shall be deemed incorporated herein effective
as of the date and with respect to such Options as required or permitted by
such amendment to the Code. If an Option is treated as an Incentive Stock
Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.3, the Optionee may designate which
portion of such Option the Optionee is exercising. In the absence of such
designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first. Separate certificates representing
each such portion shall be issued upon the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall from
time to time establish. No Option or purported Option shall be a valid and
binding obligation of the Company unless evidenced by a fully executed Option
Agreement. Option Agreements may incorporate all or any of the terms of the Plan
by reference and shall comply with and be subject to the following terms and
conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall
be established in the discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such
time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by
the Board and set forth in the Option Agreement evidencing such Option;
provided, however, that (a) no Option shall be exercisable after the
expiration of ten (10) years after the effective date of grant of such
Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee
shall be exercisable after the expiration of five (5) years after the
effective date of grant of such Option, (c) no Option granted to a
prospective Employee, prospective Consultant or prospective Director may
become exercisable prior to the date on which such person commences Service
with a Participating Company, and (d) with the exception of an Option granted
to an officer, Director or Consultant, no Option shall become exercisable at
a rate less than twenty percent (20%) per year over a period of five (5)
years from the effective date of grant of such Option, subject to the
Optionee's continued Service. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an
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<PAGE>
Option, any Option granted hereunder shall have a term of ten (10) years from
the effective date of grant of the Option.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of shares
of Stock being purchased pursuant to any Option shall be made (i) in cash, by
check or cash equivalent, (ii) by tender to the Company, or attestation to the
ownership, of shares of Stock owned by the Optionee having a Fair Market Value
(as determined by the Company without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company) not less than
the exercise price, (iii) by the assignment of the proceeds of a sale or loan
with respect to some or all of the shares being acquired upon the exercise of
the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by the
Optionee's promissory note in a form approved by the Company, (v) by such other
consideration as may be approved by the Board from time to time to the extent
permitted by applicable law, or (vi) by any combination thereof. The Board may
at any time or from time to time, by adoption of or by amendment to the standard
forms of Option Agreement described in Section 7, or by other means, grant
Options which do not permit all of the foregoing forms of consideration to be
used in payment of the exercise price or which otherwise restrict one or more
forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock to the extent such tender or
attestation would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company, or attestation to the ownership, of shares of Stock unless such
shares either have been owned by the Optionee for more than six (6) months or
were not acquired, directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company reserves, at any
and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(iii) PAYMENT BY PROMISSORY NOTE. No promissory note
shall be permitted if the exercise of an Option using a promissory note would be
a violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity
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affecting the extension of credit in connection with the Company's
securities, any promissory note shall comply with such applicable
regulations, and the Optionee shall pay the unpaid principal and accrued
interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not
the obligation, to deduct from the shares of Stock issuable upon the exercise of
an Option, or to accept from the Optionee the tender of, a number of whole
shares of Stock having a Fair Market Value, as determined by the Company, equal
to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof. Alternatively
or in addition, in its discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be
subject to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board in its discretion at the
time the Option is granted. The Company shall have the right to assign at any
time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder and
shall promptly present to the Company any and all certificates representing
shares of Stock acquired hereunder for the placement on such certificates of
appropriate legends evidencing any such transfer restrictions.
6.6 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier
termination of the Option as otherwise provided herein, an Option shall be
exercisable after an Optionee's termination of Service as follows:
(i) DISABILITY. If the Optionee's Service
with the Participating Company Group is terminated because of the Disability of
the Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer period of time as determined by the
Board, in its discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the date of expiration of the
Option's term as set forth in the Option Agreement evidencing such Option (the
"OPTION EXPIRATION DATE").
(ii) DEATH. If the Optionee's Service with
the Participating Company Group is terminated because of the death of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be
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<PAGE>
exercised by the Optionee's legal representative or other person who acquired
the right to exercise the Option by reason of the Optionee's death at any
time prior to the expiration of six (6) months (or such longer period of time
as determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within thirty (30) days (or such longer
period of time as determined by the Board, in its discretion) after the
Optionee's termination of Service.
