-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMLYIt+2wSpWQwHryrAFAtCmVUee9DZ8XM9XsHOACtXxMiBmBTvzl9KMZrtPqXOL 0q6V9Xa+WvQtGcxroMufpA== 0000912057-97-011251.txt : 19970401 0000912057-97-011251.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011251 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HA LO INDUSTRIES INC CENTRAL INDEX KEY: 0000891285 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISC DURABLE GOODS [5090] IRS NUMBER: 363573412 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20758 FILM NUMBER: 97569923 BUSINESS ADDRESS: STREET 1: 5980 TOUHY AVENUE CITY: NILES STATE: IL ZIP: 60714 BUSINESS PHONE: 7086472300 MAIL ADDRESS: STREET 1: 5980 TOUCHY AVE CITY: NILES STATE: IL ZIP: 60714 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the Transition Period from ______to______ Commission file number: 0-20758 HA-LO INDUSTRIES, INC. ---------------------- (Exact name of registrant as specified in its charter) Illinois 36-3573412 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5980 TOUHY AVE., NILES, ILLINOIS 60714 -------------------------------------- (Address of principal executive offices, Zip Code) Registrant's telephone number, including area code: (847)647-2300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value -------------------------- (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by stockholders who were not affiliates of the registrant was approximately $206,328,200 as of March 24, 1997 (based on the closing sale price on that date as reported by Midwest Edition of THE WALL STREET JOURNAL). For this computation, the registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant. At March 24, 1997, the registrant had issued and outstanding an aggregate of 19,818,816 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1996 Annual Report to Shareholders and of the proxy statement for the Annual Meeting of Shareholders to be held on June 2, 1997 described in Parts II, III and IV hereof are incorporated by reference in this report. PART I ITEM 1. BUSINESS PROMOTIONAL PRODUCTS: GENERAL HA-LO Industries, Inc. and Subsidiaries ("the Company") is the leading marketer and distributor in the $8 billion specialty and premium promotional products industry. Specialty and premium promotional products are generally articles of merchandise imprinted or otherwise customized with an advertiser's name, logo or message and used by the advertiser for marketing, sales incentives and awards and development of goodwill for a targeted audience. Examples of these products include jackets, hats, T-shirts, calendars, pens, coffee mugs and key chains, as well as more upscale items such as crystalware and desk accessories. Specialty and premium promotional products can be valuable components of an advertiser's overall advertising or marketing campaign. Because such products are designed to be useful to the recipient, messages imprinted on these products enjoy repeated exposure. Specialty and premium advertising can be readily targeted to specific audiences sought by advertisers because of the wide variety of merchandise available for such purposes. The Company enhances its promotional products business through a variety of value-added services including its in- house advertising agency, Duncan & Hill, its HA-LO Sports- Registered Trademark-, Inc. subsidiary and its Events by HA-LO-Registered Trademark- division. The Company also provides corporate fulfillment program services, which enable customers to purchase large quantities of customized products that are warehoused by the Company and are available for immediate shipment in small quantities as needed. Value- added advertising and design capabilities are provided by Duncan & Hill, which acts as an extension of customers' marketing departments and advertising agencies. HA-LO Sports - -Registered Trademark-, Inc. is the Company's sports marketing agency which consults with sports teams and corporations on many aspects of sports promotions, including endorsements, event marketing and vendor programs. Through Events by HA-LO - -Registered Trademark-, the Company plans, organizes and promotes corporate events such as business conferences and grand openings. The Company enjoys competitive advantages which differentiate HA-LO from other advertising specialty companies, as follows: - CORPORATE FULFILLMENT PROGRAMS. Under these programs, a customer contractually purchases large quantities of customized products that are warehoused by the Company and shipped at the direction of the customer. Such programs are generally implemented in conjunction with a customer catalog or brochure featuring the types of customized products being warehoused. Further, these programs afford large customers lower per unit costs and the ability to receive immediate delivery of small quantities. The Company also provides computerized inventory reports which assist the customer in monitoring its marketing efforts, and, on request, automatically reorders product at predetermined levels. The Company views the design and administration of corporate fulfillment programs as an integrated feature of the customer's overall marketing plan, thereby 2 institutionalizing the Company's relationships with these customers. - IN-HOUSE ART DEPARTMENT. The Company maintains an in-house design center and art department that designs sample products and provides camera-ready art work. This allows the Company to assist its customers in creating innovative specialty and promotion programs. The art department employs full- time artists offering illustration, graphics and typesetting services as well as the design of corporate logos. The Company has the ability to respond on a same- day basis to customer requests for art work and designs. The availability of this department saves the customer time and money. - IN-HOUSE PRODUCTION DEPARTMENT. The Company has an in-house production department with capabilities for engraving, hot-stamping and silk screening. These capabilities enable the Company to accommodate customers placing last-minute orders for a variety of products and to produce samples, typically on a same- day basis, for existing and potential customers. - COMPUTER SOURCING AND CATALOGS. The Company utilizes computer software to electronically source product needs from over 2,500 vendors. Product specifications and pictures are immediately available to the sales representative and customer. The Company has also developed its own catalog which depicts the broad range of products it provides, including some of the unique items it has developed. - BUYING POWER. As one of the nation's largest specialty and premium advertising companies, the Company has been able to successfully negotiate preferred pricing from many vendors. The Company has developed direct relationships with reliable overseas manufacturers who meet its quality and delivery standards. This allows the Company to be very competitive on pricing large orders. The Company purchases products directly from manufacturers and typically arranges to have the customer's name, logo or advertising message imprinted on the products by the manufacturer or a third party. A majority of all products sold by the Company are shipped directly by the Company's suppliers to its customers; the remaining products are warehoused by the Company in conjunction with the Company's corporate fulfillment program. The Company markets its products primarily through a sales force of independent sales representatives who are paid commissions by the Company based upon a percentage of gross profit on individual sales. 3 INDUSTRY OVERVIEW According to the Promotional Product Association International ("PPA"), an industry trade association, sales volume in the specialty and premium advertising industry grew to approximately $8 billion in 1995. There are in excess of 14,000 United States distributors of specialty and premium advertising products according to the PPA. Generally, distributors are closely-held entities with a local or regional focus. Distributors range from one- person, one-product businesses to entities similar to the Company. While certain better-capitalized distributors maintain showrooms to assist customers in the selection of the array of products which are available, the majority of distributors are comprised of one to three sales persons who bring sample cases and suppliers' catalogs to their customers. Many of the larger distributors are also manufacturers (or affiliates of manufacturers) of products traditionally used in the specialty and premium advertising industry and which principally market their own product line. STRATEGY The Company's strategy is to continue as the leading distributor in the promotional products industry. Specific elements of the Company's operating strategy include: - NATIONAL SALES FORCE AND SHOWROOM SYSTEM. The Company's national sales force currently consists of approximately 650 sales representatives. The Company currently has 11 showrooms throughout the United States that provide customers with the opportunity to view products and develop ideas for additional products and programs that can be used in their marketing or advertising campaigns. The Company plans to continue to add both sales representatives and showrooms. - STRATEGIC ACQUISITIONS. The Company has acquired 11 promotional products distributors since 1992 and continues to believe that there are significant opportunities in the fragmented promotional products industry to acquire high-quality companies. The Company believes this will increase existing business by providing additional sales representatives and new customers and allow the Company to enter new geographic areas. The Company has demonstrated its ability to improve upon the performance and profitability of these companies. The Company believes acquisitions have been and will continue to be an expeditious and cost-efficient method of growth. - EXPANSION OF EXISTING CUSTOMER RELATIONSHIPS AND STRATEGIC ALLIANCES. The Company has developed strong customer relationships with large organizations, many of which have large advertising specialty budgets. The Company's relationships allow it to identify new business opportunities and react to customer needs in the early stages of a marketing program and thereby maintain and increase its sales volume with particular customers. The Company believes that it has opportunities to increase the amount of advertising purchases made by its customers by continuously introducing new and creative products and programs. In addition, as customers seek to consolidate their advertising specialty purchases, the Company believes it has a substantial 4 opportunity to increase its share of its customers' total purchases. - BROAD LINE OF SPECIALTY PRODUCTS/BUYING POWER. The Company seeks to differentiate itself from competitors by making available to its customers a broad line of promotional products. Currently, the Company has access to products from more than 2,500 vendors located primarily throughout North America and the Far East. The Company's broad product line provides its customers with comprehensive, one-stop shopping for most of their promotional products. As one of the nation's largest purchasers of promotional products, the Company has successfully negotiated preferred pricing from many of its vendors and has developed relationships with reliable overseas manufacturers which satisfy its quality and delivery standards. - SOPHISTICATED DESIGN AND DELIVERY CAPABILITIES. The Company seeks to position itself as an integral part of its customers' overall marketing and advertising programs by offering more services than typical small distributors. Through its in-house design and production departments, the Company can respond to customers' needs with individually designed approaches to customers' overall marketing programs. When an advertising specialty concept is designed, the Company's full-service, self-contained art department generally has the capability to produce a visual representation of the product for customer approval in one day. In addition, the Company's relationships with reliable manufacturers allow it to deliver quality products on a timely basis. The Company uses these capabilities to attract new customers and to increase the volume of orders placed by existing customers. - SOPHISTICATED SYSTEMS CAPABILITIES. The Company operates a consolidated accounting, warehousing, order tracking, pricing, billing and job cost management information systems at its headquarters. This system is currently under further development to link the Company's offices and sales representatives so that representatives will be able to receive detailed information including customer purchasing patterns, payment history and order status. - FLEXIBLE EXPENSE STRUCTURE. The Company has structured its organization to lessen its fixed overhead costs. It has achieved this through: (i) compensating its sales force on a commission basis, (ii) sourcing its products from vendors, thereby avoiding fixed manufacturing expenses and (iii) handling a substantial majority of its sales via direct shipment to the customer, thereby minimizing inventory carrying costs. PRODUCTS AND SERVICES Promotional products are generally articles of merchandise imprinted or otherwise customized with an advertiser's name, logo or message which are used for marketing, sales incentives and awards and development of goodwill for a targeted audience. The products include (i) apparel such as jackets, sweaters, hats and golf shirts, (ii) business accessories such as clocks, portfolios, briefcases, blotters and pen and pencil sets, (iii) recognition awards such as trophies and plaques and (iv) other miscellaneous advertising items such as etched crystalware, calendars, golf accessories, key chains, watches and mugs. The Company's representatives work with customers to develop marketing 5 programs that utilize advertising specialty products designed to reach the specific audience targeted by the customers. When a promotional product concept is designed, the Company's full-service, self-contained art department generally has the capability to produce a visual representation of the product for customer approval within one day. The art department employs full-time artists with varying backgrounds in illustration, graphics and typography, as well as in designing corporate logos. Further, the Company's personnel utilize the latest design software and equipment and have access to thousands of pieces of art work. The Company also has an in-house production department which performs limited engraving, hot stamping and silk screening on samples and on finished products which enables the Company to produce samples on short notice and satisfy customer requests for last minute orders. The Company's design and production facilities distinguish it from many of its competitors. SALES REPRESENTATIVES The Company's products are sold primarily through a network of approximately 650 independent sales representatives. Historically, the Company has not experienced significant turnover among its experienced independent sales representatives. The Company believes that the existence of its broad range of services, buying power, stock option program and name recognition facilitate its ability to attract and retain sales representatives. The terms of the Company's customary form of sales representative arrangement provides for the representative to receive a commission in an amount equal to a percentage of the gross profit from the sale of products attributable to that person. All orders taken by the representative must comply with the policies of the Company and are subject to acceptance by the Company. Typically, a representative has no assigned or exclusive territory. COMPETITION The promotional products industry is highly fragmented and competitive, and some of the Company's competitors may have substantially greater financial and other resources than the Company. The Company also competes for advertising dollars against other media, such as television, radio, newspapers, magazines and billboards. In addition, entry into the specialty and premium advertising industry is not difficult, and new competitors are continually commencing operations. The primary bases for competition are customer service, creativity, customer relationships, product innovation and pricing. Few in the industry possess the capabilities to offer potential customers the services available from the Company. However, several of the Company's competitors are manufacturers as well as distributors and may enjoy an advantage over the Company with respect to the cost of the goods they manufacture. CUSTOMERS The Company's customers include manufacturing, financial service, broadcasting, consumer product and communications companies as well as professional sports teams. Approximately 15% and 14% of net sales in 1996 and 1995, respectively, were generated from Montgomery Ward and Co., Inc. In 1994, another customer accounted for approximately 11% of 6 net sales. Selected customers of the Company include Motorola, Inc., The Quaker Oats Company, Time-Warner Inc., Ameritech Corporation, Turner Broadcasting System, Inc., Abbott Laboratories, and Andersen Consulting. The Company has a diverse customer base which it believes serves to limit its exposure to industry downturns. Historically, the Company's largest customers have varied from year to year depending upon numerous factors affecting its customers, including advertising and promotion budgets, the introduction of new products, operating results and economic conditions. BACKLOG As of February 28, 1997, the Company had a backlog of firm orders of approximately $16,113,000, substantially all of which the Company believes will be shipped during 1997. SUPPLIERS The Company has direct access to more than 300,000 different products furnished by over 2,500 manufacturers. The Company is not dependent upon any single manufacturer, and alternative manufacturers are available for virtually all products. EMPLOYEES As of December 31, 1996, the Company employed approximately 400 people in its premium advertising business. The Company is not a party to any collective bargaining agreements and has not experienced a strike or work stoppage. The Company believes that its employee relations are excellent. PATENTS AND TRADEMARKS The Company believes the "HA-LO" name is important to its business. The Company has registered the following trademarks: "HA-LO Advertising Specialties-Registered Trademark-", "HA-LO Marketing and Promotions-Registered Trademark-", "Events by HA-LO-Registered Trademark-" and "HA-LO Sports-Registered Trademark-". SEASONALITY OF THE BUSINESS Some customers tend to utilize a greater portion of their advertising and promotion budgets in the latter part of the year, which has historically resulted in and may continue to result in a disproportionately large share of the Company's net sales being recognized in the fourth quarter. In addition, the Company incurs general and administrative expenses evenly throughout the year which has historically resulted in a disproportionate share of its net income being reported in the fourth quarter. In addition, the timing of, and method of accounting used in connection with, an acquisition may cause substantial fluctuation in operating results from quarter to quarter. Therefore, the operating results for one quarter should not be relied upon as an indication of the results to be expected in any future quarter. 7 TELEMARKETING GENERAL The Company acquired Market USA, Inc. and Marusa Marketing, LTD. (together MUSA) in September, 1996. MUSA creates, manages and conducts large scale telephone based marketing programs for large corporate clients throughout the United States and Canada. Through a network of more than 1,400 telephone service representatives ("TSRs") and 550 licensed insurance agents, MUSA provides script development, telephone-based direct sales, database analysis and management, consultation and program design as well as customer lead acquisition services to clients, primarily in the insurance and financial services industries. MUSA makes extensive use of telecommunications technology, including predictive dialers and digital switches to initiate outbound calls, electronically transmit applicable program scripts and customer information to their TSR workstations and record and report the customer and transaction data captured during each call. MUSA currently operates over 900 workstations in 17 call centers located primarily throughout the Midwestern United States and Canada. INDUSTRY OVERVIEW The telephone based marketing industry is highly fragmented and includes both captive and independent companies. The industry has experienced significant growth in recent years which has prompted the need for technologically advanced high volume call centers dedicated to providing telephone-based marketing services for clients on an outsourced basis. In addition, many large companies are continuing to focus on their core competencies and outsourcing non-core functions. The advantages of telephone based marketing, which include high response rates, low cost per transaction, direct interaction with customers and the ability to immediately respond to customer inquiries, make it an attractive alternative to other forms of direct marketing. STRATEGY In light of increasing direct marketing expenditures by large corporations, greater emphasis on telemarketing programs and the trend toward outsourcing of telemarketing activities, the Company believes there are significant opportunities to expand its telemarketing business. The Company's strategy includes the following components: - INCREASE REVENUES FROM EXISTING CLIENTS. MUSA believes there is a significant opportunity to increase revenues from existing clients. Specifically, MUSA is targeting opportunities to capture an increasing share of its clients' direct sales activities and to cross-sell their other telemarketing services. - OBTAIN NEW CLIENTS WITHIN EXISTING INDUSTRY SPECIALIZATIONS. The insurance and financial services industries include many large corporations which rely on telemarketing for a substantial portion 8 of their direct sales needs. MUSA believes there is significant opportunity to grow by targeting new clients in these industries that are seeking to outsource their existing or new telemarketing programs. MUSA believes it has a competitive advantage in competing for these new clients because of its expertise and reputation for quality service with clients in these industries. For example, MUSA currently has approximately 550 licensed insurance agents in the United States and Canada, more than any of their direct competitors. - CROSS-SELLING: Historically, MUSA has acquired new clients and marketed its services primarily through personal contacts, referrals from existing customers and by attending trade shows, advertising in industry publications and responding to requests for proposals. Although MUSA will continue to utilize these sources to identify potential clients, MUSA believes its services compliment those of HA-LO and believe the opportunities to cross-sell its services to HA-LO's current customers are significant. - ADD NEW INDUSTRY SPECIALIZATIONS. MUSA is evaluating several industries which are expected to substantially increase expenditures on direct sales and customer service telemarketing applications, including the natural gas industry, which may become even more competitive due to ongoing or potential deregulation efforts. - CREATE NEW VALUE ADDED TELEMARKETING APPLICATIONS. MUSA regularly seeks to create new value-added services which have not historically been offered by independent telemarketers. Creating additional value-added services should both increase the average account size and, more importantly, strengthen the long-term relationships between MUSA and its clients. - EXPLORE STRATEGIC ACQUISITIONS. MUSA intends to take advantage of the fragmented nature of the telemarketing industry by making strategic acquisitions. Through selected strategic acquisitions, MUSA seeks to serve new industries or complement its client base in one of its current industry specializations. MUSA will evaluate acquisitions using numerous criteria including management strength, service quality, industry focus, diversification of client base and operating characteristics. OPERATIONS OVERVIEW MUSA provides outbound telemarketing for clients primarily in the insurance and financial services industries. CALLING: Outbound telemarketing refers to direct sales, research and service activities that commence when MUSA places calls to parties targeted by its corporate clients to offer products or services. In most instances, MUSA receives customer data electronically from its clients. These files have been selected to 9 match the demographic profile of the targeted customer for the product or service being offered. MUSA's data management systems sort the records and electronically assign them to one of its call centers. Telephone calls are controlled by computerized call management systems that utilize predictive dialers to automatically dial the numbers in the files, determine if a live connection is made and present connected calls to a TSR who has been trained for the client's program. When a call is presented, the customer's name, other information about the customer and the program information simultaneously appear on the TSR's computer screen. The TSR then uses the script to solicit an order for the product or service or to request information that will be added to the client's database. QUALITY ASSURANCE: During the course of each telemarketing program, MUSA carefully monitors its representatives to insure accurate presentation of the product or service offered and to maintain quality and efficiency. Sales confirmations are recorded with the customer's consent to insure accuracy and provide a record in the event a transaction must be reconfirmed at a later date. MUSA also has extensive call monitoring programs to facilitate TSR evaluation and provide clients the ability to obtain program feedback on a real time basis. MUSA's information systems enable it to provide clients with hourly reports, if necessary, on the status of an outgoing telemarketing campaign and can transmit summary data electronically to clients, if desired. PERSONNEL AND TRAINING: MUSA believes a key component of its success is the quality of its employees. Therefore, MUSA continually refines its approach to hiring, training and managing qualified personnel. MUSA's call centers are strategically located in an effort to attract a high quality, dedicated work force. MUSA believes its relatively high proportion of full-time employees provides a more stable work force and reduces its recruiting and training expenditures. MUSA currently employs over 2,400 people. None of the MUSA's employees are subject to a collective bargaining agreement. MUSA considers its relations with its employees to be excellent. COMPETITION The telemarketing industry is very competitive and highly fragmented. MUSA's competitors range in size from very small firms offering specialized applications or short term projects, to large independent firms. A number of competitors have capabilities and resources equal to, or greater than, MUSA's. The market includes non-captive telemarketing and customer service operations such as APAC Teleservices, MATRIXX Marketing, Inc., SITEL Corporation, ITI Marketing Services, Inc., West Telemarketing, and TeleService Resources, as well as in-house telemarketing and customer service organizations throughout the United States. In-house telemarketing and customer services organizations comprise by far the largest segment of the industry. In addition, some of MUSA's services also compete with other forms of direct marketing such as 10 mail, television and radio. MUSA believes the principle competitive factors in the telephone-based marketing industry are reputation for quality, sales and marketing results, price, technological expertise, and the ability to promptly provide clients with customized solutions to their sales and marketing needs. GOVERNMENT REGULATION In the United States, telephone sales practices are regulated at both the federal and state level. The Federal Communications Commission's (the "FCC") rules under the Federal Telephone Consumer Protection Act of 1991 (the "TCPA") prohibit the initiation of telephone solicitations to residential telephone subscribers before 8:00 A.M. or after 9:00 P.M., local time, and prohibit the use of automated telephone dialing equipment to call certain telephone numbers. In addition, the FCC rules require the maintenance of a list of residential consumers who have stated that they do not wish to receive telephone solicitations and avoidance of making calls to such consumers' telephone numbers. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1996 (the "TCFAPA") broadly authorizes the FTC to issue regulations prohibiting misrepresentation in telephone sales. In August 1995, the FTC issued rules under the TCFAPA which generally prohibit abusive telephone solicitation practices and impose disclosure and record keeping requirements. MUSA believes it is in compliance with the TCPA and the FCC rules thereunder and with the FTC rules under the TCFAPA. MUSA trains its TSR's to comply with the FTC and FCC rules and programs its call management system to avoid telephone calls during restricted hours or to individuals maintained on MUSA's "do-not-call" list. Telemarketing in Canada is governed by both federal and provincial legislation. At the federal level, telemarketing practices may be dealt with under the fraud provisions of the Criminal Code (Canada) or under the misleading advertising provisions of the Competition Act. Aspects of telemarketing in Canada are also regulated by the Canadian Radio-television and Telecommunications Commission (the "Commission"), which has authority under the Telecommunications Act, to prohibit or regulate certain uses of telecommunications facilities for the provision of unsolicited telecommunications. The Commission has exercised its authority in relation to the use of automatic dialing-announcing devices ("ADADs"). Currently, the use of ADADs to make unsolicited calls for the purpose of solicitation (defined as the selling or promoting of a product or a service, or the soliciting of money, whether directly or indirectly) is prohibited (charities excluded). Additional restrictions on the use of live voice operators or facsimile equipment to make unsolicited telephone calls for the purpose of solicitation exist for territories served by Bell Canada (i.e., Ontario and Quebec). OTHER REGULATION. The industries served by MUSA are also subject to varying degrees of government regulation. MUSA has never been held responsible for regulatory noncompliance by a client. MUSA's employees who complete the sale of insurance products are required to be licensed 11 by various state and provincial insurance commissions and participate in regular continuing education programs, access to which are currently provided in-house by MUSA. Reference is made to foonote 14 of the financial statements contained in the Company's 1996 Annual Report and incorporated by reference herein for segment information regarding the Company's business segments. ITEM 2. PROPERTIES The Company leases its 150,000 square feet headquarters in Niles, Illinois (a suburb of Chicago), which includes a 2,500 square foot showroom. A wholly owned subsidiary of the Company owns land and two buildings from which it operates in Charlotte and Greensboro, North Carolina. MUSA's corporate headquarters are located in Des Plaines, Illinois in leased facilities consisting of approximately 14,000 square feet of office space. MUSA also leases the facilities listed below: CURRENT NO. OF LOCATION OPENED WORKSTATIONS - -------- ------ ------------ Des Plaines, IL 1988 16 Beloit, WI 1989 48 Hollywood, FL 1989 80 Oak Lawn, IL 1991 47 Fairborn, OH 1991 48 Montreal, Quebec 1992 100 Toronto, Ontario 1992 116 Ottawa, IL 1993 80 Houston, TX 1994 70 Loves Park, IL 1995 32 Springfield, OH 1995 64 Worth, IL 1995 16 Welland, Ontario 1995 32 Winnipeg, Manitoba 1995 80 Chicago, IL 1996 62 Morris, IL 1996 32 Middletown, OH 1996 48 The leases of these facilities generally expire between 1997 and 2000, and most contain renewal options. MUSA believes its current facilities are adequate for current operations, but additional facilities will be required to support growth. MUSA believes that suitable or alternative spaces will be available as needed at commercially reasonable terms. 12 ITEM 3. LEGAL PROCEEDINGS The Internal Revenue Service (the "IRS") has commenced and is currently engaged in a field audit examination of the Company's federal employment tax returns for the years ended December 31, 1993, 1994, and 1995 which includes a review of the facts, circumstances and legal authority supporting the Company's position that its independent sales representatives have properly been treated as independent contractors for federal employment tax purposes. To date, the IRS has proposed adjustments to increase the Company's federal withholding, federal unemployment and social security tax liabilities for 1993 and 1994, and similar proposed adjustments are possible for subsequent periods. However, the Company believes its characterization of its sales representatives as independent contractors is proper and is evaluating its various alternatives, including appeal. This process could take several years to resolve. If the IRS were to prevail and require the Company to treat all or any portion of its independent sales representatives as employees, such change in status could adversely affect the Company's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders, through solicitation of proxies or otherwise, during the fourth quarter of 1996. 13 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to "Note 17. Market for the Registrant's Common Equity and Related Stockholder Matters" of the Company's financial statements included in the Company's Annual Report to Shareholders for 1996 ("Annual Report"), as well as to note (d) in the Selected Financial Data of the Annual Report, all of which are incorporated herein by reference. The Company has not paid a cash dividend on its common stock since its initial public offering in 1992. The Company does not intend to pay such dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the Selected Financial Data on page 3 of the Annual Report which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Management's Discussion and Analysis of Financial Conditions and Results of Operations set forth on pages 4 and 5 of the Annual Report which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Balance Sheets as of December 31, 1996 and 1995, Consolidated Statements of Income, Consolidated Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996, and Notes to Financial Statements set forth on pages 6 to 19 of the Annual Report, and the Report of Arthur Andersen LLP on page 20 of the Annual Report, are incorporated herein by reference. Selected Quarterly Operating Results (Unaudited) set forth on page 19 of the Annual report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position with the Company ---- --- -------------------------- Lou Weisbach 48 Chairman of the Board, President and Chief Executive Officer Linden D. Nelson 36 Director, Vice Chairman of the Board and Chief Executive Officer of Creative Concepts in Advertising, Inc. Seymour N. Okner 70 Director, Chief Executive Officer of Market USA, Inc. and Marusa Marketing, Ltd. Richard A. Magid 38 Director, Treasurer, Chief Operating Officer and Assistant Secretary David C. Robbins 44 Director, Executive Vice President Gregory J. Kilrea 33 Chief Financial Officer Michael P. Nemlich 45 Vice President - Corporate Development/ Financial Relations Barbara G. Berman 52 Vice President - Retail Accounts and Secretary Barry T. Margolin 30 Vice President - Finance, Corporate Controller and Assistant Secretary Sabina Filipovic 36 Vice President - Human Relations and Assistant Secretary David Blumenthal 34 Vice President - Information Systems Officers are elected annually and serve at the discretion of the Board of Directors. Mr. Okner is the father-in-law of Mr. Robbins. There are no other family relationships between any directors and executive officers of the Company. Mr. Weisbach has been the President and Chief Executive Officer of the Company since January 1, 1988. From 1972 through 1987, he operated the predecessor of the Company as a sole proprietorship. Mr. Nelson has served as the Vice Chairman of HA-LO and Chief Executive Officer of Creative Concepts in Advertising, Inc. since its acquisition by HA-LO in January, 1997. Mr. Nelson was the Chairman and Chief Executive Officer of Creative Concepts in Advertising since its inception in July, 1979 through December, 1996. Mr. Okner has served as a director of HA-LO and Chief Executive Officer of Market USA, Inc. and Marusa Marketing, Ltd. Since their acquisition by HA-LO in September, 1996. Mr. Okner was the President, Treasurer, Secretary and a director of Market USA since its inception in 1988. He was also the President and Secretary of Marusa Marketing from April 1992 through September, 1996. Prior to 1988, Mr. Okner served in 15 various executive capacities, primarily in the insurance industry, including President of Montgomery Ward Life Insurance Company and Signature Life Insurance Company of America. Mr. Magid was appointed Chief Operating Officer in July of 1996. He has been the Treasurer since August, 1992 and was also appointed Assistant Secretary as of March 1996. Additionally, he was the Chief Financial Officer from August, 1992 until July of 1996 and Vice President - Finance from August, 1992 through March of 1996. From 1981 until joining HA-LO in 1992, he was employed by the accounting firm of Arthur Andersen LLP, most recently as an audit and financial consulting manager. Mr. Robbins has been Executive Vice President since November, 1992. From 1978 to November 1992, he was an independent sales representative marketing specialty and premium advertising products. Mr. Kilrea was appointed Chief Financial Officer in July of 1996. Additionally, he was the Vice President of Planning from April, 1996 through July, 1996. From 1985 until joining the Company in 1996, he was employed by the accounting firm of Arthur Andersen LLP, most recently as an audit and financial consulting manager. Mr. Nemlich was appointed Vice President - Corporate Development/Financial Relations in April of 1996. From March of 1993 until joining the Company in 1996, he was a Vice President in Trust Investment Services at Northern Trust Bank. Prior to this, he spent 15 years in various positions within the financial services industry including investment banking. Ms. Berman was appointed Vice President - Retail Accounts in March of 1996 and has been Secretary of the Company since August, 1992. She was also the Vice President of Administration from August 1992 to March of 1996. From 1985 to August 1992, she was the Director of Administration for the Company and its predecessor. From 1982 to 1985, she was the administrative assistant for the Company's predecessor. Mr. Margolin was appointed Vice President - Finance and Assistant Secretary in March of 1996 and has been the Corporate Controller since January of 1993. From 1988 until joining HA-LO in 1993, he was employed by the accounting firm of Arthur Andersen LLP as an audit and financial consultant. Ms. Filipovic was appointed Vice President - Human Relations and Assistant Secretary in March of 1996. She was the Director of Administration/Human Relations from March of 1994 to March of 1996. From July of 1984 through March of 1994, she held various positions throughout the Company and for the Company's predecessor. Mr. Blumenthal was appointed Vice President - Information Systems in March of 1996. From March of 1995 through March of 1996, he was Director of Information Systems. He started with HA-LO in 1981 and has held various positions with the Company and its predecessor. Additional information required by Item 10 regarding Directors and Executive Officers is incorporated by reference from the "Election of Directors", "Executive Compensation" and "Security Ownership of Certain Beneficial Owners and Management" sections of the Company's 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION 16 The information required by Item 11 is incorporated by reference from the "Executive Compensation" and "Certain Transactions" sections of the Company's 1997 Proxy Statement; provided, however, that neither the Report of the Compensation Committee on Executive Compensation nor the Performance Graph set forth therein shall be incorporated by reference herein, in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or in any of the Company's future filings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference from the "Executive Compensation" and "Certain Transactions" sections of the Company's 1997 Proxy Statement; provided, however, that neither the Report of the Compensation Committee on Executive Compensation nor the Performance Graph set forth therein shall be incorporated by reference herein, in any of the Company's previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or in any of the Company's future filings. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements, Schedules and Exhibits 1. Financial Statements (incorporated herein by reference to the Company's Annual Report for the year ended December 31, 1996) (i) Report of Independent Public Accountants; (ii) Consolidated Balance Sheets-December 31, 1996 and 1995; (iii) Consolidated Statements of Income for each of the three years in the period ended December 31, 1996; (iv) Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996; (v) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996; and (vi) Notes to Financial Statements. 2. Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because such schedules are not required or the information required has been presented in the aforementioned financial statements. 3. Exhibits The exhibits to this report are listed in the Exhibit Index included elsewhere herein (pages 20 through 22). (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fourth quarter of 1996. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 1997 HA-LO INDUSTRIES, INC. Registrant By: GREGORY J. KILREA ----------------------- Gregory J. Kilrea Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1997: Signature Title --------- ----- /s/ LOU WEISBACH Director, Chairman of the Board, -------------------- President and Chief Lou Weisbach Executive Officer(Principal Executive Officer) /s/ LINDEN D. NELSON Director, Vice Chairman of -------------------- the Board and Chief Linden D. Nelson Executive Officer of Creative Concepts in Advertising, Inc. /s/ DAVID C. ROBBINS Director, Executive Vice President -------------------- David C. Robbins /s/ RICHARD A. MAGID Director, Treasurer, --------------------- Chief Operating Officer, and Assistant Secretary Richard A. Magid /s/ THOMAS HERSKOVITS Director --------------------- Thomas Herskovits /s/ JORDON R. KATZ Director --------------------- Jordon R. Katz /s/ MARSHALL J. KATZ Director --------------------- Marshall J. Katz /s/ DAVID B. HERMELIN Director --------------------- David B. Hermelin /s/ NEIL A. RAMO Director --------------------- Neil A. Ramo /s/ S. N. OKNER Director, Chief Executive --------------------- Officer of S. N. Okner Market USA, Inc. and Marusa Marketing, Ltd. 19 HA-LO INDUSTRIES, INC. EXHIBIT INDEX Exhibit No. Description of Exhibit - -------------------------------------------------------------------------------- 3.1 Restated Articles of Incorporation of the Company. (1) 3.2 * Amended and Restated Bylaws of the Company. 3.3 Articles of Amendment to the Articles of Incorporation of the Company, dated August 29, 1994. (4) 3.4 * Articles of Amendment to the Articles of Incorporation of the Company, dated February 21, 1997. 4. Specimen of Stock Certificate for Common Stock. (1) 10.1 Employment Agreement, dated as of January 1, 1992, between the Company and Lou Weisbach. (1,8) 10.2 Agreement and Plan of Merger and Amalgamation dated as of June 14, 1996 among the Company, HA-LO Acquisition Corporation, Inc., HA-LO Acquisition Corporation of Canada Ltd., Market USA, Inc., Marusa Marketing Inc., Marusa Financial Services Ltd., Nerok Verifications, Inc. and the shareholders of Market USA, Inc. and Marusa Marketing Inc. (6) 10.3 * Agreement and Plan of Merger and Plan of Reorganization dated as of October 29, 1996 by and among the Company, HA-LO Acquisition Corporation of Michigan, Inc., Creative Concepts in Advertising, Inc., Creadis Group Inc., 1132832 Ontario Inc., 1132831 Ontario Corp., and the shareholders of Creative Concepts in Advertising, Inc., 1132832 Ontario Inc., and 1132831 Ontario Corp. 10.4 Employment Agreement, dated as of September 30, 1996, between the Company, Market USA, Inc. and Seymour N. Okner. (6,8) 10.5 Agreement, dated October 15, 1991, between the Company and RMI, Inc. (1,8) 10.6 Agreement, dated March 15, 1994, by and between the Company and Marshall J. Katz. (4,8) 10.7 HA-LO Industries, Inc. Stock Plan. (1,8) 10.8 HA-LO Industries, Inc. Key Employee Incentive Plan. (1,8) 10.9 Exclusive Premium Purchasing Agreement, dated January 11, 1995, between Montgomery Ward & Co., Incorporated and the Company. (4) 10.10 Stock Purchase Agreement, dated January 11, 1995, between the Company and Merchant Partners, L.P. (4) 10.11 Warrant agreement between the Company and Merchant Partners, L.P., dated January 11, 1995. (4) 10.12 Form of Indemnity Agreement between the Company and each of its directors and officers. (1,8) 10.13 Agreement between David C. Robbins and the Company dated October 25, 1994. (4) 20 10.14 Agreement between David C. Robbins and the Company dated February 1, 1995. (4) 10.15 Building Lease, dated December 30, 1992, between the Company and LaSalle National Trust N.A. No. 115722. (2) 10.16 * Agreement, dated as of March 17, 1997, between the Company and Marshall J. Katz.(8) 10.18 * Amendment of October 1996 to Bonus Shares Agreement, dated February 1, 1995, between the Company and David C. Robbins. (8) 10.19 * Employment Agreement, dated as of January 3, 1997, between the Company and Linden D. Nelson. (8) 10.20 * Employment Agreement, dated as of April 15, 1996, between the Company and Gregory J. Kilrea. (8) 10.21 * Employment Agreement, dated as of April 15, 1996, between the Company and Michael Nemlich. (8) 10.22 Negotiable Promissory Note, dated August 16, 1993 from the Company to Facility Capital Corporation and Notice and Acknowledgment of Assignment to Comerica Bank - Illinois. (3) 10.23 HA-LO Industries, Inc. Stock Plan (as amended and restated) (4,8) 10.24 Sales Representative Agreement, dated July 21, 1993, between the Company and Neil Ramo. (3,8) 10.25 Second Amendment to the HA-LO Industries, Inc. Stock Plan (as amended and restated), adopted October 28, 1995. (5) 10.26 Third Amendment to the HA-LO Industries, Inc. Stock Plan (as amended and restated), adopted on February 26, 1996. (5) 10.27 First Amendment to Exclusive Premium Purchasing Agreement, dated December 27, 1995, between Montgomery Ward & Co., Incorporated and the Company. (5) 10.28 First Amendment to Warrant, dated December 27, 1995, between the Company and Merchant Partners, L.P. (relative to January 11, 1995 Warrant). (5) 10.29 Warrant, dated December 27, 1995, from the Company to Merchant Partners, L.P. (5) 10.30 Employment Agreement, dated as of March 15, 1995, between the Company and Richard A. Magid. (5,8) 10.31 Employment Agreement, dated as of December 29, 1995, by and among FBW Acquisition Corporation, the Company and Philip C. Blount III. (7,8) 10.32 * HA-LO Industries, Inc. 1997 Stock Plan. (8) 10.33 * Credit Agreement, dated as of January 31, 1997, among the Company, American National Bank and Trust Company of Chicago, individually and as Agent, and the Lenders which are or become parties thereto. 10.34 * Guaranty Agreement, dated as of January 31, 1997, by Fletcher, Barnhardt & White, Inc., Market U.S.A., Inc., and Creative Concepts in Advertising, Inc. 10.37 Asset Purchase Agreement and Plan of Reorganization, dated December 22, 1995, between the Company, one of its subsidiaries, Fletcher Barnhardt & White, Inc., and its shareholders. (5) 21 10.38 First Amendment to Asset Purchase Agreement and Plan of Reorganization, dated December 29, 1995, between the Company, one of its subsidiaries, Fletcher Barnhardt & White, Inc., and its shareholders. (5) 13. * Annual Report to Shareholders for 1996 of registrant (for the information of the Securities and Exchange Commission and not to be deemed "filed" with the Commission, except for the portions expressly incorporated by reference in this report). 21 * List of subsidiaries of registrant 23.1 * Consent of independent public accountants. 27. * Financial Data Schedule - ---------- (1) Incorporated by reference to the correspondingly numbered exhibit to the Registration Statement (no. 33-51698) on Form S-1, as amended, filed by the Company under the Securities Act of 1933, as amended. (2) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (3) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (4) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (5) Incorporated by reference to the correspondingly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (6) Incorporated by reference to the Registration Statement (no. 333-10481) on Form S-4, as amended, filed by the Company under the Securities Act of 1933, as amended. (7) Incorporated by reference to the Registration Statement (no. 333-03928) on Form S-8 filed by the Company under the Securities Act of 1933, as amended. (8) Management contract or compensatory plan or arrangement. * Filed herewith. 22 EX-3.2 2 AMENDED AND RESTATED BYLAWS AMENDED AND RESTATED BY-LAWS OF HA-LO INDUSTRIES, INC.* ARTICLE II OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office of the Corporation in the State of Illinois shall be located in the City of Skokie and County of Cook. The Corporation may have such other offices, either within or without the State of Illinois, as the Board of Directors may determine or the business of the Corporation may require from time to time. SECTION 2. REGISTERED OFFICE. The registered office of the Corporation required by the Illinois Business Corporation Act to be maintained in the State of Illinois may be, but need not be, identical with the principal office in the State of Illinois, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II MEETING OF SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of shareholders shall be held on the first Monday of June, at the hour of 10:00 a.m., or in the event the annual meeting is not held at such time, then at the time designated by the Board of Directors, for the purpose of electing a Board of Directors and for the transaction of such other business as may properly be brought before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for an annual meeting, or any adjournment thereof, the Board of Directors shall cause the election to be held at a meeting of the shareholders as soon thereafter as may be convenient. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the President or by a majority of the Board of Directors and shall be called by the - -------------------- * AS AMENDED AND RESTATED IN THEIR ENTIRETY AND ADOPTED BY ACTION OF THE BOARD OF DIRECTORS EFFECTIVE ON JANUARY 12, 1995. Secretary upon the written request of shareholders holding of record at least twenty percent (20%) of the issued and outstanding shares entitled to vote at such meeting. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice. SECTION 3. PLACE OF MEETINGS. The Board of Directors may designate any place, either within or without the State of Illinois, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors by designating such place in the notice thereof. A waiver of notice signed by all shareholders may designate any place, either within or without the State of Illinois, as the place for the holding of such meeting. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal office of the Corporation in the State of Illinois. SECTION 4. NOTICE OF MEETINGS. Written or printed notice stating the place, day and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each shareholder of record entitled to vote at such meeting, either personally or by mail, by or at the direction of the President, Secretary or the persons calling the meeting, not less than ten (10) nor more than sixty (60) days before the date of the meeting, or, in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty (20) nor more than sixty (60) days before the date of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the records of the Corporation, with first-class postage thereon prepaid. SECTION 5. MEETING OF ALL SHAREHOLDERS. If all of the shareholders shall meet at any time and place, either within or without the State of Illinois, and shall consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and any corporate action may be taken at such meeting. SECTION 6. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days, or in the case of -2- a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, at least twenty (20) days, immediately preceding such meeting, but in neither case for a period exceeding sixty (60) days. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, for a meeting of shareholders, not less than ten (10) days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty (20) days, immediately preceding such meeting but in neither event more than sixty (60) days. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. SECTION 7. SHAREHOLDER LIST. The officer or agent who has charge of the stock transfer books for shares of the Corporation shall prepare and make, within twenty (20) days after the record date for a meeting of shareholders or ten (10) days before such meeting, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order and indicating the address of and number of shares held by each, which list, for a period of ten (10) days before such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to the examination of any shareholder, or his duly authorized legal representative, at any time during ordinary business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share ledger or transfer book, or a duplicate thereof kept in the State of Illinois, shall be PRIMA FACIE evidence as to who are the shareholders entitled to examine such list or share ledger or transfer book or to vote at any meeting of shareholders. SECTION 8. QUORUM. A majority of the outstanding shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by statute or by the Articles of Incorporation, but in no event shall a quorum consist of less than one-third (1/3) of the outstanding shares entitled to vote. If a quorum is present at any meeting, the affirmative vote of the holders of a majority of the shares represented at such meeting shall be the act of the shareholders, -3- unless the vote of a greater number or voting by classes is required by the Business Corporation Act of the State of Illinois, the Articles of Incorporation or these By-laws. SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact delivered by the beginning of the meeting. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. SECTION 10. VOTING OF SHARES. Unless otherwise provided in the Articles of Incorporation, or in any Certificate of Designation containing the rights and preferences of any class or series of stock of the Corporation, each outstanding share, regardless of class, shall be entitled to one vote in person or by proxy upon each matter submitted to a vote of the shareholders. SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares registered in the name of a deceased person, a minor ward or a person under legal disability may be voted by his administrator, executor, court-appointed guardian or conservator, either in person or by proxy without a transfer of such shares into the name of such administrator, executor, court-appointed guardian or conservator. Shares registered in the name of a trustee may be voted by him, either in person or by proxy. Shares registered in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. SECTION 12. INSPECTORS. At any meeting of shareholders, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meeting. -4- Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon their determination of the validity and effect of proxies; count all votes and report the results; and do such other acts as are proper to conduct the election and voting to ensure impartiality and fairness to all of tho shareholders. Each report of an inspector shall be in writing and signed by him or by a majority of the inspectors if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be PRIMA FACIE evidence thereof. SECTION 13. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting and without a vote, if a consent in writing, setting forth the action so taken, shall be signed (i) by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting or (ii) by all of the shareholders entitled to vote with respect to the subject matter thereof. If such consent is signed by less than all of the shareholders entitled to vote, then such consent shall become effective only if at least five (5) days prior to the execution of the consent a notice in writing is delivered to all the shareholders entitled to vote with respect to the subject matter thereof and, after the effective date of the consent, prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be delivered in writing to those shareholders who have not consented in writing. SECTION 14. VOTING BY BALLOT. Voting on any question or in any election may be VIVA VOCE unless the presiding officer or any shareholder shall demand that voting be by ballot. ARTICLE III DIRECTORS SECTION 1. NUMBER, TENURE AND QUALIFICATIONS. The number of directors which shall constitute the whole Board of Directors shall be not less than five nor more than eleven and shall be fixed from time to time, within such minimum and maximum, by the Board of Directors. The minimum and maximum number of directors constituting the Board of Directors may be increased or decreased from time to time by amendment to these by-laws. Each director elected shall hold office until the next annual meeting of the -5- shareholders or until his successor shall have been elected and shall have qualified. Directors need not be residents of Illinois nor shareholders of the Corporation. SECTION 2. VACANCIES. Vacancies and newly created directorships resulting from an increase in the number of directors may be filled by election at a meeting of the directors then in office, though less than a quorum, or by a sole remaining director, or at any annual meeting of the shareholders or special meeting of the shareholders called for that purpose. A director elected by the shareholders to fill a vacancy shall hold office for the balance of the term for which he or she was elected. A director elected by the directors to fill a vacancy shall serve until the next meeting of shareholders at which directors are to be elected. SECTION 3. DUTIES OF DIRECTORS. The business and affairs of the Corporation shall be managed by its Board of Directors, except as may be otherwise provided by statute or the Articles of Incorporation. SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held, without other notice than this by-law, immediately following, and at the same place as, the annual meeting of the shareholders. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Illinois, for the holding of additional regular meetings without other notice than this by-law. SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the President, any Vice-President or one-third of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Illinois, as the place for holding any special meeting of the Board of Directors called by them. SECTION 6. NOTICE. Notice of special meetings shall be given to each director, in person or by mail, at least five (5) days prior to the date designated therein for such meetings. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with first-class postage thereon prepaid. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. QUORUM. A majority of the directors in office shall constitute a quorum for the transaction of business at any -6- meeting of the Board of Directors; provided, that if less than a majority of such number of directors are present at any meeting of the Board of Directors, a majority of the directors present may adjourn the meeting from time to time without further notice. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the vote of a greater number is required by the Business Corporation Act of the State of Illinois, the Articles of Incorporation or these by-laws. The Board may participate in and act at any meeting through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, provided that a written record of such action and meeting are made a permanent part of the Corporation's records. SECTION 8. RESIGNATIONS. Any director may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. A resignation need not be accepted in order to be effective. SECTION 9. INFORMAL ACTION BY DIRECTORS. Any action required to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the directors entitled to vote with respect to the subject matter thereof, or by all the members of such committee, as the case may be. Any such consent signed by all the directors shall have the same effect as an unanimous vote of all of the directors or all of the members of such committee, as the case may be, at a duly called meeting thereof, and may be stated as such in any document filed with any third party, including but not limited to, the Secretary of State of Illinois, any bank or savings and loan association, Internal Revenue Service, Illinois State Department of Revenue, Cook County Recorder's Office and the Attorney General of Illinois, and shall be filed with the minutes of the proceedings of the Board or such committee. SECTION 10. COMPENSATION. The Board of Directors, by the affirmative vote of a majority of directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise. By resolution of the Board of Directors the directors may be paid their expenses, if any, of attendance at each meeting of the board. SECTION 11. PRESUMPTION OF ASSENT. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or -7- unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation within three (3) business days after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 12. REMOVAL OF DIRECTORS. One or more of the directors of the Corporation may be removed, with or without cause, at a meeting of shareholders by the affirmative vote of the holders of a majority of the outstanding shares then entitled to vote at an election of directors as provided by law. SECTION 13. COMMITTEES. A majority of the directors may create one or more committees and appoint members of the Board to serve on the committee or committees. Each committee shall have two or more members, who shall serve at the pleasure of the Board. Each committee, to the extent provided in the resolution creating the same, may exercise the authority of the Board of Directors except as otherwise provided by law. The committees shall keep regular minutes of their proceedings and when required by the Board of Directors shall report the same to the Board of Directors. ARTICLE IV OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary, a Treasurer and one or more Vice-Presidents. There shall be such other officers and assistant officers as the Board of Directors may from time to time deem necessary. Any number of offices may be held by the same person. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected annually by the Board of Directors at the regular meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. New offices may be created at any meeting of the Board of Directors. Election or appointment of an officer or agent shall not of itself create contract rights. SECTION 3. COMPENSATION. The salaries and additional compensation, if any, of all officers of the Corporation shall be -8- fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. SECTION 4. RESIGNATIONS. Any officer may resign at any time by giving notice to the Board of Directors or to the President or Secretary. A resignation of an officer need not be accepted in order to be effective. SECTION 5. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 6. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled at any meeting of the Board of Directors for the unexpired portion of the term. SECTION 7. DUTIES OF OFFICERS. The duties and powers of the officers shall be as follows: PRESIDENT The President shall be the principal executive officer of the Corporation and, subject to the control of the Board of Directors, shall, in general, be responsible for the administration and operation of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and the Board of Directors. He may sign with the Secretary, or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation and any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed or the execution of which is in the ordinary course of the Corporation's business, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed, and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time. VICE-PRESIDENTS The Vice-President, or if there shall be more than one, the Vice-Presidents in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence, disability or refusal to act of the President, perform the duties of the President, and when so -9- acting, shall have all the power of and be subject to all the restrictions upon the President. He may sign with the Secretary, or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation and any deeds, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed or the execution of which is in the ordinary course of the Corporation's business, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed, and shall perform such other duties as may be prescribed by the Board of Directors from time to time. SECRETARY The Secretary shall: (a) keep the minutes of the meetings of the shareholders, the Board of Directors and committees of directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all certificates for shares prior to the issue thereof and to all documents the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep or cause to be kept a register of the name and post-office address of each shareholder, which shall be furnished to the Corporation by such shareholder, and the number and class of shares held by each shareholder; (e) sign with the President, or a Vice-President, certificates for shares of the Corporation, the issue of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned by the President or by the Board of Directors. TREASURER If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. The Treasurer shall be the principal financial and accounting officer of the Corporation, and shall: (a) have charge and custody of, and be responsible for, all funds and securities of the Corporation; (b) keep or cause to be kept complete books and records of account including a record of all receipts and disbursements; (c) receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys not otherwise employed in the name of the Corporation in such bank, savings and loan association, trust -10- company or other depositories as shall be selected in accordance with the provisions of Article V of these by-laws; (d) from time to time prepare or cause to be prepared and render financial statements of the Corporation at the request of the President or the Board of Directors; and (e) in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned by the President or the Board of Directors. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS The Assistant Treasurers, if any, shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. In the absence of the Treasurer or Secretary or in the event of the inability or refusal of the Treasurer or Secretary to act, the Assistant Treasurer and the Assistant Secretary (or in the event there is more than one of either, in the order designated by the Board of Directors or in the absence of such designation, in the order of election) shall perform the duties of the Treasurer and Secretary, respectively, and when so acting, shall have all the authority of and be subject to all the restrictions upon such office. The Assistant Treasurers and Assistant Secretaries shall also perform such duties as shall be assigned to them from time to time by the Treasurer or the Secretary, respectively, or by the President or the Board of Directors. ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents, of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. -11- SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such bank, savings and loan association, trust company or other depositories as the Board of Directors may select. ARTICLE VI CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. The issued shares of the Corporation shall be represented by certificates or shall be uncertificated shares. Certificates representing shares of the Corporation shall be in such form as may be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice-President and by the Secretary or an Assistant Secretary and shall be sealed with the seal of the Corporation. Any or all of the signatures on the certificates may be a facsimile. All certificates for shares shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the Corporation. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. SECTION 2. TRANSFER OF SHARES. Transfers of shares of the Corporation shall be made only on the books of the Corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. The Board of Directors shall have the power to make all such rules and regulations, consistent with applicable law, as the Board of Directors may deem appropriate concerning the issue, transfer and registration of certificates for shares of the Corporation. The person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. ARTICLE VII VOTING OF SECURITIES The President shall have full authority, in the name and on behalf of the Corporation, to attend, act and vote at any meeting -12- of security holders of any corporation in which the Corporation may from time to time hold securities, and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the holder thereof, the Corporation might possess and exercise if personally present, and may exercise such power and authority through the execution of proxies, or the President or the Board of Directors may delegate such power and authority to any other officer, agent or employee of this Corporation. ARTICLE VIII FISCAL YEAR The fiscal year of the Corporation shall end on December 31 of each year, unless otherwise determined by the Board of Directors. ARTICLE IX INDEMNIFICATION SECTION 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. SECTION 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or -13- completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, provided that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been adjudged to have been liable to the Corporation unless, and only to the extent that, the court in which such action or suit is finally adjudicated shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. SECTION 3. INDEMNIFICATION AGAINST EXPENSES. Anything in Sections 1 or 2 of this Article IX to the contrary notwithstanding, to the extent that any person referred to therein has been successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to therein or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 4. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under Sections 1 and 2 of this Article IX (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case by the Board of Directors and upon a determination that the indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article IX. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum (as defined in the bylaws of the Corporation) consisting of directors who are not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the shareholders. SECTION 5. PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation. -14- SECTION 6. PROVISIONS NOT EXCLUSIVE. The indemnification and advancement of expenses provided by or granted under the other subsections of this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such official capacity and as to action in another capacity while holding such office. SECTION 7. INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article IX. SECTION 8. NOTICE TO SHAREHOLDERS. If a Corporation has paid indemnity or has advanced expenses to a director, officer, employee or agent, the Corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholder's meeting. SECTION 9. DEFINITIONS. For purposes of this Article IX, references to "the Corporation" shall include, in addition to the surviving corporation, any merging corporation (including any corporation having merged with a merging corporation) absorbed in a merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers, and employees or agents, so that any person who was a director, officer, employee or agent of such merging corporation, or was serving at the request of such merging corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article IX with respect to the surviving corporation as such person would have with respect to such merging corporation if its separate existence had continued. For the purposes of this Article IX, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee -15- benefit plan shall be deemed to have acted in a manner "not opposed to the best interest of the Corporation" as referred to in this Article IX. SECTION 10. CONTINUANCE OF INDEMNIFICATION. The indemnification and advancement of expenses provided by or granted under this Section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of that person. ARTICLE X WAIVER OF NOTICE Whenever any notice is required to be given under the provisions of these by-laws, the Articles of Incorporation or the Business Corporation Act of the State of Illinois, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XI AMENDMENTS These by-laws may be altered, amended or repealed and new by-laws may be adopted at any properly constituted meeting of the shareholders or Board of Directors by a majority vote of a quorum (as defined in the by-laws of this Corporation), provided that notice of the proposed change was given in the notice of such meeting of the shareholders or the Board of Directors, as the case may be. -16- EX-3.4 3 ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION EXHIBIT A ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION OF HA-LO INDUSTRIES, INC. RESOLVED, that Paragraph 1 of Article Four of the Corporation's Articles of Incorporation is amended to read in its entirety as follows: ARTICLE FOUR PARAGRAPH 1: The number of shares which the Corporation shall be authorized to issue, itemized by class, series and par value, if any, is: Class Series Per Share Par Value Shares Authorized ----- ------ ------------------- ----------------- Common None No par value 100,000,000 Preferred None No par value 10,000,000 FURTHER RESOLVED, that the Articles of Incorporation of the Corporation are further amended by the addition of Article Nine which shall read as follows: Article Nine OTHER PROVISIONS. Pursuant to the authorization of the Business Corporation Act of 1983 of the State of Illinois (as amended from time to time), the requirement of approval of certain acts by the affirmative vote of at least two-thirds of the votes of shares entitled to vote is hereby reduced to the affirmative vote of a majority of the votes of the shares entitled to vote on the issue and a majority of the shares of each class or series of shares entitled to vote as a class or series. EX-10.3 4 AGREEMENT AND PLAN FOR MERGER AND PLAN OF REORGANI AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION BY AND AMONG HA-LO INDUSTRIES, INC., HA-LO ACQUISITION CORPORATION OF MICHIGAN, INC., CREATIVE CONCEPTS IN ADVERTISING, INC., CREADIS GROUP INC., 1132832 ONTARIO INC., 1132831 ONTARIO CORP., and THE SHAREHOLDERS OF CREATIVE CONCEPTS IN ADVERTISING, INC., 1132832 ONTARIO INC., and 1132831 ONTARIO CORP. THIS AGREEMENT AND PLAN OF MERGER AND PLAN OF REORGANIZATION, dated as of October 29, 1996 (this "Agreement"), is by and among HA-LO Industries, Inc., an Illinois corporation ("Acquiror"), HA-LO Acquisition Corporation of Michigan, Inc., a Michigan corporation ("Acquiror Sub"), Creative Concepts In Advertising, Inc., a Michigan corporation (the "U.S. Company"), Creadis Group Inc., a British Columbia corporation (the "Canada Company"), 1132832 Ontario Inc., an Ontario corporation ("Canada Holding Company-2"), 1132831 Ontario Corp., an Ontario corporation ("Canada Holding Company-1"), Linden D. Nelson, majority shareholder of the U.S. Company and sole shareholder of Canada Holding Company-1 ("Nelson"), and the other shareholders of the U.S. Company, who are identified on Exhibit A to this Agreement (Nelson, such shareholders, and every other person who, with Acquiror's consent, acquires shares of the authorized capital stock of the U.S. Company after the date hereof, are hereafter collectively referred to as the "U.S. Shareholders", and individually as a "U.S. Shareholder"). WITNESSETH: WHEREAS, the U.S. Company is engaged in the business of creating, developing, marketing and distributing specialty advertising, promotion and premium products in the United States and the United Kingdom; WHEREAS, the Canada Company is engaged in the business of creating, developing, marketing and distributing specialty advertising, promotion and premium products in Canada; WHEREAS, the Canada Company is a wholly-owned subsidiary of Canada Holding Company-2, which is a wholly-owned subsidiary of Canada Holding Company-1 (the Canada Company, Canada Holding Company-1 and Canada Holding Company-2 are hereafter sometimes collectively referred to as the "Canadian Target Companies"); WHEREAS, the U.S. Shareholders are the sole shareholders of the U.S. Company, and Nelson is the sole shareholder of Canada Holding Company-1; WHEREAS, the U.S. Company and the Canadian Target Companies are "affiliates" through common ownership within the meaning of (i) paragraphs (c) and (d) of Rule 145 of the rules and regulations of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"), and (ii) Accounting Series, Releases 130 and 135, as amended, of the Commission (the U.S. Company and the Canadian Target Companies are hereafter sometimes collectively referred to as "Target Companies"); WHEREAS, upon the terms and subject to the conditions of this Agreement and in accordance with the Business Corporation Act of the State of Michigan, as amended ("Michigan Law"), Acquiror Sub, -1- a wholly-owned subsidiary of Acquiror, will merge with and into the U.S. Company (the "U.S. Merger"); WHEREAS, upon the terms and subject to the conditions of this Agreement, Nelson will exchange all of the outstanding shares of Canada Holding Company-1 solely for voting stock of Acquiror (such transaction is hereafter the "Canada Reorganization", and together, the U.S. Merger and the Canada Reorganization are hereafter sometimes collectively referred to as the "Unitary Transaction"); WHEREAS, the U.S. Shareholders and the Board of Directors of the U.S. Company have determined that the U.S. Merger and the Unitary Transaction are in the best interest of the U.S. Company and its shareholders, and have unanimously approved and adopted this Agreement and consented to the transactions contemplated hereby; WHEREAS, the Boards of Directors of each Canadian Target Company have determined that the Canada Reorganization and the Unitary Transaction are in the best interests of that Canadian Target Company and its shareholders, and have unanimously approved and adopted this Agreement and consented to the transactions contemplated hereby; WHEREAS, the Board of Directors of Acquiror has determined that the U.S. Merger, the Canada Reorganization and the Unitary Transaction are in the best interests of Acquiror and its shareholders, and has approved and adopted this Agreement and consented to the transactions contemplated hereby; WHEREAS, the shareholder and Board of Directors of Acquiror Sub have determined that the U.S. Merger and the Unitary Transaction are in the best interests of Acquiror Sub and its shareholder, and has approved and adopted this Agreement and consented to the transactions contemplated hereby; and WHEREAS, it is the intent of the parties to account for the Unitary Transaction as (i) a tax-free reorganization under applicable U.S. and Canadian rules and regulations, including the Internal Revenue Code of 1986, as amended (the "Code"), and the Canada-U.S. Income Tax Convention, as amended (the "Treaty"), and (ii) a "pooling of interests" under applicable rules and regulations, including U.S. generally accepted accounting principles and standards ("GAAP"), the Securities Act and releases of the Financial Accounting Standards Board and the Commission; 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: -2- ARTICLE I THE UNITARY TRANSACTION SECTION 1.01. THE U.S. MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Michigan Law, at the "Effective Time" (as hereafter defined), Acquiror Sub shall be merged with and into the U.S. Company. As a result of the U.S. Merger, the separate corporate existence of Acquiror Sub shall cease and the U.S. Company shall continue as the surviving corporation of the Merger (hereafter, the "U.S. Surviving Corporation"). SECTION 1.02. THE CANADA REORGANIZATION. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, Nelson shall convey, transfer and assign to Acquiror all of his right, title and interest in and to his shares of Canada Holding Company-1 common stock, representing one hundred percent (100%) of the outstanding stock of Canada Holding Company-1 (hereafter, the "Canada Holding Company Stock"), solely in exchange for shares of the common voting stock, no par value, of Acquiror ("Acquiror Common Stock"). SECTION 1.03. EFFECTIVE TIME. As promptly as practicable after the satisfaction or, if permissible, waiver, of the conditions set forth in Article VII, the parties shall cause the Unitary Transaction to be consummated by filing a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Michigan in such form as required by, and executed in accordance with, the relevant provisions of Michigan Law (the date and time of such filing is the "Effective Time"). SECTION 1.04. EFFECT OF THE U.S. MERGER. At the Effective Time, the effect of the U.S. Merger shall be as provided in the applicable provisions of Michigan Law. Without limiting the generality of those laws, and subject to their provisions, at the Effective Time, except as otherwise provided in this Agreement, all the properties, rights, privileges, powers and franchises of Acquiror Sub and the U.S. Company shall vest in the U.S. Surviving Corporation, and all debts, liabilities and duties of Acquiror Sub and the U.S. Company shall become the debts, liabilities and duties of the U.S. Surviving Corporation. SECTION 1.05. ARTICLES OF INCORPORATION; BY-LAWS. At the Effective Time, the Articles of Incorporation of the U.S. Company shall be the Articles of Incorporation of the U.S. Surviving Corporation, and the By-Laws of Acquiror Sub shall be the By-Laws of the U.S. Surviving Corporation. Acquiror reserves the right, exercisable in its sole discretion on and after the Effective Time, to amend, or cause to be amended, the Articles of Incorporation and By-Laws of any or all of the Canadian Target Companies. -3- SECTION 1.06. DIRECTORS AND OFFICERS. The initial Board of Directors of the U.S. Surviving Corporation shall be comprised of thirteen (13) individuals, seven (7) of whom shall be selected by Acquiror, in its sole discretion, and the remainder of whom shall be those individuals named on Schedule 1.06 to this Agreement; provided, however, in matters of routine governance, such Board shall delegate its authority to an Executive Committee comprised of Nelson, Lemberg and each of Acquiror's Chief Executive, Operating and Financial Officers. Except as may be provided in the "Company Contracts" (as hereafter defined), or in the Employment Agreements attached as Exhibits to this Agreement, at the Effective Time the officers of Acquiror Sub immediately preceding the Effective Time shall be the initial officers of the U.S. Surviving Corporation, each to hold office in accordance with the Articles of Incorporation or By-Laws of the U.S. Surviving Corporation, and until their respective successors are duly elected or appointed and qualified. SECTION 1.07. 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 Unitary Transaction. 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 U.S. Surviving Corporation with full right, title and possession to all properties, rights, privileges, immunities, powers and franchises of its constituent corporations, the officers of the U.S. Surviving Corporation are fully authorized, in the name of each constituent corporation or otherwise, to take, and shall take, all such lawful and necessary action, to carry out the purposes of this Agreement. SECTION 1.08. 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. ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 2.01. SHARE CONSIDERATION. At the Effective Time, by virtue of the Unitary Transaction, Acquiror shall issue a total of two million two hundred fifty thousand (2,250,000) shares of Acquiror Common Stock to the U.S. Shareholders and Nelson (in his capacity as sole shareholder of Canada Holding Company-1), as more fully set forth in Sections 2.01(a) and (b), below: (a) CONVERSION APPLICABLE TO OUTSTANDING SHARES OF THE U.S. COMPANY. At the Effective Time, by virtue of the U.S. Merger, and without any further action on the part of Acquiror, Acquiror Sub, the U.S. Company, the U.S. Share-holders or the holders of any other shares of capital stock of -4- the U.S. Company, each share of common stock, no par value per share, of the U.S. Company ("U.S. Company Stock") issued and outstanding immediately preceding the Effective Time shall be converted into and become that share quantity of Acquiror Common Stock (such number is the "U.S. Merger Exchange Ratio") equal to the quotient of (i) two million two hundred thousand (2,200,000), over (ii) the number of whole shares of U.S. Company Stock issued and outstanding immediately prior to the Effective Time. Each such share of U.S. Company Stock so converted shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each certificate previously representing any such shares shall thereafter represent the shares of Acquiror Common Stock into which such U.S. Company Stock was converted in the U.S. Merger. Certificates previously representing shares of U.S. Company Stock shall, together with such duly executed documents and other instruments of transfer as may reasonably be required by Acquiror, be exchanged for certificates representing whole shares of Acquiror Common Stock issued in consideration therefor, without interest. All shares of Acquiror Common Stock issued upon conversion of U.S. Company 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 U.S. Company Stock. (b) CONSIDERATION ISSUABLE TO NELSON IN THE CANADA REORGANIZATION. At the Effective Time, by virtue of the Canada Reorganization, Acquiror shall issue fifty thousand (50,000) shares of Acquiror Common Stock to Nelson against delivery by Nelson of the Canada Holding Company Stock, together with such duly executed documents and other instruments of transfer as may reasonably be required by Acquiror. (c) RESTRICTIONS APPLICABLE TO ACQUIROR COMMON STOCK. The Target Companies, the U.S. Shareholders and Nelson (in his capacity as sole shareholder of Canada Holding Company-1) acknowledge that the shares of Acquiror Common Stock issued and delivered by Acquiror at the Effective Time pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and even if so registered, may be subject to restrictions on resale under federal and state securities laws or under this Agreement generally. As used in this Agreement, the term "Unregistered Shares" shall mean the shares of Acquiror Common Stock issued hereunder which have not been registered for resale under the Securities Act. In addition, the Target Companies, the U.S. Shareholders and Nelson acknowledge that, until the Unregistered Shares have been registered in accordance with the provisions of Section 6.03, and subject to the provisions of Article IX, including but not limited to Section 9.06 thereof, Acquiror shall be entitled to set-off against or -5- withhold from the Unregistered Shares all or a portion of the damages sustained directly or indirectly by Acquiror under this Agreement or in connection with the Unitary Transaction. The Target Companies, the U.S. Shareholders and Nelson hereby consent to the issuance by Acquiror of Unregistered Shares in the Unitary Transaction, and agree they shall possess no independent right to compel, and shall forbear from taking any action whatsoever to cause, the registration of Unregistered Shares, except to the extent provided under Article VI hereof. (d) EFFECT OF RECAPITALIZATION, ETC. If between the date of this Agreement and the Effective Time the outstanding shares of Acquiror Common Stock, U.S. Company Stock or Canada Holding Company Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the U.S. Exchange Ratio and/or aggregate shares of Acquiror Common Stock to be issued to the U.S. Shareholders and Nelson under subsections (a) and (b), above, shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. (e) NO FRACTIONAL SHARES. Anything in this Agreement to the contrary notwithstanding, any fractional shares of Acquiror Common Stock otherwise issuable in the Unitary Transaction shall be rounded upward or downward to the nearest whole number of shares of Acquiror Common Stock. (f) TREASURY AND OTHER SHARES. Each share of U.S. Company Stock held in the treasury of the U.S. Company immediately preceding the Effective Time shall be cancelled and extinguished without any conversion or exchange of such shares and no payment shall be made with respect to such shares. (g) CONVERSION OF ACQUIROR SUB SHARES. Each share of common stock, no par value, of Acquiror Sub issued and outstanding immediately preceding the Effective Time shall be converted into and exchanged for one (1) newly and validly issued, fully paid and nonassessable share of common stock of the U.S. Surviving Corporation. SECTION 2.02. STOCK TRANSFER BOOKS. On and as of the date of this Agreement, the stock transfer books of the Target Companies shall be closed and thereafter, solely with respect to the Unitary Transaction, and except as provided in Section 2.03, there shall be no further registration of transfers of shares of stock of the Target Companies on the records of the Target Companies. From and after the Effective Time, the holders of certificates representing shares of U.S. Company Stock outstanding immediately preceding the Effective Time shall cease to have any rights with respect to such -6- shares of U.S. Company Stock following the U.S. Merger except as otherwise provided in this Agreement or by "Law" (as hereafter defined). For the purposes of this Agreement, the term "Law" shall mean any foreign, U.S. federal, state, provincial, local or municipal law, statute, ordinance, rule, regulation, order, judgment or decree. SECTION 2.03. OTHER U.S. COMPANY SECURITIES AND OPTIONS. As of the Effective Time, each outstanding share of common and preferred capital stock of the U.S. Company other than U.S. Company Stock ("Other U.S. Company Securities"), together with all options, warrants or other rights, agreements, arrangements or commitments (collectively, the "U.S. Company Options") to sell or purchase shares of U.S. Company Stock or Other U.S. 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 below, the U.S. Company and the U.S. Shareholders shall take all corporate action necessary to effectuate the cancellation and termination of all Other U.S. Company Securities and U.S. Company Options. (a) The Target Companies and U.S. Shareholders hereby acknowledge that, by virtue of the U.S. Merger, the last-named U.S. Shareholder on Exhibit A hereto (hereafter, "Lemberg") is entitled to a distribution of U.S. Company Stock in accordance with the provisions of the Company Contract described at Item No. 3 of Section 3.10(a)(ii) to the Target Company Disclosure Schedules (such shares are hereafter, the "Contract-Based Shares"). At least three (3) days prior to the Effective Time, (i) the U.S. Company or Nelson shall physically transfer the Contract-Based Shares to Lemberg, or at Nelson's direction, each U.S. Shareholder shall assign such quantity of U.S. Company Stock to Lemberg as shall be necessary to create equivalent proportionality of interest among all U.S. Shareholders (assuming the Contract-Based Shares had been issued directly by the U.S. Company), and (ii) the U.S. Company and U.S. Shareholders shall provide Acquiror with reasonably satisfactory verification of their compliance with the foregoing requirements. (b) Acquiror acknowledges the Contract-Based Shares have been issued to Lemberg by virtue of the Unitary Transaction, and agrees that if this Agreement is terminated prior to the Effective Time, Lemberg's liability to Acquiror shall be (i) several (opposed to joint and several), and (ii) limited to equitable relief awarded in connection with, and "Damages" (as hereafter defined) proximately resulting from or occasioned by, a breach of or violation in any covenant or agreement on Lemberg's part to be performed prior to the Effective Time, but only to the extent Acquiror may properly claim such relief -7- or Damages under the other terms and conditions of this Agreement (opposed to this Section 2.03(c)). (c) Lemberg represents to Acquiror that, as of the date hereof, no Target Company is in default under or has breached any material term or condition of any agreement, contract or understanding to which Lemberg is a party, and except for the Contract-Based Shares, wages and other remuneration not yet overdue, and benefits to be paid under the "Employee Benefit Plans" listed in Section 3.11 of the Target Company Disclosure Schedules, no basis whatsoever exists for Lemberg's assertion of a claim against the Target Companies for the payment of money, securities or other property. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE TARGET COMPANIES AND U.S. SHAREHOLDERS The term "Target 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 adverse to the financial condition, business or results of operations of a Target Company or any of its subsidiaries; provided, however, except to the extent set forth in Section 9.03 hereof, the occurrence of any change or event described in any Section of the Target Company Disclosure Schedules attached to this Agreement as Schedule 3.00 (the "Target Company Disclosure Schedules") shall not, individually or in the aggregate, constitute a Target Company Adverse Effect. The term "subsidiary" (or its plural) as used in this Agreement with respect to a Target Company, the U.S. Surviving Corporation, Acquiror, Acquiror Sub or any other entity, shall mean any corporation, partnership, joint venture or other entity of which a Target Company, the U.S. Surviving Corporation, 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, five percent (5%) or more 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 a Target Company or U.S. Shareholder, the term "knowledge" means the actual knowledge of Nelson, Lemberg and Eric Rosenbloom obtained in the normal conduct of business and following an investigation which is reasonable under the circumstances; provided, however, no investigation shall be required with respect to the Target Company locations listed below, and with respect to such locations, the term "knowledge" shall include the actual -8- knowledge of the employee(s) whose names are set forth opposite such locations: United Kingdom (U.S. Company) Christopher Halstead Alabama (U.S. Company) Richard Hassal British Columbia (Canada Company) Alan Baldwin/Mark Freed Ontario (Canada Company) Alan Baldwin/Mark Freed The Target Companies and the U.S. Shareholders jointly and severally represent and warrant to Acquiror and Acquiror Sub that, except as specifically described in the Target Company Disclosure Schedules, the statements contained in this Article III are true and correct as of the date of this Agreement and will be true and correct as of the Effective Time (as though made then) with respect to the Target Companies, their respective businesses, the U.S. Shareholders and Nelson (in his capacity as sole shareholder of the Canada Company): SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each Target Company and its subsidiaries (if any) is a corporation validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization. Except to the extent described in Section 3.01 of the Target Company Disclosure Schedules, each Target Company possesses all requisite corporate power and authority to own, lease and operate its properties and/or to carry on their 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 such Target 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 Target Company Adverse Effect. A true and complete listing of each Target Company's direct and indirect subsidiaries, together with the jurisdiction of incorporation or organization of each such subsidiary and the percentage of each subsidiary's outstanding stock or other equity interests owned by such Target Company or subsidiary thereof, is set forth in Section 3.01 of the Target Company Disclosure Schedules. SECTION 3.02. ARTICLES OF INCORPORATION; BY-LAWS. The U.S. Company has furnished to Acquiror complete and correct copies of its Articles of Incorporation and By-Laws, as amended or restated, together with those of each of its subsidiaries. The Canadian Target Companies have each furnished to Acquiror complete and correct copies of their respective Articles of Incorporation and By-Laws, as amended or restated, together with those of each of their respective subsidiaries. Except as set forth in Section 3.02 of the Target Company Disclosure Schedules, no Target Company and no subsidiary thereof is in violation of any provision of its Articles of Incorporation or By-Laws. -9- SECTION 3.03. CAPITALIZATION OF THE TARGET COMPANIES. (a) As of the date of this Agreement, the authorized capital stock of the U.S. Company consists solely of fifty thousand (50,000) shares of U.S. Company Stock, $1.00 par value, of which five thousand (5,000) shares are issued and outstanding. As of the Effective Time, except for the Contract-Based Shares, there shall not be any Other U.S. Company Securities authorized by the U.S. Company. (b) As of the date of this Agreement, the authorized capital stock of Canadian Holding Company-1 consists solely of an unlimited number of common voting shares without par value, of which one hundred (100) shares are issued and outstanding. As of the date hereof there are not, and at the Effective Time there shall not be, any Canada Holding Company-1 securities authorized by Canada Holding Company-1 and not described in the preceding sentence. (c) As of the date of this Agreement, the authorized capital stock of Canadian Holding Company-2 consists solely of an unlimited number of common voting shares without par value, of which one hundred (100) shares are issued and outstanding. As of the date hereof there are not, and at the Effective Time there shall not be, any Canada Holding Company-2 securities authorized by Canada Holding Company-2 and not described in the preceding sentence. (d) As of the date of this Agreement, the authorized capital stock of the Canada Company consists solely of (i) ten thousand (10,000) shares of Class A common voting shares without par value, of which one thousand (1,000) shares are issued and outstanding, (ii) ten thousand (10,000) shares of Class B common voting shares, none of which are issued or outstanding, and (iii) ten thousand (10,000) shares of Class C common voting shares, one thousand (1,000) of which are issued and outstanding. As of the date hereof there are not, and at the Effective Time there will not be, any Canada Company securities authorized by the Canada Company and not described in the preceding sentence. (e) Except as described in Section 3.03(e) of the Target Company Disclosure Schedules, no authorized shares of Target Company stock are held in treasury or are reserved for any other purpose. (f) All outstanding shares of Target Company 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 Law, a Target Company's Articles of Incorporation or By-Laws, or any agreement as to which a Target Company is party or by which it is bound. Section -10- 3.03(f) of the Target Company Disclosure Schedules sets forth (i) the number of authorized shares of each class of stock of, or other equity interests in, each subsidiary of a Target Company, (ii) the number of outstanding shares (if any) of each such class, and (iii) the legal and beneficial holder of each such outstanding share. All outstanding shares of stock of, or other equity interests in, the subsidiaries of the Target Companies are, and as of the Effective Time will be, duly authorized, validly issued, fully paid and non-assessable, and such shares or other equity interests are owned by their respective holders free and clear of all security interests, liens, claims, pledges, agreements, limitations on voting rights, charges or other encumbrances of any nature whatsoever except as disclosed in Section 3.03(f) of the Target Company Disclosure Schedules. (g) Except as disclosed in Section 3.03(g) of the Target Company Disclosure Schedules, there are no U.S. Company Options to which the U.S. Company or any of its subsidiaries is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, the U.S. Company or any of its subsidiaries, or obligating the U.S. Company or any of its subsidiaries to grant, issue, sell or register for sale any shares of the capital stock of, or other equity interests in, the U.S. Company or any subsidiaries thereof, whether by sale, lease, license or otherwise. As of the date of this Agreement there are no, and as of the Effective Time there will be no, obligations, contingent or otherwise, of the U.S. Company or any of its subsidiaries to (x) repurchase, redeem or otherwise acquire any shares of U.S. Company Stock or the capital stock of, or other equity interests in, any subsidiary of the U.S. Company, or (y) provide funds to, or make any investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of, any subsidiary or other person except for (i) guarantees of obligations of subsidiaries in the ordinary course of business, and (ii) advances and loans described in Section 3.03(g) of the Target Company Disclosure Schedules to a supplier or employee of the U.S. Company. (h) Except as disclosed in Section 3.03(h) of the Target Company Disclosure Schedules, there are no options to which any Canadian Target Company or any of its subsidiaries is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, a Canadian Target Company or any of its subsidiaries or obligating a Canadian Target Company or any of its subsidiaries to grant, issue, sell or register for sale any shares of the capital stock of, or other equity interests in, a Canadian Target Company or any subsidiaries thereof, whether by sale, lease, license or otherwise. As of the date of this Agreement there -11- are no, and as of the Effective Time there will be no, obligations, contingent or otherwise, of a Canadian Target Company or any of its subsidiaries to (x) repurchase, redeem or otherwise acquire any shares of such Canadian Target Company's stock, or the stock of, or other equity interests in, any subsidiary of such Canadian Target Company, or (y) provide funds to, or make any investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of, any subsidiary or other person except for (i) guarantees of obligations of subsidiaries in the ordinary course of business, and (ii) advances and loans described in Section 3.03(h) of the Target Company Disclosure Schedules to a supplier or employee of such Canadian Target Company. (i) The U.S. Shareholders hold of record and own the entire beneficial interest in all of the outstanding shares of U.S. Company Stock, and Nelson holds of record and owns the entire beneficial interest in all of the outstanding Canada Holding Company Stock. Such U.S. Company Stock and Canada Holding Company Stock is, and as of the Effective Time will be, free and clear of all liabilities, liens, charges, security interests, adverse claims, pledges, restrictions, encumbrances and demands whatsoever. Except for Lemberg's right to Contract-Based Shares, no other person has, and as of the Effective Time no other person will have, any right, title or interest in or to any shares of U.S. Company Stock or Canada Holding Company Stock, whether by reason of any purchase agreement, Law, statute, rule, option, assignment, contract (written or oral) or otherwise. Neither Nelson nor any U.S. Shareholder is a party to any voting trust, proxy or other agreement or understanding with respect to the voting of such shares of U.S. Company Stock or Canada Holding Company Stock. Neither Nelson nor any U.S. Shareholder has entered into, issued or given, or agreed to enter into, issue or give, any person other than Acquiror or its subsidiaries an option, warrant, right, put, call, commitment or agreement relating to, or any security convertible into, any shares of stock of the Target Companies or any such convertible security and, except as set forth in Section 3.03(i) to the Target Company Disclosure Schedules, no Target Company is a party to any agreement (written or oral) respecting the issue, purchase, sale or transfer of any of the same. (j) Canada Holding Company-1 holds of record and owns the entire beneficial interest in all of the outstanding stock of Canada Holding Company-2, and Canada Holding Company-2 holds of record and owns the entire beneficial interest in all of the outstanding stock of the Canada Company. Such Canada Holding Company-2 stock and Canada Company stock is, and at the Effective Time will be, free and clear of all liabilities, liens, charges, security interests, adverse claims, pledges, -12- restrictions, encumbrances and demands whatsoever, except for an unreleased security interest with respect to a purchase money note which has previously been paid in full. Except as disclosed in Section 3.03(j) of the Target Company Disclosure Schedules, no other person has, or at the Effective Time will have, any right, title or interest in or to such shares of Canada Holding Company-2 stock or Canada Company stock, whether by reason of any purchase agreement, Law, statute, rule, option, assignment, contract (written or oral) or otherwise. Neither Canada Holding Company-2 nor the Canada Company is a party to any voting trust, proxy or other agreement or understanding with respect to the voting of such shares, and neither has entered into, issued or given, or agreed to enter into, issue or give, any person other than Acquiror or its subsidiaries an option, warrant, right, put, call, commitment or agreement relating to, or any security convertible into, any shares of stock of the Target Companies or any such convertible security. SECTION 3.04. AUTHORITY. (a) Each Target Company possesses the requisite corporate power and 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 each Target Company and the consummation by such Target Company of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate action and no other corporate proceedings on the part of any Target 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 Target Companies, and assuming the due authorization, execution and delivery by Acquiror and Acquiror Sub, constitutes the legal, valid and binding obligation of each Target Company, enforceable in accordance with its terms and conditions. (b) Each U.S. Shareholder has full power and authority to execute and deliver this Agreement, including the Exhibits attached hereto, and to perform his obligations hereunder and thereunder. This Agreement has been duly executed and delivered by each U.S. Shareholder, and assuming the due authorization, execution and delivery by Acquiror and Acquiror Sub, constitutes the legal, valid and binding obligation of such U.S. Shareholder. SECTION 3.05. NO CONFLICTS; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by the U.S. Company does not, and the performance of this Agreement -13- by the U.S. Company shall not (i) conflict with or violate its Articles of Incorporation or By-Laws or equivalent organizational documents, or those of any of its subsidiaries, (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 U.S. federal, state and local rules, Laws and regulations, including but not limited to the Securities Act and the rules and regulations thereunder, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), state securities or blue sky laws and the rules and regulations thereunder ("Blue Sky Laws"), the Code, the Treaty, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), and the filing and recordation of appropriate merger documents as required by Michigan Law, and (y) obtaining the consents, approvals, authorizations or permits described in Section 3.05(d) of the Target Company Disclosure Schedules, conflict with or violate any Laws applicable to the U.S. Company or any of its subsidiaries 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 the U.S. Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the U.S. Company or any of its subsidiaries is a party or by which the U.S. Company or any of its subsidiaries 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 a Target Company Adverse Effect. (b) The execution and delivery of this Agreement by the Canadian Target Companies does not, and the performance of this Agreement by the Canadian Target Companies shall not (i) conflict with or violate their respective Articles or By-Laws or equivalent organizational documents, or those of any of their subsidiaries, (ii) subject to (x) obtaining the consents, authorizations, approvals and permits of, and making filings with or notifications to, any Governmental Entities pursuant to the applicable requirements of U.S. and Canadian federal, state, provincial and local rules, Laws and regulations, including but not limited to the HSR Act, the Competition Act (Canada), and the rules and regulations thereunder (the "Competition Act"), the Investment Canada Act, -14- and the rules and regulations thereunder (the "Investment Act"), the Code, and the rules and regulations thereunder, and the Income Tax Act (Canada), RSC 1985 (5th Supplement) c. 1, as amended, including draft legislation introduced on April 23, 1996 and June 20, 1996, and budget proposals introduced on March 6, 1996, and the rules and regulations thereunder (the "ITA"), and (y) obtaining the consents, approvals, authorizations or permits described in Section 3.05(d) of the Target Company Disclosure Schedules, conflict with or violate any Laws applicable to the Canadian Target Companies or any of their subsidiaries 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 the Canadian Target Companies or any of their subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Canadian Target Companies, or any of their subsidiaries, is a party or by which the Canadian Target Companies or any of their subsidiaries 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 a Target Company Adverse Effect. (c) Neither the execution, delivery nor performance of this Agreement, nor the observance or compliance with the terms and conditions hereof, will violate any judgment, order, writ, injunction or decree of any court or agency, any Law, statute, regulation or rule, or any material indenture, agreement or other instrument, to which a U.S. Shareholder is a party or by which such U.S. Shareholder or any of his assets or properties is bound, which could cause a Target Company Adverse Effect. (d) The execution and delivery of this Agreement by the Target Companies and the U.S. Shareholders does not, and the performance of this Agreement by the Target Companies and the U.S. Shareholders shall not, individually or collectively, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entities or other persons, except for applicable requirements, if any, of the Securities Act, Exchange Act, Blue Sky Laws, the HSR Act, the Competition Act, the Investment Act, the Code, the Treaty, the ITA, the consents, approvals, authorizations or permits described in Section 3.05(d) of the Target Company Disclosure Schedules, and the filing and recordation of appropriate merger documents as required by Michigan Law, as applicable. -15- SECTION 3.06. PERMITS; COMPLIANCE. Each Target Company and its subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary for such Target Company and its subsidiaries to own, lease and operate their respective properties or to carry on their respective businesses as they are now being conducted (each, a "Company Permit"), other than where the failure to so possess a Company Permit would not have a Target Company Adverse Effect, and no suspension, revocation or cancellation of any such Company Permit is pending or, to the knowledge of any Target Company, threatened. No Target Company or subsidiary thereof is operating in conflict with, or is in default or violation of (i) any foreign, federal, state, provincial or local rule, Law or regulation applicable to such person or by which its properties are bound or affected, or (ii) any Company Permit, except for any such conflicts, defaults or violations which would not have a Target Company Adverse Effect. Each Company Permit material to the operations of a Target Company is listed in Section 3.06 to the Target Company Disclosure Schedules. SECTION 3.07. GOVERNMENTAL REPORTS; FINANCIAL STATEMENTS. (a) Since December 31, 1992, the Target Companies and their respective subsidiaries have filed all forms, reports, statements and other documents required to be filed with any applicable Governmental Entities, except where failure to file any such forms, reports, statements and other documents would not have a Target Company Adverse Effect (all such forms, reports, statements and other documents referred to in this Subsection (a) are, collectively, "Company Reports"). The Company Reports, including all Company Reports filed after the date of this Agreement and prior to the Effective Time (i) were or will be prepared in all material respects in accordance with the requirements of applicable Laws, and (ii) did not, at the times they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not materially misleading. (b) Except as disclosed in Section 3.07(b) of the Target Company Disclosure Schedules, (X) the audited Balance Sheets, Income Statements, Statements of Cash Flow and Statements of Equity of the U.S. Company as at and for the periods ended December 31, 1993, 1994 and 1995 (separate company audited and combined unaudited for the period ended December 31, 1995, and restated to include all of the Target Companies), and (Y) the audited Balance Sheets, Income Statements and Statements of Changes in Financial Position of the Canada Company as at and for the nine-month period ended May 31, 1995, and the twelve- -16- month period ended 1996 (including, in each case, related notes) (collectively, the "Target Company Financial Statements") delivered to Acquiror prior to the date of this Agreement (i) have been prepared from, and are in agreement in all material respects with, the books, records and accounts (including consolidating workpapers and supporting entries), of the Target Companies and their subsidiaries, (ii) have been prepared in all material respects in substantial accordance with the published rules and regulations of the Financial Accounting Standards Board and GAAP (Canadian GAAP, in the case of the Canada Company) applied on a consistent basis throughout the periods involved, (iii) taken as a whole, fairly present in all material respects the financial position of the Target Companies and their subsidiaries on a combined or uncombined basis, as the case may be, as of the dates thereof, and (iv) taken as a whole, fairly present, in all material respects, the results of operations of the Target Companies for the periods indicated. (c) Prior to the date hereof, the Target Companies have internally prepared and delivered to Acquiror unaudited combined and combining (X) Balance Sheets, Income Statements, Statements of Cash Flow and Statements of Equity of the U.S. Company as at and for the calendar quarterly periods ended March 31, and June 30, 1996, and (Y) Balance Sheets, Income Statements and Statements of Changes in Financial Position of the Canada Company as at and for the quarterly period ended September 30, 1996 (the "Interim Target Company Financial Statements", which term shall include all quarterly Target Company financial statements hereafter delivered to Acquiror in accordance with the provisions of Section 5.01(e) hereof). The Interim Target Company Financial Statements (i) have been prepared from, and are in agreement in all material respects with, the books, records and accounts (including consolidating workpapers and supporting entries), of the Target Companies and their subsidiaries, (ii) fairly present in all material respects the financial position of the Target Companies and their subsidiaries as of the dates thereof, and (iii) fairly present, in all material respects, the results of operations of the Target Companies for the periods indicated; provided, however, Acquiror acknowledges that the Interim Target Company Financial Statements are subject to normal year-end adjustments and may lack footnotes and other presentation items; provided, however, no such year-end adjustment shall be deemed to have cured a prior breach of or misstatement in any representation or warranty set forth in this Agreement. (d) At the Effective Time, the Target Companies and their respective subsidiaries shall have no liabilities, obligations or indebtedness of any nature whatsoever (and there shall be no basis for any present or future action, suit, proceeding, hearing, charge, claim, complaint, -17- investigation or demand against any such Target Company or subsidiary giving rise to such liability, obligation or indebtedness), except for (i) liabilities, obligations and indebtedness set forth in the Balance Sheets included in the Interim Target Company Financial Statements dated nearest to the Effective Time (the "Most Recent Statements"), and (ii) liabilities, obligations and indebtedness which have arisen after the date of the Most Recent Statements in the ordinary course of business of the Target Companies; provided, however, such liabilities, obligations and indebtedness shall be subject to the other representations and warranties set forth in this Article III. (e) Except as and to the extent set forth on the Target Company Financial Statements, including all notes thereto, the Target Companies and their respective subsidiaries have no liability, obligation or indebtedness of any nature whatsoever (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a combined balance sheet of the Target Companies (or in the notes thereto), prepared in accordance with GAAP applied on a consistent basis, except for liabilities, obligations or indebtedness described in Section 3.07(e) of the Target Company Disclosure Schedules, or incurred in the ordinary course of business since December 31, 1995, in the case of the U.S. Company, or May 31, 1996, in the case of the Canada Company, that would not have a Target Company Adverse Effect. (f) Section 3.07(f) of the Target Company Disclosure Schedules describes by category and amount the aggregate reserves, obligations and other allowances established by the Target Companies in the audited combined Balance Sheet at December 31, 1995 (collectively, the "Closing Reserves"). Except as set forth in Section 3.07(f) of the Target Company Disclosure Schedules, each item included in the Closing Reserves has been established in accordance with GAAP in a manner consistent with that of prior periods, using such accounting methods, policies, practices and procedures, and classification, judgments and estimation methodology, as are deemed reasonably advisable by the Target Companies, after consultation with their independent auditors. SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in Section 3.08 of the Target Company Disclosure Schedules, (i) since December 31, 1995, there has not been, and the Target Companies have no knowledge of any facts that are reasonably likely to result in, any event or events causing a Target Company Adverse Effect, and (ii) from December 31, 1995, to the date of this Agreement there has not been any change by a Target Company or any subsidiary in its accounting methods, principles or practices, except any such change after the date of this Agreement mandated by a change in GAAP. -18- SECTION 3.09. ABSENCE OF LITIGATION. (a) Section 3.09(a) of the Target Company Disclosure Schedules lists and briefly describes all claims, actions, suits, litigations, proceedings, arbitrations or investigations of any kind affecting each Target Company and its subsidiaries, at law or in equity (including actions or proceedings seeking injunctive relief), which are pending or, to the knowledge of the Target Companies, threatened. Except as noted in Section 3.09(a) of the Target Company Disclosure Schedules, none of the matters listed therein may reasonably be expected to have a Target Company Adverse Effect. There is no action pending or to the knowledge of the Target Companies threatened seeking to enjoin or restrain the Unitary Transaction or any of the transactions contemplated by this Agreement. (b) Except as set forth in Section 3.09(b) of the Target Company Disclosure Schedules, no Target Company or subsidiary is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of such Target Company, 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 which could have a Target Company Adverse Effect. SECTION 3.10. CONTRACTS; NO DEFAULT. (a) Section 3.10(a) of the Target Company Disclosure Schedules sets forth as of the date of this Agreement a listing of all Target Company (and subsidiary) contracts, agreements and other arrangements in effect as of the date of this Agreement, or providing for full or partial performance by any party thereto after the date of this Agreement, which: (i) concern a partnership, joint venture or other business venture providing for the sharing of profits with another person; (ii) relate to the employment or compensation of any employee, officer, director, representative, consultant or agent, with respect to which there is or may be an obligation by a Target Company or subsidiary to provide current or deferred payments in excess of fifty thousand dollars ($50,000) annually, or which are not terminable by such Target Company or subsidiary without premium or penalty on fewer than thirty (30) days prior notice or, with respect to Canada contracts, the greater of thirty (30) days or the legal minimum provided for in applicable Canadian employment standards legislation; -19- (iii) relate to the obligation of a Target Company or its subsidiary to develop, purchase or distribute tangible or intangible property for the benefit of, or ownership by, a customer or other third party, or which incorporates, whether or not pursuant to written license, the proprietary rights, name or logo of such customer or third party, and under which such Target Company or subsidiary is subject to liability or penalty in excess of ten thousand dollars ($10,000) on account of nonperformance or nonconformity; (iv) relate to any customer of a Target Company listed on Section 3.26 to the Target Company Disclosure Schedules; (v) relate to or inventory purchases or capital expenditures involving an expenditure (or series thereof) in excess of fifty thousand dollars ($50,000); (vi) relate to bonus and incentive plans or similar plans and arrangements providing for the payment of bonuses, commissions, incentive compensation or similar result-based salary or other remuneration to employees and other service providers to the Target Companies; (vii) relate to borrowed money, guarantees or undertakings to answer for the debts of another, or otherwise encumbering title to any asset, excepting purchase money obligations relating to personal property which do not exceed fifty thousand dollars ($50,000) in any one case; (viii) concern a lease or agreement relating in any manner to real estate; (ix) 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 ten thousand dollars ($10,000) annually; or (x) otherwise create unfulfilled obligations in excess of fifty thousand dollars ($50,000) on the part of such Target Company or subsidiary. (b) Section 3.10(b) of the Target Company Disclosure Schedules lists each contract or agreement to which any Target Company or any of their respective subsidiaries, directors, affiliates, shareholders, or officers is a party limiting the right of such Target Company or any such person to engage in, or to compete with any person in, any business, including each contract or agreement containing exclusivity provisions restricting the geographical area in which, or the method by which, any business may be conducted by such Target Company or -20- any such person prior to or after the Effective Time, or by the Acquiror or any of its subsidiaries or affiliates after the Effective Time. To the knowledge of the Target Companies, after conducting interviews with Marvin Baida ("Baida") and the other sales representatives of the U.S. Company who were previously in the employ of Idea Man, Inc. ("Idea Man"), neither Baida nor such other sales representatives are party to any contract or agreement with Idea Man or any other entity whereunder they are restricted or limited in the right to compete with Idea Man or such other entity, or otherwise to engage in business within a specific geographic area or with a specific customer or class of customers, and, to the knowledge of the Target Companies, neither Baida nor such other sales representatives have, while conducting sales for the U.S. Company, violated any such contract or agreement with, engaged in unfair competition against, or tortiously interfered with, Idea Man or such another entity. For the purpose of this Agreement, the term (i) "affiliate", in addition to the meaning given by the Commission, 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 U.S. Shareholder, such U.S. Shareholder's spouse, children and descendants, and the respective spouses of each, (ii) "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) "Company Contracts" means the contracts and agreements listed in Sections 3.10(a) and 3.10(b) of the Target Company Disclosure Schedules. (c) Each Company Contract, each other material contract or agreement which would have been required to be disclosed in Section 3.10(a) of the Target Company Disclosure Schedules had such contract or agreement been entered into prior to the date of this Agreement, and each contract or agreement listed in Section 3.10(b) of the Target Company Disclosure Schedules is, on the date hereof, and shall be at the Effective Time, in full force and effect and valid and binding as to the contracting Target Company and, to the knowledge of the Target Companies, the other party or parties signatory thereto. With respect to each such Company Contract, there is no event of default by a Target Company or, to the knowledge of the Target Companies, any other party or parties thereto, in the timely performance of any obligation to be performed or amount to be paid thereunder, which default would have a Target Company Adverse Effect. -21- SECTION 3.11. EMPLOYEE BENEFIT PLANS; LABOR MATTERS. (a) Section 3.11(a) of the Target Company Disclosure Schedules sets forth all pension, retirement, savings, disability, medical, dental, health, life (including any individual life insurance policy as to which a Target 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"), any pension plan as defined in Section 1 of the Pension Benefits Act (or similar law of the province of British Columbia), as amended ("PBA"), and any employee welfare benefit plan as defined in Section 3(1) of ERISA), under which current or former employees of a Target Company or its subsidiaries or "Plan Affiliates" (as defined in Section 3.11(b) below) are entitled to participate by reason of their employment with such Target Company, subsidiary or its Plan Affiliates, whether or not any of the foregoing is funded, and whether insured or self-funded, (i) to which a Target Company, subsidiary or Plan Affiliate is a party or a sponsor or a fiduciary thereof or by which such Target Company, subsidiary or Plan Affiliate (or any of their rights, properties or assets) is bound, or (ii) with respect to which such Target Company, subsidiary or Plan Affiliate has made any payments, contributions or commitments, or may otherwise 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, a Target Company within the meaning of Section 414(b), (c), (m) or (o) of the Code, or within the intendment of the PBA. (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 the PBA, 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: -22- (i) There are no Employee Benefit Plans which are multiemployer plans as defined in Section 3(37) of ERISA or Section 1 of the PBA, and neither the Target Companies nor any of their respective subsidiaries or ERISA Affiliates has incurred or may reasonably be expected to incur, any direct or indirect liability under or by operation of Title IV of ERISA or the PBA. (ii) There are no Employee Benefit Plans which promise or provide health or life benefits to retirees or former employees of a Target Company, subsidiary or Plan Affiliate other than as required by Title I of ERISA or Section 4980 of the Code, or otherwise as identified in Section 3.11(d) of the Target Company Disclosure Schedules. (iii) Except as disclosed in Section 3.11(d) of the Target 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, the PBA, the ITA 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 Target Company Disclosure Schedules has (i) received a favorable determination letter from the Internal Revenue Service ("IRS") stating that such Plan 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, or (ii) been accepted for registration under the ITA. Any trust or trusts associated with such Pension Plans are tax exempt under Section 501(a) of the Code or the relevant provisions of the ITA. To the knowledge of the Target Companies, 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 rules, Laws or regulations. 