(iii) OTHER TERMINATION OF SERVICE. If the
Optionee's Service with the Participating Company Group terminates for any
reason, except Disability or death, the Option, to the extent unexercised and
exercisable by the Optionee on the date on which the Optionee's Service
terminated, may be exercised by the Optionee within thirty (30) days (or such
longer period of time as determined by the Board, in its discretion) after the
date on which the Optionee's Service terminated, but in any event no later than
the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of an Option within the
applicable time periods set forth in Section 6.6(a) is prevented by the
provisions of Section 11 below, the Option shall remain exercisable until thirty
(30) days (or such longer period of time as determined by the Board, in its
discretion) after the date the Optionee is notified by the Company that the
Option is exercisable, but in any event no later than the Option Expiration
Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 GENERAL. Unless otherwise provided by the Board at the
time the Option is granted, an Option shall comply with and be subject to the
terms and conditions set forth in the standard forms of Option Agreement adopted
by the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2 AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the grant
or amendment of an individual Option or in connection with the authorization of
a new standard form or forms; provided, however, that the terms and conditions
of any such new, revised or amended standard form or forms of Option Agreement
are not inconsistent with the terms of the Plan.
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<PAGE>
8. CHANGE IN CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to
have occurred if any of the following occurs with respect to the Company: (i)
the direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership
Change Event or a series of related Ownership Change Events (collectively, a
"Transaction") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of
a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of
this Section 8.2, an Option shall be deemed assumed if, following the Change
in Control, the Option confers the right to purchase in accordance with its
terms and conditions, for each share of Stock subject to the Option
immediately prior to the Change in Control, the consideration (whether stock,
cash or other securities or property) to which a holder of a share of Stock
on the effective date of the Change in Control was entitled. Any Options
which are neither assumed or substituted for by the Acquiring Corporation in
connection with the Change in Control nor exercised as of the date of the
Change in Control shall terminate and cease to be outstanding effective as of
the date of the Change in Control. Notwithstanding the foregoing, shares
acquired upon exercise of an Option prior to the Change in Control and any
consideration received pursuant to the Change in Control with respect to such
shares shall continue to be subject to all applicable provisions of the
Option Agreement evidencing such Option except as otherwise provided in such
Option Agreement.
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<PAGE>
9. PROVISION OF INFORMATION.
At least annually, copies of the Company's balance sheet and
income statement for the just completed fiscal year shall be made available to
each Optionee and purchaser of shares of Stock upon the exercise of an Option.
The Company shall not be required to provide such information to key employees
whose duties in connection with the Company assure them access to equivalent
information.
10. NONTRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, an Option shall be
exercisable only by the Optionee or the Optionee's guardian or legal
representative. No Option shall be assignable or transferable by the Optionee,
except by will or by the laws of descent and distribution.
11. COMPLIANCE WITH SECURITIES LAW.
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state and foreign law with respect to such securities.
Options may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed. In addition,
no Option may be exercised unless (a) a registration statement under the
Securities Act shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (b) in the opinion
of legal counsel to the Company, the shares issuable upon exercise of the Option
may be issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares hereunder shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of any
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
12. INDEMNIFICATION.
In addition to such other rights of indemnification as they
may have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit
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<PAGE>
or proceeding, except in relation to matters as to which it shall be adjudged
in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time.
However, subject to changes in applicable law, regulations or rules that would
permit otherwise, without the approval of the Company's stockholders, there
shall be (a) no increase in the maximum aggregate number of shares of Stock that
may be issued under the Plan (except by operation of the provisions of Section
4.2), (b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's stockholders under any applicable law, regulation or rule. No
termination or amendment of the Plan may adversely affect any then outstanding
Option or any unexercised portion thereof, without the consent of the Optionee,
unless such termination or amendment is required to enable an Option designated
as an Incentive Stock Option to qualify as an Incentive Stock Option or is
necessary to comply with any applicable law, regulation or rule.
14. STOCKHOLDER APPROVAL.
The Plan or any increase in the maximum aggregate number of
shares of Stock issuable thereunder as provided in Section 4.1 (the "Authorized
Shares") shall be approved by the stockholders of the Company within twelve (12)
months of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Authorized Shares
previously approved by the stockholders shall become exercisable no earlier than
the date of stockholder approval of the Plan or such increase in the Authorized
Shares, as the case may be.
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<PAGE>
EXHIBIT E
Amendments to the Articles of Incorporation (Amended and Restated) of
HA-LO Industries, Inc.
I. Paragraph (a) of Article Four will be amended in its entirety to read:
(a) The number of shares which the Corporation shall be authorized to issue,
itemized by class, series and par value, if any, is:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS SERIES PAR VALUE PER SHARE NUMBER OF SHARES AUTHORIZED
Common -- No par value 250,000,000
Preferred To be designated by No par value 20,000,000
the Board of Directors
</TABLE>
II. The last paragraph of Article Four, which currently reads as follows:
"If the Preferred Stock is issued as a class, then the Board of
Directors of the Corporation will determine liquidation rights and
dividend rights by filing Articles of Amendment to the Articles of
Incorporation of the Corporation prior to the issuance of any
shares of the Preferred Stock."
will be deleted in its entirety.