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 or the applicable provisions of the ITA subsequent to the issuance of each such Plan's determination letter or registration have been made, including all amendments required to be made by each respective date by the Tax Reform Act of 1986, the ITA and any other rules, Laws or regulations legislation affecting such Employee Benefit Plans. Except as set forth in Section 3.11(d) of the Target Company Disclosure Schedules, there are no amendments which are required to be made to such Pension Plans which adversely affect, or may result in the discontinuance of, the continuing tax-qualification or registered status of such Pension Plans under the Code or the ITA. -23- (v) To the knowledge of the Target Companies, 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 Target Companies, no state of facts or conditions exist which reasonably could be expected to subject such Target Company, subsidiary or Plan Affiliate to any material liability (other than routine claims for benefits) in accordance with the terms of such Employee Pension Plan or pursuant to applicable rules, Laws or regulations. (vi) Except as disclosed in Section 3.11(d) of the Target 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 the ITA, or any other applicable rules, Laws or regulations, have been timely filed and all material notices and disclosures to Plan participants required by same have been timely provided. (B) The Target Companies and their respective subsidiaries and Plan Affiliates have not made, nor have they 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, ERISA, the ITA or the PBA). (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 Target Company Disclosure Schedules are deductible in full under the Code or the ITA, as applicable. 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(e) of the Target Company Disclosure Schedules, with respect to each Employee Benefit Plan, the Target Companies have delivered to Acquiror true and complete copies of the following documents to the extent in each case that such documents exist or are required to be preserved under applicable domestic or foreign Laws: (1) plan documents, subsequent plan amendments, and any and all other documents that -24- 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 most recent letters received from the Department of National Revenue and the Pension Commissions of Ontario (and equivalent authority under British Columbia law) relating to the status of the Pension Plans adopted by the Canada Company, and a copy of the most recent letter of confirmation of registration for such Plans pursuant to the ITA and the PBA; (5) the three most recent annual information returns, including related schedules and audited financial statements and opinions of independent certified public accountants, for each Employee Benefit Plan filed (i) on IRS Form 5500 for Employee Benefit Plans adopted by the U.S. Company, and (ii) on such forms prescribed under the PBA for Employee Benefit Plans adopted by the Canada Company; and (6) all related trust agreements, insurance contracts or other funding agreements that implement each such Employee Benefit Plan. (vii) At no time have the Target Companies adopted any Pension Plan which is or could become subject to Title IV of ERISA, the funding standards of Section 402 of the Code, or which contain defined benefit provisions within the meaning of Section 147.1(1) of the ITA. The Target Companies have not, and no subsidiaries or Plan Affiliates thereof have, 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, (ii) the IRS under Chapter 43 of the Code, or (iii) the Department of National Revenue or the Pension Commissions of Ontario and British Columbia under the ITA or other Canadian Laws; (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 -25- of ERISA, or any other transaction contrary to the provisions of the ITA, the PBA or the terms of such Employee Benefit Plan. (e) The Target Companies have complied in all material respects with the provisions of ERISA, the Code and the ITA, as applicable, with respect to each Pension Plan and Welfare Plan heretofore adopted or currently in effect for the benefit of its employees, together with employees of their respective subsidiaries and Plan Affiliates. Each Employee Benefit Plan described in Section 3.11(a) of the Target 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 Target Company Disclosure Schedules, no payment that is owed or may become due to any director, officer, employee or agent of a Target Company is subject to, and none shall result in the imposition of, tax under Section 280(G) or 4999 of the Code, nor is any Target 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 Target Company. (g) Except as disclosed in Section 3.11(g) of the Target Company Disclosure Schedules, 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 Target Companies 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 Target Company Disclosure Schedules lists, as of the date of this Agreement, all collective bargaining or other labor union contracts to which a Target Company or any of its subsidiaries is a party and which is applicable to persons employed by such Target Company or subsidiary. There is no pending or, to the knowledge of the Target Companies, threatened, labor dispute, strike or work stoppage against a Target Company or any of its subsidiaries which may materially interfere with the business activities of such Target Company, its revenues, profits, cash flows, or other results of operations, or those of its subsidiaries. The Target Companies have no knowledge of the commission of any unfair labor practices in connection with the operation of their respective businesses or the businesses of their respective subsidiaries, and there is not now pending -26- or, to the knowledge of the Target Companies, threatened, any charge, complaint or other proceeding against any Target Company or its subsidiaries by the National Labor Relations Board, or comparable Governmental Entities, both Canadian and U.S., state and provincial, and local. (i) Section 3.11(a) of the Target Company Disclosure Schedules sets forth all written employment agreements, employment contracts or understandings relating to employment to which each Target Company or any of its subsidiaries is a party, other than (i) the general employment of employees pursuant to an at-will understanding, and (ii) agreements, contracts or understandings which may be terminated without penalty or premium on no more than thirty (30) days' prior notice to the employed person (or the legal minimum provided for in applicable Canadian employment standards legislation). SECTION 3.12. TAXES. (a) (i) Except as disclosed in Section 3.12(a) of the Target Company Disclosure Schedules, all material Returns (as defined below) in respect of "Taxes" (as defined below) required to be filed with respect to a Target Company or a subsidiary have been or will be timely filed (including pursuant to those extensions described in such Disclosure Schedules). (ii) Except as disclosed in Section 3.12(a) of the Target Company Disclosure Schedules, all Taxes shown on the Returns or otherwise known by a Target Company or subsidiary to be due or payable (whether by such Target Company or subsidiary or, in the case of the election by U.S. Shareholders and the U.S. Company under Section 1361 ET. SEQ. of the Code [the "S Corporation Election"], by such Shareholders) 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 a Target Company or any of its subsidiaries, affiliates or shareholders under the Code, the ITA, Part IX of the Excise Tax Act (Canada) (the "GST") or any comparable provision of foreign, federal, state, provincial, local or municipal Law have been made on the basis of the applicable party's good faith estimate of the required installments or have been expensed on the Target Company Financial Statements or have been reserved against. (iii) Except as disclosed in Section 3.12(a) of the Target Company Disclosure Schedules, all such Returns (or, in cases where amended Returns have been filed, such Returns as amended) are believed by the Target Companies to be true, correct and complete in all material respects. -27- (iv) Each Target Company and its subsidiaries has withheld and paid to the applicable taxing authority all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party. (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 with respect to any Return or the Taxes reflected on such Returns. (vii) No Target Company has, in any taxable period for which the statute of limitations on assessment remains open, acquired, either directly or through any subsidiary, any corporation that filed a consolidated federal income tax return with any other corporation that was not also acquired, either directly or through any subsidiary, by such Target Company, and no subsidiary or corporation that was included in the filing of a Return with a Target Company on a combined, consolidated or unitary basis has left such corporation's combined, consolidated or unitary group in a taxable year for which the statute of limitations on assessment remains open. (viii) No consent under Section 341(f) of the Code has been filed with respect to the Target Companies or their subsidiaries. (ix) There are no Tax liens on any assets of a Target Company or its subsidiaries other than liens for Taxes not yet due or payable or being contested in good faith. (x) Except as disclosed on Section 3.12(a) to the Target Company Disclosure Schedules, neither the Target Companies nor their subsidiaries have been at any time a member of any partnership 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. (xi) Neither the Target Companies nor their subsidiaries owe any material amount pursuant to any Tax sharing agreement or arrangement, and no such corporation will have any liability after the date hereof in respect of any Tax sharing agreement or arrangement executed or agreed to prior to the date hereof with respect to any company that has been sold or disposed prior to the date of this Agreement or the Effective Time, whether any such agreement or arrangement is written or unwritten. -28- (xii) All material Taxes required to be withheld, collected or deposited by each Target Company and its subsidiaries during any taxable period for which the statue 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; without limiting the generality of the foregoing, the Canada Company has withheld at source and remitted to the relevant Government Entity all material amounts required to be withheld under the ITA, and has accounted for and remitted all Tax that has been collected and is remittable under the GST. (xiii) Neither the Target Companies nor any of their subsidiaries were acquired in a qualified stock purchase under Section 338(d)(3) of the Code and no elections under Section 338(g) of the Code, protective carryover basis elections, offset prohibition elections or other deemed or actual elections are applicable to such Target Company or any of its subsidiaries. No Target Company received any assets in accordance with, and no Target Company is the subject of an election under, the terms and conditions of Section 367 of the Code. (xiv) Neither the Target Companies nor any of their subsidiaries were or have been subject to the provisions of Section 1503(d) of the Code related to "dual consolidated loss" rules. (xv) Except as disclosed on Section 3.12(a) to the Target Company Disclosure Schedules, neither the Target Companies nor any of their 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 Unitary Transaction. (xvi) To the knowledge of Target Companies, no property of any Target Company or any of its subsidiaries is property that is or will be required to be treated as being owned by another person under the provisions of section 168(f)(8) of the Code (as in effect prior to amendment by the Tax Reform Act of 1986); or is "tax-exempt use property" within the meaning of Section 168 of the Code. (b) (i) There are no outstanding waivers or agreements extending the statute of limitations for any period with respect to any Tax, other than real or personal property Taxes to which a Target Company or its subsidiaries may be subject; (ii) Neither the Target Companies nor any of their subsidiaries are, as of the date of this Agreement, under audit with respect to any taxable period for any foreign, -29- federal, state, provincial, local or municipal Tax (including income and franchise Taxes but not including real or personal property Taxes) by the IRS, Revenue Canada or the applicable Tax authority in each such other foreign, federal, state, provincial, local or municipal jurisdiction. (c) (i) Except as expressly provided in this subdivision (i), neither the Target Companies nor any of their subsidiaries have any -- (A) 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), or (B) Material deferred gain or loss arising out of any deferred intercompany transaction. (ii) No written Tax sharing or allocation agreement exists involving a Target Company. (iii) Except as disclosed on Section 3.12(c) of the Target Company Disclosure Schedules, neither the Target Companies nor any of their subsidiaries have any unused net operating loss, unused net capital loss, unused credit, unused foreign tax credit, or excess charitable contribution for federal or Canada income tax purposes as of the Effective Time. (d) For purposes of this Agreement, "Tax" or "Taxes" shall mean any and all taxes, payable to any foreign, federal, state, provincial, local or municipal 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, disability, employment, social security, Medicare, workers compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premiums, withholding taxes pursuant to the Tax Convention, windfall profits, transfer and gains taxes; (ii) Customs duties, imposts, charges, levies or other similar assessments of any kind; and -30- (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, Revenue Canada, or any other foreign, federal, state, provincial, local or municipal governmental entity or tax authority or agency, including, without limitation, consolidated, combined, unitary and Subchapter S Returns. For the purposes of this Section 3.12, references to a Target Company and each of its subsidiaries shall include former subsidiaries of such Target Company for periods during which any such corporations were owned, directly or indirectly, by such corporation. SECTION 3.13. INTELLECTUAL PROPERTY RIGHTS. Except as set forth in Section 3.13 to the Target Company Disclosure Schedules, to such Target Company's knowledge, each Target Company and its subsidiaries owns or possesses the right or license to use all material patents, trademarks, servicemarks, trade names, slogans, registered copyrights, industrial designs, and all trade secrets (including scientific and technical information, design processes, procedures, formulae, data processing techniques, computer programs and improvements, the specialized information and technology embodied in communications program materials, software documentation and other program and system designs), it currently uses, without any known conflict or alleged conflict with, or infringement of, the rights of others. Section 3.13 of the Target Company Disclosure Schedules identifies in all material respects (i) the intellectual property (including, without limitation, issued domestic and foreign patents, patent applications pending, patent applications in process, industrial designs, industrial design applications and registrations, trademarks, trademark registrations, trademark registration applications, copyright registrations, copyright registration applications, service marks, service mark registrations, service mark registration applications, know-how agreements, licenses (other than of computer software which is generally commercially available), rights acquired through litigation, logos, trade names and trade secrets) material to the conduct of the business of the Target Companies (collectively, the "Owned Intellectual Property"), and (ii) intellectual property currently licensed to such Target Company ("Licensed Intellectual Property") (together with the "Owned Intellectual Property", the "Intellectual Property"). To the knowledge of the Target Companies, (i) the agreements and/or arrangements for Licensed Intellectual Property (including computer software) are in full force and effect; (ii) the rights of each Target Company and subsidiary thereunder are free and clear of all adverse claims, options, liens, charges, security interests and encumbrances; and (iii) no material defaults exist thereunder. There are no interference, opposition or cancellation proceedings or infringement suits pending nor, to the actual knowledge of the -31- Target Companies, without necessity of investigation, threatened, with respect to any Owned Intellectual Property. Within the last six (6) years, no Target Company or subsidiary has been charged with infringing any patent or trademark right of any person. The Intellectual Property comprises all of the intellectual property rights and licenses pertaining thereto necessary for the Target Companies to conduct their respective businesses as now operated. No Target Company has knowingly taken or knowingly allowed there to be taken any action to cause any of the material Owned Intellectual Property relating to its business or operations to enter the public domain, or knowingly failed to take such action necessary to prevent such Owned Intellectual Property from so entering the public domain. SECTION 3.14. CERTAIN BUSINESS PRACTICES AND REGULATIONS. Neither the Target Companies, their subsidiaries, nor any of their respective executive officers, directors, or managerial employees have, to the knowledge of the Target Companies, (i) made or agreed to make any contribution, payment or gift to any customer, supplier, governmental official, employee or agent where either the contribution, payment or gift or the purpose thereof was illegal under any Law, (ii) established or maintained any unrecorded fund or asset for any purpose or 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 Law. SECTION 3.15. INSURANCE. All policies and binders of insurance for professional liability, directors and officers, fire, liability, worker's compensation and other customary matters held by or on behalf of each Target Company or its subsidiaries ("Insurance Policies") have been made available to Acquiror. The Insurance Policies (which term shall include any insurance policy entered into after the date of this Agreement in replacement of an Insurance Policy; provided, that such replacement policy shall insure against risks and liabilities, and in amounts and under terms and conditions, substantially the same as those provided in such replaced policy or binder) are in full force and effect and neither a Target Company nor any of its subsidiaries is in default with respect to any material provision contained in any Insurance Policy nor, to the knowledge of such Target Company, has such Target Company or its subsidiaries failed to give any notice of any claim under any Insurance Policy in due and timely fashion, nor, to the knowledge of such Target Company, has any coverage for current claims been denied, except where such default or failure individually or in the aggregate would not reasonably be expected to have a Target Company Adverse Effect. SECTION 3.16. ACCOUNTING AND TAX MATTERS. None of the Target Companies nor, to the knowledge of the Target Companies, any subsidiaries or affiliates thereof, has taken or agreed to take any -32- action that would prevent either the U.S. Merger or the Canada Reorganization from being effected as a pooling of interests under GAAP or the rules and regulations promulgated by the Commission, or would prevent the U.S. Merger or the Canada Reorganization from constituting a transaction qualifying as a reorganization under Section 368(a) of the Code. SECTION 3.17. REAL PROPERTY. Section 3.17(1) to the Target Company Disclosure Schedules sets forth a complete description of (i) all real property owned by the Target Companies and their subsidiaries as of the date of this Agreement ("Owned Real Property"), and (ii) all real property leased by the Target Companies and their subsidiaries as of the date of this Agreement ("Leased Real Property"). No later than thirty (30) days after the date of this Agreement, the Target Companies shall furnish Acquiror or its counsel true and complete copies of (i) the most recent lease with respect to each parcel of Leased Real Property, and (ii) each written, and a written description of each oral, contract, arrangement or understanding relating to Owned Real Property or Leased Real Property. Except as set forth in Section 3.17(2) to the Target Company Disclosure Schedules: (a) There is no condemnation proceeding or eminent domain proceeding pending or, to the knowledge of the Target Companies, threatened, against any Owned Real Property or Leased Real Property. (b) Neither the Target Companies nor their subsidiaries have any interest in, or any right or obligation to acquire any material interest in, any real property other than Owned Real Property and Leased Real Property. (c) There are no pending or, to the knowledge of the Target Companies, threatened, requests, applications or proceedings to alter or materially restrict the zoning or other use restrictions applicable to the Owned Real Property and Leased Real Property. (d) The rental set forth in each lease for Leased 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 3.17(2) to the Target Company Disclosure Schedules. (e) Each Target Company or subsidiary which is lessee under a lease for Leased 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. (f) There are no written or oral contracts between a Target Company or subsidiary and any third party relating to any claim by such third party of any right to all or any part -33- of the interest of such Target Company or subsidiary in any Owned Real Property or Leased Real Property. (g) All security deposits required under leases for Leased Real Property have been made and no forfeiture with respect thereto has been claimed by any of the lessors. SECTION 3.18. ENVIRONMENTAL REPRESENTATIONS. Except as specifically described in Section 3.18 to the Target Company Disclosure Schedules: (a) No Target Company or any subsidiary or affiliate thereof has generated, used, transported, treated, stored, handled, released or disposed of, whether temporarily or permanently, any "Hazardous Substances" (as herein defined) at any location described in Section 3.17(1) to the Target Company Disclosure Schedules in violation of any applicable statute, Law, rule or regulation or so as to require reporting to or notification of any governmental official, agency, bureau, board, commission, court, department or other instrumentality. (b) To the knowledge of the Target Companies, there has never been any generation, use, transportation, treatment, storage, release, presence, handling or disposal of any Hazardous Substances by any other person at the Owned Property in violation of any applicable statute, Law, rule or regulation or so as to require reporting to or notification of any governmental official, agency, bureau, board, commission, court, department or other instrumentality. (c) To the knowledge of the Target Companies, no asbestos or polychlorinated biphenyl is contained in or located at the Owned Real Property. (d) All Hazardous Substances generated, disposed of, handled or dealt with in any way in the conduct by the Target Companies, or their subsidiaries and affiliates, of their respective businesses has been and is being generated, disposed of, handled or dealt with in all material respects in compliance with all applicable statutes, Laws, rules and regulations. (e) Each Target Company and each subsidiary thereof is in material compliance with, and to the knowledge of the Target Companies, the Owned Real Property has not been used by any other person in violation of, any Environmental Laws. (f) No Target Company is the subject of any remedial order entered with respect to any real property described in Section 3.17(1) to the Target Company Disclosure Schedules. -34- (g) As used in this Agreement, the term "Hazardous Substances" shall mean (i) substances which are defined or listed in, or otherwise classified pursuant to, any applicable statutes, Laws, rules or regulations as "hazardous substances," "hazardous materials," "hazardous wastes" or "toxic substances," (ii) any oil, petroleum or petroleum derived substance, (iii) any flammable substances or explosives, (iv) any radioactive materials, (v) asbestos in any form, (vi) urea formaldehyde foam insulation, (vii) electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million, (viii) pesticides, or (ix) any other pollutant, contaminant, hazardous, dangerous or other material which is defined as a toxic chemical or waste under any environmental laws. (h) For purposes of this Agreement, the term "Environmental Laws" shall mean all foreign, federal, state, provincial, local and municipal statutes, Laws, ordinances, codes, rules, regulations, orders, decrees, directives, permits, licenses and guidelines 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, the Environmental Quality Act, R.S.Q.C., Q-2, and Canadian and U.S. state and provincial tort laws and common Laws. SECTION 3.19. BROKERS. 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 a U.S. Shareholder, any Target Company or their respective subsidiaries or affiliates. SECTION 3.20. TITLE TO ASSETS. With the exception of those items disclosed in Sections 3.20, 3.03(f) and 3.03(j) of the Target Company Disclosure Schedules, statutory liens for real estate tax, materialmen, warehousemen and landlord liens incurred in the ordinary course of business and not yet due or which are being contested in good faith and for which the Target Company has established a specific Closing Reserve in the Target Company Financial Statements, or minor imperfections in title which would not have a Target Company Adverse Effect, each Target Company and its applicable subsidiary is the owner of and has good and valid title to, or in the case of leased property has a valid leasehold interest in, its material properties and assets, including those assets and properties reflected in the Target Company Financial Statements. -35- SECTION 3.21. RELATED PARTY TRANSACTIONS. Except as disclosed in Section 3.21 of the Target Company Disclosure Schedules, and except with respect to the ownership of not greater than two percent (2%) of the outstanding securities of a company trading on an established public exchange, to the knowledge of the Target Companies, neither the Target Companies, their subsidiaries, or their respective directors, employees, shareholders, officers or agents, have any direct or indirect interest in any competitor, supplier or customer of a Target Company or in any person from whom or to whom a Target Company leases any property, or in any other person, firm or entity with whom a Target Company transacts business of any nature. Section 3.21 to the Target Company Disclosure Schedules identifies and describes all material contracts and other arrangements (oral or written), including, but not limited to, intercompany loans, advances, transfers of goods or services, or other transactions (whether or not for consideration), to which a Target Company is a party and to which another Target Company, its subsidiaries or affiliates, or the officers, directors, employees, shareholders, officers or agents of a Target Company, is directly or indirectly also a party. SECTION 3.22. BANK ACCOUNTS. Section 3.22 to the Target Company Disclosure Schedules sets forth all banks and other institutions or agents in which a Target Company or any of its subsidiaries has or maintains an account, installment obligation, mortgage, deposit, escrow, lockbox or safe deposit box, the names of all persons authorized to draw thereon or to have access thereto, the number of signatures required to be given for any transaction, deposit or withdrawal, and a description of the type of relationship maintained by such entity with such bank, institution or agent. SECTION 3.23. OFFICERS AND DIRECTORS. Section 3.23 to the Target Company Disclosure Schedules sets forth a list of the names, addresses and years of service of all officers and directors of the Target Companies and their respective subsidiaries as of the date hereof. SECTION 3.24. POWERS OF ATTORNEY. No Target Company has given a power of attorney (irrevocable or otherwise) to any person or entity for any purpose whatsoever. SECTION 3.25. GUARANTEES. Except as disclosed in Section 3.25 to the Target Company Disclosure Schedules, no Target Company is a guarantor of, or indemnitor, co-maker or otherwise liable for, any indebtedness of any person, except as an endorser of checks received by it and deposited in the ordinary course of business. SECTION 3.26. CUSTOMERS. Section 3.26 to the Target Company Disclosure Schedules sets forth a true, complete and accurate listing of (i) the names, addresses and telephone numbers of the ten (10) largest customers (measured by revenue) to whom each -36- Target Company has provided services or sold products during calendar year 1995 and the first nine months of 1996, (ii) the revenues attributable to each such customer for the same periods, and (iii) the approximate gross profits attributable to each such customer for such periods. The business of the Target Companies will, as of the Effective Time, include the services provided on behalf of those customers listed on Section 3.26 to the Target Company Disclosure Schedules. Except as specifically noted on such Disclosure Schedules, the Target Companies have no knowledge that the customers listed therein will not continue as customers of the U.S. Surviving Corporation and Canada Company on and after the Effective Time. SECTION 3.27. CUSTOMER BILLINGS; OPEN PURCHASE ORDERS. (a) Except for billings with respect to customer deposits, the Target Companies have made no billings whatsoever to their customers for services to be provided or products to be sold after the Effective Time which could result in a Target Company Adverse Effect. All customer deposits held by a Target Company arose from written agreements between such Target Company and the remitting customer, are correct as to amount, and no such customer has notified the Target Company of its intention to seek a refund of its deposit. All such customer deposits were received by the Target Companies in cash, in the ordinary course of their business. The Target Companies have previously delivered to Acquiror true and complete copies of all contracts and agreements (and written descriptions of any oral arrangements) between all such customers and the applicable Target Company. As of the date of this Agreement, no party to any such contract has defaulted in any of its material obligations thereunder, and no customer is in default of its payment obligations on invoices for services previously rendered or products previously sold by such Target Company. (b) The open purchase orders of the U.S. Company and Canada Company reflected in the most current Interim Target Company Financial Statements were entered into by such Target Companies in good faith, in the ordinary course of business, and with the exception of routine cancellations in the ordinary course of business, such open purchase orders were, and to the extent any such order remains unfilled as of the date of this Agreement, and are, in full force and effect. To the knowledge of the Target Companies, the sales prices under such open purchase orders were calculated to yield gross profit margins which are customary for the business conducted by the Target Companies. SECTION 3.28. PROPRIETARY SOFTWARE USED IN THE BUSINESS. Section 3.28 to the Target Company Disclosure Schedules contains a description of all material non-licensed computer software products -37- and software programs (collectively, "Software Programs"), both generally available in a Target Company's business and under development (in all stages of development), that are used or intended for use in the business and operations of each Target Company. To the extent any Software Program has been developed by a third party for the benefit of, or in accordance with specifications provided by, a Target Company, Section 3.28 to the Target Company Disclosure Schedules sets forth the form and placement of the proprietary legends and/or copyright notices displayed in or on the Software Programs. To the knowledge of the Target Companies, in no instance has the eligibility of any such Software Program for protection under applicable copyright law been forfeited to the public domain by omission of any required notice or any other action or inaction by a Target Company unless such forfeiture would not have a Target Company Adverse Effect. Except as provided in Section 3.28 of the Target Company Disclosure Schedules, to the knowledge of the Target Companies, the source code for such Software Programs has at all times been maintained in strict confidence and the only individuals or entities who have access to such source code are parties to written nondisclosure agreements with the Target Company. SECTION 3.29. RECEIVABLES AND ADVANCES. Except as described on Section 3.29(1) to the Target Company Disclosure Schedules, all accounts receivable and advances of the Target Companies have arisen in the ordinary course of business, for full and adequate consideration, and, to the knowledge of the Target Companies, are subject to no claims, charges or defenses (either by a Target Company or by any other person). Sections 3.29(2) and (3) to the Target Company Disclosure Schedules sets forth by outstanding principal amount, accrued interest and payor, all loans and advances by the Target Companies and their subsidiaries as to which balances remain unpaid on the date of this Agreement, together with a written description of all future commitments to make any such loans or advances, other than loans and advances arising from the sale of products or services to customers in the ordinary course of business. Without limiting the generality of the foregoing sentence, such Schedules shall include loans and advances to or on behalf of Target Company (or subsidiary) shareholders, directors, officers, employees, sales representatives, independent contractors, agents, vendors, and their respective affiliates. No person has asserted a right of set-off (or similar right) against any receivable, loan or advance made by a Target Company (or its subsidiary). Anything in this Section 3.29 to the contrary notwithstanding, Acquiror acknowledges and agrees that the Target Companies shall not be required to institute any actions against obligors under loans and advances described on Schedule 3.29 to the Target Company Disclosure Schedule. SECTION 3.30. COMMISSION POLICIES. Each Target Company's commission and bonus policies with respect to sales personnel, employed and independent, entitled to receive commissions and/or -38- bonus in excess of ten thousand dollars ($10,000) per year are described on Section 3.30 to the Target Company Disclosure Schedules. SECTION 3.31. LABOR MATTERS. Each Target Company is in compliance in all material respects with all applicable foreign, federal, state, provincial and local Laws, rules or regulations relating to the employment of labor, including those relating to salaries, wages, hours, collective bargaining, affirmative action and the payment and withholding of Taxes. Each Target Company has withheld all amounts required by Law or agreement to be withheld from the salaries or wages of its employees and is not liable for any arrears of any Tax or penalties for failure to comply with the foregoing. Each Target Company has paid to the appropriate Governmental Entity, at the time or times required by Law, or accrued as an expense on its books, all employment taxes and withholding taxes with respect to its employees. No Target Company is party to any collective bargaining agreement or other material labor agreement. To the knowledge of the Target Companies, there are no impending labor difficulties involving groups of employees (whether or not organized) which involve strikes, slowdowns, work stoppages, job actions, lockouts, union certifications or grievances before any foreign, federal, state, provincial or local labor commission or bureau. SECTION 3.32. SOLE SOURCE SUPPLIERS. Section 3.32 to the Target Company Disclosure Schedules sets forth the names and addresses of, and volume of purchases from, any suppliers of significant goods, equipment or services to each Target Company (other than public utilities) with respect to which practical alternative sources of supply are not available. SECTION 3.33. INVENTORY AND WARRANTY MATTERS. (a) The product inventories of the Target Companies and their subsidiaries are in good and merchantable condition. The Program inventories of the Target Companies reflected in the Interim Target Company Financial Statements at and as of December 31, 1996 do not contain more than "immaterial amounts" of "Obsolete Program Inventory Costs" (hereafter defined). (b) As used herein, the terms (i) "Program" shall mean the sale or distribution by a Target Company, whether directly to a customer for redistribution, or to the end-users of such customer, of customized products incorporating or promoting a distinctive name, logo, idea, likeness, affiliation, copyright, trademark or other exclusionary property right, and which are therefore limited for use by the owner or licensee of such distinctive property right, (ii) "immaterial amounts" shall mean those products includible within, or sold as part of, a particular Program with an aggregate extended cost not -39- exceeding two thousand dollars ($2,000), and (iii) "Obsolete Program Inventory Costs" shall mean, with respect to each of the Program-types (or product-types) described in clauses (1) through (5), below, the extended cost of products attributable to such Program reflected in the inventory of a Target Company at January 1, 1997, LESS the amount of actual recoveries thereon through December 31, 1997. The calculation of Obsolete Program Inventory Costs shall be limited to the following Programs and products: (i) Programs which have been discontinued prior to January 1, 1997; (ii) Products bearing distinctive identifying marks, the use of which have been discontinued prior to January 1, 1997, or which have been determined to infringe the property rights of a third-party on or prior to March 31, 1997; (iii) Products as to which catalogue sales have been discontinued prior to January 1, 1997; (iv) Products which advertise an event, or series thereof, having taking place prior to January 1, 1997; or (v) Products as to which there exist general defects or flaws in the distinctive identifying marks thereon which cannot be corrected or which are saleable in the ordinary course of business at an average price not exceeding seventy-five percent (75%) of cost. (c) Representatives of Acquiror, the U.S. Company and/or the Canada Company shall, within a reasonable time following Acquiror's written request given prior to June 30, 1997, conduct a full or partial count and extension of such Target Company's Program product inventories. Product units comprising Program inventories shall be identified by vendor code, product code or such other reasonable tracking method as Acquiror shall determine. For purposes of such count, all product units (i) containing the same or a similar distinguishing mark, and (ii) customized in accordance with the same specifications or constituting a component of a single Program theme, shall be considered part of the individual Program. At the conclusion of the count, Acquiror and the U.S. Company shall approve a definitive listing, on a Program-by-Program basis, of (i) the aggregate Program products counted in each Program, (ii) the base cost for each product unit so counted, (iii) the extended value of all such -40- product units, and (iv) the Obsolete Program Inventory Costs satisfying the definitions herein. SECTION 3.34. DISCLOSURE. No representations or warranties made by a Target Company or U.S. Shareholder under this Agreement or in any certificate, Schedule, Exhibit or other document furnished or to be furnished to Acquiror, Acquiror Sub or their respective counsel pursuant hereto contains or will contain any untrue statement of any material fact, or omits or will omit to state a material fact necessary to make the statements of fact contained therein not misleading. SECTION 3.35. SCOPE OF REPRESENTATIONS AND WARRANTIES. Notwithstanding any other provision of this Agreement, to the extent any breach of or misstatement in a representation or warranty under Article III also constitutes a breach of or misstatement in a representation or warranty under any one of the Agreements described in Section 3.35 of the Target Company Disclosure Schedules (each, a "Predecessor Agreement") then, to the extent (i) such representation or warranty under the Predecessor Agreement survives for at least sixty (60) days following discovery of such breach or misstatement, (ii) the U.S. Surviving Corporation is entitled, by virtue of its status as successor to the U.S. Company, to indemnification under the Predecessor Agreement in respect of such breach or misstatement, (iii) Nelson, in his capacity as Chief Executive Officer of the U.S. Surviving Corporation, or his successor, authorizes the filing of a claim for indemnification under the terms and conditions of such Predecessor Agreement, and (iv) the U.S. Surviving Corporation actually receives payment for its Damages resulting from such breach or misstatement, Acquiror shall be deemed not to have incurred or suffered Damages of like amount in respect of the applicable representation or warranty made under this Article III; provided, however, (aa) Acquiror's claim for indemnification under this Agreement shall be stayed during the pendency of any claim filed with respect to such Predecessor Agreement, but only with respect to the maximum amount recoverable thereunder, and the balance thereof shall be prosecutable by Acquiror (provided, the provisions of clause (cc), below, shall not apply), (bb) any Unregistered Shares securing such pendent claim shall not be sold until the final resolution thereof, subject to limitations set forth in Section 9.02(iii), (cc) any factual or legal determination made with respect to the U.S. Surviving Corporation's claim under the Predecessor Agreement shall have the effect of RES JUDICATA for purposes of Acquiror's claim under this Agreement, and (dd) Acquiror shall at all times retain the right to appoint legal counsel to prosecute the U.S. Surviving Corporation's claim under the Predecessor Agreement. -41- 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 adverse to the financial condition, business or results of operations of Acquiror and its subsidiaries; provided, however, the occurrence of any change or event described in any Section of the Acquiror Disclosure Schedules attached to this Agreement as Schedule 4.00 (the "Acquiror Disclosure Schedules") shall not, individually or in the aggregate, constitute a Acquiror Adverse Effect. Acquiror and Acquiror Sub jointly and severally represent and warrant to and with the Target Companies and U.S. Shareholders that, except as specifically described in the Acquiror Disclosure Schedules, the statements contained in this Article IV are true and correct as of the date of this Agreement and will be true and correct as of the Effective Time (as though made then) with respect to Acquiror and Acquiror Sub, and their respective businesses: SECTION 4.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of Acquiror and Acquiror's subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization, has all requisite corporate or other 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 its subsidiaries 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. A true and complete list of all of Acquiror's directly or indirectly owned subsidiaries, together with the jurisdiction of incorporation or organization of each subsidiary and the percentage of each subsidiary's outstanding capital stock or other equity interests owned by the Acquiror or another subsidiary of Acquiror, is set forth in Section 4.01 of the Acquiror Disclosure Schedules. SECTION 4.02. ARTICLES OF INCORPORATION; BY-LAWS. Acquiror has furnished to the Target Companies a complete and correct copy of the Articles of Incorporation and the By-Laws, as amended or restated, of Acquiror and Acquiror Sub. Neither Acquiror nor Acquiror Sub is in violation of any of the provisions of its Articles of Incorporation or By-Laws. -42- SECTION 4.03. CAPITALIZATION OF ACQUIROR. (a) The authorized capital stock of Acquiror consists of (i) 25,000,000 shares of Acquiror Common Stock, and (ii) 10,000,000 shares of preferred stock, no par value per share. As of the date of this Agreement, (i) 12,479,219 shares of Acquiror Common Stock are issued and outstanding, and are duly authorized, validly issued, fully-paid and non-assessable and not subject to preemptive rights created by statute, Law, Acquiror's Articles of Incorporation or By-Laws or any agreement to which Acquiror is a party or is bound, (ii) approximately 3,111,905 shares of Acquiror Common Stock were reserved for future issuance pursuant to stock options, warrants and awards issued to certain officers, employees, consultants, directors and affiliates of Acquiror, and (iii) approximately 3,060,426 shares of Acquiror Common Stock were issued and outstanding pursuant to the terms and conditions of those certain agreements described in Section 4.03(a) of the Acquiror Disclosure Schedules, a significant portion of which are subject to set-off or cancellation in accordance with the terms and provisions of such agreements, and therefore may not be fully-paid and non-assessable. As of the date of this Agreement, no shares of Acquiror preferred stock were outstanding. (b) As of the date of this Agreement, except as set forth in Section 4.03(b) to the Acquiror Disclosure Schedules, there are no obligations, contingent or otherwise, of Acquiror or any of its subsidiaries to repurchase, issue, redeem or otherwise acquire any shares of Acquiror Common Stock or the capital stock of, or other equity interests in, any subsidiary of Acquiror. SECTION 4.04. CAPITALIZATION OF ACQUIROR SUB. (a) The authorized capital stock of Acquiror Sub consists of 100,000 shares of Acquiror Sub Common Stock of which, as of the date of this Agreement, 10,000 shares are issued and outstanding. On the date of this Agreement, all issued and outstanding shares of Acquiror Sub Common Stock are, and at the Effective Time all issued and outstanding shares of 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) Except as disclosed in Section 4.0(b) to the Acquiror Disclosure Schedules, as of the date of this -43- Agreement, there are no options, warrants or other rights, agreements, arrangements or commitments to which Acquiror or Acquiror Sub is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, Acquiror Sub, or obligating Acquiror or Acquiror Sub to grant, issue, sell or register for sale any shares of the capital stock of, or other equity interests in, Acquiror Sub by sale, lease, license or otherwise. SECTION 4.05. AUTHORITY. Each of Acquiror and Acquiror Sub has the requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder, and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Acquiror and Acquiror Sub, and the consummation by Acquiror and Acquiror Sub of the transactions contemplated hereby, have been duly authorized by all necessary corporate action and no other corporate proceedings on the part of Acquiror or Acquiror Sub 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 Target Companies and U.S. Shareholders, constitutes the legal, valid and binding obligation of Acquiror and Acquiror Sub. SECTION 4.06. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by Acquiror and Acquiror Sub do not, and the performance of this Agreement by Acquiror and such Acquiror Subs shall not (i) conflict with or violate the Articles, By-Laws or equivalent organizational documents of Acquiror Sub or any of Acquiror's subsidiaries, (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 the Securities Act, the Exchange Act, Blue Sky Laws, the NASDAQ, the HSR Act, the Competition Act, the Investment Act, the Code, the Treaty, the ITA and the filing and recordation of appropriate merger and amalgamation documents as required by Michigan Law, and (y) obtaining the consents, approvals, authorizations or permits described in Section 4.06(b) of the Acquiror Disclosure Schedules, conflict with or violate any Laws applicable to Acquiror, Acquiror Sub or any of Acquiror's other subsidiaries 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, Acquiror Sub or any of Acquiror's other subsidiaries pursuant to, any note, bond, -44- mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Acquiror, Acquiror Sub or any of Acquiror's other subsidiaries is a party or by which Acquiror, Acquiror Sub or other Acquiror subsidiaries 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 the performance of this Agreement by Acquiror and Acquiror Sub shall not, require 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 NASDAQ, the HSR Act, the Competition Act, the Investment Act, the Code, the Treaty and the ITA, (ii) the consents, approvals, authorizations or permits described in Section 4.06(b) of the Acquiror Disclosure Schedules, and (iii) the filing and recordation of appropriate merger and amalgamation documents as required by Michigan Law. SECTION 4.07. PERMITS; COMPLIANCE. Each of Acquiror and its subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary for Acquiror or any of its subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Acquiror Permits") and no suspension, revocation or cancellation of any of the Acquiror Permits is pending or, to the knowledge of Acquiror, threatened, except where the failure to have, or the suspension, revocation or cancellation of, any of the Acquiror Permits would not have an Acquiror Adverse Effect. Neither Acquiror nor any of its subsidiaries is in conflict with, or in default or violation of (i) any Law applicable to Acquiror or any of its subsidiaries or by which any of their respective properties is bound or affected, or (ii) any of the Acquiror Permits, except for any such conflicts, defaults or violations which would not have an Acquiror Adverse Effect. SECTION 4.08. SECURITIES REPORTS; FINANCIAL STATEMENTS. (a) Since December 31, 1993, Acquiror and its subsidiaries have filed (x) all forms, reports, statements and other documents required to be filed (or filed by reference) with (i) 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 -45- registration statements (collectively, the "Acquiror SEC Documents"), 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 and other documents referred to in this Subsection (a) are, collectively, "Acquiror Reports"). The Acquiror Reports, including all Acquiror Reports filed after the date of this Agreement and prior to the Effective Time (i) were or will be prepared in all material respects in accordance with the requirements of applicable Law, and (ii) did not, at the times they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Except as disclosed in Section 4.08(b) of the Acquiror Disclosure Schedules, and except for changes required under GAAP or by the Commission, each of Acquiror's financial statements (including any notes to such financial statements) included within the Acquiror Reports (i) has been or will be prepared in all material respects in accordance with the published rules and regulations of the Financial Accounting Standards Board and GAAP and the Commission applied on a consistent basis throughout the periods involved, and (ii) fairly present, or will fairly present, in all material respects, the consolidated financial position of the 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) Except as and to the extent disclosed in Section 4.08(c) of the Acquiror Disclosure Schedules, neither Acquiror nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Acquiror, prepared in accordance with GAAP, except (i) as otherwise disclosed in Section 4.08(c) of the Acquiror Disclosure Schedules, or (ii) for liabilities or obligations incurred in the ordinary course of business since September 30, 1996, that would not have an Acquiror Adverse Effect. -46- (d) Since the date of Acquiror's most-recent filings with the Commission (whether on Form 10-Q or otherwise), there are no material facts and circumstances known to Acquiror that have not been reported which would cause a material reduction in the value of Acquiror's shares if known. SECTION 4.09. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in Section 4.09 of the Acquiror Disclosure Schedules, or as contemplated in this Agreement, (i) since June 30, 1996, there has not been, and Acquiror has no knowledge of any facts that are reasonably likely to result in, an Acquiror Adverse Effect, and (ii) from December 31, 1995, to the date of this Agreement, there has not been any change by Acquiror or its subsidiaries in their accounting methods, principles or practices, except any such change after the date of this Agreement required by GAAP or the Commission. SECTION 4.10. ABSENCE OF LITIGATION. (a) 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. (b) 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 4.11. TITLE TO ASSETS. Acquiror, or its applicable subsidiary, 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 material properties and assets (except statutory liens for taxes, materialmen, warehousemen and landlords incurred in the ordinary course of business and not yet due), including those assets and properties reflected in the Acquiror's consolidated financial statements. SECTION 4.12. ACCOUNTING AND TAX MATTERS. Neither Acquiror nor, to the knowledge of Acquiror, any of its subsidiaries or affiliates, has taken or agreed to take any action that would prevent either the U.S. Merger or the Canadian Reorganization from -47- being effected as a pooling of interests under GAAP or the rules and regulations promulgated by the Commission, or would prevent the U.S. Merger or the Canadian Reorganization from constituting a transaction qualifying as a reorganization under Section 368(a) of the Code. SECTION 4.13. OWNERSHIP OF ACQUIROR SUB; PRIOR ACTIVITIES. (a) Acquiror Sub was formed for the purpose of engaging in the transactions contemplated by this Agreement and has no material debts or liabilities. (b) As of the Effective Time, all the outstanding capital stock of Acquiror Sub will be owned directly by Acquiror. As of the Effective Time, there will be no options, warrants or other rights (including registration rights), agreements, arrangements or commitments to which Acquiror Sub is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, Acquiror Sub or obligating Acquiror Sub to grant, issue or sell any shares of the capital stock of, or other equity interests in, Acquiror Sub, by sale, lease, license or otherwise. There are no obligations, contingent or otherwise, of Acquiror Sub to repurchase, redeem or otherwise acquire any shares of the capital stock of Acquiror Sub. SECTION 4.14. BROKERS. Except as disclosed in Section 4.14 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 4.15. DISCLOSURE. No representations or warranties made by Acquiror under this Agreement or in any certificate, Schedule, Exhibit or other document furnished or to be furnished to the Target Companies, U.S. Shareholders or their respective counsel pursuant hereto contains or will contain any untrue statement of any material fact, or omits or will omit to state a material fact necessary to make the statements of fact contained therein not misleading. ARTICLE V COVENANTS RELATING TO THE CONDUCT OF TARGET COMPANY BUSINESS SECTION 5.01. AFFIRMATIVE COVENANTS OF THE TARGET COMPANIES. The Target Companies and U.S. Shareholders hereby covenant and agree 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, each Target Company shall, and shall cause its subsidiaries to: -48- (a) Operate its business in the usual and ordinary course, consistent with reasonable past practices. (b) Use reasonable 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. (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) Confer with Acquiror from time-to-time at Acquiror's reasonable request to report on all manner of operational matters, and to provide, orally or in writing, as Acquiror shall reasonably request, the general status of the ongoing operations of the business of such Target Company. (e) Internally prepare and deliver to Acquiror combined and combining interim (i) quarterly financial statements (including a Balance Sheet, Income Statement, Statement of Cash Flow [Statement of Changes in Financial Position with respect to the Canada Company] and Statement of Equity) as at and for the period ended September 30, 1996, and (ii) monthly financial statements as at and for the monthly periods ending October 31, November 30 and, if more than thirty (30) days prior to the Effective Time, December 31, 1996. The Interim Target Company Financial Statements shall be prepared in accordance with GAAP, applied on a consistent basis for the periods involved, and shall present fairly, in all material respects, the combined and combining financial positions of the Target Companies as of the dates indicated therein, and the combined and combining results of operations and cash flows of the Target Companies for the periods then ended; provided, however, the Interim Target Company Financial Statements are subject to normal year-end adjustments and may lack footnotes and other presentation items. (f) File their foreign and federal income tax Returns, and all required provincial, state, local and municipal income and franchise tax Returns, and Subchapter S Returns, that include a Target Company or any of its subsidiaries, for the fiscal tax year coinciding with or ending in 1995, on or before the due date for filing such Returns (including extensions), and if such Returns, or any of them, are filed prior to the Effective Time, such corporation shall afford to Acquiror reasonable opportunity for review of such returns prior to filing. -49- (g) Unless otherwise instructed by Acquiror, the U.S. Company shall (i) use its reasonable efforts to solicit bids and offers for those non-operating assets described in Section 5.01(g) to the Target Company Disclosure Schedules (the "Non-Operating Assets"), (ii) prior to the Effective Time, use its reasonable efforts to enter into agreements to sell, convey, assign or transfer its entire right and interest in each Non-Operating Asset for an aggregate consideration, consisting of cash or its equivalent, not less than the U.S. Company's carrying value therefor, as set forth in the Target Company Financial Statements, and (iii) use its reasonable efforts to close, subject to Acquiror's supervision, the sale of all Non-Operating Assets pursuant to the terms and conditions so established. To the extent any such assets are not sold prior to the Effective Time, Nelson agrees he shall purchase same immediately prior to consummation of the U.S. Merger for the consideration set forth in clause (ii), payable in accordance with the terms of a Promissory Note executed by Nelson and delivered to the U.S. Company (the "Nelson Note"), in form and substance reasonably satisfactory to Acquiror, and providing, INTER ALIA, the following terms and conditions: The Nelson Note shall be in a principal amount equal to the carrying value of such Non-Operating Assets remaining unsold by the U.S. Company immediately prior to the Effective Time and shall be payable, together with interest calculated at the short-term applicable federal rate from time to time in effect, compounded monthly, in one lump sum on the one-year anniversary of the Effective Time. The Nelson Note shall be unsecured and fully negotiable. The holder of the Nelson Note shall have all the rights of a commercial lender under Illinois Law in the event Nelson shall default in the payment of principal or interest thereunder. The Nelson Note shall be prepayable without premium or penalty by Nelson. Nelson shall be obligated to make mandatory prepayments against the principal amount of the Nelson Note and interest accrued thereunder to the extent of the net proceeds received by Nelson from the first sales of "Registered Shares" (hereafter defined) through and until payment in full of all amounts outstanding and accrued under the Nelson Note. Acquiror and Nelson agree that the default provisions under the Nelson Note shall be commercially reasonable for commercial loans of the same relative magnitude. The Target Companies agree that neither they, nor any employee, officer, director, shareholder or agent of the Target Companies, shall be compensated, directly or indirectly, for their services in connection with the sale of the Non-Operating Assets; provided, the foregoing provision shall not prevent such individual from receiving his regular -50- compensation from a Target Company or, to the extent of the documentation therefor, reimbursement for reasonable out-of-pocket expenditures incurred on behalf of the U.S. Company in effectuating a sale to a person other than Nelson. (h) At the Effective Time, each individual reflected as an obligor under a loan from the U.S. Company in Section 3.29(2) to the Target Company Disclosure Schedules shall execute and deliver to the U.S. Surviving Corporation a promissory note for the outstanding principal balance under such loan, which promissory note shall have a term as set forth on such Schedules, bear interest at the short-term applicable federal rate and otherwise be in form and substance reasonably satisfactory to Acquiror. Nelson hereby agrees to indemnify and hold the U.S. Surviving Corporation harmless from and against any losses under each such promissory note, including principal and interest which is not paid when due, and upon full satisfaction of the principal amount and accrued interest outstanding under any such promissory note by Nelson, the U.S. Surviving Corporation shall quitclaim to Nelson, without recourse of any nature whatsoever, its entire right, title and interest in such promissory note. Thereafter, Nelson shall hold the U.S. Surviving Corporation (and its successor) harmless from and against any and all claims arising thereunder. (i) Prior to the Effective Time, Acquiror and the U.S. Company shall mutually determine the Taxes, if any, payable by the U.S. Shareholders with respect to the Subchapter S Status of the U.S. Company for the taxable year ending December 31, 1996 and the 1997 short period ending prior to the Effective Time (the "Stub Period"). Such Taxes shall be calculated at a combined rate equal to the highest marginal rate of federal and state income tax applicable to Nelson's taxable income for the taxable year ending December 31, 1996. Immediately prior to the Effective Time, the U.S. Company shall declare and pay to each U.S. Shareholder an amount in cash (the "S Corporation Tax Distribution") equal to the difference between (i) the Taxes so determined by Acquiror and the U.S. Company based on their estimate of such Shareholder's portion of U.S. Company taxable income for the taxable year ended December 31, 1996, and the Stub Period, LESS (ii) aggregate distributions by the U.S. Company to such Shareholder after January 1, 1996; provided, however, such distributions shall be net of any cash distributions (1) reported to such Shareholder as wages on Form W-2, or interest, rents, periodic payments, reimbursement amounts, loans, annuities and pension distributions on Forms 1099 issuable in respect of such Shareholder in respect of the 1996 taxable year, or (2) made to Nelson in April, 1996 to cover his Taxes on U.S. Company taxable income for the year ended December 31, 1995 (such net distribution amount is hereafter the "Prior S Corporation Distribution"). -51- (i) Acquiror has informed the U.S. Shareholders, and the U.S. Shareholders hereby acknowledge, that Acquiror's ability to characterize the Unitary Transaction herein as a pooling-of-interests may be compromised if Prior S Corporation Distributions and S Corporation Tax Distributions to a U.S. Shareholder exceed his share of the U.S. Company's taxable income for 1996. The U.S. Shareholders therefore agree that, upon Acquiror's written demand after the Effective Time, they shall be jointly and severally obligated to pay the U.S. Surviving Corporation the amount, if any, by which the U.S. Company's taxable income during the entire 1996 taxable year, as reported on the U.S. Company's Form 1120S for such period, is less than the sum of the S Corporation Tax Distribution and the Prior S Corporation Distribution. The U.S. Shareholders agree that payment of such amount to the U.S. Surviving Corporation shall be made promptly upon written demand by Acquiror. Each U.S. Shareholder jointly and severally warrants to Acquiror that from the date of this Agreement to the Effective Time, the U.S. Company shall not make any distributions to, for or on account of any U.S. Shareholder other than in respect of wages or those other Form 1099 items enumerated above. (ii) The U.S. Shareholders agree the S Corporation Tax Distribution shall be final and binding for all purposes under this Agreement, notwithstanding subsequent changes in the U.S. Company's net income or Nelson's tax calculations for 1995, and whether due to error, mistake, permissive adjustments, the recalculation of U.S. Company income or expenses, or other matters, and whether within or outside the control of the U.S. Company or U.S. Shareholders. SECTION 5.02. NEGATIVE COVENANTS OF THE TARGET COMPANIES. Except as expressly contemplated by this Agreement, or 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 Target Companies shall not, and shall not cause their subsidiaries to, and no U.S. Shareholder shall cause a Target Company to, individually or collectively, do any of the following: (a) (i) Increase the compensation payable or to become payable to any director, officer, manager or employee, except for increases in salary, bonuses or wages payable or to become payable in the ordinary course of business and consistent with past practice to employees who are not directors, officers or managers, (ii) grant any severance or termination pay (other than pursuant to normal severance policy) to, or enter into -52- any severance agreement with, any director, officer, manager or employee, (iii) enter into any employment agreement of any nature whatsoever with any director, officer, manager 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 or arrangement, except as may be required to comply with applicable Law; (b) Except as provided in Section 5.01(i) hereof, declare or pay, or agree to declare or pay, in any manner whatsoever, any dividend on, or make any other distribution in respect of, outstanding shares of U.S. Company Stock, Other U.S. Company Securities or U.S. Company Options, and the stock, securities or options of each of the Canadian Target Companies; (c) (i) Redeem, purchase or otherwise acquire any shares of its or any of its subsidiaries' capital stock or any securities or obligations convertible into or exchangeable for any shares of its or its subsidiaries' capital stock, or any options, warrants or conversion or other rights to acquire any shares of its or its subsidiaries' capital stock or any such securities or obligations, (ii) effect any reorganization or recapitalization, or (iii) split, combine or reclassify any of its or its respective subsidiaries' capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its or its subsidiaries' capital stock; (d) 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 or its subsidiaries' 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; (e) Acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with reasonable past practices); -53- (f) Except to the extent required under Section 5.01(g) of this Agreement, sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any amount of any of its or its subsidiaries' operating assets, except for retirements of operating assets in the ordinary course of business and consistent with reasonable past practices; (g) The U.S. Shareholders agree not to sell their shares in any of the Target Companies; (h) Initiate, solicit 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), enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Competing Transaction. Each Target Company shall promptly notify Acquiror if any such inquiries or proposals are received by a Target Company or any of its subsidiaries, or by any of their respective 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 a Target Company or any subsidiary (other than the transactions contemplated by this Agreement): (i) any merger, consolidation, share exchange, business combination, or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of two percent (2%) or more of the assets of a Target Company or a subsidiary thereof, in a single transaction; (iii) any sale or exchange for any outstanding shares of capital stock of a Target Company or any subsidiary thereof; or (iv) any agreement to, or announcement by a Target Company of a proposal, plan or intention, to do any of the foregoing; (i) Adopt any amendments to their Articles or By-Laws; (j) Change any methods of accounting in effect at December 31, 1995, or make or rescind any express or deemed election relating to taxes (including an election to file a Subchapter S Return), settle or compromise any claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, or change any method of reporting income, gain, expense, loss or deduction for foreign, federal, state, provincial or local income tax purposes from those employed in the preparation of income tax returns for taxable years ending on or prior to September 30, 1996, in the case of the Canada Company, or December 31, 1995, -54- in the case of the U.S. Company, except in either case as may be required by Law; (k) Incur any obligation for borrowed money or purchase money indebtedness, whether or not evidenced by a note, bond, debenture or similar instrument, except for borrowings under the Credit Agreement described in Section 6.08(b)(1) hereof in furtherance of a Target Company's activities with respect to the sale of product inventories to customers in the ordinary course of business, or those borrowings made with the prior written consent of Acquiror, which consent shall not be unreasonably withheld; provided, however, such consent may be withheld in Acquiror's sole discretion in the event (i) such borrowing exceeds fifty thousand dollars ($50,000) in any instance, or the aggregate of all such borrowings after the date hereof exceeds two hundred fifty thousand dollars ($250,000), or (ii) no funds are available for disbursement under the said Credit Agreement; (l) Agree in writing or otherwise to do any of the foregoing; or (m) Without first consulting with Acquiror, (i) perform any act which, if performed, would prevent or excuse the performance of this Agreement by Acquiror or which would result in any representation or warranty herein contained of the Target Companies to be untrue in any material respect as if originally made on and as of the Effective Time, 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 which would result in any representation or warranty herein contained of the Target Companies to be untrue in any material respect as if originally made on and as of the Effective Time. SECTION 5.03. AFFIRMATIVE COVENANTS OF ACQUIROR. Acquiror hereby covenants and agrees that, prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by the Target Companies, Acquiror will, and will cause each of its subsidiaries to: (a) Operate its business in the usual and ordinary course; (b) Use reasonable efforts to preserve intact its business organization and assets, maintain its rights and franchises, retain the services of its respective officers and key employees and maintain the relationships with its respective customers and suppliers; -55- (c) Use reasonable efforts to keep in full force and effect liability insurance and bonds comparable in amount and scope of coverage to that currently maintained; and (d) Disclose a reasonable time beforehand and consult with Nelson with respect to any material acquisition prior to entering into any binding agreement with respect to such acquisition. SECTION 5.04. NEGATIVE COVENANTS OF ACQUIROR. Except as expressly contemplated by this Agreement or otherwise consented to in writing by the Target Companies, from the date of this Agreement to the Effective Time, Acquiror shall not, and shall not permit any of its subsidiaries to (i) amend any of the material terms or provisions of Acquiror's securities, (ii) agree in writing or otherwise to do the foregoing, or (iii) without first consulting with the Target Companies, (x) perform any act which, if performed, would prevent or excuse the performance of this Agreement by the Target Companies or which would result in any representation or warranty herein contained of the Acquiror to be untrue in any material respect as if originally made on and as of the Effective Time, or (y) fail to perform any act which, if omitted to be performed, would prevent or excuse the performance of this Agreement by the Target Companies or which would result in any representation or warranty herein contained of Acquiror to be untrue in any material respect as if originally made on and as of the Effective Time. SECTION 5.05. ACCESS AND INFORMATION. (a) Upon reasonable prior notice from Acquiror, the Target Companies shall (and shall cause their subsidiaries to) 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 Target Companies and their subsidiaries are conducting business activities, (ii) the directors, officers and management personnel of the Target Companies 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 Target Companies and their subsidiaries. The Target Companies 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 such corporations, and/or for obtaining any approvals, consents, licenses or permits for the transactions contemplated by this Agreement. (b) Acquiror shall (and shall cause its subsidiaries to) afford to the Target Companies and their respective officers, -56- employees, accountants, consultants, legal counsel and other representatives, reasonable access upon reasonable notice to all information concerning the business, properties, contracts, records, personnel (whether employees or independent contractors), and independent accountants and legal counsel of Acquiror or its subsidiaries as the Target Companies may reasonably request, and as may be lawfully disclosed by Acquiror. (c) The parties and their respective officers, employees, accountants, consultants, legal counsel and other representatives shall comply with all of their respective obligations under that certain Confidentiality Letter Agreement dated August, 1996, among Acquiror, the U.S. Company, and Nelson. SECTION 5.056. NEW U.S. SHAREHOLDERS. Only to the extent Acquiror consents in writing to the addition of a new U.S. Shareholder prior to the Effective Date, the Target Companies shall cause each person so becoming a U.S. Shareholder to be bound by this Agreement, by executing a counterpart of this Agreement and such other documents in form and substance reasonably satisfactory to Acquiror which causes this Agreement, and the duties and obligations of current and subsequent U.S. Shareholders hereunder, to become valid and binding on such new U.S. Shareholder; provided, however, prior to the Effective Time no person shall be permitted to acquire shares of stock in, and consent shall be deemed automatically denied with respect to any (i) proposed transfer of shares of, the Canada Company or Canada Holding Company-2, or (ii) proposed transfer of shares of the U.S. Company or the Canada Company if Acquiror believes such transfer may prevent the Unitary Transaction from qualifying as a pooling-of-interests. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. AFFILIATE STATUS; ACCOUNTING AND TAX TREATMENT. Each U.S. Shareholder acknowledges and agrees that (i) as of the date hereof, he/she is an affiliate of the Target Companies under applicable accounting releases with respect to pooling-of-interests accounting treatment, and (ii) at and after the Effective Time, by virtue of his/her shareholdings in Acquiror, as well as his/her employment status, status set forth in Section 6.13 hereof, or relationship to Nelson, he/she shall be deemed to be an affiliate of Acquiror. As used herein, the term "affiliate" shall have the same meaning given to such term for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations of the Commission under the Securities Act, and/or as used in and for purposes of Accounting Series, Releases 130 and 135, as amended, of the Commission. Prior to the Effective Time, but in any event not later than the second business day following any acquisition by a -57- U.S. Shareholder of registered shares of Acquiror's Common Voting Stock in a transaction executed on a recognized public securities exchange, each U.S. Shareholder shall execute and deliver to each of Acquiror, the U.S. Company and the Canada Company an agreement substantially in the form of Exhibit B hereto ("Affiliate Agreement"), and thereafter such U.S. Shareholder shall perform in accordance with the terms and conditions thereof. In addition, each party shall use reasonable efforts to cause the U.S. Merger, the Canada Reorganization and the Unitary Transaction to qualify, and shall not take any actions which could prevent any such transaction from qualifying, for pooling-of-interests accounting treatment and as a reorganization qualifying under the provisions of Section 368(a) of the Code; provided, however, that the incurrence of tax by Nelson upon consummation of the Canada Reorganization by virtue of the Canada Company's status as a "controlled foreign corporation" under the Code shall not, in itself, be deemed a disqualification from reorganization treatment under the provisions of Section 368(a) of the Code. SECTION 6.02. RULES GOVERNING THE ISSUANCE AND HOLDING OF ACQUIROR COMMON STOCK. Shares of Acquiror Common Stock are being issued by Acquiror to the U.S. Shareholders under the U.S. Merger and Canada Reorganization in reliance upon the following representations, warranties and agreements of the U.S. Shareholders, each of which shall be true and correct as of the date hereof and at the Effective Time, and each of which shall survive the Effective Time. (a) Each U.S. Shareholder acknowledges that shares of Acquiror Common Stock issuable to him/her at the Effective Time in the U.S. Merger and Canada Reorganization will not have been registered under the Securities Act or under applicable state securities laws. (b) All shares of Acquiror Common Stock deliverable to a U.S. Shareholder in the Unitary Transaction are being acquired solely for investment purposes and for such Shareholder's account, and not as a nominee or agent for others or with a view to or for sale in connection with any distribution, and such Shareholder has no present intention of selling, granting a participation in or otherwise distributing such shares of Acquiror Common Stock or any portion thereof. (c) Each U.S. Shareholder agrees that he/she shall not make a disposition of any shares of Acquiror Common Stock issued in the Unitary Transaction unless such shares have been registered in accordance with Section 6.03 hereof, or are sold in accordance with the terms and conditions of the Affiliate Agreement. (d) Each U.S. Shareholder acknowledges that his/her investment in shares of Acquiror Common Stock is a speculative -58- investment with limited liquidity and subject to the risk of loss. Each U.S. Shareholder represents and warrants to Acquiror that he/she is able to fend for himself/herself in the transactions contemplated by this Agreement, has such knowledge and expertise in financial and business matters as to be capable of evaluating the merits and risks of his/her investment and has the ability to bear the economic risks (including the risk of loss) of his/her investment. (e) Each U.S. Shareholder represents and warrants that he/she has had the opportunity to ask questions of Acquiror concerning its business and to obtain any information which he/she considered necessary to verify the accuracy of or to amplify upon Acquiror's disclosures, and has had all questions which have been asked by him/her answered by Acquiror. The information, documentation, analyses, compilations, studies or other documentation, whether supplied by Acquiror to a U.S. Shareholder or prepared by any of them on their own behalf, in connection with the transactions contemplated hereby (hereinafter "Information"), will be kept confidential and shall not, without Acquiror's prior written consent or as may be required by Law, be disclosed directly or indirectly by the U.S. Shareholders, the Target Companies, or their subsidiaries, employees, officers, directors, agents or representatives in any manner whatsoever, in whole or in part, and shall not be used by the U.S. Shareholders, the Target Companies, or their subsidiaries, employees, officers, directors, agents or representatives in any manner whatsoever, except for the purpose of assessing the transactions contemplated hereby. (f) Each U.S. Shareholder acknowledges that his/her shares of Acquiror Common Stock must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available. Such U.S. Shareholder acknowledges he/she is aware of the provisions of Rule 144 and Rule 144A promulgated under the Securities Act which permit limited resales of unregistered securities, subject to the satisfaction of certain conditions. (g) Each U.S. Shareholder acknowledges that his/her shares of Acquiror Common Stock are subject to set-off and cancellation as provided herein for (i) the breach by a U.S. Shareholder or a Target Company of a covenant or agreement hereunder, (ii) a breach of or misstatement in the representations or warranties of a U.S. Shareholder or a Target Company under this Agreement, or (iii) a claim as to which a U.S. Shareholder has agreed to indemnify Acquiror in accordance with the terms and conditions of Article IX hereof; provided, however, Acquiror's right of set-off and cancellation in respect of such indemnification shall be limited to two hundred two thousand five hundred (202,500) -59- unregistered shares of Acquiror Common Stock, representing nine percent (9%) of the total number of shares of Acquiror Common Stock issuable by Acquiror to the U.S. Shareholders in the Unitary Transaction; and provided, further, Acquiror rights under this Agreement shall not be so limited with respect to any claim respecting, or breach or violation of, those matters described in Schedule 6.02(g) to the Acquiror Disclosure Schedules. SECTION 6.03. STEP REGISTRATION OF ACQUIROR COMMON STOCK. On or prior to May 17, 1997, Acquiror shall effect the registration for resale of thirty-three and one-third percent (33 1/3%) of the Acquiror Common Stock previously issued to the U.S. Shareholders in the Unitary Transaction. Acquiror further agrees that (i) on or prior to the first anniversary of the Effective Time, it shall effect the registration for resale of an additional thirty-three and one-third percent (33 1/3%) of the unregistered shares of the original total Acquiror Common Stock, and (ii) on or prior to the second anniversary of the Effective Time, except as provided below, it shall effect the registration for resale of the balance of such unregistered shares of Acquiror Common Stock, to the extent then owned by the U.S. Shareholders. Acquiror shall use all reasonable efforts to effect the registration of the unregistered shares of Acquiror Common Stock for resale under the Securities Act, by performing the following: (a) The registration for resale shall be effected through a shelf registration statement and related prospectus (collectively, "Resale Prospectus") covering the applicable unregistered shares of Acquiror Common Stock ("Unregistered Shares"), prepared and filed by Acquiror with the Securities and Exchange Commission (the "Commission"). Acquiror shall cause each Resale Prospectus to become and remain effective for a period of five years from the Effective Time. (b) Acquiror shall, if deemed reasonably necessary by any U.S. Shareholder, use its best efforts to register, or obtain and maintain exemption from registration or qualification for, such Unregistered Shares otherwise qualifying for registration under this Section under the securities or blue sky laws of each state as such Shareholder shall reasonably request, and update such registration, qualification or exemption and take any other action which may be reasonably necessary or advisable to enable such Shareholder to consummate the sale or disposition of Acquiror Common Stock in such states; provided, however, Acquiror shall not be required to (i) qualify to do business as a foreign corporation in any such state, (ii) consent to general service of process in any such state, or (iii) comply with any requirement or condition to registration or qualification which would impose an unreasonable burden on Acquiror or any of its respective officers, directors or shareholders. -60- (c) Acquiror shall identify and cause there to be provided at all times to the U.S. Shareholders a transfer agent for all the Acquiror Common Stock required to be registered under this Agreement; (d) Acquiror shall provide, or cause there to be provided, such certificates, instruments and any other documents required under the Securities Act, requested by the Commission in connection with the sale by any U.S. Shareholder of Acquiror Common Stock covered by a Resale Prospectus, or otherwise necessary or reasonably required in connection with, or to facilitate, the sale of Acquiror Common Stock in accordance with this Agreement or any other related agreement; (e) Acquiror shall file with the appropriate stock exchange or trading system a notification form for the listing of additional shares with respect to the Unregistered Shares at the time(s) and in the manner required by the such exchange or trading system; (f) Acquiror shall prepare and file with the Commission such required amendments and supplements to each Resale Prospectus as may be necessary to update and keep such Resale Prospectus effective and to comply with the provisions of the Securities Act with respect to the sale of securities covered by such Resale Prospectus; provided, however, nothing herein shall require Acquiror to disclose any confidential information concerning its business, results of operations or contemplated activities not otherwise required to be disclosed; provided however, that Acquiror covenants and agrees that it shall not allow any period of greater than three (3) months to exist wherein the Acquiror would have information such that it could not appropriately update the Resale Prospectus. (g) Acquiror shall furnish the U.S. Shareholders with such number of copies of the preliminary and final Resale Prospectus as the U.S. Shareholders may reasonably request in order to facilitate the sale of registered shares of Acquiror Common Stock ("Registered Shares") owned by such Shareholder; provided that the U.S. Shareholders shall comply with all prospectus delivery requirements under the Securities Act; and provided, further, all sales of Registered Shares shall be in accordance with and subject to the conditions of the Affiliate Agreement. (h) All expenses incurred by Acquiror in effecting the registration for resale of Unregistered Shares including, without limitation, all registration and filing fees with any governmental entity, printing expenses, and fees and disbursements of counsel for Acquiror, shall be paid by and the sole obligation of Acquiror. All selling commissions -61- applicable to sales of Registered Shares and all fees and disbursements of counsel in connection therewith shall be paid by and be the sole obligation of the U.S. Shareholders. (i) The U.S. Shareholders shall timely furnish such information as may reasonably be requested by Acquiror for inclusion in, or necessary to the preparation of, a Resale Prospectus or other filing ancillary thereto. The information supplied by the U.S. Shareholders (or by a Target Company on their behalf) for inclusion in a Resale Prospectus shall not, at the time such Resale Prospectus is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (j) The information supplied by Acquiror for inclusion in a Resale Prospectus shall not, at the time such Resale Prospectus is declared effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (k) To the extent required by the rules and regulations of the Commission, the U.S. Shareholders hereby consent to the use of his or her name and to the inclusion of financial statements and business information relating to the Target Companies in any registration statement or proxy statement prepared by Acquiror. The U.S. Shareholders agree to use reasonable efforts to obtain the written consent of any person or entity retained by him or a Target Company and required to be named (as an expert or otherwise) in such registration statement or proxy statement, and further, agrees to cooperate, with any legal counsel, investment banker, accountant or other agent or representative retained by Acquiror in connection with the preparation of any and all information required. SECTION 6.04. DEMAND REGISTRATION RIGHTS OF U.S. SHAREHOLDERS. (a) DEMAND REGISTRATION. If, by December 31, 1997, the U.S. Shareholders have not sold Registered Shares in open market and private transactions yielding aggregate gross proceeds (hereafter, the "Realized Value") of eighteen million dollars ($18,000,000), at discounts of seven percent (7%) or better, then Nelson shall have the right, exercisable at any time through and including June 30, 1998, to notify Acquiror in writing of his election to sell a quantity of Registered Shares then having an aggregate fair market value not exceeding the difference between eighteen million dollars ($18,000,000) and the Realized Value (Registered Shares with -62- such aggregate fair market value are the "Underwritten Block"). Promptly upon its receipt of Nelson's notice, but in no event later than ninety (90) days thereafter, Acquiror shall select a managing underwriter reasonably acceptable to Nelson to conduct an underwritten offering of the Underwritten Block, together with such shares as Acquiror may elect to sell in such underwritten offering, and each of Acquiror, such managing underwriter and Nelson shall use their respective best efforts to cause such an underwritten offering to become effective on or prior to June 30, 1998. In connection with the underwritten offering, Acquiror will: (i) promptly give to the U.S. Shareholders written notice thereof of their ability to participate therein to the extent of the Underwritten Block; and (ii) include in such registered offering and in the underwriting involved therein all securities, to the extent of the Underwritten Block, specified in a written request or requests made within twenty (20) days after receipt of such written notice from Acquiror by a U.S. Shareholder. Acquiror, together with such U.S. Share-holders who shall elect to participate in such registered offering, shall enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by Acquiror. In no event shall any other holder of registration rights with respect to a security of Acquiror be given preferential or similar treatment to the registration rights granted to U.S. Shareholders in accordance with this Section 6.04. (b) PIGGYBACK REGISTRATION. If at any time or from time to time, prior to the disposition of the Acquiror Common Stock issued pursuant to this Agreement, Acquiror proposes to register under the Securities Act any Shares of Acquiror Common Stock for its own account or the account of any other person Acquiror will: (i) promptly give the U.S. Shareholders written notice thereof; and (ii) subject to the other provisions of this Section 6.04 and to the rights of other stockholders of Acquiror pursuant to (1) those certain Registration Rights Agreements dated sa of September 30, 1996 between Acquiror and the former stockholders of Market USA, Inc., and (2) the Registration Rights Agreement dated as of January 11, 1995, as amended, between Acquiror and Merchant Partners, L.P. (and its distributors and permitted assignees), include in such registration and -63- in the underwriting involved therein all securities specified in a written request or requests made within twenty (20) days after delivery of such written notice by Acquiror to the U.S. Shareholders. U.S. Shareholders electing to participate in such registration shall enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by Acquiror. With the exception of the rights of certain Acquiror stockholders Registrants in existence on the date of this Agreement, no other person shall be granted registration rights with respect to shares of Acquiror Common Stock which are superior to or on a par with the rights of the U.S. Shareholders pursuant to this subsection (b); provided, however, the foregoing prohibition shall expire and have no further force or effect upon the earlier of (1) expiration of the "Nominating Period" (hereafter defined), or (2) Nelson's sale of sixty-five percent (65%) or more of the shares of Acquiror Common Stock issued to him in the Unitary Transaction. (c) REGISTRATION EXPENSES. All demand and piggyback registration expenses incurred in connection with any registration, qualification or compliance pursuant this Section 6.04, including but not limited to fees and expenses of counsel appointed to represent the selling U.S. Shareholders, shall be borne by Acquiror, except that the selling U.S. Shareholders shall be responsible for and separately pay their pro-rata portion of any underwriting discount and any fees of counsel retained by them. SECTION 6.05. INDEMNIFICATION FOR SECURITIES MATTERS. (a) In connection with the registration of the Unregistered Shares under the Securities Act pursuant to a Resale Prospectus, Acquiror agrees to indemnify and hold harmless the seller of the Registered Shares, each underwriter of the Registered Shares and each other person, if any, who controls such seller or underwriter within the meaning of Section 15 of the Securities Act, against any Damage (as hereafter defined), joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such Damages (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement (or alleged untrue statement) of a material fact contained in any Resale Prospectus (or any amendment or supplement thereto), or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and Acquiror will reimburse such seller, underwriter and controlling person for any legal or other -64- expenses reasonably incurred by such seller, underwriter or controlling person in connection with investigating or defending against any such Damage; provided, however, that Acquiror shall not be liable in any such case to the extent that any such Damage (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement (or alleged untrue statement) or omission (or alleged omission) of a material fact made in such Resale Prospectus (or amendment or supplement thereto) in reliance upon and in conformity with written information furnished to Acquiror through an instrument duly executed by such seller or underwriter specifically for use in the preparation thereof; and provided, further, that Acquiror shall not be liable to any person who participates as an underwriter in the offer or sale of Registered Shares or any other person, if any, who controls such underwriter within the meaning of the Securities Act (or the Exchange Act), in any such case to the extent that any Damage (or action or proceeding in respect thereof) arises out of such person's failure to send or give a copy of the final Resale Prospectus, as the same may be then supplemented or amended, to the person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to written confirmation of the sale of Registered Shares to such person if such statement or omission was corrected in such final Resale Prospectus. (b) In connection with the registration of the Unregistered Shares under the Securities Act pursuant to a Resale Prospectus, Nelson and the other sellers of the Registered Shares, severally and not jointly, will indemnify and hold harmless Acquiror, each person, if any, who controls Acquiror within the meaning of Section 15 of the Securities Act, each officer of Acquiror who signs the Resale Prospectus, each director of Acquiror, each underwriter and each person who controls an underwriter within the meaning of Section 15 of the Securities Act, against any Damage, joint or several, to which Acquiror or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, and will reimburse Acquiror or such officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by Acquiror or such officer, director, underwriter or controlling person in connection with investigating or defending against any such Damage, but only insofar as such Damage (or actions in respect thereof) arises out of or is based upon an untrue statement (or alleged untrue statement) or omission (or alleged omission) of a material fact referred to in subsection (a), above; and provided, further, that this subsection (b) shall apply if and only if such statement (or alleged untrue statement) or omission (or alleged omission) was made in reliance upon and in conformity with information furnished in -65- writing to Acquiror by or on behalf of Nelson or such seller specifically for use in such Resale Prospectus. (c) It shall be a condition of Acquiror's obligations to effect the registration of Unregistered Shares that the sellers participating in such registration provide Acquiror and the underwriters, if any, with all material facts, including, without limitation, furnishing such certificates, questionnaires and legal opinions as may be required by Acquiror or such underwriters, concerning such participating sellers and the Unregistered Shares to be registered which are reasonably required to be stated in the Resale Prospectus or are otherwise required in connection with the offering. If any seller does not provide such requisite information, Acquiror shall have the right to prevent the registration of unregistered shares held by the cooperative sellers. (d) If the indemnification provided in this Section 6.05 is for any reason unavailable or insufficient to hold an indemnified party harmless hereunder, then the indemnifying party shall contribute the amount paid or payable by such indemnified party as a result of the Damage referred to herein in such proportion as is appropriate to reflect the relative fault of Acquiror, on the one hand, and Nelson, on the other, in connection with the statements or omissions that resulted in such Damage, as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from a person who was not guilty of fraudulent misrepresentation. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action in respect of which contribution may be sought, it shall promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder. (e) Acquiror covenants and agrees at the reasonable request of any of the Shareholders to enter into underwriting agreements containing indemnification provisions substantially identical to those contained in this Section 6.05. SECTION 6.06. MERGERS, ETC. Acquiror agrees that it shall not, directly or indirectly, enter into any merger, consolidation or reorganization in which it shall not be the surviving corporation unless the proposed surviving corporation shall, prior to such merger, consolidation or reorganization, agree in writing to assume the obligations of Acquiror under Sections 6.02(c) and (i), 6.03 and 6.04 hereof; provided, however, that the provisions of Section 6.03 hereof shall not apply in the event of any merger, -66- consolidation or reorganization in which Acquiror is not the surviving corporation if all Acquiror shareholders are entitled to receive consideration in exchange for their shares of Acquiror Common Stock consisting solely of cash, securities of the acquiring corporation which may be immediately sold to the public without registration under the Securities Act, or securities of the acquiring corporation which the acquiring corporation has agreed to register for resale to the public within ninety (90) days after the completion of such transaction. SECTION 6.07. RATIFICATION OF TARGET COMPANY APPROVAL. At any time or times prior to the Effective Time as Acquiror shall reasonably request, the U.S. Shareholders shall provide Acquiror with documents, in such form and substance as reasonably requested by Acquiror, executed by the shareholder(s) and/or Board of Directors of each Target Company, affirming and ratifying their unanimous approval of and consent to the Unitary Transaction and the other transactions contemplated hereunder. SECTION 6.08. APPROPRIATE ACTION; CONSENTS; FILINGS. (a) The Target Companies, U.S. Shareholders 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 Target Companies, U.S. Shareholders 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 Unitary Transaction, and (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Unitary Transaction required under (A) the Securities Act and the Exchange Act, and any other applicable U.S. and Canadian, federal, provincial or state securities Laws, (B) the HSR Act, (C) the Competition Act, and (D) any other applicable Law; provided, however, that the Target Companies 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. The Target Companies, U.S. Shareholders and Acquiror shall furnish to each other all information -67- 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) in connection with the transactions contemplated by this Agreement. (b)(i) The Target Companies, U.S. Shareholders and Acquiror shall give (or shall cause their respective subsidiaries or affiliates 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, (A) necessary or advisable to consummate the transactions contemplated in this Agreement, or (B) required to prevent a Target 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"). Without limiting the generality of the foregoing, the Target Companies and U.S. Shareholders agree that the consents described below shall constitute Material Consents, and on and after the date hereof they shall use their reasonable best efforts to secure such Material Consents in writing, at no cost to the U.S. Surviving Corporation, prior to the Effective Time: 1. Consent of Comerica Bank, as Agent, to the assignment by the U.S. Company to the U.S. Surviving Corporation of all rights under Credit Agreement dated as of June 28, 1996. 2. Consent of Ford Motor Company to the assignment by the U.S. Company to the U.S. Surviving Corporation of all rights under (i) Agreement Relating to Fulfillment and Corporate Marketing and Licensing Representation, and (ii) Trademark License Agreement, each dated July 11, 1996. 3. Consent of Roots USA, Inc. and Roots Canada Limited to the assignment by the U.S. Company to the U.S. Surviving Corporation of all rights under an Agreement dated as of February 2, 1996 with the U.S. Company and the Canada Company. (ii) In the event that any party shall fail to obtain a third party consent described in subsection (b)(i), above, without incurring additional premium, penalty or cost (excepting, however, legal costs incurred by the contract principal and charged to a Target Company in connection with such assignment), such party shall use best reasonable efforts, and shall take any such actions reasonably requested by the other party hereto, to minimize any adverse effect upon the Target Companies and Acquiror, their respective subsidiaries, and their respective businesses resulting, or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. -68- (c) From the date of this Agreement until the Effective Time, the Target Companies and U.S. Shareholders shall promptly notify Acquiror in writing of any pending or, to the knowledge of any Target Company, threatened action, proceeding or investigation by any Governmental Entity or any other person (i) challenging or seeking damages in connection with the U.S. Merger, the Canada Reorganization, the Unitary Transaction, the conversion of U.S. Company Stock into Acquiror Common Stock pursuant to the U.S. Merger, the conversion of Canada Holding Company Stock into Acquiror Common Stock pursuant to the Canada Reorganization, and the conversion of Acquiror Sub capital stock into capital stock of the U.S. Surviving Corporation, or (ii) seeking to restrain or prohibit the consummation of the Unitary Transaction, 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 Target Companies, the U.S. Surviving Corporation or their subsidiaries, which in either case is reasonably likely to have a Target 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 Target Companies and Nelson 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 U.S. Merger, the Canada Reorganization, the Unitary Transaction, the conversion of U.S. Company Stock into Acquiror Common Stock pursuant to the U.S. Merger, the conversion of Canada Holding Company Stock into Acquiror Common Stock pursuant to the Canada Reorganization, or the conversion of Acquiror Sub capital stock into capital stock of the U.S. Surviving Corporation, or (ii) seeking to restrain or prohibit the consummation of the Unitary Transaction 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. SECTION 6.09. UPDATED TARGET COMPANY FINANCIAL STATEMENTS. The Target Companies and U.S. Shareholders shall use their reasonable efforts, respectively, to cause Coopers & Lybrand, L.L.P., independent public accountants for the Target Companies and Nelson, to revise and restate the Target Company Financial Statements for the years ended December 31, 1994 and 1995, in the format as previously discussed between the respective financial officers of Acquiror and the U.S. Company to bring them into conformity with the accounting practices and principles utilized by Acquiror and to satisfy the pooling-of-interest rules, and which revised and restated Financial Statements shall be in form and substance reasonably satisfactory to Acquiror. -69- SECTION 6.10. UPDATE DISCLOSURE; BREACHES. From and after the date of this Agreement until the Effective Time, the Target Companies and Nelson, on the one hand, and Acquiror, 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 Unitary Transaction and the other transactions contemplated by this Agreement not to be satisfied, or (ii) the failure of any Target Company, Nelson or Acquiror, as the case may be, to comply with or satisfy any covenant, condition 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 U.S. Merger and the other transactions contemplated by this Agreement not to be satisfied; provided, however, that the delivery of any notice pursuant to this Section 6.10 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. If the Chief Financial Officer shall obtain actual knowledge during the course of his due diligence, or in any other manner prior to the Effective Time, of the occurrence of a change or event which shall cause a Target Company's or U.S. Shareholder's representation or warranty under Article III hereof to become untrue, and thereafter, provided Acquiror shall have had the right to terminate this Agreement in accordance with the provisions of Section 8.01 hereof (due to the magnitude of the breach or misstatement in such representation or warranty), but elected not to terminate this Agreement, Acquiror shall be forever barred, as of and after the Effective Time, from asserting a claim for indemnification under Article IX of this Agreement with respect to such change or event, or otherwise alleging Damages had been incurred or suffered after the Effective Time as a result of such change or event. SECTION 6.11. PUBLIC ANNOUNCEMENTS. Acquiror shall consult with the Target Companies and Nelson before issuing any press release with respect to the Unitary Transaction or this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, including as may be required by Law or the requirements of the NASDAQ. The Target Companies and Nelson acknowledge and agree that any such press release or other public announcement respecting the Unitary Transaction or this Agreement may be disseminated only through the agents of Acquiror, except that following Acquiror's dissemination of a public announcement hereunder, the Target Companies may issue a press release or other public announcement respecting the Unitary Transaction with the prior written consent of Acquiror, which consent shall not be unreasonably withheld. SECTION 6.12. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE U.S. COMPANY. From and after the Effective Time, Acquiror -70- shall cause the U.S. Surviving Corporation to indemnify, defend and hold harmless the present and former officers and directors of the U.S. Company (such U.S. Company present and former officers and directors are collectively, the "Indemnified Parties") against all losses, expenses, claims, damages or liabilities arising out of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement, but specifically excluding damages or liabilities attributable to an inaccuracy in or breach or violation of the representations, warranties, covenants and agreements of the Target Companies made under or pursuant to the Agreement) to the fullest extent permitted or required under Michigan Law (and shall also cause the U.S. Surviving Corporation to advance expenses as incurred to the fullest extent permitted under Michigan Law, provided that the person to whom expenses are advanced provides the undertaking to repay such advances contemplated by Michigan Law). Acquiror and Acquiror Sub agree that all rights to indemnification, including provisions relating to advances of expenses incurred in defense of any claim, action, suit, proceeding or investigation (a "Claim") existing in favor of the Indemnified Parties as provided in each Target Company's Articles of Incorporation or By-Laws, as in effect as of the date hereof, with respect to matters occurring through the Effective Time, shall (subject to the exclusions provided for damages and liabilities attributable to inaccuracies in, and breaches and violations of, this Agreement, as provided above) survive the Unitary Transaction and continue in full force and effect, as provided by Law. SECTION 6.13. ELECTION OF NELSON TO ACQUIROR BOARD; ELECTION OF NELSON AS ACQUIROR VICE CHAIRMAN. (a) During the unexpired term (and any extension term) of Nelson's Employment Agreement in the form attached to this Agreement as Exhibit D, and thereafter, so long as Nelson shall continue to hold at least thirty-five percent (35%) of the shares of Acquiror Common Stock issued to him in the Unitary Transaction (hereafter, the "Nominating Period"), Acquiror will use its best efforts, subject to applicable fiduciary requirements under Illinois Law (and any other principles or rules which may apply to the composition of Acquiror's Board of Directors, including rules promulgated by the Commission), to maintain two (2) seats on Acquiror's Board of Directors to be filled by Nelson and a second individual experienced in matters pertaining to public corporations who is recommended by Nelson and approved by the then-acting Chief Executive Officer of Acquiror ("Nelson's Nominee"). (b) Throughout the Nominating Period, Acquiror shall use its best efforts and take all reasonable steps to cause two (2) seats on its Board of Directors to be reserved for Nelson and Nelson's Nominee. The parties agree that such seats may be newly established by amendment to Acquiror's By-Laws, or -71- pre-existing, through a prior vacancy in Acquiror's Board of Directors. To the extent Acquiror, consistent with fiduciary requirements and principles, is unable to nominate Nelson and/or Nelson's Nominee to such seats on the Board, then Acquiror shall refrain from nominating any person to such seats, unless such action would itself violate applicable requirements and principles. Nelson acknowledges that, due to the fact Acquiror's Directors are elected annually by its public shareholders, Acquiror is unable to guarantee the election of Nelson and Nelson's Nominee to Acquiror's Board. (c) As soon as practicable following the Effective Time, but not later than ten (10) days prior to Acquiror's solicitation of proxies in connection with the Annual Meeting of the Shareholders next following the Effective Time, Acquiror shall cause a Special Meeting of its Directors to be convened for the purpose of voting on the appointment of Nelson and Nelson's Nominee to (i) any vacancy then existing in the Board, or (ii) to new seat(s) previously established by action of the Directors of Acquiror. To the extent the Directors of Acquiror do not elect Nelson and Nelson's Nominees to such seats on the Board, Acquiror agrees, to the extent consistent with applicable fiduciary requirements and principles, to conduct a reasonable solicitation of its shareholders prior to the next Annual Meeting for the express purpose of securing the election of Nelson and Nelson's Nominee to Acquiror's Board of Directors. Until the Nominating Period shall have expired, and except to the extent prohibited by Law or applicable fiduciary requirements and principles, Acquiror shall refrain from withdrawing its recommendation of or support for Nelson and Nelson's Nominee in subsequent solicitations mailed to its shareholders. (d) Nelson acknowledges and agrees that Lou Weisbach, Acquiror's current Chief Executive Office, and his successor, shall have the sole authority and discretion, exercised in a reasonable manner and with due regard for the significant interest in Acquiror's Common Stock owned by Nelson and the other U.S. Shareholders, to approve or disapprove of Nelson's Nominee; provided, however, Nelson shall be entitled to receive an adequate explanation of (i) the reasons for any such disapproval, and (ii) the separate criteria, if any, which must be satisfied by Nelson's Nominee. (e) As soon as practicable following the Effective Time, Acquiror shall cause its directors to amend Acquiror's By-Laws to include the office of Vice Chairman (which office is described on Exhibit C to this Agreement) as an elected position of Acquiror, and shall so elect Nelson to such position. Thereafter, until the Nominating Period shall have expired, Acquiror's Directors shall nominate and elect Nelson as Vice Chairman of Acquiror at each Annual Meeting of -72- the Board of Directors of Acquiror. Once so nominated and elected, Acquiror's Directors shall not, until expiration of the Nominating Period and except to the extent of applicable fiduciary requirements and principles, remove Nelson from such position. SECTION 6.14. OBLIGATIONS OF ACQUIROR SUB. Acquiror shall take all reasonable action necessary to cause of Acquiror Sub to perform its obligations under this Agreement and to consummate the Unitary Transaction on the terms and conditions set forth in this Agreement. SECTION 6.15. OBLIGATIONS OF THE TARGET COMPANIES. Each Target Company shall take all reasonable action necessary to cause the others to perform its obligations under this Agreement and to consummate the Unitary Transaction on the terms and conditions set forth in this Agreement. SECTION 6.16. OBLIGATIONS OF THE U.S. SHAREHOLDERS. Each U.S. Shareholder shall take all reasonable action necessary to cause the Target Companies to perform their respective obligations under this Agreement and to consummate the Unitary Transaction on the terms and conditions set forth in this Agreement. SECTION 6.17. REAL ESTATE PURCHASE. (a) At the Effective Time, the U.S. Surviving Corporation, as successor to the U.S. Company, shall purchase from Maple Lane Acquisition, L.L.C., a Michigan Limited Liability Company and affiliate of Nelson ("Nelson's LLC"), and Nelson's LLC shall sell, convey and assign to the U.S. Surviving Corporation, the vacant parcel of real property located at 1499 Maple Lane, Troy, Oakland County, Michigan, and more particularly described on Schedule 6.17(a) attached hereto or all of the outstanding interests in Nelson's LLC (the "Maple Property"), together with all rights of way, privileges and appurtenances pertaining thereto, and all foundations, structures, wiring, plumbing and property of every kind, character and description appurtenant thereto. The purchase price for the Maple Property shall be that quantity of unregistered shares of Acquiror Common Stock as shall have an aggregate market value (determined in accordance with the last sentence of this subsection) of one million dollars ($1,000,000) LESS the value of the adjustments described in subsection (b) hereof. Such Unregistered Shares shall be subject to the restrictions and rights otherwise set forth in this Agreement and made applicable to Unregistered Shares issuable to Nelson in the Unitary Transaction, and shall be registered for resale in accordance with a Resale Prospectus on the last date provided in Section 6.03 hereof; provided, however, no Unregistered Shares issuable to Nelson in respect of the sale of the Maple Property shall be subject -73- to Acquiror's right of set-off arising upon a breach of the other provisions of this Agreement, and such shares shall be subject to cancellation or set-off, if at all, for a breach in or violation of the representations, warranties, covenants and agreements of Nelson and Nelson's LLC set forth in the agreements prepared in accordance with the provisions of Section 6.17(c) hereof. For purposes of this Section 6.17(a), each share of Acquiror's Common Stock issuable in respect of the Maple Property shall be valued at the mean between the bid and ask prices for shares of Acquiror Common Stock as reported by the NASDAQ National Market or other securities exchange on which the Acquiror Common Stock is traded ("NASDAQ") as of the close of trading on the date of this Agreement. (b) The purchase price for the Maple Property shall be reduced by the unamortized value of all assets or costs reflected in the Interim Target Company Disclosure Schedules which are attributable or pertain to, or have been incurred in connection with, the Maple Property (hereafter, "Construction Plans"), including, without limiting the generality of the foregoing, the following assets: (i) Those certain architectural plans for the construction of an office/ warehouse complex prepared by Ben Tiseo Architects, and approved by the City of Troy, Michigan; (ii) That certain Construction Contract with Contractor International Development Co. of Farmington Hills, Michigan; (iii) That certain Construction Loan Agreement with Comerica Bank; and (iv) Excavation costs, tear-down costs for any structures previously in place on the Maple Property, foundation costs, land acquisition costs, capitalized interest and construction loan principal payments, and real estate taxes attributable to the Maple Property. (c) Within fifteen (15) days after the date of this Agreement, the Target Companies, Nelson and Nelson's LLC shall provide Acquiror with all documents, instruments and other items in their possession (or in the possession of an affiliate) which relate to the Maple Property, including the Construction Plans, surveys, charts, warranties, other plans, designs and the like. Not later than forty-five (45) days following the date of this Agreement, Acquiror Sub, the U.S. Company, Nelson and Nelson's LLC shall enter into binding agreements for the purchase and sale of the Maple Property in accordance with the terms of this Section 6.17, pursuant to instruments and other documents required or customary in -74- connection with the sale of real property under Michigan Laws, all in the condition provided for herein, with full warranty of title, and in form and substance reasonably satisfactory to Acquiror. Such agreements shall contain provisions for Nelson's (i) repurchase of the Maple Property, at Acquiror's election, for an all-cash purchase price which is not less than the price reflected in Section 6.17(a) hereof, plus the sum of all construction expenditures and interest on construction loans incurred with respect thereto after the date hereof, and (ii) obligation to enter into a lease with the U.S. Surviving Corporation, at Acquiror's option, for such repurchased improved Maple Property (should the repurchase election have been exercised) and, until the Maple Property has been fully improved and occupied, such other commercial real properties as have been previously leased to the Target Companies, at rentals which do not exceed market rates. (d) At least forty-five (45) days prior to the Effective Time, Nelson shall cause Nelson's LLC, at its sole cost, to furnish Acquiror a title commitment in form and substance reasonably satisfactory to Acquiror ("Title Commitment") for the issuance of an owner's title insurance policy on ALTA Form B or other form reasonably acceptable to Acquiror ("Title Policy") for the Maple Property. The Title Commitment shall be issued in the name of Acquiror for an amount of title coverage equal to one hundred thousand dollars ($100,000). The Title Commitment shall set forth