<PAGE>
PROXY HA-LO INDUSTRIES, INC. PROXY
SPECIAL MEETING OF SHAREHOLDERS - MAY 3, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned shareholder of HA-LO INDUSTRIES, INC., an Illinois corporation
("HA-LO" or the "Company")), hereby appoints John R. Kelley, Jr. and Gregory J.
Kilrea, and each of them, proxies and attorneys-in-fact of the undersigned,
each with full power of substitution, to attend and act for the undersigned at
the special meeting of shareholders to be held on Wednesday, May 3, 2000 at
Harris Bank, Room 20C, 111 West Monroe Street, Chicago, Illinois 60603 and
at any adjournments or postponements thereof, and in connection therewith to
vote and represent all of the shares of common stock of HA-LO which the
undersigned would be entitled to vote.
Said proxies and attorneys, and each of them, shall have the powers which the
undersigned would have if acting in person. Said proxies, without hereby
limiting their general authority, are authorized to vote in accordance with
their best judgment with respect to all matters incident to the conduct of the
special meeting and all matters presented at the meeting but which are not
known to the board of directors at the time of solicitation of this proxy. The
undersigned hereby revokes any other proxy to vote at such meeting and hereby
ratifies and confirms all that said proxies and attorneys, and each of them,
may lawfully do by virtue hereof.
Each of the above named proxies at said meeting, either in person or by
substitute, shall have and exercise all the powers of said proxies hereunder.
This proxy will be voted in accordance with the choices specified by the
undersigned on this proxy. In their discretion, each of the above-named
proxies is authorized to vote upon such other business incident to the conduct
of the special meeting as may properly come before the meeting or any
postponements or adjournments thereof.
IF NO INSTRUCTIONS ARE INDICATED HEREIN, THIS PROXY WILL BE TREATED AS A GRANT
OF AUTHORITY TO VOTE FOR THE PROPOSALS AND ANY OTHER MATTERS TO BE VOTED UPON
AT THE SPECIAL MEETING OR AT ANY POSTPONEMENTS OR ADJOURNMENTS THEREOF.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN THIS CARD
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. Approval of the merger, including the issuance in the merger and upon / / / / / /
exercise of options assumed by the Company under Starbelly.com's stock option
plan of 17 million shares of HA-LO common stock, an amendment to the
Company's articles of incorporation to permit the issuance in the merger and
upon exercise of the assumed options of 5.1 million shares of convertible
preferred stock and the reservation of 5.1 million shares of common stock for
issuance upon conversion of the convertible preferred stock.
2. Approval of a new stock option plan under which HA-LO will assume / / / / / /
Starbelly.com's stock option plan and the options outstanding under the plan.
3. Approval of amendment to the Company's articles of incorporation to increase / / / / / /
the number of shares of common stock and the number of shares of preferred
stock the Company is authorized to issue from 100 million to 250 million and
from 10 million to 20 million, respectively.
4. Approval of an amendment to the Company's articles of incorporation to / / / / / /
authorize the board of directors to provide for the future issuance of
preferred stock without the approval of the holders of our common stock.
5. Approval of any proposal by the board of directors to postpone or adjourn / / / / / /
the meeting.
6. The persons named in this proxy also may vote, in their discretion, upon / / / / / /
such other matters as may properly come before the meeting or any
adjournment thereof.
</TABLE>
Please note that approval of proposal 1 is conditioned on approval of
proposal 2. Similarly, approval of proposal 2 is conditioned on approval of
proposal 1.
Please complete, sign and mail this proxy promptly in the enclosed envelope.
No postage is required for mailing in the United States.
Dated _____________________, 2000
Signature(s) _________________________________
_________________________________
IMPORTANT: Please date this proxy and sign exactly as your name appears on
this proxy. If shares are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee or guardian, please
give title as such. If a corporation, please sign in full corporate name by
president, or authorized officer. If a partnership, please sign in
partnership name by authorized person. (This Proxy should be marked, dated,
signed by the shareholder(s) exactly as his or her name appears hereon, and
returned promptly in the enclosed envelope. Persons signing in a fiduciary
capacity should so indicate. If shares are held by joint tenants or as
community property, both should sign.)