the state of title of the Maple Property as of the date of such Title Commitment (which date shall be a date subsequent to the date of this Agreement), and shall describe all exceptions or conditions to title or usage, including, but not limited to, easements, zoning and other restrictions, rights-of-way, covenants, reservations, mortgages, liens and other encumbrances, whether or not separately insured, waived or cured by easement or other endorsement. No information disclosed by the Title Commitment shall materially or adversely affect the value of, or the ability of the U.S. Surviving Corporation to operate, occupy or use, the Maple Property. (e) At least ten (10) days prior to the Effective Time, Nelson shall cause Nelson's LLC, at its sole cost, to furnish Acquiror a so-called "Phase I" environmental impact audit for the Maple Property, commenced not earlier than the date of this Agreement, by a licensed environmental consultant in the general vicinity of the insured property selected by the U.S. Company and reasonably acceptable to Acquiror. No information respecting the Maple Property coming to the attention of Acquiror prior to the Effective Time as a result of such Phase I audit shall (i) disclose necessity for performing material environmental remediation activities at such property, or (ii) otherwise materially affect the value of, or Acquiror's -75- ability to construct upon, operate, occupy or use, the Maple Property. SECTION 6.18. INITIAL EXECUTIVE STOCK OPTION GRANTS. At the Effective Time and as directed by Nelson, Acquiror shall issue a total of one hundred fifty thousand (150,000) options (the "Initial Options") to acquire one hundred fifty thousand (150,000) shares of Acquiror Common Stock pursuant to the terms of the HA-LO Industries, Inc. Stock Plan (the "Plan") to certain executives employed by the U.S. Surviving Corporation and the Canada Company. Acquiror agrees to amend the Plan as necessary to fulfill the requirements of this Section 6.18. SECTION 6.19. ADDITIONAL EXECUTIVE STOCK OPTION GRANTS. In addition to the Initial Options, Acquiror shall issue a total of three hundred fifty thousand (350,000) options (the "Additional Options") to acquire three hundred fifty thousand (350,000) shares of Acquiror Common Stock pursuant to the terms of the Plan. The issuance of the Additional Options shall be subject to the following terms and conditions. (a) Acquiror shall issue the Additional Options in four (4) annual installments of eighty seven thousand five hundred (87,500) options each. The issuance of each installment is subject to the achievement of certain annual profitability goals for the U.S. Surviving Corporation and the Canada Company, to be set by mutual agreement of Nelson and Lou Weisbach from time to time for each of the four (4) installments, the first such goal to be established within thirty (30) days after the Effective Time. As promptly as possible after the end of a year as to which the profitability goal has been satisfied, the entire installment shall be granted to such company executive employees designated by Nelson. (b) The Additional Options shall then, when issued, vest according to the Plan and shall have an exercise price per option equal to the arithmetic mean between the bid and the ask price of Acquiror Common Stock at the close of business on the date of grant. (c) Acquiror agrees to cause the amendment of the Plan as necessary to fulfill the requirements of this Section 6.19. If for any reason Acquiror does not amend the Plan, Acquiror shall create a separate non-qualified stock option plan for the executives of the U.S. Surviving Corporation and the Canada Company and as necessary, cause the registration of the shares of Acquiror Common Stock covered thereunder with respect to the Additional Options. -76- 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 Unitary Transaction 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. There shall not have been instituted and there shall not be pending any action or proceeding by a Governmental Entity, and no such action or proceeding shall have been specifically threatened in a written communication from a representative of a Governmental Entity with authority to institute such an action or proceeding, before any court of competent jurisdiction or governmental agency or regulatory or administrative body, and no order or decree shall have been entered in any action or proceeding before such court, agency or body (i) imposing or seeking to impose limitations on the ability of Acquiror to acquire or hold or to exercise full rights of ownership of any securities of the U.S. Surviving Corporation, Canada Holding Company-1 or any of their respective subsidiaries or affiliates, (ii) imposing or seeking to impose limitations on the ability of Acquiror to combine and operate the business and assets of any Target Company with any of Acquiror's subsidiaries or other operations, (iii) imposing or seeking to impose other sanctions, damages or liabilities arising out of the Unitary Transaction on Acquiror, Acquiror Sub, the U.S. Company, the Canadian Target Companies, any of their respective officers or directors, and Nelson, (iv) requiring or seeking to require divestiture by Acquiror of all or any significant portion of the business, assets or properties of any Target Company or any of its subsidiaries, or (v) restraining, enjoining or prohibiting or seeking to restrain, enjoin or prohibit the consummation of the U.S. Merger, the Canada Reorganization, or both. (b) HSR ACT. The applicable waiting period, together with any extensions thereof, under the HSR Act shall have expired or been terminated. (c) COMPETITION ACT. If deemed reasonably necessary, the Director under the Competition Act shall have informed the parties in writing that no approval, consent or application for an order is required under the Competition Act; provided, if approval is required thereunder, then such approval, consent or order shall have been received. -77- (d) SECTION 116 CERTIFICATE. Nelson shall have delivered to Acquiror a certificate issued under Section 116 of the Treaty indicating a certificate limit equal to the value of Acquiror's Common Stock issued in connection herewith. Section 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligations of Acquiror to effect the Unitary Transaction 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 Target Companies and Nelson contained in this Agreement shall be true and correct in all material respects as of the Effective Time, 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 each Target Company to that effect (subject to provisions for identified breaches of or misstatements in representations and warranties); provided, however, that those representations and warranties which address matters only as of a particular date shall remain true and correct in all material respects as of such date. (b) AGREEMENTS AND COVENANTS. Nelson and each Target Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it or him on or prior to the Effective Time, and Acquiror shall have received a certificate of the Chief Executive Officer (acting in such capacity) of each Target Company to that effect. (c) CONSENTS UNDER AGREEMENTS. The Material Consents shall have been obtained. (d) AFFILIATE AGREEMENTS. Acquiror shall have received from each U.S. Shareholder, and any other person who may be deemed to have become an affiliate or shareholder of a Target Company after the date of this Agreement and on or prior to the Effective Time (or affiliate of Acquiror after the Effective Time), a duly executed Affiliate Agreement in the form of Exhibit B. (e) EMPLOYMENT AND OTHER AGREEMENTS. Acquiror, on behalf of the U.S. Surviving Corporation, shall have received from (i) Nelson, an executed Employment Agreement in the form of Exhibit D hereto, (ii) Steven J. Lemberg, an executed Addendum to Employment Agreement in the form of Exhibit E hereto, (iii) Eric Rosenbloom, an executed Addendum to Employment Agreement in the form of Exhibit F hereto, (iv) Alan Baldwin, an executed Addendum to Employment Agreement in the form of Exhibit G hereto, and (v) Mark Freed and Jon -78- Sloan, executed Employment Agreements in the form of Exhibit H hereto, and all such Employment Agreements, as amended, shall be in full force and effect at and as of the Effective Time. In addition, Acquiror shall have received from Nelson an executed Agreement and Covenant Against Unfair Competition, in the form of Exhibit I hereto, and from Nelson and each other individual executing an Employment Agreement or Addendum thereto pursuant to this subsection (e), a General Release of Claims, in the form of Exhibit J hereto. (f) RESIGNATIONS. Except as specifically provided in the Employment Agreements referenced in Section 7.02(e), above, each Director or Officer of a Target Company shall provide such Target Company with his written resignation from office, effective as of the Effective Time. (g) THE CANADA REORGANIZATION. Acquiror, Nelson and the Canadian Target Companies shall have closed the transactions under the Canada Reorganization. (h) CASH ACCOUNTS. Acquiror shall have received, if it so requests, terminations of authority, effective as of the Effective Time, by each employee or agent of a Target Company having signatory or other authority over such Target Company's cash, checking, lock box, safe deposit and other depositary arrangements, and for each institution described in Section 3.22 to the Target Company Disclosure Schedules. (i) OPINION OF COUNSEL. Acquiror shall have received the opinion of Miro Weiner & Kramer, legal counsel for the Target Companies, dated as of the Effective Time, with respect to those matters set forth in Exhibit K hereto, and in a form reasonably acceptable to Acquiror. (j) COMPLETE FINANCIAL INFORMATION. Acquiror shall have received true and complete financial information from the Target Companies and U.S. Shareholders in the form required, in the reasonable opinion of Arthur Andersen, L.L.P., the independent auditor for Acquiror, to be included in any and all of Acquiror's filings with the Commission after the Effective Time. In addition, Acquiror shall have received the Target Company Financial Statements as provided in Section 6.09 hereof. (k) DIRECTOR RESOLUTIONS. Acquiror shall have received resolutions of each Target Company's Board of Directors, dated after the date hereof and immediately prior to the Effective Time, and certified by such Target Company's Secretary, unanimously approving, ratifying and confirming (1) all matters and things done by the officers and directors of such Target Company at any time in the conduct its business or otherwise during the course of operations, and (2) the -79- consummation of the Unitary Transactions and other transactions contemplated by this Agreement. (l) SHAREHOLDER RESOLUTIONS. Acquiror shall have received resolutions of each Target Company's shareholders, dated after the date hereof and immediately prior to the Effective Time, and certified by such Target Company's Secretary, unanimously approving, ratifying and confirming (1) all matters and things done by the officers and directors of such Target Company at any time in the conduct its business or otherwise during the course of operations, and (2) the consummation of the Unitary Transactions and other transactions contemplated by this Agreement. (m) WAIVER OF AGREEMENT. Acquiror shall have received a written waiver and termination, in form and substance satisfactory to Acquiror, of the provisions of Section 16 of that certain Asset Purchase Agreement dated as of February 27, 1995, and described at Item 1 of Section 3.35 to the Target Company Disclosure Statements. (n) OTHER DOCUMENTS AND INSTRUMENTS. Acquiror shall have received, upon its written request given at least two (2) days prior to the Effective Time, such other certificates, instruments and other documents reasonably required to effectuate the transactions contemplated hereby, or to confirm to Acquiror the effectiveness thereof. SECTION 7.03. CONDITIONS TO OBLIGATIONS OF THE TARGET COMPANIES AND NELSON. The obligations of the Target Companies and Nelson to effect the Unitary Transaction 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 contained in this Agreement shall be true and correct in all material respects as of the Effective Time, as though made on and as of the Effective Time, and the Target Companies and U.S. Share-holders shall have received a certificate of the Chief Operating Officer or Chief Financial Officer of Acquiror to that effect (subject to provisions for identified breaches of or misstatements in representations and warranties); provided, however, that those representations and warranties which address matters only as of a particular date shall remain true and correct in all material respects as of such date. (b) AGREEMENTS AND COVENANTS. Acquiror and its subsidiaries shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time, and the Target Companies and Nelson -80- shall have received a certificate of the Chief Operating Officer or Chief Financial Officer of Acquiror to that effect. (c) CONSENTS UNDER AGREEMENTS. Acquiror shall have obtained the consent or approval of each person whose consent or approval shall be required in connection with the Unitary Transaction under all loan or credit agreements, notes, mortgages, indentures, leases or other agreements or instruments to which it or any of its subsidiaries is a party, except those agreements or instruments for which failure to obtain such consents and approvals would, in the Target Companies' reasonable estimation, not have a Target Company Adverse Effect prior to or after the Effective Time, or an Acquiror Adverse Effect after the Effective Time. (d) AFFILIATE AGREEMENTS. Each person entering into an Affiliate Agreement shall have received an executed counterpart thereof from Acquiror. (e) EMPLOYMENT AGREEMENTS. Each individual entering into an Employment Agreement/Addendum with the U.S. Surviving Corporation or Canada Company shall have received an executed counterpart thereof from Acquiror and the U.S. Surviving Corporation or Canada Company, as the case may be. (f) OPINION OF COUNSEL. The Target Companies and U.S. Shareholders shall have received the opinion of Neal Gerber & Eisenberg, counsel for Acquiror, dated as of the Effective Time, with respect to those matters set forth in Exhibit M hereto, and in a form reasonably acceptable to the Target Companies. (g) OTHER DOCUMENTS AND INSTRUMENTS. The Target Companies and U.S. Shareholders shall have received, upon their written request given at least two (2) days prior to the Effective Time, such other certificates, instruments and other documents reasonably required to effectuate the transactions contemplated hereby, or to confirm to the Target Companies and U.S. Shareholders the effectiveness thereof. (h) RELEASE OF NELSON GUARANTEES. Nelson shall have received from Acquiror a release, in form and substance reasonably satisfactory to Nelson, of Nelson's guarantee obligations under those Agreements described in Section 3.35 to the Target Company Disclosure Schedules. -81- ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. TERMINATION. This Agreement, and the Unitary Transaction, may be terminated at any time prior to the Effective Time in the following manner: (a) MUTUAL CONSENT. By mutual consent of Acquiror and the Target Companies (or Nelson acting on their behalf and on behalf of the other U.S. Shareholders). (b) TARGET BREACH. By Acquiror, if (i) there has been a breach by a Target Company or U.S. Shareholder of any covenant or agreement on their part to be performed under this Agreement, or (ii) Acquiror shall reasonably determine that any one or more of the representations and warranties of the Target Companies and U.S. Shareholders contained in Article III of this Agreement is in breach, and the aggregate potential Damages which could be sustained, directly or indirectly, by Acquiror as a result of such breach exceeds five hundred thousand dollars ($500,000) (hereafter, the "Termination Threshold"); provided, however, (x) the Target Companies and U.S. Shareholders shall have the right to cure any such breach in accordance with the provisions of Section 8.01(h) hereof, and (y) Acquiror shall have the right to compel Nelson to cure any such breach in accordance with the provisions of Section 8.01(i) hereof. (c) ACQUIROR BREACH. By Nelson (acting alone and on behalf of the Target Companies and other U.S. Shareholders), if (i) there has been a material breach by Acquiror of any covenant or agreement on its part to be performed under this Agreement, and such breach is not cured within thirty (30) days following receipt by Acquiror of written notice thereof from the Target Companies or Nelson, or (ii) Nelson shall reasonably determine that any one or more of the representations and warranties of Acquiror contained in Article IV of this Agreement is in material breach, and the aggregate potential Damages which could be sustained, directly or indirectly, by Nelson and the Target Companies as a result of such breach exceeds five hundred dollars ($500,000). (d) INJUNCTION. By Acquiror or Nelson (acting alone and on behalf of the Target Companies and other U.S. Shareholders) 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 U.S. Merger or the Canada Stock Reorganization shall have become final and nonappealable. -82- (e) OUTSIDE DATE. By Acquiror or Nelson (acting alone and on behalf of the Target Companies and other U.S. Shareholders) if the Unitary Transaction shall not have been consummated on or prior to January 31, 1997 (the "Outside Date") unless otherwise mutually agreed to by the parties. (f) TARGET COMPETING TRANSACTION. By Acquiror, if any Target Company or U.S. Shareholder shall have engaged or shall propose to engage in any Competing Transaction (as defined in Section 5.02(h) hereof. (g) ACQUIROR REFUSAL TO CLOSE. By Nelson (acting alone and on behalf of the Target Companies and other U.S. Shareholders), if Acquiror shall have refused to consummate the U.S. Merger or Canada Reorganization, and (i) Acquiror shall not have exercised its right to terminate this Agreement under any provision of this Section 8.01, and (ii) no Target Company or U.S. Shareholder is otherwise in breach of the provisions of this Agreement in an amount that would give Acquiror the right to terminate this Agreement. (h) TARGET CURE PROVISIONS. Acquiror shall not exercise its termination rights under this Section 8.01 until the expiration of thirty (30) days following a written election by the Target Companies and Nelson (acting alone and on behalf of the other U.S. Shareholders) to cure a breach or violation of any covenant, agreement, representation or warranty set forth in this Agreement; provided, however, such election by the Target Companies and U.S. Shareholders, and the manner in which any such breach is cured, shall be in strict accordance with the following provisions: (i) In the event there has been a breach by a Target Company or U.S. Shareholder of any covenant or agreement on their part to be performed under this Agreement, then immediately following written notice by the Target Companies and Nelson to Acquiror given not later than the Outside Date, the Target Companies and U.S. Shareholders shall have thirty (30) days in which to cure such breach of covenant or agreement, and in the event such covenant or agreement is cured, (x) the new Outside Date shall be April 1, 1997, and (y) unless there shall be any new or further breach hereunder by the Target Companies or U.S. Shareholders, Acquiror shall not have the right to terminate this Agreement under Section 8.01(b)(i); or (ii) In the event there has been a breach by a Target Company or U.S. Shareholder of any representation or warranty on their part made under this Agreement, then immediately following written notice by the Target Companies and Nelson to Acquiror given not later than the -83- Outside Date, the Target Companies and U.S. Shareholders shall have thirty (30) days in which to fully cure the matter or event which has resulted in such breach of representation or warranty, and in the event such breach of representation or warranty is cured, (x) the new Outside Date shall be April 1, 1997, and (y) unless there shall be any new or further breach hereunder by the Target Companies or U.S. Shareholders, Acquiror shall not have the right to terminate this Agreement under Section 8.01(b)(ii); provided, however, if such representation or warranty is not capable of cure and relates to a loss or expense incurred by a Target Company prior to the Effective Time or which may be incurred by a Target Company after the Effective Time, then Nelson shall have the right, prior to the expiration of such thirty (30) day period, to cure such breach by contributing cash to the affected Target Company equal to the difference between (1) the total loss or expense incurred or to be incurred by such Target Company, LESS (2) that portion of the Termination Threshold, if any, which exceeds the aggregate potential Damages which could be sustained, directly or indirectly, by Acquiror as a result of all breaches of this Agreement by the Target Companies and U.S. Shareholders prior to the Effective Time, and Acquiror agrees that upon such contribution by Nelson, the representation or warranty which was the subject matter of the breach shall be deemed cured for purposes of this Agreement. (i) ACQUIROR FORCED CURE PROVISIONS. In the event there has been a breach by a Target Company or U.S. Shareholder of any representation or warranty (or series thereof) on their part made under this Agreement, and the aggregate potential Damages which could be sustained, directly or indirectly, by Acquiror as a result of all such breaches exceeds the Termination Threshold, then in the event Nelson shall not elect to cure such breach in accordance with the provisions of Section 8.01(h) hereof, and immediately following Acquiror's written notice to Nelson given not later than the Outside Date, Nelson shall be obligated to cure such breach within thirty (30) days following receipt of such notice by making a cash contribution to the affected Target Company equal to the difference between (x) the total loss or expense incurred or to be incurred by such Target Company, LESS (y) that portion of the Termination Threshold, if any, which exceeds the aggregate potential Damages which could be sustained, directly or indirectly, by Acquiror as a result of all breaches of this Agreement by the Target Companies and U.S. Shareholders prior to the Effective Time, and Acquiror agrees that upon such contribution by Nelson, the representations or warranties which were the subject matter of its notice shall be deemed cured for purposes of this Agreement; provided, however, -84- Nelson shall not be obligated to contribute more than $1 million to the affected Target Companies, and in the event Acquiror's aggregate potential Damages from all breaches exceeds $1.5 million, then Acquiror shall be required to waive its claims for Damages in excess of $1.5 million or, alternatively, it may elect to terminate this Agreement in accordance with Section 8.01(b); and provided, further, if Nelson breaches his obligations under this subsection (i), Acquiror shall, if it otherwise elects to close the Unitary Transaction, retain all remedies at law or in equity to proceed against Nelson on account of such breach. SECTION 8.02. EFFECT OF TERMINATION. Upon termination of this Agreement in accordance with the provisions of Section 8.01 hereof, the remedies of the terminating party shall be limited to those provided under Sections 8.03 and 9.02, and except to the extent necessary for the enforcement of such party's rights thereunder, this Agreement shall be null and void, and all other rights and obligations of Acquiror, Acquiror Sub, the U.S. Company, the Canada Company, Canada Holding Company-1, Canada Holding Company-2 and U.S. Shareholders shall forthwith cease and have no further force or effect. SECTION 8.03. FEES AND EXPENSES. (a) Except as specifically provided in subsections (d) and (e), 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. (b) As used in this Agreement, the term "Expenses" shall include all reasonable out-of-pocket expenses and disbursements (including, without limitation, all reasonable fees and expenses of counsel and accountants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement, the preparation of the Resale Prospectus and all other matters related to the closing of the transactions contemplated herein. As used herein, the term "Payment Date" shall mean the tenth business day following a party's receipt of an election to terminate this Agreement pursuant to Section 8.01 hereof. (c) The Target Companies and U.S. Shareholders agree that if Acquiror shall terminate this Agreement pursuant to Section 8.01(b), and Acquiror shall be without fault of its own, on the Payment Date, the Target Companies shall pay to Acquiror an amount equal to the sum of the Expenses incurred by Acquiror in connection with this Agreement. -85- (d) Acquiror agrees that if the Target Companies shall terminate this Agreement pursuant to Section 8.01(c), and each of the Target Companies and U.S. Shareholders shall be without fault of their own, on the Payment Date, Acquiror shall pay to the Target Companies an amount equal to the sum of the Expenses incurred by them in connection with this Agreement. (e) The Target Companies agree that if Acquiror shall terminate this Agreement pursuant to Section 8.01(f), on the Payment Date the Target Companies shall jointly and severally pay to Acquiror an amount equal to fifteen million dollars ($15,000,000) plus all of the Expenses incurred by Acquiror in connection with this Agreement. (f) Acquiror agrees that if the Target Companies shall terminate this Agreement pursuant to Section 8.01(g) without fault of their own, on the Payment Date Acquiror shall pay to the Target Companies an amount equal to fifteen million dollars ($15,000,000) plus all of the Expenses incurred by the Target Companies in connection with this Agreement. (g) 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 payments owing in 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. (h) Notwithstanding the provisions of this Article VIII, in the event a party shall refuse to comply with the terms and provisions of this Agreement, the other party may bring an action to specifically enforce this Agreement, each party hereby acknowledging and agreeing that (i) time is of the essence of this Agreement, (ii) a party may suffer irreparable injury in the event of a wilful breach of this Agreement, and (iii) monetary damages from a party's wilful failure to observe the provisions hereof may be impossible to calculate; provided, however, no action to specifically enforce this Agreement may be brought by any party who actually receives the amounts provided under Sections 8.03(d) or (e) hereof. -86- ARTICLE IX INDEMNIFICATION MATTERS SECTION 9.01. SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. Notwithstanding the closing of the Unitary Transaction, the representations and warranties of Nelson, the Target Companies and Acquiror contained in this Agreement shall survive the Effective Time until sixty (60) days following the audit by Acquiror's independent accountants of the Target Companies' results of operations for the fiscal year ending December 31, 1997 (the expiration of such sixty (60) days is hereafter the "Audit Cut-Off"). 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. (a) From and after the Effective Time, the U.S. Shareholders covenant and agree they shall jointly and severally indemnify and save harmless Acquiror from and against any and all Damages incurred or suffered directly or indirectly by Acquiror and proximately resulting from the breach of any one or more of the representations or warranties of Nelson and the Target Companies made in this Agreement. Except as provided in Section 9.03 hereof, such indemnification by the U.S. Shareholders shall be subject to the following limitations: (i) Any and all claims by Acquiror for Damages pursuant to this Section 9.02 shall be enforceable, if at all, only against the shares of Acquiror Common Stock issuable to the U.S. Shareholders in the Unitary Transaction and further limited as provided herein; provided, however, the U.S. Shareholders may, upon reasonable notice to Acquiror, elect to pay any claim hereunder in cash, opposed to set-off against Unregistered Shares. (ii) In valuing the Unregistered Shares for purposes of Acquiror's set-off and indemnification rights under this Section 9.02, such Unregistered Shares shall in all events be valued at the average closing sale price of a -87- share of Acquiror Common Stock as reported by the NASDAQ for the ten (10) trading days prior to the Effective Time (the "Average Value"). In illustration of the foregoing, if an indemnification claim for thirty thousand dollars ($30,000) is asserted, and the Average Value is calculated at thirty dollars ($30) per share, then subject to clause (iii) herein, and notwithstanding that the fair market value of such shares may be higher at the time, one thousand (1,000) shares of Acquiror Common Stock shall be subject to set-off in satisfaction of such claim. Each U.S. Shareholder acknowledges that any such set-off shall be treated as a reduction of the share consideration received in the Unitary Transaction, and agree that any and all Returns filed in connection with the Unitary Transaction after such set-off shall so reflect. (iii) Acquiror's right of indemnification under this Section 9.02 shall in each and every instance be limited to the set-off against and cancellation of no greater than nine percent (9%) of the total number of shares of Acquiror Common Stock issued in the Unitary Transaction. Thus, if all two million two hundred fifty thousand (2,250,000) shares of Acquiror Common Stock are issued to the U.S. Shareholders in accordance with the provisions of Article II, then only two hundred two thousand five hundred (202,500) of such shares, valued in accordance with clause (ii), above, shall be subject to set-off hereunder. (iv) Acquiror shall not be entitled to any recovery under this Section 9.02 unless a claim for indemnification is made prior to the Audit Cut-Off. (v) Acquiror shall not be entitled to any recovery for Damages (or portion thereof) which are attributable to (x) amounts for which Acquiror has received (or is indirectly entitled to receive) proceeds of insurance under a policy which was in effect at the Effective Time with respect to the matter for which indemnification is otherwise available hereunder, or (y) the actual amounts of Closing Reserves created in or added to the Interim Target Company Financial Statements prior to the Effective Time by the U.S. Company, but only to the extent such amounts were created or added at the specific request of Acquiror's Treasurer or Chief Financial Officer. (vi) Acquiror shall not be entitled to (i) make any indemnification claim unless such claim equals or exceeds one thousand dollars ($1,000); and (ii) recover any amount for such allowed indemnification claims under this -88- Section 9.02 unless and until the aggregate Damages which Acquiror is entitled to recover in respect of all such claims exceeds five hundred thousand dollars ($500,000) LESS the amount of any Damages sustained by Acquiror as a result of any breach of representation or warranty determined prior to the Effective Time and used in the calculation of the Termination Threshold under Section 8.01(b)(ii) hereof (such difference is hereafter the "Basket"), and only to the extent such Damages exceed the Basket. (vii) Acquiror shall not be entitled to recover any amount for indemnification claims under this Section 9.02 for Damages arising solely from the failure to obtain a Material Consent; provided, however, that the U.S. Shareholders and the Target Companies have used reasonable best efforts to obtain such Material Consent. SECTION 9.03. SPECIAL PROVISIONS RELATING TO CERTAIN TAX LIABILITIES AND OTHER MATTERS. Anything in this Agreement to the contrary notwithstanding: (a) The U.S. Shareholders shall be primarily liable for and shall pay directly all foreign, federal, state and local income Taxes imposed upon, assessed against or attributable to the U.S. Company, and any Taxes calculated or measured with respect to the revenues, receipts, gross profits or net profits of the U.S. Company, in each case attributable to periods (or portions thereof) ending on or prior to the Effective Time. In addition, the U.S. Shareholders covenant and agree they shall indemnify and save harmless Acquiror from and against any and all Damages incurred or suffered directly or indirectly by Acquiror and resulting from the Taxes described in the preceding sentence, or attributable to Taxes which would not have been payable by or assessable against the U.S. Company if a valid S Corporation Election had been in effect with respect to the U.S. Company during such Tax periods. (b) In the event of a recharacterization by any taxing authority of the employment status of a Target Company's sales representatives, such that the representations of the Target Companies and U.S. Shareholders set forth in Section 3.12(a) (iv) or (xii) are breached or otherwise incorrect, the U.S. Shareholders covenant and agree they shall, subject to application of the Basket under Section 9.02(a)(vi) hereof, indemnify and save harmless Acquiror from and against any and all Taxes, interest and penalties incurred or suffered by the U.S. Surviving Corporation or Acquiror, and resulting from such recharacterization. -89- (c) Subject to application of the Basket under Section 9.02(a)(vi) hereof, the U.S. Shareholders covenant and agree they shall indemnify and save harmless Acquiror from and against any and all Damages incurred or suffered directly or indirectly by Acquiror and proximately resulting from or attributable to (i) Obsolete Program Inventory Costs, determined in accordance with the provisions of Section 3.33 hereof, and (ii) slow moving or excessive products reflected in the inventories of the Target Companies as of December 31, 1996, and determined below. To the extent that, during the period from January 1, 1997 through completion of the audit by Acquiror's independent accountants of the Target Companies' results of operations for the fiscal year ending December 31, 1997, the Target Companies are unable to sell or dispose of at least ninety-five percent (95%) of the entire quantity of product items included in each "product unit" reflected in the inventories of the Target Companies as of December 31, 1996 (the "Base Shortfall"), or the Target Companies' net revenues from the sale of product items so reflected are less than the extended cost therefor (the "Secondary Shortfall"), then in each case, at the Audit Cut-Off, the U.S. Shareholders shall indemnify Acquiror for the Base Shortfall and the Secondary Shortfall, subject to the Basket, by payment of such Shortfall(s) to Acquiror, or by set-off of an amount equal to such Shortfall(s) against Unregistered Shares in accordance with the provisions of this Article IX, as Nelson shall determine. For purposes of this subsection, (1) the Base Shortfall shall equal the extended cost of all items included in each product unit, and remaining unsold as of the applicable date, and (2) the Secondary Shortfall shall mean the amount by which net revenues from the sale such product items is less than the extended cost therefor. As used herein, the term "product unit" shall mean each separate product or merchandise unit offered for sale by a Target Company. Product units shall be identified by vendor code, product code or such other reasonable tracking method as Acquiror shall determine. (d) Notwithstanding the Basket, the U.S. Shareholders shall indemnify and hold Acquiror harmless from and against any and all Damages incurred or suffered directly or indirectly by Acquiror and proximately resulting from or attributable to those litigation matters described in Section 3.09(a) to the Target Company Disclosure Schedules; provided, in the event the liability of the U.S. Company under Item Nos. 1 and 2 thereon is zero or a nominal amount, no indemnification shall be required in respect of attorney's fees and costs; and provided, further, the Basket shall be increased by the amount of any recovery, net of attorney's fees and costs, under Item No. 3 thereon. -90- SECTION 9.04. ACQUIROR'S INDEMNIFICATION. Acquiror covenants and agrees to indemnify and save harmless the Target Companies and Nelson 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, or misstatement in, any one or more of the representations or warranties of Acquiror made in this Agreement. The Target Companies and Nelson shall not be entitled to recover any amount for indemnification claims under this Section 9.04 unless and until the aggregate Damages which the Target Companies are entitled to recover in respect of all such claims exceed the Basket, and only to the extent the Target Companies' aggregate Damages exceed the Basket. In addition, the Target Companies and Nelson shall not be entitled to any recovery under this Section 9.04 unless a claim for indemnification is made prior to expiration of the Audit Cut-Off. SECTION 9.05. INDEMNIFICATION PROCEDURES. (a) In the event that any party hereto 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 by serving written notice on the party providing indemnification (the "Indemnitor"), stating the nature and basis of such claim. (b) In case either party has received actual notice of any claim asserted or any action or administrative or other proceeding in respect of which claim, action or proceeding such party believes indemnity properly may be sought against the other party pursuant to this Agreement, the Indemnitee shall, within thirty (30) 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 -91- time settle, compromise or satisfy any such claim, action or proceeding without the written consent of the Indemnitor, which shall not unreasonably be withheld. 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 proceeding defended only by the Indemnitee shall be binding upon the Indemnitor. The failure of the Indemnitor to assume the defense of any claim, action or proceeding shall not be deemed a concession that it is required to indemnify the Indemnitee for the subject matter thereof. If the Indemnitor has elected under this Section to conduct the defense of any claim, action or proceeding, then the Indemnitor shall be obligated to pay the amount of any adverse final judgment or decree rendered with respect to such claim, action or proceeding. SECTION 9.06. DISPUTE RESOLUTION. In the event a U.S. Shareholder shall notify Acquiror in writing that it objects to any characterization of a breach, Damage calculation, indemnification claim or other determination made by Acquiror under this Agreement, and sets forth with particularity the amounts in dispute, the nature of the dispute and the basis therefor, the parties shall in good faith thereafter attempt to resolve such dispute, in which event no set-off against Unregistered Shares shall be made by Acquiror until the resolution thereof and, if applicable, no right of termination shall be exercised until the resolution thereof. Any such objection must be delivered to Acquiror not later than twenty (20) days following Acquiror's delivery of its claim for indemnification. If the parties do not reach agreement resolving the dispute within twenty (20) days after notice is given in accordance with herewith, the parties shall submit the dispute to an independent certified public accounting firm mutually agreeable to the parties, which firm shall not have had a material relationship with Acquiror, the Target Companies or any of their respective Affiliates within the two (2) years preceding the date hereof (the "Arbiter"), for resolution in a proceeding to be conducted in Chicago, Illinois. If the parties cannot agree on the selection of the independent certified public accounting firm to act as Arbiter, the parties shall request the American Arbitration Association (the "Association") to appoint such a firm, and such appointment shall be conclusive and binding on the parties. Promptly, but not later than sixty (60) days after acceptance of its appointment as Arbiter, the Arbiter shall determine, based on presentations by Acquiror and Nelson (acting on behalf of all U.S. Shareholders) or, if deemed necessary by the Arbiter, by independent review, only those issues in dispute, and shall render a report as to the dispute, and the resulting determination on Acquiror's claim for indemnification, which determination shall be conclusive and binding upon the parties, and in the event any portion of Acquiror's claim is allowed, Acquiror may thereafter set-off such portion against the Unregistered Shares. In resolving any disputed item, the Arbiter may not assign -92- a value to any item greater than the greatest value for such item claimed by a party in its claim or objection thereto, or less than the smallest value for such item claimed by either party. The fees, costs and expenses of the Arbiter shall be paid one-half by Acquiror and one-half by Nelson. Whether any dispute is resolved by agreement among the parties or by the Arbiter, changes to Acquiror's claim for indemnification shall be made hereunder only for items as to which a U.S. Shareholder has taken exception as provided herein. Anything in this Agreement to the contrary notwithstanding, Acquiror shall not be obligated to register any Unregistered Shares under Section 6.03 hereof, to the extent such Unregistered Shares are the subject of Acquiror's claim for indemnification made prior to expiration of the Audit Cut-Off. 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 as of the date delivered, mailed or transmitted, and shall be effective upon receipt, if delivered personally, mailed by registered or certified mail (postage prepaid, return receipt requested) 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: If to Acquiror or Acquiror Sub: HA-LO Industries, Inc. 5980 West Touhy Avenue Niles, IL 60714 Attention: Mr. Gregory J. Kilrea, CFO Facsimile number: 847.647.4970 with copies to: Marc S. Roth, Esq. Marc S. Roth & Associates, Ltd. 176 Ambrogio Drive Gurnee, IL 60031 Facsimile number: 847.336.6368 -and- Barry J. Shkolnik, Esq. Neal Gerber & Eisenberg Two North LaSalle Street Suite 2200 Chicago, IL 60602 Facsimile number: 312.269.1747 -93- If to the Target Companies: Creative Concepts in Advertising, Inc. 31535 Southfield Road Beverly Hills, MI 48075 Attention: Steven J. Lemberg, CFO Facsimile No.: 810.988.9406 with a copy to: Ernest J. Weiner, Esq. Miro Weiner & Kramer 500 North Woodward Avenue Suite 100 Bloomfield Hills, MI 48304 Facsimile No.: 810.646.4204 If to Nelson: Linden D. Nelson c/o Creative Concepts in Advertising, Inc. 31535 Southfield Road Beverly Hills, MI 48075 Facsimile No.: 810.258.1340 with a copy to: Ernest J. Weiner, Esq. Miro Weiner & Kramer 500 North Woodward Avenue Suite 100 Bloomfield Hills, MI 48304 Facsimile No.: 810.646.4204 SECTION 10.02. AMENDMENT. This Agreement may be amended by the parties by action taken personally, in the case of Nelson, or by their respective Boards of Directors at any time prior to the Effective Time. This Agreement may not be amended except by an instrument in writing signed by the parties. SECTION 10.03. WAIVER. At any time prior to the Effective Time, 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 be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. -94- 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. SECTION 10.05. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties 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. SECTION 10.06. ENTIRE AGREEMENT. This Agreement (together with the Exhibits, and the Target Company 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 and, except as otherwise expressly provided herein, are not intended to confer upon any other person any rights or remedies hereunder. Any matter which is disclosed in any portion of the Target Company or Acquiror Disclosure Schedules shall be deemed to have been disclosed for the purposes of all relevant provisions of this Agreement. The inclusion of any item in any such 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. SECTION 10.07. ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise. SECTION 10.08. 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 Unitary Transaction pursuant to Article II, 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. -95- SECTION 10.09. GOVERNING LAW; CURRENCY DIFFERENCES. Except as provided in Sections 1.01, 1.03 and 6.17(c) hereof, 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. As used herein, all dollar-denominated monetary amounts shall refer to U.S. dollars, and there shall be no adjustments made for differences in the value of currencies existing at the date of this Agreement, or for fluctuations in such values after the date hereof. SECTION 10.10. 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. Each person owning shares of U.S. Company or Canada Holding Company Stock on the date of this Agreement shall execute this Agreement on the date hereof as a Target Company shareholder, and every other person so acquiring shares of U.S. Company or Canada Holding Company Stock after the date of this Agreement and prior to the Effective Time shall execute a separate undertaking or counterpart hereof, agreeing to be bound by all the representations, warranties, covenants and agreements of a Target Company shareholder herein. SECTION 10.11. SCHEDULES. To the extent that any fact or facts set forth in any Target Company Disclosure Schedule (delivered by the Company concurrently herewith) is relevant to any one or more other schedules included in the schedule volume, such fact or facts shall be deemed included on each such relevant schedule or schedules. IN WITNESS WHEREOF, Acquiror, Acquiror Sub, the U.S. Company, the Canada Company, Canada Holding Company-1, Canada Holding Company-2 and the U.S. Shareholders 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. By: ----------------------------------------- Its: CEO HA-LO ACQUISITION CORPORATION OF MICHIGAN, INC., By: ----------------------------------------- Its: CEO -96- CREATIVE CONCEPTS IN ADVERTISING, INC., By: ----------------------------------------- Its: CEO CREADIS GROUP INC. By: ----------------------------------------- Its: CEO 1132832 ONTARIO INC. By: ----------------------------------------- Its: CEO 1132831 ONTARIO INC. By: ----------------------------------------- Its: CEO ---------------------------------------------- LINDEN D. NELSON ---------------------------------------------- MICHELLE NELSON ---------------------------------------------- JULIE A. NELSON, not individually, but as Trustee u/a/d 01/01/96 f/b/o Sanford E. Nelson -97- ---------------------------------------------- JULIE A. NELSON, not individually, but as Trustee u/a/d 01/01/96 f/b/o Arielle L. Nelson ---------------------------------------------- STEVEN J. LEMBERG -98- STATE OF MICHIGAN ) ) SS. COUNTY OF OAKLAND ) I, __________________________, a Notary Public in and for said State and County, do hereby certify that Julie A. Nelson, who is personally known to me as the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that she signed and delivered the said instrument as her own free and voluntary act, for the uses and purposes therein set forth. Given under my hand and notarial seal this ____ day of October, 1996. ------------------------------ Notary Public -99- EX-10.16 5 AGREEMENT CO. AND MARSHALL J. KATZ March 17, 1997 Mr. Marshall J. Katz 3625 Indian Wells Road Northbrook, IL 60062 RE: FINDER'S COMPENSATION PLAN Dear Marshall: The purpose of this letter is to confirm your engagement by HA-LO Industries, Inc. ("HA-LO") for the purpose of your identification of businesses for potential acquisition by HA-LO, your participation in all phases of review and evaluation of such businesses, and your assistance to HA-LO in negotiations for the purchase of the stock or assets of such businesses. SERVICES TO BE RENDERED. 1. You agree that you will perform on a best efforts basis, solely for the account and benefit of HA-LO, the following services (the "Services"): (a) Soliciting the interest of, and identifying in writing to the executive officers of HA-LO, businesses and sales representatives for potential transactions in which HA-LO would acquire the stock or assets of such businesses ("Prospects"); provided that such Prospects shall be engaged in the operations which are similar to the operations currently conducted by HA-LO or contemplated to be conducted by HA-LO pursuant to its long-term business plans; (b) Making formal and informal introductions to the executive officers of HA-LO, and HA-LO's outside agents and representatives, of the owners and key employees of the Prospects; (c) Reviewing and evaluating the relevant business(es) of the Prospects, including their operations and financial position, for compliance with HA-LO's internal requirements as disclosed to you from time to time, it being understood by HA-LO that you may rely upon information supplied by the Prospects without independent verification; (d) Assisting HA-LO in its purchase negotiations with the Prospects; and (e) Performing such other and ancillary services with respect to the Prospects, and HA-LO's acquisition thereof, as are reasonably requested by HA-LO and not inconsistent with the provisions of this Section 1. For purposes of this agreement, the term "acquisition" shall mean, in one or a series of transactions, directly or indirectly, the acquisition by HA-LO of a majority interest in the voting securities of a Prospect, a merger, consolidation or similar business combination in which HA-LO acquires a Prospect, the transfer of assets of a Prospect to HA-LO, the election of, or the ability by HA-LO to elect, nominees to a majority of the Board of Directors of a Prospect, or any similar purchase, investment or arrangement, however structured, by which HA-LO acquires an ownership interest in a Prospect or in such Prospects' operating assets and all or substantially all of the sales representatives of the Prospect become HA-LO sales representatives. Given the limited scope of the Services, the contingent nature of your compensation for the Services and in recognition of your outside business endeavors, HA-LO acknowledges and agrees that you shall not be required to devote your full-time to the performance of the Services provided that any contacts which you establish with Prospects shall be for the exclusive benefit of HALO; and provided, further, that your outside business endeavors shall not materially interfere with your performance of the Services. 1. COMPENSATION - SUCCESS FEE FOR ACQUISITIONS. As compensation for the Services with respect to acquisitions, HA-LO agrees to pay you a fee (the "Success Fee") following completion of each acquisition of a Prospect (whether or not you have identified such Prospect or HA-LO has requested your services in connection with such acquisition) during the term of this agreement. The Success Fee shall be equal to the sum of the following: (a) An amount equal to four percent (4%) ( the "Applicable Percentage") of the "gross profits" (as hereinafter defined) of each Prospect during the full twelve (12) calendar month period immediately preceding the completion of the acquisition of such Prospect by HA-LO (the "Pre-Closing Gross Profits") up to a maximum fee of $200,000 per transaction ("Fee Cap"). (b) Ten years options (the "Options") to acquire shares of the common capital stock of HA-LO in an amount equal to two hundred fifty (250) shares for every Ten Thousand Dollars ($10,000) of Success Fee earned hereunder. The exercise price of the Options shall be equal to the closing price for HA-LO shares as quoted by the NASDAQ (or similar securities exchange on which HA-LO shares shall be trading) as of the close of business on the day before the date of the closing of the acquisition of such Prospect by HA-LO (or if a Saturday or a Sunday, on the first business day preceding such date of closing). All Options issued with respect to a Prospect shall be deemed issued as of the close of business on the date of the completion of the acquisition of such Prospect by HA-LO, vest 50% on issuance and 50% after twelve months, and in all other respects shall be subject to the rules, regulations, terms, conditions and provisions of the HA-LO Stock Plan, as amended from time to time. As a 2 precondition to your receiving such Options, you shall be required to enter into and deliver to HA-LO an appropriate stock option agreement. (c) To the extent that the Success Fee is limited due to the Fee Cap, additional options ("Excess Options") shall be granted at a rate of 10,000 shares for every $100,000 of Success Fee otherwise payable but not paid due to the Fee Cap. The Excess Options shall be issued pursuant to the provisions in paragraph (b) above, except the exercise price shall be increased by 17.5%. (d) As an example of the above, should an acquisition be closed with Pre-Closing Gross Profits of $10,000,000 when the stock price closed at $20 per share on the day prior to closing, the Success Fee would be $200,000, the options issued pursuant to paragraph (b) would be 5,000 at $20 per share and the Excess Options would be 20,000 at $23.50. For purposes of calculating Success Fees under this Section 2, the term "gross profits" shall mean the gross profits (revenues less returns and allowances and less cost of goods sold) attributable to the operations or business(es) conducted or previously conducted, or the assets owned or previously owned, by a Prospect, exclusive of those gross profits attributable to operations or business(es) that are discontinued or are otherwise known to be non-recurring following acquisition by HA-LO; gross profits to be calculated in accordance with the generally accepted accounting principles, methods policies, practices and procedures employed by HA-LO in the calculation of its own gross profits, on a consistent basis throughout the periods. Notwithstanding any provision in this letter agreements to the contrary, the Success Fee otherwise payable hereunder with respect to an acquisition in which more than fifty percent (50%) of the voting securities of HA-LO are distributed to one or more persons shall be limited to no more than Two Hundred Thousand Dollars ($200,000) plus options to purchase ten thousand (10,000) shares of HA-LO stock. The Success Fee described above, shall be calculated and paid within ten (10) days following the date of the completion of the acquisition of each Prospect by HA-LO. You shall also be entitled to compensation from HA-LO with respect to acquisitions of those Prospects with which you have devoted attention and that are closed within six (6) months after the term of this agreement expires; provided that HA-LO shall have provided a draft of an acquisition contract to the Prospect within 30 days of the termination of this agreement. Generally, we contemplate the term "devoted attention" to mean a meeting or telephone call with the Prospect in which a meaningful discussion has occurred regarding acquisition of such Prospect or its business coupled with the receipt by HA-LO of financial statements of the Prospect. HA-LO will not unreasonably delay the acquisition process to avoid paying a Success Fee. Your engagement hereunder shall commence on the date of this agreement and expire on the second anniversary of this agreement. The provisions of this paragraph shall survive any termination of your engagement. If, in the course of the negotiation witha Prospect, no acquisition is consummated, but as a 3 result of such negotiation one or more qualified sales representatives of the Prospect (each a "qualified sales representative") enter into a sales representative agreement with HA-LO within sixty (60) days of the consummation of such negotiations with the Prospect, then HA-LO shall pay you the following: an amount equal to four percent (4%) of the gross profits generated by the qualified sales representatives (as determined by HA-LO) during the twelve (12) month period prior to the execution of a written sales representative agreement with HA-LO. 1. OTHER AGREEMENTS. (a) In addition to any Success Fees payable to you hereunder, and regardless whether an acquisition of a Prospect is proposed or consummated, HA-LO hereby agrees, from time to time promptly upon your written request, to reimburse you for all reasonable travel and lodging expenses, and meals with Prospects, authorized by HA-LO and incurred by you in connection with, or arising out of, the Services. (b) This agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to the conflicts of laws provisions thereof. (a) HA-LO recognizes and confirms that, with respect to Prospects, (1) you are not obligated to independently verify the accuracy or completeness of information provided to you by a Prospect, and (2) you do not assume responsibility for the accuracy or completeness thereof. HA-LO further recognizes and agrees that all analyses, evaluations and advice provided by you in connection with Prospects (whether written or oral, formal or informal;) are intended solely for the benefit and use of HA-LO in pursuing acquisitions, and that no such analyses, evaluations or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose. You recognize and agree that all such analyses, evaluations and advice, together with all information provided to you by Prospects, is confidential and that no such analyses, evaluations, advice or information shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose. HA-LO hereby agrees to indemnify and hold you harmless from and against all losses, claims, damages, liabilities and expenses incurred by you (including fees and disbursements of counsel) which are related to or arise out of the Services, unless the same are finally judicially determined to have resulted from your bad faith or recklessness. (b) You and HA-LO mutually agree to file all tax returns, and take reasonable, consistent positions therewith, with any taxing authorities, in a manner which is consistent with the characterization of any item by this agreement. You agree that, with respect to the Services, you are an independent contractor and not an employee of HA-LO. (c) This agreement may be executed in two or more counterparts, all of which together shall be considered a single instrument. This agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, supersedes all prior agreements and understandings, both written and oral, between the parties with 4 respect to the subject matter hereof, including but not limited to the March 17, 1993 and March 17, 1994 letter agreements between us, and cannot be amended or otherwise modified except in writing executed by the parties hereto. The provisions of this agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto; provided, however, that you may not assign your obligations or duties under this agreement without HA-LO's prior written consent, which consent may be withheld in HA-LO's sole discretion. (d) At any time within thirty (30) days following the termination of the term of this Agreement, HA-LO shall provide you the opportunity to become a HA-LO independent sales representative pursuant to HA-LO's independent sales representative agreement. We are delighted to offer you this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate copy of this letter. Sincerely, HA-LO Industries, Inc. By: ------------------------------ Richard A. Magid Chief Operating Officer ACCEPTED AND AGREED TO: - --------------------------------- Marshall J. Katz 5 EX-10.18 6 AMENDMENT TO BONUS SHARES AGREEMENT AMENDMENT TO BONUS SHARES AGREEMENT WHEREAS, HA-LO INDUSTRIES, INC., an Illinois corporation (the "Company"), and DAVID C. ROBBINS, a resident of the State of Illinois (the "Participant"), entered into a Bonus Shares Agreement dated the 1st day of February, 1995 (the "Agreement"), whereby the Participant was granted Two Hundred Forty Thousand (240,000) shares of the Company's common stock (which reflects all stock splits since the date of the Agreement) as restricted stock (the "Bonus Shares"); and WHEREAS, pursuant to Section 8 of the Agreement, the Agreement may be amended at any time by mutual agreement of the Company and the Participant; and WHEREAS, the Company and the Participant mutually desire to amend the Agreement to change the vesting provisions applicable to the Bonus Shares under Section 4 of the Agreement. THEREFORE, Section 4 of the Agreement is hereby amended to read as follows effective with respect to vesting of all Unvested Bonus Shares (as such term is defined in the Agreement) effective January 1, 1996: "4. VESTING OF BONUS SHARES. The Bonus Shares shall vest according to the most rapid, from time to time, of the vesting schedules set forth in subsections (a), (b) and (c), below; provided, however, that if Participant shall be in default of or breach any of the covenants set forth in this Agreement, then, subject to the opportunity to cure set forth in Section 1 hereof, any unvested Bonus Shares shall be forfeited and shall not be awarded to Participant. Any Bonus Shares in which Participant has not previously vested shall, for purposes of this Section 4, be referred to as "Unvested Bonus Shares". Certificates representing vested Bonus Shares shall be delivered to Participant as soon as reasonably practicable but in no event later than the ninetieth (90th) day following the date on which such Bonus Shares vested. (a) Participant shall, to the extent of remaining Unvested Bonus Shares, vest one hundred percent (100%) in Twenty-Six Thousand Six Hundred Sixty-Seven (26,667) Bonus Shares on January 15 of each year commencing January 15, 1997 through January 15, 2004; provided however, that Participant shall have complied with the covenants set forth in Section 2 hereof for each calendar year ending immediately preceding the January 15 on which such Bonus Shares vest under this subsection (a). (b)(i) On October 21, 1996 Participant shall vest in 30,000 Bonus Shares. (ii) On January 15, 1997 Participant shall, to the extent of remaining Unvested Bonus Shares, vest in Twenty-Two and One-Half (22.5) shares for every One Thousand Dollars ($1,000) of gross profit earned by the Company with respect to sales of merchandise to Ward under the EPPA for the period January 1, 1996 through December 31, 1996, less 60,000 shares; and (iii) On January 15 of each of year commencing January 15, 1998 through January 15, 2005, Participant shall, to the extent of remaining Unvested Bonus Shares, vest in Twenty-Two and One-Half (22.5) shares for every One Thousand Dollars ($1,000) of gross profit earned by the Company with respect to sales of merchandise to Ward under the EPPA for the calendar year ending immediately prior to the January 15 on which such Bonus Shares vest under this subsection (b). For purposes of this Section 4(b) the term "gross profit" shall mean the gross profit (revenues less returns, allowances and cost of goods sold) of the Company attributable to sales to Ward under the EPPA calculated in accordance with generally accepted accounting principles and rules applied by the Company in the calculation of its own gross profits, on a consistent basis from period to period. The calculation of Ward's purchases under the EPPA shall be made in good faith by the Company, which calculation shall, in the absence of fraud, be final and binding on Participant. Each purchase shall be deemed to have taken place upon the Company's shipment of merchandise to Ward. (c) Participant shall vest one hundred percent (100%) in all Unvested Bonus Shares as of the date on which (i) Participant dies, (ii) Participant suffers a "permanent disability" (as hereinafter defined), or (iii) there occurs a "change in control" (as hereinafter defined). For purposes of this Agreement, the term "permanent disability" shall mean any disability, whether caused by illness, injury or other incapacity, which can be expected to permanently prevent Participant from fulfilling his regular duties with the Company For purposes of this Agreement, a "change in control" shall mean the termination of Participant's sales representative status with the Company, or any material and adverse change by the company in the method under which Participant's aggregate compensation, commissions or sales support budgets are calculated, in each case occurring within twelve (12) months following both (i) the purchase by any person, or group of persons acting in concert, other than Lou Weisbach, of greater than fifty percent (50%) of the shares of common stock of the Company then outstanding, and (ii) the termination of Lou Weisbach as the Chief Executive Officer of the Company." -2- IN WITNESS WHEREOF, this Amendment to the Bonus Shares Agreement having been authorized by the Compensation Committee of the Board of Directors is executed on this 21st day of October, 1996. Participant: Company: - ----------- ------- HA-LO INDUSTRIES, INC. By: - --------------------------- ------------------------ Its: Chief Financial Officer -3- EX-10.19 7 EMPLOYMENT AGREEMENT LINDEN D. NELSON EMPLOYMENT AGREEMENT This Agreement made as of the 3rd day of January, 1997 (the "Effective Date"), by and between HA-LO INDUSTRIES, INC., an Illinois corporation ("Employer"), and LINDEN D. NELSON ("Employee"). WHEREAS, in consideration of the employment of Employee with Employer and other good and valuable consideration the receipt of which is hereof acknowledged, Employee and Employer agree to execute and be bound by this Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the promise and covenants contained herein the parties agree as follows: 1. RECITALS. Each of the above recitals are incorporated in this Agreement and are binding upon the parties hereof. 2. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby accepts employment as Vice Chairman of the Board of Employer and Chairman of the Board and Chief Executive Officer of Creative Concepts in Advertising, Inc., a Michigan corporation which is a wholly-owned subsidiary of Employer ("CCA"), all on the terms and conditions set forth herein. 3. TERM. Subject to the provisions for termination hereinafter provided, the term of this Agreement shall be a period of five (5) years from the Effective Date (the "Term"). 4. DUTIES OF EMPLOYEE. Employee shall perform, on a full-time best efforts basis as his principal employment, such duties commensurate with his position and experience as shall be assigned to him from time to time by the Board of Directors of the Employer, including, without limitation, serving on the Board of Directors of the Employer and/or the Board of Directors of such subsidiaries of the Employer as the Employer may determine; provided, however, that Employer shall not be entitled to any additional compensation for such service. 5. COMPENSATION AND BENEFITS. (a) Employer shall pay to Employee salary at an initial annual rate of Five Hundred Thousand Dollars ($500,000) per year, payable monthly, on the last day of each calendar month or upon such other frequency as the parties hereto shall agree ("Base Pay") while this Agreement is in effect. The Base Pay may be changed from time to time by the Board of Directors in its sole discretion; provided, however, that so long as Lou Weisbach is the Chief Executive Office of Employer, Employee shall at all times during the Term receive no less than the base pay and cash bonus then received by Lou Weisbach. (b) BONUS. Employee shall be entitled to such bonus payments as may be determined in the sole and absolute discretion of the Board of Directors of the Employer (or an authorized committee thereof), in such forms and at such times as the Board of Directors of the Employer shall determine from time to time in its sole discretion. (c) FRINGE BENEFITS. Employer shall provide to Employee such employee fringe benefits as are generally provided for employees of Employer similarly situated to Employee, including, without limitation, one car. Employee shall be entitled to take such annual vacation at such time and in such amounts as are consistent with the Employer's policy. (d) OPTIONS. Upon the execution hereof, Employee shall receive three hundred twelve thousand five hundred (312,500) options to purchase the common stock of Employer (the "Option Shares"). The exercise price of such options shall be equal to the mean between the bid and asked prices for Employer's common stock, as reported by NASDAQ System as of the close of business on the date of this Agreement. The options shall be fully vested upon grant. The option shall be valid for a term commencing as of the date of this Agreement and ending ten (10) years thereafter. The options shall be non-transferable (other than by will or otherwise upon death). During Employee's lifetime, the options may be exercised only by the Employee. (i) At any time after the first anniversary of the Effective Date, Employee may, by written notice (the "Registration Notice") to the Company request that the Company register for sale under the Securities Act of 1933, as amended (the "Securities Act"), all or any portion of the Option Shares that Employee has purchased, or will purchase, on or before the effective of the registration statement relating to the disposition of the Option Shares. As soon as practicable following receipt of the Registration Notice, Employer (i) shall commence to prepare and shall file a registration statement under the Securities Act for the sale of the Option Shares specified in such Registration Notice and (ii) use its best efforts to cause such registration statement to become effective for the lesser of (y) one year and (z) the date upon which all of the Option Shares which are the subject of such registration statement have been disposed of. The registration statement contemplated by this clause (d) shall provide for the sale by Employee of the Option Shares included therein from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, but shall not provide for the distribution of the Option Shares pursuant to an underwritten distribution. -2- (ii) Notwithstanding anything to the contrary contained in this Agreement, Employer shall not be required to file a registration statement or cause it to be declared effective at a time (x) after completion of a fiscal year end, but prior to the availability of the year end audited financial statements, (y) when Employer, in the good faith judgement of its board of directors shall determine that any offering of Option Shares would impede, delay or otherwise interfere with any pending or contemplated acquisition involving Employer or (z) when Employer is in possession of material information which, in the good faith judgment of Employer's board of directors, if disclosed in a registration statement, would be materially harmful to the interests of Employer and its shareholders. Employee shall cease all disposition efforts with respect to Option Shares upon receipt of notice from Employer indicating the existence of any circumstance of any of the events described in this clause (ii). (iii) Employer shall not be required to register the Option Shares pursuant to this clause (d) on more than one occasion. (iv) It shall be a condition to the inclusion of any Option Shares in a registration statement that Employee cooperate in the execution and filing of the registration statement and any necessary state securities law filings. (v) Whether or not any registration statement becomes effective, Employer shall pay all costs, fees and expenses incident to Employer's performance of or compliance with this clause (d). Notwithstanding the foregoing, any discounts, commissions, brokers' fees or fees of similar securities industry professional relating to the distribution of the Option Shares and fees and expenses of counsel for Employee will be payable by Employee and the Company will have no obligation to pay any such amounts. 6. EXPENSE REIMBURSEMENT. Employee shall be entitled to reimbursement by the Company for all reasonable and customary travel and other business expenses incurred by Employee in carrying out his duties under this Agreement, including but not limited to, gas, oil, automobile insurance, repairs and maintenance, parking expenses, tolls, lodgings and meals, while performing services, and other transportation expenses, all subject to and consistent with the Employer's policy. 7. TERMINATION. This Agreement shall be terminated on the earliest to occur of (i) the expiration of the Term; (ii) the -3- mutual agreement of Employer and Employee; (iii) the death of the Employee; (iv) the permanent disability of the Employee as hereinafter defined, or (v) the dismissal of Employee for "cause" as hereinafter defined. Upon any termination of the term of this Agreement, Employee shall promptly deliver to the Employer (without retaining any copies thereof) all the forms, brochures, project materials, sales materials, manuals, letterhead, business cards or any other written or printed materials relating to the business of the Employer. Employee shall be deemed to be "permanently disabled" hereunder if it is determined by a physician selected by the Employer, with the reasonable approval of Employee, which physician is on the staff of a hospital associated with a medical school and located in the Detroit, Michigan metropolitan area, that the Employee is suffering from a mental, physical or emotional disability or condition which is reasonably expected to last for two hundred and ten (210) days or more, and which prevents Employee from fully performing his duties hereunder. The Company shall be deemed to have "cause" to dismiss Employee from employment by the Employer hereunder upon the occurrence of any of the following: (i) Employee's conviction of a felony; (ii) Employee's engagement in illegal conduct tending to place Employee or Employer in disrepute; or (iii) upon thirty (30) days prior written notice to Employee by Employer, upon Employee's breach of, and failure to cure, any other material provision of this Agreement. 8. NON-COMPETITION. Employee covenants that during the Term and for a period of two (2) years after the Term, Employee shall not, directly or indirectly, within the United States or Canada, on his own account, or as an employee, consultant, agent, partner, joint venturer, owner or officer of any other person, firm, partnership, corporation or other entity, or in any other capacity, in any way, conduct, engage in or aid or assist anyone in the conduct of a business competitive with the Employer (or any of its direct or indirect subsidiaries). 9. NON-SOLICITATION. Employee covenants that during the Term and for a period of two (2) years after the Term, Employee shall not, directly or indirectly, as an employee, agent, salesman or member of any person, corporation, firm or otherwise, (i) call upon, solicit, or engage in the business conducted by the Employer (or any of its direct or indirect subsidiaries) with a customer of the Employer (or any of its direct or indirect subsidiaries) (a) with which Employee had direct or indirect contact or (b) regarding which customer Employee learned Employer's confidential information or trade secrets while employed by Employer or CCA or while on either of their respective Boards of Directors or (ii) solicit any employee or agent of Employer (or its direct or indirect subsidiaries) or make such other contact with such employees or -4- agents, which contact will or may yield a termination of the employment or agency relationship of such employees or agents. 10. REMEDIES. Employee acknowledges that compliance with the restrictive covenants set forth in Section 8 and 9 herein is necessary to protect the business, goodwill and proprietary information of the Employer and that a breach of these restrictions will irreparably and continually damage the Employer for which money damages may not be inadequate. Consequently, Employee agrees that, in the event that he breaches or threatens to breach any of these covenants, Employer shall be entitled to both (1) a temporary, preliminary or permanent injunction in order to prevent the continuation of such harm and (2) money damages insofar as they can be determined. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, or the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of this Agreement enforceable. 11. SEVERABILITY. Each of the terms and provisions of this Agreement is to be deemed severable in whole or in part and, if any term or provision of the application thereof in any circumstances should be invalid, illegal or unenforceable, the remaining terms and provisions or the application thereof to circumstances other than those as to which it is held invalid, illegal or unenforceable, shall not be affected thereby and shall remain in full force and effect. 12. BINDING AGREEMENT. This Agreement shall be binding upon the parties, their heirs, successors, personal representatives and assigns. Employer may assign this Agreement to any successor in interest to the business, or part thereof, of Employer. Employee may not assign any of his obligations or duties hereunder. 13. CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. Employee hereby consents to the jurisdiction of the state and federal courts in Illinois in the event that any disputes arise under this Agreement. 14. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties with regard to the subject matter hereof, may not be changed orally, but only by an agreement in writing signed by the parties hereto. 15. FAILURE TO ENFORCE. The failure to enforce any of the provisions of this Agreement shall not be construed as a waiver of such provisions. Further, any express waiver by any party with -5- respect to any breach of any provision hereunder by any other party shall not constitute a waiver of such party's right to thereafter fully enforce each and every provision of the Agreement. 16. HEADINGS. All numbers and heading of paragraphs are for reference only and are not intended to qualify, limit or otherwise affect the meaning or interpretation of any paragraph. 17. NOTICES. All notices which are required, permitted or contemplated hereunder to be given or made shall be given or made in writing by certified mail (return receipt requested) to the Employer at 5980 West Touhy, Niles, Illinois 60714, Attention: Board of Directors, and to the Employee at 6180 Wing Lake Road, Bloomfield Hills, Michigan 48301. 18. GENDER. The masculine, feminine or neuter pronouns used herein shall be interpreted without regard to gender, and the use of the singular or plural shall be deemed to include the other whenever the context so requires. WHEREFORE, the parties have executed this Agreement on the date and year first above written. EMPLOYER EMPLOYEE By: HA-LO INDUSTRIES, INC. By: ---------------------------- ------------------------------ Its: Linden D. Nelson ---------------------- -6- EX-10.20 8 EMPLOYMENT AGREEMENT-GREG KILREA EMPLOYMENT AGREEMENT This Agreement dated as of April 15, 1996 by and between HA-LO INDUSTRIES, INC., an Illinois corporation (hereinafter the "Company"), and GREG KILREA, (hereinafter referred to as the "Executive"). W I T N E S S E T H WHEREAS, the Company and the Executive desire to enter into this Agreement, whereby the Company will be assured of the right to the Executive's services, skills and expertise for the period and on the terms and conditions hereinafter set forth, and the Executive will be assured of employment on such terms and conditions. NOW THEREFORE, in consideration of the foregoing, the Company and the Executive hereby agree as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Company hereby employs the Executive as Vice President-Planning, of the Company and the Executive hereby accepts such employment. 2. TERM. Subject to earlier termination in accordance with the provisions of Section 6 of this Agreement, the term of the employment of the Executive by the Company pursuant to this Agreement (the "Term") shall be for a period of one (1) year, commencing on the date of closing under this Agreement provided however, that the Term shall be automatically extended, unless either party elects not to do so and gives written notice to the other party at least ninety (90) days prior to such scheduled termination date of their election not to so extend. 3. EMPLOYMENT SERVICES. During the Term of his employment pursuant to this Agreement, the Executive shall render his services to the Company as Vice President Planning, of the Company, or in such other capacities as the President or Board of Directors of the Company may, from time to time, reasonably designate. The Executive shall report to the Chief Financial Officer of the Company in the performance of his duties hereunder. The Executive shall devote all of his business time, efforts and his energy and skill to the business of the company and, the Executive will not engage in the active operation of any other business. 4. COMPENSATION. In consideration of the services to be rendered by the Executive to the Company pursuant to this Agreement, the Company agrees to pay the executive during the Term, and the Executive agrees to accept the following: a. A base salary at the rate of One Hundred Fourteen Thousand Dollars ($114,000) per annum, payable in installments during the Term hereof in accordance with the normal practice of the Company. b. Discretionary bonus being determined by the President or Board of Directors. c. Upon execution of this Agreement, the Executive shall receive options ("Options") to purchase ten thousand (10,000) shares of the Company's common stock. The Options shall be issued pursuant to the HA-LO Industries, Inc. Stock Plan and shall be exercisable at a purchase price equal to the Fair Market Value at the date of grant (as defined in the Stock Plan). The Options shall vest and be exercisable by Executive one year from date of grant. i. Except as provided below, the Option shall be valid for a term commencing as of the date of grant ("Date of Grant") and ending ten (10) years from the date of Grant (the "Termination Date"). ii. If Executive is in default or otherwise breaches the covenants set forth in this Agreement, or otherwise ceases to be employed by the Company for any reason other than death, permanent disability or a "change in control" (as hereinafter defined), all unvested Options shall be immediately forfeited and all vested Options previously granted to executive shall be exercisable at any time prior to the earlier of (i) the Termination date, or (ii) within sixty (60) days after the date of Executive's breach of this Agreement, or termination of employment. iii. For purposes of this agreement, the term "change in control" shall mean the acquisition, on or after the date of this Agreement, of more than fifty percent (50%) of the voting rights with respect to outstanding common capital stock of Employer, by a person, or group of persons acting in concert, other than Lou Weisbach. 5. EMPLOYEE BENEFITS. During the Term of this Agreement, the Executive shall be entitled to the following benefits: a. The Executive shall be entitled to participate, subject to qualification requirements, in medical or other insurance or hospitalization plans which are presently maintained or hereinafter instituted by the Company and are made generally available to employees of the Company. b. The Company shall reimburse the Executive for reasonable out-of-pocket business expenses which the Executive shall incur in connection with his services for the Company hereunder in accordance with Company policy upon presentation by the Executive of appropriate support. c. Subject to the rules of the Company, the Executive shall be entitled to vacation leave of four (4) weeks during any calendar year. d. Subject to qualification and other requirements, the Executive shall be entitled to participate in any profit sharing/401(k), bonus or management incentives (including Non-Qualified Key Employee Plan), pension, retirement or insurance plan maintained by the Company and made generally available to employees of the Company. 6. TERMINATION. i. The Term of this Agreement and the Executive's employment hereunder shall terminate upon the first to occur of the following events: (1) the mutual agreement of the Company and the Executive to so terminate this Agreement, (2) the death or disability (as hereinafter defined) of the Executive, or (3) the Company's election to terminate this Agreement and the Executive's employment hereunder "For Cause" (as hereinafter defined). The term "Disability" shall mean any mental, physical or emotional disability or condition which is reasonably expected to last for one hundred twenty (120) days or more, and which prevents the Executive from performing substantially all of his duties hereunder. Disability shall be determined by a physician selected by the Company with reasonable approval of Executive. 2 ii. The term "For Cause" shall mean any of the following: A) the commission by the Executive of a breach of any material covenant, provision, term or condition set forth in this Agreement; or B) the commission by the Executive of a felony or crime; or C) the commission by the Executive of an act of personal dishonesty or fraud involving personal profit, including, without limitation, theft, embezzlement, fraud or other misappropriation of funds. iii. In the event that there is a "change in control", as previously defined, in the initial 12 months of employment and the Executive is terminated because of this, the Company shall be obliged to continue to pay the Executive his salary for one year. 7. EXECUTIVE'S REPRESENTATION. The Executive hereby represents and warrant to and with the Company that the Executive is not subject to any covenants, agreements or restrictions including without limitation any covenants, agreement or restrictions arising out of the Executive's prior employment or independent contractor relationships, which would be breached or violated by the Executive's execution of this Agreement or by Executive's performance of his duties hereunder. 8. CONFIDENTIALITY. Executive acknowledges that by virtue of his employment with Company, he has been and/or will be exposed to or has had or will have access to confidential information regarding Company's business, including but not limited to, trade secrets and proprietary information, all of which are proprietary to Company referred to collectively as "Proprietary Information". Executive acknowledges that Company's Proprietary Information constitutes a proprietary and exclusive interest of Company, and, therefore, agrees that during the term of his employment and thereafter, for any reason whatsoever, Executive shall hold and keep secret the Proprietary Information as described herein, as to which the Executive is now or any time during his employment shall become informed, and Executive shall not directly or indirectly disclose any such information to any person, firm, court, governmental agency or corporation or use the same except in connection with the business and affairs of Company. 9. NON-DISTURBANCE OF EMPLOYEES; NON-DISPARAGEMENT. The Executive covenants that during the Term and for a period of two (2) years after the termination thereof, for any reason whatsoever, the Executive shall not, directly or indirectly, as an employee, agent, salesman or member of any person, corporation, firm or otherwise (a) solicit any employee, agent or independent contractor sales representative of the Company, the product of which contact will or may yield a termination of relationship of such employment, agency or independent contractor sales representative relationship of such employees, agents or independent contract sales representatives from the Company, or (b) make, whether in writing or orally, disparaging statements or inferences with respect to the company, its respective business, officers or shareholders. 10. RETURN OF MATERIALS. The Executive will, at any time upon the request of the Company, and in any event upon the termination of his employment, for whatever reason, immediately return and surrender to the company originals and all copies of all records, notes, memoranda, electronic files, personal computers, computer discs, computer equipment, telephones, price lists, customer and customer prospects lists, business plans, recordings and other documents and other property belonging to the Company, created or obtained by the Executive as a result of or in the course of or in connection with the Executive's employment with the Company. The executive acknowledges that all such materials are, and will always remain, the exclusive property of the Company. 11. REVISION. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon or are otherwise invalid, for whatsoever cause, then the court so holding shall reduce and is so authorized to 3 reduce, the territory to which it pertains and/or the period of time in which it operates, to the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of the Agreements enforceable. 12. GENERAL PROVISIONS. a. SEVERABILITY. Each of the terms and provisions of this Agreement is to be deemed severable in whole or in part and, if any term or provision of the application thereof in any circumstances should be invalid, illegal or unenforceable, the remaining terms and provisions or the application thereof to circumstances other than those as to which it is held invalid, illegal or unenforceable, shall not be affected thereby and shall remain in full force and effect. b. BINDING AGREEMENT. This Agreement shall be binding upon the parties, their heirs, successors, personal representatives and assigns. The Company may assign this agreement to any successor in the interest to the business, or part thereof, of the Company. The Executive may not assign any of his obligations or duties hereunder. c. CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The Executive hereby consents to the jurisdiction of the state and federal courts in Illinois in the event that any disputes arise under this Agreement. d. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties with regard to the subject matter hereof, may not be changed orally, but only by an agreement in writing signed by the parties hereto. e. FAILURE TO ENFORCE. The failure to enforce any of the provisions of this Agreement shall not be construed as a waiver of such provisions. Further, any express waiver by any party with respect to any breach of any provision hereunder by any other party shall not constitute a waiver of such party's right to thereafter fully enforce each and every provision of the Agreement. f. SURVIVAL. Subject to the provisions hereof, the obligations contained in this Agreement shall survive the termination, for any reason whatsoever, for cause or otherwise, of the Executive's employment with the Company. g. HEADINGS. All numbers and headings of sections are for reference only and are not intended to qualify, limit or otherwise affect the meaning or interpretation of any Section. h. NOTICES. All notices which are required, permitted or contemplated hereunder to be given or made shall be given or made in writing by certified mail (return receipt required) to the Executive at 1205 GLOUCESTER ROAD, WOODRIDGE, ILLINOIS 60517, and to the Company at 5980 West Touhy Avenue, Niles, Illinois, 60714, Attention: President. i. GENDER. The masculine, feminine or neuter pronouns used herein shall be interpreted without regard to gender, and the use of the singular or plural shall be deemed to include the other whenever the context so requires. 4 WHEREFORE, the parties have executed this Agreement on the date and year first above written. HA-LO INDUSTRIES, INC. EXECUTIVE: By: Richard A. Magid Greg Kilrea Its: Chief Financial Officer 5 EX-10.21 9 EMPLOYMENT AGREEMENT-MICHAEL NEMLICH EMPLOYMENT AGREEMENT This Agreement dated as of April 15, 1996 by and between HA-LO INDUSTRIES, INC., an Illinois corporation (hereinafter the "Company"), and MICHAEL NEMLICH, (hereinafter referred to as the "Executive"). W I T N E S S E T H WHEREAS, the Company and the Executive desire to enter into this Agreement, whereby the Company will be assured of the right to the Executive's services, skills and expertise for the period and on the terms and conditions hereinafter set forth, and the Executive will be assured of employment on such terms and conditions. 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Company hereby employs the Executive as Vice President Corporate Development and Financial Relations, of the Company and the Executive hereby accepts such employment. 2. TERM. Subject to earlier termination in accordance with the provisions of Section 6 of this Agreement, the term of the employment of the Executive by the Company pursuant to this Agreement (the "Term") shall be for a period of one (1) year, commencing on the date of closing under this Agreement provided however, that the Term shall be automatically extended, unless either party elects not to do so and gives written notice to the other party at least ninety (90) days prior to such scheduled termination date of their election not to so extend. 3. EMPLOYMENT SERVICES. During the Term of his employment pursuant to this Agreement, the Executive shall render his services to the Company as Vice President Corporate Development and Financial Relations, of the Company, or in such other capacities as the President or Board of Directors of the Company may, from time to time, reasonably designate. The Executive shall report to the Chief Financial Officer of the Company in the performance of his duties hereunder. The Executive shall devote all of his business time, efforts and his energy and skill to the business of the company and, the Executive will not engage in the active operation of any other business. 4. COMPENSATION. In consideration of the services to be rendered by the Executive to the Company pursuant to this Agreement, the Company agrees to pay the executive during the Term, and the Executive agrees to accept the following: a. A base salary at the rate of One Hundred Twenty-Five Thousand Dollars ($125,000) per annum, payable in installments during the Term hereof in accordance with the normal practice of the Company. b. Discretionary bonus being determined by the President or Board of Directors. c. Upon execution of this Agreement, the Executive shall receive options ("Options") to purchase ten thousand (10,000) shares of the Company's common stock. The Options shall be issued pursuant to the HA-LO Industries, Inc. Stock Plan and shall be exercisable at a purchase price equal to the Fair Market Value at the date of grant (as defined in the Stock Plan). The Options shall vest and be exercisable by Executive one year from date of grant. i. Except as provided below, the Option shall be valid for a term commencing as of the date of grant ("Date of Grant") and ending ten (10) years from the date of Grant (the "Termination Date"). ii. If Executive is in default or otherwise breaches the covenants set forth in this Agreement, or otherwise ceases to be employed by the Company for any reason other than death, permanent disability or a "change in control" (as hereinafter defined), all unvested Options shall be immediately forfeited and all vested Options previously granted to executive shall be exercisable at any time prior to the earlier of (i) the Termination date, or (ii) within sixty (60) days after the date of Executive's breach of this Agreement, or termination of employment. iii. For purposes of this agreement, the term "change in control" shall mean the acquisition, on or after the date of this Agreement, of more than fifty percent (50%) of the voting rights with respect to outstanding common capital stock of Employer, by a person, or group of persons acting in concert, other than Lou Weisbach. a. Performance is to be reviewed initially at six (6) months and compensation reviewed annually. 5. EMPLOYEE BENEFITS. During the Term of this Agreement, the Executive shall be entitled to the following benefits: a. The Executive shall be entitled to participate, subject to qualification requirements, in medical or other insurance or hospitalization plans which are presently maintained or hereinafter instituted by the Company and are made generally available to employees of the Company. b. The Company shall reimburse the Executive for reasonable out-of-pocket business expenses which the Executive shall incur in connection with his services for the Company hereunder in accordance with Company policy upon presentation by the Executive of appropriate support. c. Subject to the rules of the Company, the Executive shall be entitled to vacation leave of four (4) weeks during any calendar year. d. Subject to qualifications and other requirements, the Executive shall be entitled to participate in any profit sharing/401(k), bonus or management incentives (including Non-Qualified Key Employee Plan), pension, retirement or insurance plan maintained by the Company and made generally available to employees of the Company. 6. TERMINATION. i. The Term of this Agreement and the Executive's employment hereunder shall terminate upon the first to occur of the following events: (1) the mutual agreement of the Company and the Executive to so terminate this Agreement, (2) the death or disability (as hereinafter defined) of the Executive, or (3) the Company's election to terminate this Agreement and the Executive's employment hereunder "For Cause" (as hereinafter defined). The term "Disability" shall mean any mental, physical or emotional disability or condition which is reasonably expected to last for one hundred twenty (120) days or more, and which prevents the Executive from performing substantially all of his duties hereunder. Disability shall be determined by a physician selected by the Company with reasonable approval of Executive. 2 ii. The term "For Cause" shall mean any of the following: A) the commission by the Executive of a breach of any material covenant, provision, term or condition set forth in this Agreement; or B) the commission by the Executive of a felony or crime; or C) the commission by the Executive of an act of personal dishonesty or fraud involving personal profit, including, without limitation, theft, embezzlement, fraud or other misappropriation of funds. iii. In the event that there is a "change in control", as previously defined, in the initial 12 months of employment and the Executive is terminated because of this, the Company shall be obliged to continue to pay the Executive his salary for one year. 7. EXECUTIVE'S REPRESENTATION. The Executive hereby represents and warrant to and with the Company that the Executive is not subject to any covenants, agreements or restrictions including without limitation any covenants, agreement or restrictions arising out of the Executive's prior employment or independent contractor relationships, which would be breached or violated by the Executive's execution of this Agreement or by Executive's performance of his duties hereunder. 8. CONFIDENTIALITY. Executive acknowledges that by virtue of his employment with Company, he has been and/or will be exposed to or has had or will have access to confidential information regarding Company's business, including but not limited to, trade secrets and proprietary information, all of which are proprietary to Company referred to collectively as "Proprietary Information". Executive acknowledges that Company's Proprietary Information constitutes a proprietary and exclusive interest of Company, and, therefore, agrees that during the term of his employment and thereafter, for any reason whatsoever, Executive shall hold and keep secret the Proprietary Information as described herein, as to which the Executive is now or any time during his employment shall become informed, and Executive shall not directly or indirectly disclose any such information to any person, firm, court, governmental agency or corporation or use the same except in connection with the business and affairs of Company. 9. NON-DISTURBANCE OF EMPLOYEES; NON-DISPARAGEMENT. The Executive covenants that during the Term and for a period of two (2) years after the termination thereof, for any reason whatsoever, the Executive shall not, directly or indirectly, as an employee, agent, salesman or member of any person, corporation, firm or otherwise (a) solicit any employee, agent or independent contractor sales representative of the Company, the product of which contact will or may yield a termination of relationship of such employment, agency or independent contractor sales representative relationship of such employees, agents or independent contract sales representatives from the Company, or (b) make, whether in writing or orally, disparaging statements or inferences with respect to the company, its respective business, officers or shareholders. 10. RETURN OF MATERIALS. The Executive will, at any time upon the request of the Company, and in any event upon the termination of his employment, for whatever reason, immediately return and surrender to the company originals and all copies of all records, notes, memoranda, electronic files, personal computers, computer discs, computer equipment, telephones, price lists, customer and customer prospects lists, business plans, recordings and other documents and other property belonging to the Company, created or obtained by the Executive as a result of or in the course of or in connection with the Executive's employment with the Company. The executive acknowledges that all such materials are, and will always remain, the exclusive property of the Company. 11. REVISION. In the event that any of the provisions, covenants, warranties or agreements in this Agreement are held to be in any respect an unreasonable restriction upon or are otherwise 3 invalid, for whatsoever cause, then the court so holding shall reduce and is so authorized to reduce, the territory to which it pertains and/or the period of time in which it operates, to the scope of activity to which it pertains or effect any other change to the extent necessary to render any of the restrictions of the Agreements enforceable. 12. GENERAL PROVISIONS. a. SEVERABILITY. Each of the terms and provisions of this Agreement is to be deemed severable in whole or in part and, if any term or provision of the application thereof in any circumstances should be invalid, illegal or unenforceable, the remaining terms and provisions or the application thereof to circumstances other than those as to which it is held invalid, illegal or unenforceable, shall not be affected thereby and shall remain in full force and effect. b. BINDING AGREEMENT. This Agreement shall be binding upon the parties, their heirs, successors, personal representatives and assigns. The Company may assign this agreement to any successor in the interest to the business, or part thereof, of the Company. The Executive may not assign any of his obligations or duties hereunder. c. CONTROLLING LAW AND JURISDICTION. This Agreement shall be governed by and interpreted and construed according to the laws of the State of Illinois. The Executive hereby consents to the jurisdiction of the state and federal courts in Illinois in the event that any disputes arise under this Agreement. d. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties with regard to the subject matter hereof, may not be changed orally, but only by an agreement in writing signed by the parties hereto. e. FAILURE TO ENFORCE. The failure to enforce any of the provisions of this Agreement shall not be construed as a waiver of such provisions. Further, any express waiver by any party with respect to any breach of any provision hereunder by any other party shall not constitute a waiver of such party's right to thereafter fully enforce each and every provision of the Agreement. f. SURVIVAL. Subject to the provisions hereof, the obligations contained in this Agreement shall survive the termination, for any reason whatsoever, for cause or otherwise, of the Executive's employment with the Company. g. HEADINGS. All numbers and headings of sections are for reference only and are not intended to qualify, limit or otherwise affect the meaning or interpretation of any Section. h. NOTICES. All notices which are required, permitted or contemplated hereunder to be given or made shall be given or made in writing by certified mail (return receipt required) to the Executive at 2012 N. CLEVELAND, CHICAGO, IL 60614, and to the Company at 5980 West Touhy Avenue, Niles, Illinois, 60714, Attention: President. 4 i. GENDER. The masculine, feminine or neuter pronouns used herein shall be interpreted without regard to gender, and the use of the singular or plural shall be deemed to include the other whenever the context so requires. WHEREFORE, the parties have executed this Agreement on the date and year first above written. HA-LO INDUSTRIES, INC. EXECUTIVE: By: Richard A. Magid Michael Nemlich Its: Chief Financial Officer 5 EX-10.32 10 HA-LO, IND. 1997 STOCK PLAN HA-LO INDUSTRIES, INC. 1997 STOCK PLAN 1. PREAMBLE. In 1997, HA-LO Industries, Inc. (the "Company") established the HA-LO Industries, Inc. 1997 Stock Plan (the "Plan") as a means whereby the Company may, through awards of (i) stock appreciation rights ("SARs"), (ii) non-qualified stock options ("NSOs"), (iii) restricted stock ("Restricted Stock"), and (iv) phantom stock ("Phantom Stock"): (a) provide employees who have substantial responsibilities for the direction and management of the Company and other employees of the Company with additional incentive to promote the success of the Company's business; (b) enable such employees to acquire proprietary interests in the Company; (c) encourage such employees to remain in the employ of the Company; (d) provide Officers and Directors of the Company (who are not otherwise employees of the Company) with additional incentive to promote the success of the Company's business; and (e) provide Sales Representatives with an incentive to remain associated with the Company and to promote the success of the Company's business. By action of the Board of Directors of the Company, the Plan was approved. The terms of the Plan are contained herein. The provisions of this Plan do not apply to or affect any option, SAR, or stock heretofore or hereafter granted under any other stock plan of the Company, and all such options, SARs or stock continue to be governed by and subject to the applicable provisions of the plan under which they were granted. 2. DEFINITIONS. 2.01 "BOARD" or "BOARD OF DIRECTORS" means the board of directors of the Company. 2.02 "CAUSE" means, as determined in the sole discretion of the Board, a Participant's (1) commission of a felony; (2) dishonesty or misrepresentation involving the Company; (3) serious misconduct in the performance or non-performance of Participant's responsibilities to the Company; (4) violation of a material condition of employment; (5) unauthorized use of trade secrets or confidential information; (6) aiding a competitor of the Company. 2.03 "CHANGE IN CONTROL" means, the occurrence of any one of the following events: (a) any consolidation or merger of the Company is not the continuing or surviving corporation or which contemplates that all or substantially all of the business and/or assets of the Company shall be controlled by another corporation or a recapitalization in which the current controlling stockholders do not continue to be the controlling stockholders; (b) any sale, lease, exchange or transfer (in one transaction or series of related transactions) of all or substantially all of the assets of the Company; (c) approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company, unless such plan or proposal is abandoned within 60 days following such approval; (d) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than a person who is a stockholder of the Company on the Option Date, who shall become the beneficial owner of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding securities ordinarily having the right to vote in the election of directors; (e) any sale, exchange or transfer (other than transfers affiliated entities, i.e. entities controlling, controlled by or under common control with, the transferor) of securities of the Company representing more than 50% of (i) the total fair market value of the Company's then outstanding equity securities, or (ii) the combined voting power of the Company's then outstanding securities ordinarily having the right to vote in the election of directors, whether pursuant to a tender or exchange offer, open market offering, purchase or sale, privately negotiated purchase and sale or otherwise; or (f) if during a period of two consecutive years from the Option Date, individuals who at the beginning of such period constituted the directors of the Company cease for any reason to constitute a majority thereof (unless the election, or nomination for election by the Company's stockholders, of each director of the Company first elected during such period was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of any such period. -2- 2.04 "CODE" means the Internal Revenue Code of 1986, as it exists now and as it may be amended from time to time. 2.05 "COMMITTEE" means the Compensation Committee of the Board of Directors. Each member of the Committee shall be a member of the Board of Directors who has not at any time within one year prior thereto, or at any time during such member's term of service on the Committee, received any stock options, SARs or allocations of any equity securities under the Plan or any other plan maintained by the Company or any of its affiliates, except as permitted pursuant to the provisions of Rule 16b-3(c) (2) (i) of the Securities and Exchange Commission or any successor rule thereof. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. 2.06 "COMMON STOCK" means the common stock of the Company, no par value. 2.07 "COMPANY" means HA-LO Industries, Inc., an Illinois corporation, and any successor thereto. 2.08 "DIRECTOR" means a member of the Board. 2.09 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as it exists now or from time to time may hereafter be amended. 2.10 "FAIR MARKET VALUE" means, at the discretion of the Company in each case, either (a) the mean between the bid and asked prices or (b) the last sale price, as of the close of business on the day Fair Market Value is to be determined for Common Stock as reported by the NASDAQ System or any other stock exchange on which the Common Stock is traded. If Common Stock is not traded on that day, the next preceding day on which such stock was traded. If trading of the Common Stock is not reported by the NASDAQ System or on a stock exchange, Fair Market Value will be determined by the Board based upon the best available data. 2.11 "NAKED SAR" means a SAR issued not in connection with a ISO or NSO. 2.12 "NSO" means non-qualified stock options, which are NOT intended to qualify under Section 422 of the Code. 2.13 "OFFICER" means a corporate officer of the Company. 2.14 "OPTION" means the right of a participant to purchase a specified number of shares of Common Stock, subject to the terms and conditions of the Plan. -3- 2.15 "OPTION DATE" means the date upon which an Option, SAR, Restricted Stock or Phantom Stock is awarded to a Participant under the Plan. 2.16 "OPTION PRICE" means the price per share at which an Option may be exercised. 2.17 "PARTICIPANT" means an individual to whom an Option, SAR, Phantom Stock or Restricted Stock has been granted under the Plan. 2.18 "PHANTOM STOCK" means a hypothetical share of Common Stock issued as phantom stock under the Plan. 2.19 "PLAN" means the HA-LO Industries, Inc. 1997 Stock Plan, as set forth herein and as from time to time amended. 2.20 "RESTRICTED STOCK" means Common Stock awarded to a Participant pursuant to this Plan and subject to the restrictions contained in Section 8. 2.21 "SALES REPRESENTATIVE" means an independent contractor who has an arrangement with the Company, whether or not exclusively, to market, promote and sell the Company's products. 2.22 "SAR" means a stock appreciation right. A SAR may be a Naked SAR or a Tandem SAR. 2.23 "TANDEM SAR" means a SAR associated with and issued in connection with an Option. 2.24 RULES OF CONSTRUCTION. (a) GOVERNING LAW. The construction and operation of this Plan are governed by the laws of the State of Illinois. (b) UNDEFINED TERMS. Unless the context requires another meaning, any term not specifically defined in this Plan is used in the sense given to it by the Code. (c) HEADINGS. All headings in this Plan are for reference only and are not to be utilized in construing the Plan. (d) GENDER. Unless clearly appropriate, all nouns of whatever gender refer indifferently to persons or objects of any gender. (e) SINGULAR AND PLURAL. Unless clearly inappropriate, singular terms refer also to the plural and VICE VERSA. (f) SEVERABILITY. If any provision of this Plan is determined to be illegal or invalid for any reason, the remaining provisions are to continue in full force and -4- effect and to be construed and enforced as if the illegal or invalid provision did not exist, unless the continuance of the Plan in such circumstances is not consistent with its purposes. 3. STOCK SUBJECT TO THE PLAN. Except as otherwise provided in Section 12, the aggregate number of shares of Common Stock that may be issued under Options or as Restricted Stock, under this Plan may not exceed One Million Five Hundred Thousand (1,500,000) shares. Reserved shares may be either authorized but unissued shares or treasury shares, in the Board's discretion. If any awards hereunder shall terminate or expire, as to any number of shares, new NSOs, and Restricted Stock may thereafter be awarded with respect to such shares. 4. ADMINISTRATION. The Plan is administered by the Committee. In addition to any other powers set forth in this Plan, the Committee has the following powers: (a) to construe and interpret the Plan, including the power to remedy any ambiguities or inconsistencies in the Plan document; (b) to establish, amend and rescind appropriate rules and regulations relating to the Plan; (c) subject to the express provisions of the Plan, to determine the individuals who will receive awards of Options, Restricted Stock, Phantom Stock and/or SARs, the times when they will receive them, the number of shares to be subject to each award and the Option Price, payment terms, payment method, and expiration date applicable to each award; (d) to contest on behalf of the Company or Participants, at the expense of the Company, any ruling or decision on any matter relating to the Plan or to any awards of NSOs, Restricted Stock, Phantom Stock and/or SARs; (e) generally, to administer the Plan, and to take all such steps and make all such determinations in connection with the Plan and the awards of NSOs, Restricted Stock, Phantom Stock and/or SARs granted thereunder as it may deem necessary or advisable; (f) to determine the form in which payment of a SAR or a Phantom Stock award granted hereunder will be made (i.e., cash, Common Stock or a combination thereof) or to approve a participant's election to receive cash in -5- whole or in part in settlement of the SAR or Phantom Stock award; and (g) to determine the form in which tax withholding under Section 15 of this Plan will be made. 5. ELIGIBILITY. The Committee shall have the power to award Options, SARs, Restricted Stock, and Phantom Stock. Subject to the provisions of the Plan, the Committee shall determine from time to time those employees, Directors and Officers of the Company and Sales Representatives who shall be designated as Participants and the number, if any, of Options, SARs, Restricted Stock, and Phantom Stock, or any combination thereof, to be awarded to each such participant. 6. TERMS AND CONDITIONS OF NON-QUALIFIED STOCK OPTION. The Committee may, in its discretion, grant NSOs to any Participant under the Plan. Each NSO shall be evidenced by an agreement between the Company and the Participant. Each NSO agreement, in such form as is approved by the Committee, shall be subject to the following express terms and conditions and to such other terms and conditions, not inconsistent with the Plan as the Committee may deem appropriate: (a) OPTION PERIOD. Each NSO will expire as of the earliest of: (i) the date on which it is forfeited under the provisions of Section 11; (ii) the date three months after the Participant's termination of employment, directorship or relationship with the Company, as applicable, for any reason other than death; or (iii) the date six months after the Participant's death. (b) OPTION PRICE. At the time of grant, the Committee will fix the Option Price, which will be no less than eighty-five percent (85%) of the Fair Market Value of the shares subject to the NSO on the Option Date. (c) OTHER OPTION PROVISIONS. The form of NSO authorized by the Plan may contain such other provisions as the Committee may from time to time determine. -6- 7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant a SAR to any Participant under the Plan. Each SAR shall be evidenced by an agreement between the Company and the Participant, and may be a Naked SAR or a Tandem SAR. Each SAR awarded to Participants under the Plan shall be subject to the following express terms and conditions and to such other terms and conditions, not inconsistent with the Plan, as the Committee shall deem appropriate: (a) TANDEM SARS. Tandem SARs shall terminate on the same date as the related NSO. A Tandem SAR shall be exercisable only if the Fair Market Value of a share of Common Stock on the date of surrender exceeds the Fair Market Value of the Common Stock on the Option Date, if related to an NSO, and then shall be exercisable to the extent, and only to the extent, that the related NSO is exercisable. A Tandem SAR shall entitle the Participant to whom it is granted the right to elect, so long as such Tandem SAR is exercisable and subject to such limitations as the Committee shall have imposed, to surrender any then exercisable portion of his related NSO, in whole or in part, and receive from the Company in exchange, without any payment of cash (except for applicable employee withholding taxes), that number of shares of Common Stock having an aggregate Fair Market Value on the date of surrender equal to the product of (i) the excess of the Fair Market Value of a share of Common Stock on the date of surrender over the per share Option Price under such NSO or the Fair Market Value of the Common Stock on the Option Date, if such SAR is related to an NSO and (ii) the number of shares of Common Stock subject to such NSO or portion thereof which is surrendered. Any NSO or portion thereof which is surrendered shall no longer be exercisable. The Committee, in its sole discretion, may allow the Company to settle all or part of the Company's obligation arising out of the exercise of a Tandem SAR by the payment of cash equal to the aggregate Fair Market Value of the shares of Common Stock which the Company would otherwise be obligated to deliver. (b) NAKED SARS. Naked SARs shall terminate as provided in the Participant's SAR agreement. The Committee may at the time of granting any Naked SAR add such conditions and limitations to the Naked SAR as it shall deem advisable, including but not limited to, limitations on the period within which the Naked SAR shall be exercisable and the maximum amount of appreciation to be recognized with regard to such Naked SAR. -7- (c) OTHER CONDITIONS. If a Participant is subject to Section 16(a) and Section 16(b) of the Exchange Act, the Committee may at any time add such additional conditions and limitations to such SAR which, in its discretion, the Committee deems necessary or desirable in order to comply with such Section 16(a) or Section 16(b) and the rules and regulations issued thereunder, or in order to obtain any exemption therefrom. If a Participant subject to Section 16(a) or Section 16(b) of the Exchange Act exercises a SAR and receives cash, the exercise must be made within a ten-day period beginning on the third business day after the release of quarterly or annual statements of sales and earnings by the Company and ending on the twelfth business day after such release of statements. 8. TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS. The Committee, in its discretion, may grant Restricted Stock to any Participant under the Plan. Each grant of Restricted Stock shall be evidenced by an agreement between the Company and the Participant. All shares of Common Stock awarded to Participants under the Plan as Restricted Stock shall be subject to the following express terms and conditions as to such other terms and conditions, not inconsistent with the Plan, as the Committee shall deem appropriate: (a) RESTRICTED PERIOD. Shares of Restricted Stock awarded to Participants may not be sold, transferred, pledged or otherwise encumbered before they vest. Subject to the provisions of subparagraphs (b) and (c) below and any other restrictions imposed by law, any shares of Restricted Stock that vest will be transferred, to the Participant or, in the event of his death, to the beneficiary or beneficiaries designated by writing filed by the Participant with the Committee for such purpose or, if none, to his estate. Delivery of shares in accordance with the preceding sentence shall be made within the thirty-day period after they vest. (b) FORFEITURES. A Participant shall forfeit all unpaid accumulated dividends and all shares of Restricted Stock which have not vested prior to the date that his employment, membership on the Board, if a Director, or relationship, if a Sales Representative with the Company is terminated for any reason. (c) CERTIFICATES DEPOSITED WITH COMPANY. Each certificate issued in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant and deposited with the Company. Each such -8- certificate shall bear the following (or a similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) relating to Restricted Stock contained in the HA-LO Industries, Inc. 1997 Stock Plan and an agreement entered into between the registered owner and HA-LO Industries, Inc. Copies of such Plan and agreement are on file at the principal office of HA-LO Industries, Inc." (d) STOCKHOLDER RIGHTS. Subject to the foregoing restrictions, each Participant shall have all the rights of a stockholder with respect to his shares of Restricted Stock including, but not limited to, the right to vote such shares. (e) DIVIDENDS. On each Common Stock dividend payment date, each Participant shall receive an amount equal to the dividend paid on that date on a share of Common Stock, multiplied by his number of shares of Restricted Stock. 9. TERMS AND CONDITIONS OF PHANTOM STOCK. The Committee may, in its discretion, award Phantom Stock to any Participant under the Plan. Each award of Phantom Stock shall be evidenced by an agreement between the Company and the Participant. The Committee may at the time of awarding any Phantom Stock add such additional conditions and limitations to the Phantom Stock as it shall deem advisable, including, but not limited to, the right for Participants to receive payments equivalent to dividends paid on Common Stock, limitations on the period or periods within which the Phantom Stock may be surrendered, and the maximum amount of appreciation to be recognized with regard to such Phantom Stock. If a Participant is subject to Section 16(a) and Section 16(b) of the Exchange Act, the Committee may at any time add such additional conditions and limitations to such Phantom Stock which, in its discretion, the Committee deems necessary or desirable in order to comply with such Section 16(a) or Section 16(b) and the rules and regulations issued thereunder, or in order to obtain any exemption therefrom. An award of Phantom Stock shall entitle the Participant to whom it is awarded the right to elect, so long as such Phantom Stock is vested and subject to such limitations as the Committee shall have imposed, to surrender any then vested portion of the Phantom Stock, in whole or in part, and receive from the Company in exchange therefor the Fair Market Value on the date of surrender of the Common Stock to which the surrendered Phantom Stock relates in cash or in shares of Common Stock as the Committee may determine. If a Participant subject to Section 16(a) or 16(b) of the Exchange Act receives cash in exchange for the surrender of Phantom Stock, the surrender of such -9- Phantom Stock must be made within a ten-day period beginning on the third business day after the release of quarterly or annual statements of sales and earnings by the Company and ending on the twelfth business day after such release of statements. 10. MANNER OF EXERCISE OF OPTIONS. To exercise an Option in whole or in part, a Participant (or, after his death, his executor or administrator) must give written notice to the Committee, stating the number of shares to which he intends to exercise the Option. The Company will issue the shares with respect to which the Option is exercised upon payment in full of the Option Price. Upon receipt of such notice, and prior to issuance of shares, the Company may require the Participant (or after his death, his executor or administrator) to pay to the Company any and all amounts which the Participant may owe the Company on such date. The Option Price may be paid in cash, certified bank check or by delivery of irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds necessary to pay for all Common Stock acquired through such exercise and any tax withholding obligations resulting from such exercise. At the discretion of the Company, the Option Price may also be paid in shares of Common Stock having an aggregate Fair Market Value, as determined on the date of delivery, equal to the Option Price. At the discretion of the Company, the Option Price may be paid in shares of Common Stock which were received by the Participant upon the exercise of one or more Options, including shares which the Participant directs the Company to withhold for the purpose of paying the Option Price from shares the Participant would have received upon the exercise of the Option. At the discretion of the Company, the Option Price may be paid in shares of Common Stock which were received by the Participant as an award of Restricted Stock under the Plan. The Option Price may be paid by surrender of Tandem SARs equal to the Option Price. 11. VESTING. (a) A Participant may not exercise an Option or surrender a SAR or Phantom Stock until it has become vested. The portion of an Option, SAR or Phantom Stock award that is vested depends upon the period that has elapsed since the Option Date. The following schedule applies to any Options granted under this Plan, to Restricted Stock, SARs, and Phantom Stock awarded under this Plan unless the Committee establishes a different vesting schedule at the time when an Option is granted or, the Restricted Stock, SAR or Phantom Stock is awarded: -10- Number of Years Since Option Date Vested Percentage ----------------- ----------------- Fewer than one 0% One but fewer than two 20% Two but fewer than three 40% Three but fewer than four 60% Four but fewer than five 80% Five or more 100% If a Participant terminates employment with, or if a Director, his membership on the Board, or if a Sales Representative, his relationship with, the Company for any reason, he will be deemed to have forfeited as of the date of such termination any Options, Restricted Stock, SARs and/or Phantom Stock that are not yet vested as of such date. A transfer from the Company to a subsidiary or affiliate, or VICE VERSA is not a termination of employment for purposes of this Plan. Notwithstanding the vesting schedule contained herein or in the Participant's agreement, if the Participant's employment, or if a Director, his membership on the Board, or if a Sales Representative, his relationship is terminated for Cause, the Participant's Vested Percentage shall be 0%, and he shall forfeit all Options, SARs, Restricted Stock and/or Phantom Stock immediately upon delivery of notice that his termination was for Cause. (b) Notwithstanding the provisions of Section 11(a) or anything contained in a Participant's agreement to the contrary, upon a Change in Control all Option, Restricted Stock, SARs and/or Phantom Stock shall become 100% vested and immediately exercisable. 12. ADJUSTMENTS TO REFLECT CHANGES IN CAPITAL STRUCTURE. If there is any change in the corporate structure or shares of the Company, the Board of Directors may make any adjustments necessary to prevent accretion, or to protect against dilution, in the number and kind of shares authorized by the Plan and, with respect to outstanding Options, Restricted Stock, Phantom Stock and/or SARs, in the number and kind of shares covered thereby and in the applicable Option Price. For the purpose of this Section 12, a change in the corporate structure or shares of the Company includes, without limitation, any change resulting from a recapitalization, stock split, stock dividend, consolidation, rights offering, spin-off, reorganization, or liquidation and any transaction in which shares of Common Stock are changed into or exchanged for a different number or kind of shares of stock or other securities of the Company or another corporation. -11- 13. NON-TRANSFERABILITY OF OPTIONS, SARS AND PHANTOM STOCK. The Options and SARs granted or Phantom Stock awarded under the Plan are not transferable, voluntarily or involuntarily, other than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in Section 414(p) of the Code. During a Participant's lifetime, his Options may be exercised only by him. 14. RIGHTS AS STOCKHOLDER. No Common Stock may be delivered upon the exercise of any Option until full payment has been made. A Participant has no rights whatsoever as a stockholder with respect to any shares covered by an Option until the date of the issuance of a stock certificate for the shares. A Participant who has been granted SARs or Phantom Stock shall have no rights whatsoever as a stockholder with respect to such SARs or Phantom Stock. 15. WITHHOLDING TAX. The Company shall have the right to withhold in cash or shares of Common Stock with respect to any payments made to Participants under the Plan any taxes required by law to be withheld because of such payments. With respect to a Participant subject to Section 16(a) or 16(b) of the Exchange Act, withholding made in Common Stock upon the exercise of an Option, or the exercise of a SAR or Phantom Stock which the Participant had the discretion regarding the timing of exercise, must be made during the period beginning on the third business day following the release of quarterly or annual statements of sales and earnings by the Company and ending on the twelfth business day after such release of statements. Notwithstanding the foregoing, with respect to a Participant subject to Section 16(a) or 16(b) of the Exchange Act, all amounts required to be withheld upon either (i) the vesting of Restricted Stock or (ii) the exercise of a SAR or surrender of Phantom Stock which had a set duration and for which payment is made in Common Stock, shall automatically be withheld in Common Stock otherwise deliverable to the Participant and having a Fair Market Value determined on the date the income is includable in the Participant's income equal to the amount of taxes required to be withheld. 16. NO RIGHT TO EMPLOYMENT. Participation in the Plan will not give any Participant a right to be retained as an employee of the Company, or any right or claim to any benefit under the Plan, unless the right or claim has specifically accrued under the Plan. -12- 17. AMENDMENT OF THE PLAN. The Board of Directors may from time to time amend or revise the terms of this Plan in whole or in part and may without limitation, adopt any amendment deemed necessary; provided, however, that no change in any award previously granted to a Participant may be made that would impair the rights of the Participant without the Participant's consent. 18. CONDITIONS UPON ISSUANCE OF SHARES. An Option shall not be exercisable, a share of Common Stock shall not be issued pursuant to the exercise of an Option, and Restricted Stock shall not be awarded until such time as the award of Restricted Stock, exercise of such Option and the issuance and delivery of such share pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares of Common stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Common Stock is being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 19. EFFECTIVE DATE AND TERMINATION OF PLAN. 19.01 EFFECTIVE DATE. This Plan is effective as of January 1, 1997. 19.02 TERMINATION OF THE PLAN. The Board of Directors may terminate the Plan at any time with respect to any shares that are not then subject to Options or Restricted Stock. Termination of the Plan will not affect the rights and obligations of any Participant with respect to Options, SARs, Phantom Stock or Restricted Stock awarded before termination. 20. DIRECTOR STOCK OPTIONS. (a) Each Director who is not otherwise an employee of the Company from and after the effective date of the Plan shall, at the first regularly scheduled meeting of the Board held after January 1 of each calendar year, automatically be granted NSOs to purchase five thousand (5,000) shares of Common Stock having an exercise price per share equal to 100% of the Fair Market Value of the Common Stock at the Option Date. -13- (b) Each Director's interest in any NSO granted pursuant to this Section 20 shall vest ratably over a period of twelve months from the Option Date; provided, however, such NSO may not be exercised at any time prior to six months after the Option Date. NSOs granted pursuant to this Section 20 shall expire ten years from the Option Date. (c) In the event that the number of shares of Common Stock available for future grant under the Plan is insufficient to make all automatic grants required to be made on such date, then all non-employee Directors entitled to a grant on such date shall share ratably in the number of NSOs on shares available for grant under the Plan. (d) The provisions of paragraph (a) of this Section 20 may not be amended more often than once every six months. Except as expressly provided in this Section 20, any NSO granted hereunder shall be subject to the terms and conditions of the Plan if the grant were made pursuant to Section 6 hereof. -14- EX-10.33 11 CREDIT AGREEMENT DTD CREDIT AGREEMENT DATED AS OF JANUARY 31, 1997 among HA-LO INDUSTRIES, INC., AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, individually and as Agent and the Lenders which are or become parties hereto TABLE OF CONTENTS PAGE SECTION 1. THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Revolving Credit . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Revolving Loans. . . . . . . . . . . . . . . . . . . . 2 Section 1.3. Letters of Credit. . . . . . . . . . . . . . . . . . . 2 (a) General Terms. . . . . . . . . . . . . . . . . . . . . 2 (b) Applications . . . . . . . . . . . . . . . . . . . . . 2 (c) The Reimbursement Obligation . . . . . . . . . . . . . 3 (d) The Participating Interests. . . . . . . . . . . . . . 3 (e) Indemnification. . . . . . . . . . . . . . . . . . . . 4 Section 1.4. Term Credit. . . . . . . . . . . . . . . . . . . . . . 4 Section 1.5. Manner of Borrowing Loans. . . . . . . . . . . . . . . 5 (a) Generally. . . . . . . . . . . . . . . . . . . . . . . 5 (b) Reimbursement Obligation . . . . . . . . . . . . . . . 5 (c) Agent Reliance on Bank Funding . . . . . . . . . . . . 6 (d) Reliance . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 2. INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.1. Options. . . . . . . . . . . . . . . . . . . . . . . . 6 Section 2.2. Base Rate Portion. . . . . . . . . . . . . . . . . . . 7 Section 2.3. LIBOR Portions . . . . . . . . . . . . . . . . . . . . 7 Section 2.4. Manner of Rate Selection . . . . . . . . . . . . . . . 8 Section 2.5. Change of Law. . . . . . . . . . . . . . . . . . . . . 8 Section 2.6. Unavailability of Deposits or Inability to Ascertain the Adjusted LIBOR Rate. . . . . . . . . . . . . . . . 8 Section 2.7. Taxes and Increased Costs. . . . . . . . . . . . . . . 8 Section 2.8. Funding Indemnity. . . . . . . . . . . . . . . . . . . 9 Section 2.9. Lending Branch . . . . . . . . . . . . . . . . . . . .10 Section 2.10. Discretion of Lenders as to Manner of Funding. . . . .10 Section 2.11. Capital Adequacy . . . . . . . . . . . . . . . . . . .10 SECTION 3. FEES, PAYMENTS, REDUCTIONS, APPLICATIONS AND NOTATIONS. .11 Section 3.1. Commitment Fee . . . . . . . . . . . . . . . . . . . .11 Section 3.2. Letter of Credit Fees. . . . . . . . . . . . . . . . .11 Section 3.3. Computation of Interest and Fees . . . . . . . . . . .11 Section 3.4. Agents Fees. . . . . . . . . . . . . . . . . . . . . .11 Section 3.5. Voluntary Prepayments. . . . . . . . . . . . . . . . .11 Section 3.6. Commitment Terminations. . . . . . . . . . . . . . . .12 Section 3.7. Place and Application. . . . . . . . . . . . . . . . .12 Section 3.8. Notations and Requests . . . . . . . . . . . . . . . .13 SECTION 4. THE GUARANTIES. . . . . . . . . . . . . . . . . . . . . .14 Section 4.1. Guaranties . . . . . . . . . . . . . . . . . . . . . .14 Section 4.2. Further Assurances.. . . . . . . . . . . . . . . . . .14 -i- SECTION 5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . .14 Section 5.1. Organization and Qualification . . . . . . . . . . . .14 Section 5.2. Subsidiaries . . . . . . . . . . . . . . . . . . . . .14 Section 5.3. Corporate Authority and Validity of Obligations. . . .15 Section 5.4. Use of Proceeds; Margin Stock. . . . . . . . . . . . .15 Section 5.5. Financial Reports. . . . . . . . . . . . . . . . . . .15 Section 5.6. No Material Adverse Change . . . . . . . . . . . . . .16 Section 5.7. Litigation and Other Controversies . . . . . . . . . .16 Section 5.8. Taxes. . . . . . . . . . . . . . . . . . . . . . . . .16 Section 5.9. Approvals. . . . . . . . . . . . . . . . . . . . . . .16 Section 5.10. Investment Company; Public Utility Holding Company . .16 Section 5.11. ERISA. . . . . . . . . . . . . . . . . . . . . . . . .16 Section 5.12. Compliance with Laws . . . . . . . . . . . . . . . . .17 Section 5.13. Other Agreements . . . . . . . . . . . . . . . . . . .17 Section 5.14. No Default . . . . . . . . . . . . . . . . . . . . . .17 SECTION 6. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . .17 Section 6.1. All Advances . . . . . . . . . . . . . . . . . . . . .17 Section 6.2. Initial Advance. . . . . . . . . . . . . . . . . . . .18 SECTION 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . .19 Section 7.1. Maintenance of Business. . . . . . . . . . . . . . . .19 Section 7.2. Maintenance of Properties. . . . . . . . . . . . . . .19 Section 7.3. Taxes and Assessments. . . . . . . . . . . . . . . . .20 Section 7.4. Insurance. . . . . . . . . . . . . . . . . . . . . . .20 Section 7.5. Financial Reports. . . . . . . . . . . . . . . . . . .20 Section 7.6. Inspection . . . . . . . . . . . . . . . . . . . . . .21 Section 7.7. Current Ratio. . . . . . . . . . . . . . . . . . . . .22 Section 7.8. Tangible Net Worth . . . . . . . . . . . . . . . . . .22 Section 7.9. Leverage Ratio . . . . . . . . . . . . . . . . . . . .22 Section 7.10. Cash Flow Coverage Ratio . . . . . . . . . . . . . . .22 Section 7.11. Indebtedness for Borrowed Money. . . . . . . . . . . .22 Section 7.12. Liens. . . . . . . . . . . . . . . . . . . . . . . . .22 Section 7.13. Investments, Acquisitions, Loans, Advances and Guaranties . . . . . . . . . . . . . . . . . . . . . .23 Section 7.14. Mergers, Consolidations and Sales. . . . . . . . . . .25 Section 7.15. Dividends and Certain Other Restricted Payments. . . .25 Section 7.16. ERISA. . . . . . . . . . . . . . . . . . . . . . . . .26 Section 7.17. Compliance with Laws . . . . . . . . . . . . . . . . .26 Section 7.18. Change in the Nature of Business . . . . . . . . . . .26 SECTION 8. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . .26 Section 8.1. Events of Default. . . . . . . . . . . . . . . . . . .26 Section 8.2. Non-Bankruptcy Remedies. . . . . . . . . . . . . . . .28 Section 8.3. Bankruptcy Remedies. . . . . . . . . . . . . . . . . .28 -ii- Section 8.4. Collateral for Undrawn Letters of Credit . . . . . . .28 SECTION 9. DEFINITIONS; INTERPRETATIONS. . . . . . . . . . . . . . .29 Section 9.1. Definitions. . . . . . . . . . . . . . . . . . . . . .29 Section 9.2. Interpretation.. . . . . . . . . . . . . . . . . . . .37 SECTION 10. THE AGENT . . . . . . . . . . . . . . . . . . . . . . . .38 Section 10.1. Appointment and Authorization. . . . . . . . . . . . .38 Section 10.2. Rights as a Lender . . . . . . . . . . . . . . . . . .38 Section 10.3. Standard of Care . . . . . . . . . . . . . . . . . . .38 Section 10.4. Costs and Expenses . . . . . . . . . . . . . . . . . .39 Section 10.5. Indemnity. . . . . . . . . . . . . . . . . . . . . . .39 SECTION 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . .39 Section 11.1. Withholding Taxes. . . . . . . . . . . . . . . . . . .39 Section 11.2. Non-Business Days. . . . . . . . . . . . . . . . . . .40 Section 11.3. No Waiver, Cumulative Remedies . . . . . . . . . . . .41 Section 11.4. Waivers, Modifications and Amendments. . . . . . . . .41 Section 11.5. Costs and Expenses . . . . . . . . . . . . . . . . . .41 Section 11.6. Documentary Taxes. . . . . . . . . . . . . . . . . . .41 Section 11.7. Survival of Representations. . . . . . . . . . . . . .42 Section 11.8. Notices. . . . . . . . . . . . . . . . . . . . . . . .42 Section 11.9. Participations . . . . . . . . . . . . . . . . . . . .42 Section 11.10. Assignment Agreements. . . . . . . . . . . . . . . . .42 Section 11.11. Extension of the Revolving Credit Commitments. . . . .43 Section 11.12. Lender's Obligations Several . . . . . . . . . . . . .44 Section 11.13. Headings . . . . . . . . . . . . . . . . . . . . . . .44 Section 11.14. Severability of Provisions . . . . . . . . . . . . . .44 Section 11.15. Counterparts . . . . . . . . . . . . . . . . . . . . .44 Section 11.16. Binding Nature and Governing Law . . . . . . . . . . .44 Section 11.17. Entire Understanding . . . . . . . . . . . . . . . . .44 Section 11.18. Submission to Jurisdiction; Waiver of Jury Trial . . .44 Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 EXHIBIT A -- Form of Revolving Credit Note EXHIBIT B -- Notice of Payment Request EXHIBIT C -- Form of Term Note EXHIBIT D -- Compliance Certificate EXHIBIT E -- Opinion of Counsel EXHIBIT F -- Assignment and Acceptance SCHEDULE 5.2 -- Subsidiaries -iii- CREDIT AGREEMENT American National Bank and Trust Company of Chicago Chicago, Illinois Harris Trust and Savings Bank Chicago, Illinois Comerica Bank Detroit, Michigan and the other Lenders from time to time party hereto Ladies and Gentlemen: The undersigned, HA-LO Industries, Inc., an Illinois corporation (the "COMPANY"), applies to you for your several commitments, subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, to make credit available to the Company, all as more fully hereinafter set forth. SECTION 1. THE CREDITS. SECTION 1.1. REVOLVING CREDIT. Subject to the terms and conditions hereof, each Lender, by its acceptance hereof, severally agrees to extend a revolving credit (the "REVOLVING CREDIT") to the Company in the aggregate amount of such Lender's commitment to extend the Revolving Credit as set forth on the applicable signature page hereof or pursuant to Section 11.10 hereof (its "REVOLVING CREDIT COMMITMENT" and cumulatively for all the Lenders, the "REVOLVING CREDIT COMMITMENTS") (subject to any reductions thereof pursuant to the terms hereof) prior to the Termination Date. The Revolving Credit, subject to all of the terms and conditions hereof, may be utilized by the Company in the form of Revolving Loans and Letters of Credit, all as more fully hereinafter set forth; PROVIDED, HOWEVER, that the aggregate principal amount of the Revolving Loans and L/C Obligations outstanding at any one time shall not at any time exceed the Revolving Credit Commitments then in effect. During the period from and including the date hereof to but not including the Termination Date, the Company may use the Revolving Credit Commitments by borrowing, repaying and reborrowing Revolving Loans in whole or in part and/or by having the Agent issue Letters of Credit, having such Letters of Credit expire or otherwise terminate without having been drawn upon or, if drawn upon, reimbursing the Agent for each such drawing, and having the Agent issue new Letters of Credit, all in accordance with the terms and conditions of this Agreement. For all purposes of this Agreement, where a determination of the unused or available amount of the Revolving Credit Commitments is necessary, the Revolving Loans and L/C Obligations shall all be deemed to utilize the Revolving Credit Commitments. The obligations of the Lenders hereunder are several and not joint, and no Lender shall under any circumstances be obligated to extend credit hereunder in excess of its Revolving Credit Commitment. SECTION 1.2. REVOLVING LOANS. Subject to the terms and conditions hereof, the Revolving Credit may be availed of in the form of loans (individually a "REVOLVING LOAN" and collectively the "REVOLVING LOANS"). Each Borrowing of Revolving Loans shall be made ratably by the Lenders in accordance with their Percentages. Each Borrowing of Revolving Loans shall be in an amount of $100,000 or such greater amount which is an -2- integral multiple of $50,000; PROVIDED, HOWEVER, that (i) a Borrowing made to repay a Reimbursement Obligation may be made in the amount thereof and (ii) a Borrowing of Revolving Loans, or any part thereof, which bears interest with reference to the Adjusted LIBOR Rate shall be in such greater amount as is required by Section 2 hereof. All Revolving Loans made by a Lender shall be evidenced by a single Revolving Credit Note of the Company (individually a "REVOLVING CREDIT NOTE" and collectively the "REVOLVING CREDIT NOTES", which shall include the Revolving Credit Notes issued pursuant to Section 11.10 hereof) payable to the order of such Lender in the amount of its Revolving Credit Commitment, each Revolving Credit Note to be in the form (with appropriate insertions) attached hereto as Exhibit A. Each Revolving Credit Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2 hereof, and be expressed to mature on the Termination Date. Without regard to the principal amount of each Revolving Credit Note stated on its face, the actual principal amount at any time outstanding and owing by the Company on account thereof shall be the sum of all Revolving Loans then or theretofore made thereon less all payments of principal actually received thereon. SECTION 1.3. LETTERS OF CREDIT. (a) GENERAL TERMS. Subject to the terms and conditions hereof, as part of the Revolving Credit, the Agent shall issue standby and commercial letters of credit (each a "LETTER OF CREDIT") for the account of the Company in U.S. Dollars in an aggregate undrawn face amount up to the amount of the L/C Commitment. Each Letter of Credit shall be issued by the Agent, but each Lender shall be obligated to reimburse the Agent for such Lender's Percentage of the amount of each draft drawn under a Letter of Credit and, accordingly, each Letter of Credit shall be deemed to utilize the Revolving Credit Commitment of each Lender pro rata in accordance with its Percentage thereof. (b) APPLICATIONS. At any time before the Termination Date, the Agent shall, at the request of the Company, issue one or more Letters of Credit to or for the account of the Company in a form satisfactory to the Agent, with expiration dates no later than the earlier of (i) 12 months from the date of issuance (or be cancellable not later than 12 months from the date of issuance and each renewal) and (ii) 3 months after the Termination Date then in effect, in an aggregate face amount as set forth above, upon the receipt of an application for the relevant Letter of Credit in the form then customarily prescribed by the Agent duly executed by the Company (each an "APPLICATION"). On the Termination Date, the Company shall pay to the Agent an amount equal to the aggregate amounts undrawn on all Letters of Credit which are outstanding on that date to be held as cash collateral for the Obligations of the Company with respect to such Letters of Credit and the Applications therefor. Notwithstanding anything contained in any Application to the contrary, (i) the obligation of the Company to pay fees in connection with each Letter of Credit shall be as set forth in Section 3.2 hereof and (ii) except during the existence of an Event of Default, the Agent will not call for the funding by the Company of any amount under a Letter of Credit, or any other form of collateral security for the obligations of the Company in connection with such Letter of Credit, before being presented with a drawing thereunder. The Agent will promptly notify the Lenders of each issuance by the Agent of a Letter of -3- Credit. If the Agent issues any Letter of Credit with an expiration date that is automatically extended unless the Agent gives notice that the expiration date will not so extend beyond its then scheduled expiration date, the Agent will give such notice of non-renewal before the time necessary to prevent such automatic extension if before such required notice date (i) the expiration date of such Letter of Credit if so extended would be after the Termination Date, (ii) the Revolving Credit Commitments have been terminated or (iii) a Default or an Event of Default exists and the Required Lenders have given the Agent instructions not to so permit the extension of the expiration date of such Letter of Credit. The Agent shall provide the Company with a copy of such notice of non-renewal promptly after issuance thereof. The Agent agrees to issue amendments to the Letter(s) of Credit increasing the amount, or extending the expiration date, thereof at the request of the Company subject to the conditions of Section 6 and the other terms of this Section 1.3. Without limiting the generality of the foregoing, the Agent will not issue, amend or extend the expiration date of any Letter of Credit if any Lender notifies the Agent of any failure to satisfy or otherwise comply with the conditions and terms of Section 6 or of this Section 1.3 and directs the Agent not to take such action. (c) THE REIMBURSEMENT OBLIGATION. Subject to Section 1.3(b) hereof, the obligation of the Company to reimburse the Agent for all drawings under a Letter of Credit (a "REIMBURSEMENT OBLIGATION") shall be governed by the Application related to such Letter of Credit, except that (i) reimbursement of each drawing shall be made in immediately available funds at the Agent's principal office in Chicago, Illinois by no later than 2:00 p.m. Chicago time on the date when such drawing is paid if the Company has been informed of such drawing by the Agent on or before 11:30 a.m. Chicago time on the date when such drawing is paid or, if notice of such drawing is given to the Company after 11:30 a.m. Chicago time on the date when such drawn is paid, by 2:00 p.m. Chicago time on the next Business Day and (ii) the Company's Reimbursement Obligation shall bear interest (which the Company hereby promises to pay), whether before or after judgment, until payment in full thereof at the rate per annum equal to the Base Rate as in effect from time to time. If the Company does not make any such reimbursement payment on the date due and the Participating Lenders fund their participations therein in the manner set forth in Section 1.3(d) below, then all payments thereafter received by the Agent in discharge of any of the relevant Reimbursement Obligations shall be distributed in accordance with Section 1.3(d) below. (d) THE PARTICIPATING INTERESTS. Each Lender (other than the Lender then acting as Agent in issuing Letters of Credit), by its acceptance hereof, severally agrees to purchase from the Agent, and the Agent hereby agrees to sell to each such Lender (a "PARTICIPATING LENDER"), an undivided percentage participating interest (a "PARTICIPATING INTEREST"), to the extent of its Percentage, in each Letter of Credit issued by, and each Reimbursement Obligation owed to, the Agent. Upon any failure by the Company to pay any Reimbursement Obligation in respect of a Letter of Credit at the time required on the date the related drawing is paid, as set forth in Section 1.3(c) above, or if the Agent is required at any time to return to the Company or to a trustee, receiver, liquidation, custodian or other Person any portion of any payment of any Reimbursement Obligation, each -4- Participating Lender shall, not later than the Business Day it receives a certificate in the form of Exhibit B hereto from the Agent to such effect, if such certificate is received before 2:00 p.m. Chicago time, or not later than the following Business Day, if such certificate is received after such time, pay to the Agent an amount equal to such Lender's Percentage of such unpaid or recaptured Reimbursement Obligation together with interest on such amount accrued from the date the related payment was made by the Agent to the date of such payment by such Participating Lender at a rate per annum equal to (i) from the date the related payment was made by the Agent to the date 2 Business Days after payment by such Participating Lender is due hereunder, the Federal Funds Rate for each such day and (ii) from the date 2 Business Days after the date such payment is due from such Participating Lender to the date such payment is made by such Participating Lender, the Base Rate in effect for each such day. Each such Participating Lender shall thereafter be entitled to receive its Percentage of each payment received in respect of the relevant Reimbursement Obligation and of interest paid thereon, with the Agent retaining its Percentage as a Lender hereunder. The several obligations of the Participating Lenders to the Agent under this Section 1.3 shall be absolute, irrevocable and unconditional under any and all circumstances whatsoever and shall not be subject to any set-off, counterclaim or defense to payment which any Participating Lender may have or have had against the Company, the Agent, any other Lender or any other Person whatsoever. Without limiting the generality of the foregoing, such obligations shall not be affected by any Default or Event of Default or by any reduction or termination of any Revolving Credit Commitment of any Lender, and each payment by a Participating Lender under this Section 1.3 shall be made without any offset, abatement, withholding or reduction whatsoever. The Agent shall be entitled to offset amounts received for the account of a Lender under this Agreement against unpaid amounts due from such Lender to the Agent hereunder (whether as fundings of participations, indemnities or otherwise), but shall not be entitled to offset against amounts owed to the Agent by any Lender arising outside this Agreement. (e) INDEMNIFICATION. The Participating Lenders shall, to the extent of their respective Percentages, indemnify the Agent (to the extent not reimbursed by the Company) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with any Letter of Credit. The obligations of the Participating Lenders under this Section 1.3(e) and all other parts of this Section 1.3 shall survive termination of this Agreement, the Applications, and all drafts and any other documents presented in connection with a drawing under any Letter of Credit. SECTION 1.4. TERM CREDIT. Subject to the terms and conditions hereof, each Lender severally agrees to make one or more loans (individually a "TERM LOAN" and collectively the "TERM LOANS") to the Company in the aggregate amount of such Lender's commitment to make Term Loans as set forth on the applicable signature page hereof or pursuant to Section 11.10 hereof (its "TERM LOAN COMMITMENT" and collectively for all Lenders the "TERM LOAN COMMITMENTS") (subject to any reductions thereof pursuant to the -5- terms hereof) prior to the Term Credit Termination Date. Each Borrowing of Term Loans shall be made ratably by the Lenders in accordance with their Percentages. Each Borrowing of Term Loans shall be in an amount of $1,000,000 or such greater amount which is an integral multiple of $100,000; PROVIDED, HOWEVER, that a Borrowing of Term Loans, or any part thereof, which bears interest with reference to the Adjusted LIBOR Rate shall be in such greater amount as is required by Section 2 hereof. The principal amount of each Term Loan shall permanently reduce the amount available to the Company under each Lender's Term Loan Commitment, and no amount repaid or prepaid on any Term Loan may be borrowed again. Each Term Loan made by a Lender shall be evidenced by a Term Note of the Company (individually a "TERM NOTE" and collectively the "TERM NOTES", which shall include the Term Notes issued pursuant to Section 11.10 hereof) payable to the order of such Lender in an amount equal to such Lender's Percentage of the Borrowing of Term Loans then being made, each Term Note to be in the form (with appropriate insertions) attached hereto as Exhibit C. Each Term Note shall be dated the date of issuance thereof, be expressed to bear interest as set forth in Section 2 hereof, and be expressed to mature in consecutive quarterly principal installments, with each principal installment of a Term Note to be in an amount equal to 1/20th of the original principal amount of the Term Loan evidenced thereby, commencing on the date which is three calendar months after the date on which the relevant Term Loan is made and continuing on the same date of each and every third calendar month thereafter (or if no such date exists for any one or more of such installments, then on the last day of such third calendar month), except that the final payment of both principal and interest, if not sooner paid, shall be due on the earlier of (i) the fifth anniversary date of the date on which the relevant Term Loan was made or (ii) June 30, 2003. The obligations of the Lenders hereunder are several and not joint, and no Lender shall under any circumstances be obligated to extend credit hereunder in excess of its Term Loan Commitment. SECTION 1.5. MANNER OF BORROWING LOANS. (a) GENERALLY. The Company shall give the Agent notice (which may be written or oral, but if oral, promptly confirmed in writing) by 10:00 a.m. Chicago time on any Business Day of each request that any Borrowing of Loans, in each case specifying the amount of each such Borrowing, the type of Loan being requested, and the date such Borrowing is to be made (which shall be a Business Day). The Agent shall notify each Lender of its receipt of each such notice by 12:00 noon Chicago time on the Business Day any Borrowing of Loans constituting the Base Rate Portion is to be made and by 12:00 noon Chicago time on the Business Day it receives such a request for any Borrowing of Loans constituting a LIBOR Portion. Each Borrowing shall initially constitute part of the relevant Base Rate Portion except to the extent the Company has timely elected that such Borrowing, or any part thereof, constitute part of a LIBOR Portion as provided in Section 2 hereof. Not later than 2:00 p.m. Chicago time on the date specified for any Borrowing of Loans to be made hereunder, each Lender shall make the proceeds of its Loan comprising part of such Borrowing available in immediately available funds to the Agent in Chicago, Illinois. Subject to all of the terms and conditions hereof, the proceeds of each Lender's Loan shall be made available to the Company in accordance with the instruction of the -6- Company at the office of the Agent in Chicago, Illinois and in funds there current. (b) REIMBURSEMENT OBLIGATION. In the event the Company fails to give notice pursuant to Section 1.5(a) above of a Borrowing equal to the amount of a Reimbursement Obligation and has not notified the Agent by 11:30 a.m. Chicago time on the day such Reimbursement Obligation becomes due that the Company intends to repay such Reimbursement Obligation through funds not borrowed under this Agreement, the Company shall be deemed to have requested a Borrowing of Revolving Loans constituting part of the Base Rate Portion on such day in the amount of the Reimbursement Obligation then due, subject to Section 6 hereof, which Borrowing shall be applied to pay the Reimbursement Obligation then due. (c) AGENT RELIANCE ON BANK FUNDING. Unless the Agent shall have been notified by a Lender before the date on which such Lender is scheduled to make payment to the Agent of the proceeds of a Loan (which notice shall be effective upon receipt) that such Lender does not intend to make such payment, the Agent may assume that such Lender has made such payment when due and the Agent may in reliance upon such assumption (but shall not be required to) make available to the Company the proceeds of the Loan to be made by such Lender and, if any Lender has not in fact made such payment to the Agent, such Lender shall, on demand, pay to the Agent the amount made available to the Company attributable to such Lender together with interest thereon in respect of each day during the period commencing on the date such amount was made available to the Company and ending on (but excluding) the date such Lender pays such amount to the Agent at a rate per annum equal to (i) from the date the related amount was made available to the Company by the Agent to the date 2 Business Days after such amount is due from the Lender hereunder, the Federal Funds Rate for each such day and (ii) from the date 2 Business Days after such amount is due from the Lender hereunder to the date such amount is paid to the Agent by such Lender, the Base Rate in effect for each such day. If such amount is not received from such Lender by the Agent immediately upon demand, the Company will, on demand, repay to the Agent the proceeds of the Loan attributable to such Lender with interest thereon at a rate per annum equal to the interest rate applicable to the relevant Loan, but without such payment being considered a payment or prepayment of a Loan under Section 2.8 hereof, so that the Company will have no liability under Section 2.8 with respect to such payment. (d) RELIANCE. All requests for Borrowings and selection of interest rates to be applicable thereto may be written or oral, including by telephone or telecopy. The Company agrees that the Agent may rely on any such notice given by any person the Agent in good faith believes is an Authorized Representative without the necessity of independent investigation (the Company hereby indemnifying the Agent and the Lenders from any liability or loss ensuing from such reliance), and in the event any such telephonic or other oral notice conflicts with any written confirmation, such oral or telephonic notice shall govern if the Agent has acted in reliance thereon. SECTION 2. INTEREST. SECTION 2.1. OPTIONS. Subject to all of the terms and conditions of this Section 2, portions of the principal indebtedness evidenced by the Notes (all of the indebtedness -7- evidenced by Notes of the same type and, with respect to the Term Notes, relating to the same Borrowing, and bearing interest at the same rate for the same period of time being hereinafter referred to as a "PORTION") may, at the option of the Company, bear interest with reference to the Base Rate ("BASE RATE PORTIONS") or with reference to the Adjusted LIBOR Rate ("LIBOR PORTIONS"), and Portions may be converted from time to time from one basis to the other. All of the indebtedness evidenced by the Notes of the same type and, with respect to the Term Notes, relating to the same Borrowing, which is not part of a LIBOR Portion shall constitute a single Base Rate Portion. All of the indebtedness evidenced by the Notes of the same type and, with respect to the Term Notes, relating to the same Borrowing, which bears interest with reference to a particular Adjusted LIBOR Rate for a particular Interest Period shall constitute a single LIBOR Portion. Anything contained herein to the contrary notwithstanding, there shall not be more than five (5) LIBOR Portions applicable to Notes of the same type and, with respect to the Term Notes, relating to the same Borrowing, outstanding at any one time and each Lender shall have a ratable interest in each Portion. The Company hereby promise to pay interest on each Portion applicable to it at the rates and times specified in this Section 2. SECTION 2.2. BASE RATE PORTION. Each Base Rate Portion shall bear interest (which the Company hereby promises to pay at the times herein provided) at the rate per annum equal to the Base Rate as in effect from time to time minus .25% per annum, provided that if a Base Rate Portion is not paid when due (whether by lapse of time, acceleration or otherwise), such Portion shall bear interest (which the Company hereby promises to pay at the times hereinafter provided), whether before or after judgment, and until payment in full thereof, at the rate per annum determined by adding 2% to the Base Rate as in effect from time to time. Interest on the Base Rate Portions shall be payable monthly in arrears on the last day of each month in each year and at maturity of the applicable Notes, and interest after maturity shall be due and payable upon demand. SECTION 2.3. LIBOR PORTIONS. Each LIBOR Portion shall bear interest (which the Company hereby promises to pay at the times herein provided) for each Interest Period selected therefor at a rate per annum determined by adding the Applicable Margin to the Adjusted LIBOR Rate for such Interest Period, provided that if any LIBOR Portion is not paid when due (whether by lapse of time, acceleration or otherwise), such Portion shall bear interest (which the Company hereby promises to pay at the times hereinafter provided), whether before or after judgment, and until payment in full thereof, through the end of the Interest Period then applicable thereto at the rate per annum determined by adding 2% to the interest rate otherwise applicable thereto and effective at the end of such Interest Period, such LIBOR Portion shall automatically be converted into and added to the applicable Base Rate Portion and shall thereafter bear interest at the rate per annum determined by adding 2% to the Base Rate as in effect from time to time. Interest on each LIBOR Portion shall be due and payable on the last day of each Interest Period applicable thereto (provided that if any Interest Period is longer than three months, then interest on the LIBOR Portion having such Interest Period shall be due and payable on the date occurring every three months after the date such Interest Period began and on the last day of such Interest Period), and interest after maturity shall be due and payable upon demand. The Company -8- shall notify the Agent on or before 10:00 a.m. Chicago time on the third Business Day preceding the end of an Interest Period applicable to a LIBOR Portion whether such LIBOR Portion is to continue as a LIBOR Portion, in which event the Company shall notify the Agent of the new Interest Period selected therefor, and in the event the Company shall fail to so notify the Agent, such LIBOR Portion shall automatically be converted into and added to the applicable Base Rate Portion as of and on the last day of such Interest Period. The Agent shall promptly notify each Lender of each notice received from the Company pursuant to the foregoing provisions. Each LIBOR Portion shall be in an amount equal to $500,000 or such greater amount which is an integral multiple of $100,000. Anything contained herein to the contrary notwithstanding, the obligation of the Lenders to create, continue or effect by conversion any LIBOR Portion shall be conditioned upon the fact that at the time no Default or Event of Default shall have occurred and be continuing. SECTION 2.4. MANNER OF RATE SELECTION. The Company shall notify the Agent by 10:00 a.m. Chicago time at least 3 Business Days prior to the date upon which it requests that any LIBOR Portion be created or that any part of the applicable Base Rate Portion be converted into a LIBOR Portion (such notice to specify in each instance the amount thereof and the Interest Period selected therefor) and the Agent shall advise each Lender of each such notice by 12:00 noon Chicago time on the same Business Day it receives such notice. If any request is made to convert a LIBOR Portion into the applicable Base Rate Portion, such conversion shall only be made so as to become effective as of the last day of the Interest Period applicable thereto. All requests for the creation, continuance or conversion of Portions under this Agreement shall, subject to Section 2.6 hereof, be irrevocable. SECTION 2.5. CHANGE OF LAW. Notwithstanding any other provisions of this Agreement or the Notes, if at any time a Lender shall determine in good faith that any change in applicable laws, treaties or regulations or in the interpretation thereof makes it unlawful for such Lender to create or continue to maintain LIBOR Portions, it shall promptly so notify the Agent (which shall in turn promptly notify the Company and the other Lenders) and the obligation of such Lender to create, continue or maintain any LIBOR Portion under this Agreement shall be suspended until it is no longer unlawful for such Lender to create, continue or maintain LIBOR Portions. The Company shall, on demand, if the continued maintenance of a LIBOR Portion is unlawful, thereupon prepay the outstanding principal amount of the LIBOR Portion, together with all interest accrued thereon and all other amounts payable to the affected Lender with respect thereto under this Agreement; PROVIDED, HOWEVER, that the Company may instead elect to convert the principal amount of the affected LIBOR Portion into the applicable Base Rate Portion, subject to the terms and conditions of this Agreement. SECTION 2.6. UNAVAILABILITY OF DEPOSITS OR INABILITY TO ASCERTAIN THE ADJUSTED LIBOR RATE. Notwithstanding any other provision of this Agreement or the Notes, if prior to the commencement of any Interest Period, (a) any Lender shall inform the Agent that such Lender has determined that United States dollar deposits in the amount of any LIBOR Portion scheduled to be outstanding during such Interest Period are not readily available to such Lender in the offshore interbank market or (b) the Required Lenders shall advise the Agent that LIBOR as determined by the Agent will not adequately and fairly reflect the -9- cost to such Lenders of funding such LIBOR Portion for such Interest Period, the Agent shall promptly give notice thereof to the Company and each other Lender and the obligations of the Lenders to create, continue or effect by conversion any LIBOR Portion in such amount and for such Interest Period shall be suspended until the circumstances giving rise to such suspension no longer exist. SECTION 2.7. TAXES AND INCREASED COSTS. With respect to the LIBOR Portions, if any Lender shall determine in good faith that any change in any applicable law, treaty, regulation or guideline (including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or any new law, treaty, regulation or guideline, or any interpretation of any of the foregoing by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over such Lender or its lending branch or the Portions contemplated by this Agreement (whether or not having the force of law) shall: (i) impose, increase, or deem applicable any reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, or any other acquisition of funds or disbursements by, such Lender which is not in any instance already accounted for in computing the Adjusted LIBOR Rate; (ii) subject such Lender, the LIBOR Portions or any Note to the extent it evidences any LIBOR Portion, to any tax (including, without limitation, any United States interest equalization tax or similar tax however named applicable to the acquisition or holding of debt obligations and any interest or penalties with respect thereto), duty, charge, stamp tax, fee, deduction or withholding in respect of this Agreement, any LIBOR Portion or any Note to the extent it evidences such a Portion, except such taxes as may be measured by the overall net income or gross receipts of such Lender or its lending branches and imposed by the jurisdiction, or any political subdivision or taxing authority thereof, in which such Lender's principal executive office or its lending branch is located; (iii) change the basis of taxation of payments of principal and interest due from the Company to such Lender hereunder or under any Note to the extent it evidences any LIBOR Portion (other than by a change in taxation of the overall net income or gross receipts of such Lender or its lending branches); or (iv) impose on such Lender any penalty with respect to the foregoing or any other condition regarding this Agreement, any LIBOR Portion, or any Note to the extent it evidences any LIBOR Portion; and such Lender shall determine that the result of any of the foregoing is to increase the cost (whether by incurring a cost or adding to a cost) to such Lender of creating or maintaining any LIBOR Portion hereunder or to reduce the amount of principal or interest received or receivable by such Lender, then the Company shall pay on demand to the Agent for the account of such Lender from time to time as specified by such Lender such additional amounts as such Lender shall reasonably determine are sufficient to compensate and indemnify it for such increased cost or reduced -10- amount. If a Lender makes such a claim for compensation, it shall provide to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the computation of the increased cost or reduced amount as a result of any event mentioned herein and such certificate shall be conclusive if reasonably determined. SECTION 2.8. FUNDING INDEMNITY. In the event any Lender shall incur any loss, cost or expense (including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired or contracted to be acquired by such Lender to fund or maintain its part of any LIBOR Portion or the relending or reinvesting of such deposits or other funds or amounts paid or prepaid to such Lender) as a result of: (i) any payment of a LIBOR Portion on a date other than the last day of the then applicable Interest Period for any reason, whether before or after the occurrence of a Default or Event of Default, and whether or not such payment is required by any provisions of this Agreement; or (ii) any failure by any of the Company to create, borrow, continue or effect by conversion a LIBOR Portion on the date specified in a notice given pursuant to this Agreement; then, upon the demand of such Lender, the Company shall pay on demand to the Agent for the account of such Lender such amount as will reimburse such Lender for such loss, cost or expense. If a Lender requests such a reimbursement, it shall provide the Company (with a copy to the Agent) with a certificate setting forth in reasonable detail the computation of the loss, cost or expense giving rise to the request for reimbursement and such certificate shall be conclusive if reasonably determined. SECTION 2.9. LENDING BRANCH. Each Lender may, at its option, elect to make, fund or maintain its Loans hereunder at the branches or offices specified on the signature pages hereof or on any Assignment Agreement executed and delivered pursuant to Section 11.10 hereof or at such other of its branches or offices as such Lender may from time to time elect. SECTION 2.10. DISCRETION OF LENDERS AS TO MANNER OF FUNDING. Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its share of its Notes in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including determinations under Sections 2.6, 2.7 and 2.8 hereof) shall be made as if each such Lender had actually funded and maintained each LIBOR Portion during each Interest Period applicable thereto through the purchase of deposits in the offshore interbank market in the amount of its share of such LIBOR Portion, having a maturity corresponding to such Interest Period and bearing an interest rate equal to LIBOR for such Interest Period. SECTION 2.11. CAPITAL ADEQUACY. If any Lender shall determine that any applicable law, rule or regulation regarding capital adequacy instituted after the date hereof, or any change in the interpretation or administration of any applicable law, rule or regulation regarding capital adequacy by any governmental authority, central bank or -11- comparable agency charged with the interpretation or administration thereof or compliance by such Lender (or its lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder or credit extended by it hereunder to a level below that which such Lender could have achieved but for such law, rule, regulation, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within 15 days after demand by such Lender, the Company shall pay to the Agent for the account of such Lender such additional amount or amounts as will compensate such Lender for such reduction. Any Lender claiming compensation under this Section shall accompany its demand for compensation with a certificate (with a copy to the Agent) setting forth the additional amount or amounts to be paid to it hereunder in reasonable detail, which certificate shall be conclusive if reasonably determined. In determining such amount, such Lender may use any reasonable averaging and attribution methods. SECTION 3. FEES, PAYMENTS, REDUCTIONS, APPLICATIONS AND NOTATIONS. SECTION 3.1. COMMITMENT FEE. For the period from the date hereof to but not including the Termination Date, the Company shall pay to the Agent for the account of the Lenders in accordance with their Percentages a commitment fee at the rate per annum equal to .20% per annum on the average daily unused amount of the Revolving Credit Commitments hereunder. Such fee shall be payable in arrears on the last day of each March, June, September, and December in each year (commencing with the first of such dates after the date hereof) and on the Termination Date. SECTION 3.2. LETTER OF CREDIT FEES. With respect to each standby Letter of Credit, commencing on the date which is three calendar months after the date of issuing the relevant Letter of Credit and continuing on the same date each and every third calendar month thereafter, the Company shall pay to the Agent a letter of credit fee at the rate of 1.5% per annum applied to the daily average face amount of the relevant standby Letter of Credit outstanding during such period (of which amount the Agent shall retain for its own account, as the issuing bank and not on account of its interest therein as a Lender, .25% per annum with the remaining 1.25% per annum fee to be remitted to the Lenders pro rata in accordance with their Percentages). With respect to each commercial Letter of Credit, on the date when any drawing is made thereunder (or, if sooner, the expiry date of the relevant Letter of Credit), the Company shall pay to the Agent a letter of credit fee at the rate of .25% (minimum of $70) per annum applied to the face amount of the drawing of the relevant commercial Letter of Credit (or, if being paid on the expiry date of such Letter of Credit, on the undrawn face amount thereof) (of which amount the Agent shall retain for its own account, as the issuing bank and not on account of its interest therein as a Lender, .05% per annum, with the remaining .20% per annum fee to be remitted to the Lenders pro rata in accordance with their Percentages). In addition, the Company shall pay to the Agent for its own use and benefit the Agent's standard amendment and other administrative fees for each Letter of Credit, as such standard fees may be established by the Agent from time to time. SECTION 3.3. COMPUTATION OF INTEREST AND FEES. All interest on the Notes, and all fees, charges and commissions due hereunder, shall be computed on the basis of a year of -12- 360 days for the actual number of days elapsed. SECTION 3.4. AGENTS FEES. The Company shall pay to the Agent for its own use and benefit fees with respect to the administration of the credit facilities described in this Agreement as are agreed to between the Company and the Agent in that certain fee letter dated January 31, 1997, or as otherwise agreed to by them. SECTION 3.5. VOLUNTARY PREPAYMENTS. The Company shall have the privilege of prepaying the Revolving Credit Notes in whole or in part (but if in part, then in a minimum amount of $100,000 or such greater amount which is an integral multiple of $50,000) and the Term Notes in whole or in part (but if in part, then in a minimum amount of $100,000 or such greater amount which is an integral multiple of $50,000) at any time upon 1 Business Day prior notice to the Agent (such notice if received subsequent to 2:00 p.m. Chicago time on a given day to be treated as though received at the opening of business on the next Business Day), which shall promptly so notify the Lenders, by paying to the Agent for the account of the Lenders the principal amount to be prepaid and (i) if such a prepayment prepays the Term Notes relating to the same Borrowing in full, accrued interest thereon to the date of prepayment, (ii) if such a prepayment prepays the Revolving Credit Notes in full and is accompanied by the termination in whole of the Revolving Credit Commitments, accrued interest thereon to the date of prepayment plus any commitment fee which has accrued and is unpaid, and (iii) any amounts due to the Lenders under Section 2.8 hereof. SECTION 3.6. COMMITMENT TERMINATIONS. (a) VOLUNTARY TERMINATIONS. The Company shall have the privilege upon 1 Business Day prior notice to the Agent (which shall promptly notify the Lenders) to ratably terminate the Revolving Credit Commitments and/or the Term Loan Commitments in whole or in part (but if in part then in the amount of $5,000,000 or such greater amount which is an integral multiple of $1,000,000). No partial terminations of the Revolving Credit Commitments may be made below the L/C Commitment then in effect, unless the L/C Commitment is concurrently reduced by a like amount. Not later than the termination date stated in such notice, there shall be made such payments to the Agent as may be necessary to reduce the sum of the aggregate outstanding principal amount of the relevant Loans to the amount to which the relevant Commitments have been reduced, together with (x) any amount due the Lenders under Section 2.8 hereof and (y) in the case of a termination in whole, all interest, fees and other amounts due on the Obligations. The foregoing to the contrary notwithstanding, (i) no termination of the Revolving Credit Commitment may be effected hereunder if as a result thereof the outstanding aggregate amount of L/C Obligations would exceed the L/C Commitment as reduced by such termination and (ii) the relevant Commitments may not be terminated below $10,000,000 except concurrently with their termination in whole. No termination of the Commitments may be reinstated. (b) CHANGE IN CONTROL. After the occurrence of a Change in Control, the Required Lenders may at any time, but in no event later than 30 days after the date the Company notifies the Lenders of such Change in Control, terminate the Commitments effective on the Business Day after the day the Company receives notice of such termination. Any Loans outstanding on the date the Commitments are so terminated, -13- together with all other Obligations owing hereunder, shall be due and payable on such date. SECTION 3.7. PLACE AND APPLICATION. All payments of principal, interest, fees and any other Obligations shall be made to the Agent at its office at 33 North LaSalle Street, Chicago, Illinois (or at such other place as the Agent may specify) in immediately available and freely transferable funds at the place of payment. All such payments shall be made without set-off or counterclaim and without reduction for, and free from, any and all present or future taxes, levies, imposts, duties, fees, charges, deductions, withholdings, restrictions or conditions of any nature imposed by any government or political subdivision or taxing authority thereof. Payments received by the Agent after 2:00 p.m. Chicago time shall be deemed received as of the opening of business on the next Business Day. Except as herein provided, all payments shall be received by the Agent for the ratable account of the Lenders and shall be promptly distributed by the Agent to the Lenders in accordance with their Percentages. Unless the Company otherwise directs, payments on any Loans shall be deemed first applied to the applicable Base Rate Portion until payment in full thereof, with any balance applied to the LIBOR Portions in the order in which their Interest Periods expire. Any amount prepaid on the Revolving Credit Notes may, subject to all of the terms and conditions hereof, be borrowed, repaid and borrowed again. No amounts prepaid on the Term Notes may be reborrowed, and any partial prepayments (whether voluntary or mandatory) shall be applied to the several installments of such Notes in the inverse order of maturity. All payments (whether voluntary or required) shall be accompanied by any amount due the Lenders under Section 2.8 hereof, but no acceptance of such a payment without requiring payment of amounts due under Section 2.8 shall preclude a later demand by the Lenders for any amount due them under Section 2.8 in respect of such payment. Anything contained herein to the contrary notwithstanding, all payments and collections received in respect of the Obligations and all proceeds of collateral or payments on guarantees received, in each instance, by the Agent or any of the Lenders after the occurrence of an Event of Default shall be remitted to the Agent and distributed as follows: (a) first, to the payment of any outstanding actual costs and expenses incurred by the Agent in protecting, preserving or enforcing rights under the Loan Documents, and in any event all costs and expenses of a character which the Company has agreed to pay under Section 11.5 hereof (such funds to be retained by the Agent for its own account unless the Agent has previously been reimbursed for such costs and expenses by the Lenders, in which event such amounts shall be remitted to the Lenders to reimburse them for payments theretofore made to the Agent); (b) second, to the payment of any outstanding interest or other fees or amounts due under the Notes and the other Loan Documents, in each case other than for principal or in reimbursement or collateralization of L/C Obligations, ratably as among the Agent and the Lenders in accord with the amount of such interest and other fees or amounts owing each; (c) third, to the payment of the principal of the Notes and any unpaid -14- Reimbursement Obligations and to the Agent to be held as collateral security for any other L/C Obligations (until the Agent is holding an amount of cash equal to the then outstanding amount of all such L/C Obligations), the aggregate amount paid to or held as collateral security for the Lenders to be allocated pro rata as among the Lenders in accordance with the then respective aggregate unpaid principal balances of their Loans and interests in the Letters of Credit; and (d) fourth, to the Company or whoever else may be lawfully entitled thereto. SECTION 3.8. NOTATIONS AND REQUESTS. All Borrowings made against the Notes, the status of all amounts evidenced by the Notes as constituting part of the applicable Base Rate Portion or LIBOR Portion and the rates of interest and Interest Periods applicable to such Portions shall be recorded by the Lenders on their books or, at their option in any instance, endorsed on the reverse side of the Notes and the unpaid principal balances and status, rates and Interest Periods so recorded or endorsed by the Lenders shall be prima facie evidence in any court or other proceeding brought to enforce the Notes of the principal amount remaining unpaid thereon, the status of such Borrowings and the interest rates and Interest Periods applicable thereto. Prior to any negotiation of any Note, the Lender holding such Note shall endorse thereon the status of all amounts evidenced thereby as constituting part of the Base Rate Portion or LIBOR Portion and the rates of interest and the Interest Periods applicable thereto. SECTION 4. THE GUARANTIES. SECTION 4.1. GUARANTIES. The payment and performance of the Obligations shall at all times be guaranteed by each Subsidiary, whether now existing or hereafter formed or acquired, pursuant to a guaranty agreement executed by such Subsidiary in form and substance satisfactory to the Agent (individually a "GUARANTY" and collectively the "GUARANTIES"); PROVIDED, HOWEVER, that, unless an Event of Default exists and thereafter until requested by the Agent or the Required Lenders, no Subsidiary organized outside of the United States of America needs to execute and deliver any such Guaranty or otherwise become bound as a guarantor of the Obligations hereunder. SECTION 4.2. FURTHER ASSURANCES. In the event the Company or any Subsidiary forms or acquires any Subsidiary after the date hereof, the Company shall cause such newly formed or acquired Subsidiary to execute a Guaranty in accordance with Section 4.1 above, and the Company shall also deliver, or cause such Subsidiary to deliver, at the Company's cost and expense, such other instruments, documents, certificates, and opinions reasonably required by the Agent in connection therewith. SECTION 5. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Lenders as follows: SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Company is duly organized, validly existing and in good standing as a corporation under the laws of the State of Illinois, has full and adequate corporate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying, except where the failure to do -15- so would not have a Material Adverse Effect. SECTION 5.2. SUBSIDIARIES. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, as the case may be, has full and adequate power to own its Property and conduct its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of the business conducted by it or the nature of the Property owned or leased by it requires such licensing or qualifying, except where the failure to do so would not have a Material Adverse Effect. Schedule 5.2 hereto identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding shares of each class of its capital stock or other equity interests owned by the Company and the Subsidiaries and, if such percentage is not 100% (excluding directors' qualifying shares as required by law), a description of each class of its authorized capital stock and other equity interests and the number of shares of each class issued and outstanding. All of the outstanding shares of capital stock and other equity interests of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such shares and other equity interests indicated on Schedule 5.2 as owned by the Company or a Subsidiary are owned, beneficially and of record, by the Company or such Subsidiary free and clear of all Liens. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any shares of any class of capital stock or other equity interests of any Subsidiary. SECTION 5.3. CORPORATE AUTHORITY AND VALIDITY OF OBLIGATIONS. The Company has full right and authority to enter into this Agreement and the other Loan Documents executed by it, to make the borrowings herein provided for, to issue its Notes in evidence thereof, and to perform all of its obligations hereunder and under the other Loan Documents executed by it. Each Subsidiary has full right and authority to enter into the Loan Documents executed by it, to guarantee the Obligations, and to perform all of its obligations under the Loan Documents executed by it. The Loan Documents delivered by the Company and by each of its Subsidiaries have been duly authorized, executed and delivered by such Person and constitute valid and binding obligations of such Person enforceable in accordance with their terms except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether the application of such principles is considered in a proceeding in equity or at law); and this Agreement and the other Loan Documents do not, nor does the performance or observance by the Company or any Subsidiary of any of the matters and things herein or therein provided for, contravene or constitute a default under any provision of law or any judgment, injunction, order or decree binding upon the Company or any Subsidiary or any provision of the charter, articles of incorporation or by-laws of the Company or any Subsidiary or any covenant, indenture or agreement of or affecting the Company or any Subsidiary or any of its Property, or result in the creation or imposition of any Lien on any Property of the Company or any Subsidiary. SECTION 5.4. USE OF PROCEEDS; MARGIN STOCK. The Company shall use the -16- proceeds of the Loans and other extensions of credit made available hereunder for its general working capital purposes and for such other legal and proper purposes as are consistent with all applicable laws. Neither the Company nor any Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan or any other extension of credit made hereunder will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Margin stock constitutes less than 25% of those assets of the Company and its Subsidiaries which are the subject to any limitation on sale, pledge or other restriction hereunder. SECTION 5.5. FINANCIAL REPORTS. The consolidated balance sheet of the Company and its Subsidiaries as at December 31, 1995, and the related consolidated statements of income, shareholders equity and cash flows of the Company and its Subsidiaries for the fiscal year then ended, and accompanying notes thereto, which financial statements are accompanied by the audit report of Arthur Andersen, L.L.P., independent public accountants, and the unaudited interim consolidated balance sheet of the Company and its Subsidiaries as at September 30, 1996, and the related consolidated statements of income, shareholders equity and cash flows of the Company and its Subsidiaries for the 9 months then ended, heretofore furnished to the Lenders, fairly present the financial condition of the Company and its Subsidiaries as at said dates and the results of their operations and cash flows for the periods then ended in conformity with GAAP applied on a consistent basis. Neither the Company nor any Subsidiary has contingent liabilities which are material to it other than as indicated on such financial statements or, with respect to future periods, on the financial statements furnished pursuant to Section 7.5 hereof. SECTION 5.6. NO MATERIAL ADVERSE CHANGE. Since September 30, 1996, there has been no change in the condition (financial or otherwise) or business prospects of the Company or any Subsidiary, except those occurring in the ordinary course of business, none of which individually or in the aggregate constitute a Material Adverse Effect. SECTION 5.7. LITIGATION AND OTHER CONTROVERSIES. There is no litigation or governmental proceeding or labor controversy pending, nor to the knowledge of the Company threatened, against the Company or any Subsidiary which, if adversely determined, is reasonably likely to result in a Material Adverse Effect except as disclosed prior to the date hereof in filings by the Company with the Securities and Exchange Commission. SECTION 5.8. TAXES. All tax returns required to be filed by the Company or any Subsidiary in any jurisdiction have, in fact, been filed or appropriate extensions therefor have been obtained, and all taxes, assessments, fees and other governmental charges upon the Company or any Subsidiary or upon any of their respective Properties, income or franchises, which are shown to be due and payable in such returns, have been paid as and when due. The Company does not know of any proposed additional tax assessment against the Company or any of its Subsidiaries for which adequate provisions in accordance with GAAP have not been made on their accounts. Adequate provisions in accordance with GAAP for taxes on the books of the Company and each Subsidiary have been made for all -17- open years, and for its current fiscal period. SECTION 5.9. APPROVALS. No authorization, consent, license, or exemption from, or filing or registration with, any court or governmental department, agency or instrumentality, nor any approval or consent of the stockholders of the Company or any other Person, is or will be necessary to the valid execution, delivery or performance by the Company of this Agreement or by the Company or any Subsidiary of any other Loan Document, except for such approvals of the Board of Directors of the Company and its Subsidiaries which have been obtained and remain in full force and effect. SECTION 5.10. INVESTMENT COMPANY; PUBLIC UTILITY HOLDING COMPANY. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "public utility holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 5.11. ERISA. The Company and each other member of its Controlled Group has fulfilled its obligations under the minimum funding standards of and is in compliance in all material respects with ERISA and the Code to the extent applicable to it and has not incurred any material liability to the PBGC or a Plan under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Neither the Company nor any Subsidiary has any contingent liabilities with respect to any post-retirement benefits under a Welfare Plan, other than liability for continuation coverage described in article 6 of Title I of ERISA. SECTION 5.12. COMPLIANCE WITH LAWS. The Company and each of its Subsidiaries are in compliance with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to their Properties or business operations (including, without limitation, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, laws and regulations relating to the providing of health care services, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or hazardous wastes and substances), non-compliance with which is reasonably likely to result in a Material Adverse Effect. Neither the Company nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action is reasonably likely to result in a Material Adverse Effect. SECTION 5.13. OTHER AGREEMENTS. Neither the Company nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Company or any Subsidiary, or any of its Property, which default, if uncured, is reasonably likely to result in a Material Adverse Effect. SECTION 5.14. NO DEFAULT. No Default or Event of Default has occurred and is continuing. SECTION 6. CONDITIONS PRECEDENT. SECTION 6.1. ALL ADVANCES. The obligation of the Lenders to make any Loan or -18- other financial accommodation to the Company hereunder (including the first such accommodation) shall be subject to the conditions precedent that as of the time of the making of each such accommodation: (a) each of the representations and warranties set forth herein and in the other Loan Documents shall be and remain true and correct as of said time, except to the extent the same expressly relate to an earlier date; (b) no Default or Event of Default shall have occurred Sand be continuing; (c) after giving effect to such extension of credit, the aggregate principal amount of all Revolving Loans and L/C Obligations outstanding under this Agreement shall not exceed the Revolving Credit Commitments then in effect; (d) in the case of any Borrowing of Term Loans, the Agent shall have received for each of the Lenders a duly executed and completed Term Note for such Lender in the amount of its Term Loan; (e) in the case of the issuance of any Letter of Credit, the Agent shall have received a properly completed Application therefor and, in the case of an extension or increase in the amount of the Letter of Credit, the Agent shall have received a written request therefor, in a form reasonably acceptable to the Agent; and (f) such extension of credit shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Agent or any Lender (including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System) as then in effect. The Company's request for any Loan or Letter of Credit shall constitute its warranty as to the facts specified in subsections (a) through (e), both inclusive, above. SECTION 6.2. INITIAL ADVANCE. At or prior to the time of the initial Loans or other financial accommodation hereunder, the following conditions precedent shall also have been satisfied: (a) the Agent shall have received the following for the account of the Lenders (each to be properly executed and completed) and the same shall have been approved as to form and substance by the Agent: (i) the Revolving Credit Notes; (ii) the Guaranties; (iii) copies (executed or certified as may be appropriate) of resolutions of the Board of Directors of the Company and each Subsidiary authorizing the execution, delivery and performance of the Loan Documents to which it is a party and all other documents relating thereto; (iv) an incumbency certificate containing the name, title and genuine signature of the Company's Authorized Representatives and each authorized signatory of each Subsidiary; (v) a good standing certificate for the Company and each Subsidiary, dated as of a date no earlier than 30 days prior to the date hereof, from the appropriate governmental offices in the state of its incorporation and in each state in which it is qualified to do business as a foreign corporation; -19- (vi) articles of incorporation and by-laws for the Company and each Subsidiary certified by such Person's corporate Secretary or other appropriate officer acceptable to the Agent; and (vii) a pay-off letter from each lender to the Company and its Subsidiaries whose debt is being satisfied out of the initial Borrowing hereunder, each pay-off letter to be in form and substance reasonably satisfactory to the Agent (without limiting the foregoing, each such pay-off letter shall contain an undertaking of the relevant lender to execute and deliver to the Agent all necessary UCC termination statements and other lien release documents necessary to release all liens and security interests filed in favor of such lender against the property of the Company and its Subsidiaries). (b) all legal matters incident to the transactions contemplated hereby shall be acceptable to the Lenders and their counsel, and the Agent shall have received for the account of the Lenders the favorable written opinion of counsel to the Company and its Subsidiaries, in the form of Exhibit E hereto or in such other form as is reasonably acceptable to the Agent and its counsel; (c) the Agent shall have received for itself and for the Lenders the initial fees, if any, called for hereby; (d) the Company shall have delivered to each of the Lenders a Compliance Certificate substantially in the form attached hereto as Exhibit D showing compliance with the financial covenants set forth in Sections 7.7, 7.8 and 7.9 hereto as of December 31, 1996, and a pro forma Compliance Certificate substantially in the form attached hereto as Exhibit D showing compliance with the financial covenants set forth in Sections 7.7, 7.8 and 7.9 hereof after giving effect to the Creative Concepts Acquisition; and (e) the Agent shall have received for the account of the Lenders such other agreements, instruments, documents, certificates and opinions as the Agent may reasonably request. SECTION 7. COVENANTS. The Company agrees that, so long as any credit is available to or in use by the Company hereunder, except to the extent compliance in any case or cases is waived in writing by the Required Lenders: SECTION 7.1. MAINTENANCE OF BUSINESS. The Company shall, and shall cause each Subsidiary to, preserve and maintain its existence, except as otherwise provided in Section 7.14(c) hereof. The Company shall, and shall cause each Subsidiary to, preserve and keep in force and effect all licenses, permits, franchises, approvals, patents, trademarks, trade names, trade styles, copyrights, and other proprietary rights reasonably necessary to the proper conduct of its business. SECTION 7.2. MAINTENANCE OF PROPERTIES. The Company shall, and shall cause each Subsidiary to, maintain, preserve and keep its property, plant and equipment in good repair, working order and condition (ordinary wear and tear excepted). SECTION 7.3. TAXES AND ASSESSMENTs. The Company shall duly pay and -20- discharge, and shall cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees and governmental charges upon or against it or its Properties, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor. SECTION 7.4. INSURANCE. The Company shall insure and keep insured, and shall cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Company shall insure, and shall cause each Subsidiary to insure, such other hazards and risks (including employers' and public liability risks) with good and responsible insurance companies as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Company shall upon request furnish to the Agent and the Lenders a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. SECTION 7.5. FINANCIAL REPORTS. The Company shall, and shall cause each Subsidiary to, maintain a standard system of accounting in accordance with GAAP and shall furnish to the Agent, each Lender and each of their duly authorized representatives such information respecting the business and financial condition of the Company and its Subsidiaries as the Agent or such Lender may reasonably request; and without any request, shall furnish to the Agent and the Lenders: (a) as soon as available, and in any event within 45 days after the close of each of the first three fiscal quarters of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated statements of income, shareholders equity and cash flows of the Company and its Subsidiaries for the fiscal quarter and for the fiscal year-to-date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Company in accordance with GAAP (subject to year-end audited adjustments) and certified to by the Company's chief financial officer, or another officer of the Company acceptable to the Agent; (b) as soon as available, and in any event within 90 days after the close of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries as of the last day of the period then ended and the consolidated statements of income, shareholders equity and cash flows of the Company and its Subsidiaries for the period then ended, and accompanying notes thereto, each in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of Arthur Andersen, L.L.P. or another firm of independent public accountants of recognized national standing selected by the Company and reasonably satisfactory to the Required Lenders, to the effect that the consolidated financial statements have been -21- prepared in accordance with GAAP and present fairly in accordance with GAAP the consolidated financial condition of the Company and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended and that an examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, such examination included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (c) promptly after the sending or filing thereof, copies of each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to its stockholders, and copies of each regular, periodic or special report, registration statement or prospectus filed by the Company or any of its Subsidiaries with any securities exchange or the Securities Exchange Commission or any successor agency; (d) as soon as available, and in any event within 60 days after the end of each fiscal year of the Company, a copy of the Company's consolidated annual budget for the then current fiscal year, such budget to show the Company's projected consolidated revenues and expenses on a quarter-by-quarter basis, such budget to be in reasonable detail prepared by the Company and in form reasonably satisfactory to the Agent; and (e) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Company, written notice of any threatened or pending litigation or governmental proceeding or labor controversy against the Company or against any Subsidiary which, if adversely determined, is reasonably likely to result in a Material Adverse Effect or of the occurrence of any Default or Event of Default hereunder. Each of the financial statements furnished to the Lenders pursuant to subsections (a) and (b) of this Section 7.5 shall be accompanied by a written certificate in the form attached hereto as Exhibit D signed by the chief financial officer of the Company, or another officer of the Company acceptable to the Agent, to the effect that to the best of such officer's knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Company or any Subsidiary to remedy the same. Such certificate shall also set forth the calculations supporting such statements in respect of Sections 7.7, 7.8, 7.9 and 7.10 of this Agreement. SECTION 7.6. INSPECTION. The Company shall, and shall cause each of its Subsidiaries to, permit the Agent, each Lender and each of their duly authorized representatives and agents to visit and inspect any of its Properties, corporate books and financial records, to examine and make copies of its books of accounts and other financial records, and to discuss its affairs, finances and accounts with, and to be advised as to the same by its officers at such reasonable times and intervals as the Agent or any such Lender may designate provided, however, that in each case the Company receives not less than 24 -22- hours prior notice and that such inspections only occur during normal business hours. SECTION 7.7. CURRENT RATIO. The Company shall at all times maintain a Current Ratio of not less than 1.5 to 1.0. SECTION 7.8. TANGIBLE NET WORTH. The Company shall, at all times, maintain Tangible Net Worth of not less than the sum of (a) $30,000,000 plus (b) 50% of Net Income for each fiscal year of the Company ending after the date hereof (commencing with the fiscal year ending December 31, 1996) for which such Net Income is a positive amount (I.E., there shall be no reduction to the amount of Tangible Net Worth required to be maintained hereunder for any fiscal year in which Net Income is less than zero). SECTION 7.9. LEVERAGE RATIO. The Company shall, at all times, maintain a ratio of Total Liabilities to Tangible Net Worth of not more than 2.5 to 1.0. SECTION 7.10. CASH FLOW COVERAGE RATIO. As of the last day of each fiscal quarter of the Company, the Company shall maintain a ratio of Adjusted EBITDA for the four fiscal quarters of the Company then ended to Fixed Charges for the same four fiscal quarters then ended of not less than 1.2 to 1.0. SECTION 7.11. INDEBTEDNESS FOR BORROWED MONEY. The Company shall not, nor shall it permit any Subsidiary to, issue, incur, assume, create or have outstanding any Indebtedness for Borrowed Money; PROVIDED, HOWEVER, that the foregoing shall not restrict nor operate to prevent: (a) the Obligations of the Company owing to the Agent and the Lenders hereunder; (b) purchase money indebtedness and Capitalized Lease Obligations incurred in the ordinary course of business in an aggregate amount not to exceed $2,000,000 at any one time outstanding (c) obligations of the Company arising out of interest rate hedging agreements entered into with financial institutions in the ordinary course of business; (d) guaranties expressly permitted by Section 7.13 hereof; (e) indebtedness from time to time owing by any Subsidiary to the Borrower or to any other Subsidiary arising in the ordinary course of business; (f) indebtedness of up to $7,000,000 in the aggregate to finance the purchase and/or construction of the Company's intended Detroit-area Creative Concepts facility; and (g) other unsecured indebtedness of the Company and its Subsidiaries in an aggregate amount not to exceed $500,000 at any one time outstanding. SECTION 7.12. LIENS. The Company shall not, nor shall it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Property owned by the Company or any Subsidiary; PROVIDED, HOWEVER, that the foregoing shall not apply to nor operate to prevent: (a) Liens arising by statute in connection with worker's compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges, good faith cash deposits in connection with tenders, contracts or leases to which the Company or any Subsidiary is a party or other cash deposits required to be made in the ordinary -23- course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor; (b) mechanics', workmen's, materialmen's, landlords', carriers', or other similar Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest; (c) the pledge of assets for the purpose of securing an appeal, stay or discharge in the course of any legal proceeding, provided that the aggregate amount of liabilities of the Company and their Subsidiaries secured by a pledge of assets permitted under this subsection, including interest and penalties thereon, if any, shall not be in excess of $1,000,000 at any one time outstanding; (d) Liens on property of the Company or of any Subsidiary created solely for the purpose of securing indebtedness permitted by Section 7.11(b) hereof, representing or incurred to finance, refinance or refund the purchase price of Property, provided that no such Lien shall extend to or cover other Property of the Company or such Subsidiary other than the respective Property so acquired, and the principal amount of indebtedness secured by any such Lien shall at no time exceed the original purchase price of such Property; and (e) Liens on the Detroit-area real property purchased and/or developed by the Company securing indebtedness permitted by Section 7.11(f) above. SECTION 7.13. INVESTMENTS, ACQUISITIONS, LOANS, ADVANCES AND GUARANTIES. The Company shall not, nor shall it permit any Subsidiary to, directly or indirectly, make, retain or have outstanding any investments (whether through purchase of stock or obligations or otherwise) in, or loans or advances (other than for travel advances and other similar cash advances made to employees in the ordinary course of business) to, any other Person, or acquire all or any substantial part of the assets or business of any other Person or division thereof, or be or become liable as endorser, guarantor, surety or otherwise for any debt, obligation or undertaking of any other Person, or otherwise agree to provide funds for payment of the obligations of another, or supply funds thereto or invest therein or otherwise assure a creditor of another against loss, or apply for or become liable to the issuer of a letter of credit which supports an obligation of another, or subordinate any claim or demand it may have to the claim or demand of any other Person; PROVIDED, HOWEVER, that the foregoing shall not apply to nor operate to prevent: (a) investments in direct obligations of the United States of America or of any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, provided that any such obligations shall mature within one year of the date of issuance thereof; (b) investments in commercial paper rated at least P-1 by Moody's Investors Services, Inc. and at least A-1 by Standard & Poor's Ratings Group, a division of The McGraw-Hills Companies, Inc. maturing within 270 days of the date of issuance thereof; -24- (c) investments in certificates of deposit issued by any United States commercial bank having capital and surplus of not less than $100,000,000 which have a maturity of one year or less; (d) endorsement of items for deposit or collection of commercial paper received in the ordinary course of business; (e) the Company's investments from time to time in its Subsidiaries; (f) intercompany advances made from time to time between the Company and one or more Subsidiaries or between Subsidiaries in the ordinary course of business; (g) one or more acquisitions by the Company of all or any substantial part of the assets and business of, or all or any substantial part of the equity interest in, a Person in the business of providing marketing or promotional services and/or merchandise including, but not limited to, telemarketing, event planning, licensing, sports marketing and advertising (a "PERMITTED LINE OF BUSINESS") if each of the following are met (i) no Default or Event of Default has occurred and is continuing or would occur as a result of such transaction, (ii) the Board of Directors or other governing body of such Person whose assets or Voting Stock is being so acquired has approved the terms of such acquisition, (iii) the Company has given the Agent prior written notice of the proposed transaction, (iv) if the Company or any Subsidiary, in the aggregate, incur Indebtedness for Borrowed Money of more than $10,000,000 in connection with any such acquisition or more than $30,000,000 during any 12-month period for all acquisitions occurring during such period, the Company shall have obtained the prior written consent of the Required Lenders prior to consummating any such acquisition (the Lenders hereby acknowledging their consent to the Creative Concepts Acquisition closed on January 3, 1997, and provided the other conditions of this Section 7.13(g) are satisfied), and (v) if such transaction results in a new Subsidiary, the Company shall cause such new Subsidiary to execute and deliver to the Agent (with sufficient number of copies for each Lender) a Guaranty, together with such other instruments, documents, certificates and opinions reasonably requested by the Agent, each of which to be in form and substance satisfactory to the Agent, and Schedule 5.2 of this Agreement shall from and after such date be deemed amended to include reference to such Subsidiary; (h) Guaranties executed by one or more Subsidiaries in favor of the Agent and the Lenders; and (i) other investments, loans and advances in addition to these otherwise permitted by this Section in an aggregate amount not to exceed $2,000,000 at any one time outstanding. In determining the amount of investments, acquisitions, loans, advances and guaranties permitted under this Section, investments and acquisitions shall always be taken at the original cost thereof (regardless of any subsequent appreciation or depreciation therein), loans and advances shall be taken at the principal amount thereof then remaining unpaid, and guaranties shall be taken at the amount of the obligations guaranteed thereby. -25- SECTION 7.14. MERGERS, CONSOLIDATIONS AND SALES. The Company shall not, nor shall it permit any of its Subsidiaries to, be a party to any merger or consolidation, or sell, transfer, lease or otherwise dispose of all or any substantial part of its Property, including any disposition of Property as part of a sale and leaseback transaction, or in any event sell or discount (with or without recourse) any of its notes or accounts receivable; PROVIDED, HOWEVER, that this Section shall not apply to nor operate to prevent: (a) the sale or lease of inventory in the ordinary course of business; (b) the sale, transfer, lease, or other disposition of Property of the Company or any Subsidiary to one another in the ordinary course of its business; and (c) a merger of any Subsidiary with and into the Company or any Wholly-Owned Subsidiary; provided that the Company or such Wholly-Owned Subsidiary survives such merger and, in the case of any merger involving the Company, the Company is the corporation surviving the merger. The term "SUBSTANTIAL" as used herein shall mean the sale, transfer, lease or other disposition of Property of the Company or of any Subsidiary aggregating, for the Company and its Subsidiaries during any fiscal year, 15% or more of the consolidated total assets of the Company and its Subsidiaries. In the event of any merger permitted by Section 7.14(c) above, the Company shall give the Agent and the Lender's prior written notice of any such event and, immediately after giving effect to any such merger, Schedule 5.2 of this Agreement shall be deemed amended excluding reference to any such Subsidiary merged out of existence. SECTION 7.15. DIVIDENDS AND CERTAIN OTHER RESTRICTED PAYMENTS. The Company shall not during any fiscal year (i) declare or pay any dividends on or make any other distributions in respect of any class or series of its capital stock (other than dividends payable solely in its capital stock) or (ii) directly or indirectly purchase, redeem or otherwise acquire or retire any of its capital stock, except that the Company may declare and pay dividends on, and purchase, redeem, or otherwise acquire or retire, its capital stock so long as no Default or Event of Default exists prior to or would result after giving effect to any such action. SECTION 7.16. ERISA. The Company shall, and shall cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its Properties. The Company shall, and shall cause each Subsidiary to, promptly notify the Agent of (i) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (iii) its intention to terminate or withdraw from any Plan, and (iv) the occurrence of any event with respect to any Plan which would result in the incurrence by the Company or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Company or any Subsidiary with respect to any post-retirement Welfare Plan benefit. SECTION 7.17. COMPLIANCE WITH LAWS. The Company shall, and shall cause each Subsidiary to, comply in all respects with the requirements of all federal, state and local -26- laws, rules, regulations, ordinances and orders applicable to or pertaining to its Properties or business operations, non-compliance with which is reasonably likely to result in a Material Adverse Effect. SECTION 7.18. CHANGE IN THE NATURE OF BUSINESS. The Company shall not, nor shall it permit any Subsidiary to, engage in any business or activity if as a result the general nature of the business of the Company or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by it as of the date of this Agreement or as of the date such Person becomes a Subsidiary hereunder. SECTION 8. EVENTS OF DEFAULT AND REMEDIES. SECTION 8.1. EVENTS OF DEFAULT. Any one or more of the following shall constitute an "EVENT OF DEFAULT" hereunder: (a) default for a period of 5 days in the payment when due of all or any part of the principal of or interest on any Note (whether at the stated maturity thereof or at any other time provided for in this Agreement) or of any Reimbursement Obligation or of any fee or other Obligation payable hereunder or under any other Loan Document; (b) default in the observance or performance of any covenant set forth in Sections 7.5, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14, or 7.15 hereof; (c) default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within 30 days after written notice thereof is given to the Company by the Agent (provided that the Company shall have an additional 30 days to cure any such default before the same becomes an "EVENT OF DEFAULT" hereunder if such default is reasonably susceptible to cure within the additional 30-day period but only so long as the Company diligently and in good faith works to cure such default during such additional 30-day period); (d) any material representation or warranty made herein or in any other Loan Document or in any certificate furnished to the Agent or the Lenders pursuant hereto or thereto or in connection with any transaction contemplated hereby or thereby proves untrue in any material respect as of the date of the issuance or making thereof; (e) any event occurs or condition exists (other than those described in subsections (a) through (d) above) which is specified as an event of default under any of the other Loan Documents and any applicable notice and cure period has expired, or any of the Loan Documents shall for any reason not be or shall cease to be in full force and effect, or any of the Loan Documents is declared to be null and void, or any Subsidiary takes any action for the purpose of terminating, repudiating or rescinding any Loan Document executed by it or any of its obligations thereunder; (f) default shall occur under any Indebtedness for Borrowed Money issued, assumed or guaranteed by the Company or any Subsidiary aggregating, for the Company and its Subsidiaries, in excess of $1,000,000, or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the -27- maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated), or any such Indebtedness for Borrowed Money shall not be paid when due (whether by demand, lapse of time, acceleration or otherwise); (g) any judgment or judgments, writ or writs or warrant or warrants of attachment, or any similar process or processes shall be entered or filed against the Company or any Subsidiary, or against any of its Property, aggregating, for the Company and its Subsidiaries, in excess of $1,000,000, and which remains undischarged, unvacated, unbonded or unstayed for a period of 60 days; (h) the Company or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $1,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $1,000,000 (collectively, a "MATERIAL PLAN") shall be filed under Title IV of ERISA by the Company or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Company or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 60 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (i) the Company or any Subsidiary shall (i) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (vi) take any corporate action in furtherance of any matter described in parts (i) through (v) above, or (vii) fail to contest in good faith any appointment or proceeding described in Section 8.1(j) hereof; or (j) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Company or any Subsidiary or any substantial part of any of its Property, or a proceeding described in Section 8.1(i)(v) shall be instituted against the Company or any Subsidiary, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 days. -28- SECTION 8.2. NON-BANKRUPTCY REMEDIES. When any Event of Default described in subsections 8.1(a) to 8.1(h), both inclusive, has occurred and is continuing, the Agent shall, upon request of the Required Lenders, by notice to the Company, take any or all of the following actions: (a) terminate the obligations of the Lenders to extend any further credit hereunder on the date (which may be the date thereof) stated in such notice; (b) declare the principal of and the accrued interest on the Notes to be forthwith due and payable and thereupon the Notes, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind; and (c) enforce any and all rights and remedies available to it under the Loan Documents or applicable law. SECTION 8.3. BANKRUPTCY REMEDIES. When any Event of Default described in subsection 8.1(i) or 8.1(j) has occurred and is continuing, then the Notes, including both principal and interest, and all fees, charges and other Obligations payable hereunder and under the other Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, and the obligations of the Lenders to extend further credit pursuant to any of the terms hereof shall immediately terminate. In addition, the Agent may exercise any and all remedies available to it under the Loan Documents or applicable law. SECTION 8.4. COLLATERAL FOR UNDRAWN LETTERS OF CREDIT. If and when (x) any Event of Default, other than an Event of Default described in subsections (i) or (j) of Section 8.1, has occurred and is continuing, the Company shall, upon demand of the Agent, and (y) any Event of Default described in subsections (i) or (j) of Section 8.1 has occurred or any Letter of Credit is outstanding on the Termination Date (whether or not any Event of Default has occurred), the Company shall, without notice or demand from the Agent, immediately pay to the Agent the full amount of each Letter of Credit, the Company agreeing to immediately make each such payment and acknowledging and agreeing that the Agent and the Lenders would not have an adequate remedy at law for failure of the Company to honor any such demand and that the Agent shall have the right to require the Company to specifically perform such undertaking whether or not any draws have been made under the Letters of Credit. SECTION 9. DEFINITIONS; INTERPRETATIONS. SECTION 9.1. DEFINITIONS; The following terms when used herein have the following meaning: "ADJUSTED EBITDA" means, with reference to any period, the difference of (a) Net Income for such period plus the sum of all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period, (ii) federal, state and local income taxes for such period, and (iii) depreciation of fixed assets and amortization of intangible assets for such period MINUS (b) net capital expenditures for such period (i.e., capital expenditures incurred during such period computed on a consolidated basis for the Company and its Subsidiaries less (i) Indebtedness for Borrowed Money incurred to acquire -29- such assets and (ii) capital expenditures acquired with the proceeds of insurance as a result of a casualty to its property, plant or equipment and applied to replace or restore such assets). "ADJUSTED LIBOR RATE" means a rate per annum determined by the Agent pursuant to the following formula: Adjusted LIBOR Rate = LIBOR ------------------------- 100%-Reserve Percentage "RESERVE PERCENTAGE" means, for the purpose of computing the Adjusted LIBOR Rate, the maximum rate of all reserve requirements (including, without limitation, any marginal emergency, supplemental or other special reserves) imposed by the Board of Governors of the Federal Reserve System (or any successor) under Regulation D on Eurocurrency liabilities (as such term is defined in Regulation D) for the applicable Interest Period as of the first day of such Interest Period, but subject to any amendments to such reserve requirement by such Board or its successor, and taking into account any transitional adjustments thereto becoming effective during such Interest Period. For purposes of this definition, LIBOR Portions shall be deemed to be Eurocurrency liabilities as defined in Regulation D without benefit of or credit for prorations, exemptions, or offsets under Regulation D. "LIBOR" means, for each Interest Period, the rate of interest per annum (rounded upwards, if necessary, to nearest 1/100 of 1%) at which deposits in U.S. dollars in immediately available funds are being offered to prime banks in the London interbank market at 11:00 a.m. (London, England time) 2 Business Days before the beginning of such Interest Period for a period equal to such Interest Period and in an amount equal or comparable to the principal amount of the applicable LIBOR Portion, as determined by the Agent by reference to Bloomberg Financial Market's terminal screen entitled "OFFICIAL BBA LIBOR FIXINGS" or such other information vendor selected by the Agent for determining British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits. Each determination of LIBOR made by the Agent shall be conclusive and binding on the Company and the Lenders absent manifest error. "AFFILIATE" means any Person directly or indirectly controlling or controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such Person possesses, directly or indirectly, the power to direct, or cause the direction of, the management and policies of the other Person, whether through the ownership of voting securities, common directors, trustees or officers, by contract or otherwise. "AGENT" means American National Bank and Trust Company of Chicago, and any successor thereto appointed pursuant to Section 10.1 hereof. "AGREEMENT" means this Credit Agreement, as the same may be amended, modified or restated from time to time in accordance with the terms hereof. "APPLICABLE MARGIN" means, with respect to LIBOR Portions, .375% per annum until the first Pricing Date, and thereafter from one Pricing Date to the next the Applicable Margin with respect to LIBOR Portions shall mean a rate per annum determined in accordance with the following schedule: -30- FUNDED DEBT/EBITDA RATIO APPLICABLE MARGIN FOR SUCH PRICING DATE SHALL BE Greater than 2.5 to 1.0 1.00% Equal to or less than 2.5 to 1.0, but .80% greater than 2.0 to 1.0 Equal to or less than 2.0 to 1.0, but .60% greater than 1.0 to 1.0 Equal to or less than 1.0 to 1.0 .375% For purposes hereof, the term "PRICING DATE" means, for any fiscal quarter of the Company ended after the date hereof, 15 days after the date the Agent is in receipt of the Company's most recent financial statements for the fiscal quarter then ended, pursuant to Section 7.5(a) or (b) hereof. The Applicable Margin established on a Pricing Date shall remain in effect until the next Pricing Date. If the Company has not delivered its financial statements by the date such financial statements (and, in the case of the year-end financial statements, audit report) are required to be delivered under Section 7.5(a) and (b) hereof, until such financial statements and audit report are delivered, the Applicable Margin for LIBOR Portions shall be 1.00%. If the Company subsequently delivers such financial statements before the next Pricing Date, the Applicable Margin established by such late delivered financial statements shall take effect from the date of delivery until the next Pricing Date. In all other circumstances, the Applicable Margin established by such financial statements shall be in effect from the Pricing Date that occurs immediately after the end of the Company's fiscal quarter covered by such financial statements until the next Pricing Date. Each determination of the Applicable Margin made by the Agent in accordance with the foregoing shall be conclusive and binding on the Company and the Lenders if reasonably determined. "APPLICATION" is defined in Section 1.3 hereof. "AUTHORIZED REPRESENTATIVE" means those persons shown on the list of individuals provided by the Company pursuant to Section 6.2 hereof or on any update of any such list provided by the Company to the Agent, or any further or different individuals so named by an Authorized Representative of the Company in a written notice to the Agent. "BASE RATE" means a fluctuating interest rate per annum equal at all times to the greater of (i) the rate of interest announced by the Agent from time to time as its commercial base rate (also commonly referred to as its "prime rate") as in effect on such day (it being acknowledged and agreed that such rate may not be the Agent's best or lowest rate), with any change in such rate resulting from a change in said commercial base rate to be effective as of the date of the relevant change in said commercial base rate; and (ii) the sum of (x) the rate determined by the Agent to be the average (rounded upwards, if necessary, to the next higher 1/100 of 1% of the rates per annum quoted to the Agent at approximately 10:00 a.m. Chicago time (or as soon thereafter as is practicable) on such day -31- (or, if such day is not a Business Day, on the immediately preceding Business Day) by two or more Federal funds brokers selected by the Agent for the sale to the Agent at face value of Federal funds in the secondary market in an amount equal or comparable to the principal amount owed to the Agent for which such rate is being determined, plus (y) 1/2 of 1%. "BASE RATE PORTIONS" is defined in Section 2.1(a) hereof. "BORROWING" means the total of Loans of a single type made to the Company by all the Lenders on a single date, and if such Loans are to be part of a LIBOR Portion, for a single Interest Period. Borrowings of Loans are made and maintained ratably from each of the Lenders according to their Percentages of the relevant Commitment. "BUSINESS DAY" shall mean any day (other than a Saturday or Sunday) on which banks are not authorized or required to close in Chicago, Illinois and, when used with respect to LIBOR Portions, a day on which banks are also dealing in United States Dollar deposits in London, England. "CAPITAL LEASE" means any lease of Property (whether real or personal) which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. "CAPITALIZED LEASE OBLIGATION" means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease determined in accordance with GAAP. "CHANGE OF CONTROL" means any one of the following events: (i) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company (or other securities convertible into such securities) representing 49% or more of the combined voting power of all securities of the Company entitled to vote in the election of directors, other than securities having such power only be reason of the happening of a contingency; or (ii) during any period of up to 24 consecutive months, commencing before or after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Company shall cease for any reason to constitute a majority of the board of directors of the Company. "CODE" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. "COMMITMENTS" means and includes the Revolving Credit Commitments, the L/C Commitment, and the Term Loan Commitments. "COMPANY" is defined in the introductory paragraph of this Agreement. "CONTROLLED GROUP" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under Section 414 of the Code. "CREATIVE CONCEPTS ACQUISITION" means the acquisition by the Company of 100% of the capital stock of Creative Concepts in Advertising, Inc. for a purchase price of approximately 2,750,000 shares of the capital stock of the Company. "CURRENT RATIO" means, at any time the same is to be determined, the ratio of consolidated current assets of the Company and its Subsidiaries to consolidated current -32- liabilities of the Company and its Subsidiaries, each as determined in accordance with GAAP. "DEFAULT" means any event or condition the occurrence of which would, with the lapse of time or the giving of notice, or both, constitute an Event of Default. "EBITDA" means, with reference to any period, the difference of (a) Net Income for such period plus the sum of all amounts deducted in arriving at such Net Income amount in respect of (i) Interest Expense for such period, (ii) federal, state and local income taxes for such period, and (iii) depreciation of fixed assets and amortization of intangible assets for such period. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. "EVENT OF DEFAULT" means any event or condition specified as such in Section 8.1 hereof. "FEDERAL FUNDS RATE" means the fluctuating interest rate per annum described in part (x) of clause (ii) of the definition of Base Rate. "FIXED CHARGES" means, with reference to any period, the sum of (i) the aggregate amount of payments of principal due within 12 calendar months on and after the last day of such period in respect of any and all Indebtedness for Borrowed Money of the Company and its Subsidiaries, plus (ii) Interest Expense for the same period, plus (iii) federal, state and local income taxes of the Company and its Subsidiaries accrued during such period, plus (iv) payments made in respect of dividends, distribution, purchases and/or redemptions of the Company's capital stock during such period "FUNDED DEBT/EBITDA RATIO" means, as of the last day of the most recently completed fiscal quarter of the Company, the ratio of Total Funded Debt as of the last day of such fiscal quarter to EBITDA for the four fiscal quarters then ended. "GAAP" means generally accepted accounting principles as in effect from time to time, applied by the Company and its Subsidiaries on a basis consistent with the preparation of the Company's most recent financial statements furnished to the Lenders pursuant to Section 5.5 hereof. "INDEBTEDNESS FOR BORROWED MONEY" shall mean for the Company and its Subsidiaries the sum (without duplication) of (i) all indebtedness of the Company and each of its Subsidiaries for borrowed money, whether current or funded, or secured or unsecured, (ii) all indebtedness for the deferred purchase price of Property or services, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by the Company or any of its Subsidiaries (even though the rights and remedies of the seller or lender under such agreement in the event of a default are limited to repossession or sale of such Property), (iv) all indebtedness secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of Property subject to such mortgage or Lien, (v) all obligations under leases which shall have been or must be, in accordance with GAAP, recorded as Capital Leases in respect of which the Company or any of its Subsidiaries is liable as lessee, (vi) any liability in respect of banker's acceptances or letters of credit, (vii) any indebtedness, whether or not assumed, secured by Liens on Property acquired by the Company or any of its Subsidiaries at the -33- time of acquisition thereof and (viii) all indebtedness referred to in clause (i), (ii), (iii), (iv), (v), (vi) or (vii) above which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which any of the foregoing have agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which any of them have otherwise assured a creditor against loss, it being understood that the term "Indebtedness for Borrowed Money" shall not include trade payables arising in the ordinary course of business. "INTEREST EXPENSE" means, with reference to any period, the sum of all interest charges (including imputed interest charges with respect to Capitalized Lease Obligations and all amortization of debt discount and expense) of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "INTEREST PERIOD" means, with respect to any LIBOR Portion, the period commencing on, as the case may be, the creation, continuation or conversion date with respect to such LIBOR Portion and ending 1, 2, 3 or 6 months thereafter as selected by the Company in its notice as provided herein; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day, unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) no Interest Period may extend beyond the final maturity date of the relevant Notes; (iii) the interest rate to be applicable to each Portion for each Interest Period shall apply from and including the first day of such Interest Period to but excluding the last day thereof; and (iv) no Interest Period may be selected if after giving effect thereto the Company will be unable to make a principal payment scheduled to be made during such Interest Period without paying part of a LIBOR Portion on a date other than the last day of the Interest Period applicable thereto. For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on a numerically corresponding day in the next calendar month, PROVIDED, HOWEVER, if an Interest Period begins on the last day of a month or if there is no numerically corresponding day in the month in which an Interest Period is to end, then such Interest Period shall end on the last Business Day of such month. "L/C COMMITMENT" means $7,500,000, as reduced pursuant to Section 3.6 hereof. "L/C OBLIGATIONS" means the aggregate undrawn face amounts of all outstanding Letters of Credit and all unpaid Reimbursement Obligations. "LENDERS" means American National Bank and Trust Company of Chicago, Harris Trust and Savings Bank, Comerica Bank and all other lenders becoming parties hereto pursuant to Section 11.10 hereof. "LETTER OF CREDIT" is defined in Section 1.3 hereof. "LIBOR PORTIONS" is defined in Section 2.1(a) hereof. -34- "LIEN" means any mortgage, lien, pledge, charge, security interest or encumbrance of any kind or nature in respect of any Property, including the interest of a vendor or lessor under any conditional sale, Capital Lease or other title retention arrangement. "LOAN DOCUMENTS" means this Agreement, the Notes, the Applications, the Guaranties, and each other instrument or document to be delivered hereunder or thereunder or otherwise in connection therewith. "LOANS" means and includes Revolving Loans and the Term Loans. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries taken as a whole, (ii) the ability of the Company or any Subsidiary to perform its obligations under the Loan Documents, or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent or the Lenders thereunder. "NET INCOME" means, with reference to any period, the net income (or net loss) of the Company and its Subsidiaries for such period computed on a consolidated basis in accordance with GAAP. "NOTES" means and includes the Revolving Credit Notes and the Term Notes. "OBLIGATIONS" means all obligations of the Company to pay principal and interest on the Loans, all Reimbursement Obligations owing under the Applications, all fees and charges payable hereunder, and all other payment obligations of the Company or any Subsidiary arising under or in relation to any Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. "PERCENTAGE" means, for each Lender, the percentage of the applicable Commitments represented by such Lender's Commitment or, if the Commitments have been terminated, the percentage held by such Lender (including through participation interests in L/C Obligations) of the aggregate principal amount of all outstanding Obligations. "PERSON" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. "PLAN" means any employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code that either (i) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group, or (ii) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "PORTION" is defined in Section 2.1(a) hereof. "PROPERTY" means, as to any Person, all types of real, personal, tangible, intangible or mixed property owned by such Person whether or not included in the most recent balance sheet of such Person and its subsidiaries under GAAP. -35- "REIMBURSEMENT OBLIGATION" is defined in Section 1.3 hereof. "REQUIRED LENDERS" means, at any time, Lenders whose Commitments aggregate 51% or more of the total Commitments or, if at the time no Commitments are outstanding, Lenders holding 51% or more of the aggregate outstanding principal balance of the Notes and the credit risk with respect to the Letters of Credit. "REVOLVING CREDIT COMMITMENTS" is defined in Section 1.1 hereof. "REVOLVING CREDIT NOTES" is defined in Section 1.2 hereof. "REVOLVING LOANS" is defined in Section 1.2 hereof. "SUBSIDIARY" means, as to any particular parent corporation or organization, any other corporation or organization more than 50% of the outstanding Voting Stock of which is at the time directly or indirectly owned by such parent corporation or organization or by any one or more other entities which are themselves subsidiaries of such parent corporation or organization. The term "SUBSIDIARY" shall mean, when used with reference to the Company, a subsidiary of, respectively, the Company or any of its direct or indirect Subsidiaries. "TANGIBLE NET WORTH" means, at any time the same is to be determined, total shareholder's equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock, but excluding minority interests in Subsidiaries) which would appear on a consolidated balance sheet of the Company and its Subsidiaries prepared on a consolidated basis in accordance with GAAP, minus the sum of (i) all assets which would be classified as intangible assets under GAAP, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and deferred research and development expense) and similar assets, (ii) the write-up of assets above cost, and (iii) the aggregate book value of all sample inventory. "TERM CREDIT TERMINATION DATE" means January 31, 1999, or such earlier date on which the Term Loan Commitments are terminated in whole pursuant to Sections 3.6, 8.2 or 8.3 hereof. "TERM LOAN COMMITMENTS" is defined in Section 1.4 hereof. "TERM LOANS" is defined in Section 1.4 hereof. "TERM NOTES" is defined in Section 1.4 hereof. "TERMINATION DATE" means January 31, 1999, or such earlier date on which the Revolving Credit Commitments are terminated in whole pursuant to Sections 3.6, 8.2 or 8.3 hereof, or such later date to which the Revolving Credit Commitments are extended pursuant to Section 11.11 hereof. "TOTAL FUNDED DEBT" means, at any time the same is to be determined, the difference between (a) the aggregate of all Indebtedness for Borrowed Money of the Company and its Subsidiaries at such time, including all Indebtedness for Borrowed Money of any other Person which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which the Company or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Company or any of its Subsidiaries has otherwise assured a creditor against loss minus (b) investments of the type referred to in Section 7.13 (a)-(c) hereof maintained by the Company or any -36- Subsidiary with the Agent or any Lender which are unrestricted and freely available (other than restrictions in the form of early withdrawal penalties for time deposits and other similar instruments) and which are free and clear of any Liens whatsoever (other than unasserted rights of offset of the relevant financial institution). "TOTAL LIABILITIES" means, at any time the same is to be determined, the aggregate of all indebtedness, obligations, liabilities, reserves and any other items which would be listed as a liability on a balance sheet of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "UNFUNDED VESTED LIABILITIES" means, for any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "U.S. DOLLARS" AND "$" each means the lawful currency of the United States of America. "VOTING STOCK" of any Person means capital stock or other equity interests of any class or classes (however designated) having ordinary power for the election of directors or other similar governing body of such Person, other than stock or other equity interests having such power only by reason of the happening of a contingency. "WELFARE PLAN" means a "welfare plan" as defined in Section 3(1) of ERISA. "WHOLLY-OWNED SUBSIDIARY" means a Subsidiary of which all of the issued and outstanding shares of capital stock (other than directors' qualifying shares as required by law) or other equity interests are owned by the Company and/or one or more wholly-owned subsidiaries of the Company within the meaning of this definition. SECTION 9.2. INTERPRETATION The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. The words "HEREOF", "HEREIN", and "HEREUNDER" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All references to time of day herein are references to Chicago, Illinois time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. SECTION 10. THE AGENT SECTION 10.1. APPOINTMENT AND AUTHORIZATION. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers hereunder and under the other Loan Documents as are designated to the Agent by the terms hereof and thereof together with such powers as are reasonably incidental thereto. The Lenders expressly agree that the Agent is not acting as a fiduciary of the Lenders in respect of the Loan Documents, the Company or otherwise, and nothing herein or in any of the other Loan Documents shall result in any duties or obligations on the Agent or any of the -37- Lenders except as expressly set forth herein. The Agent may resign at any time by sending 20 days prior written notice to the Company and the Lenders. In the event of any such resignation, the Required Lenders may appoint a new agent after consultation with the Company which shall succeed to all the rights, powers and duties of the Agent hereunder and under the other Loan Documents. Any resigning Agent shall be entitled to the benefit of all the protective provisions hereof with respect to its acts as an agent hereunder, but no successor Agent shall in any event be liable or responsible for any actions of its predecessor. If the Agent resigns and no successor is appointed, the rights and obligations of such Agent shall be automatically assumed by the Required Lenders and the Company shall be directed to make all payments due each Lender hereunder directly to such Lender. SECTION 10.2. RIGHTS AS A LENDER. The Agent has and reserves all of the rights, powers and duties hereunder and under the other Loan Documents as any Lender may have and may exercise the same as though it was not the Agent. The terms "LENDER" and "LENDERS" as used herein and in all other Loan Documents shall, the context otherwise expressly indicates, include the Agent in its individual capacity as Lender. SECTION 10.3. STANDARD OF CARE. The Lenders acknowledge that they have received and approved copies of the Loan Documents and such other information and documents concerning the transactions contemplated and financed hereby as they have requested to receive and/or review. The Agent makes no representations or warranties of any kind or character to the Lenders with respect to the validity, enforceability, genuineness, perfection, value, worth or collectibility hereof or of the Notes or any of the other Obligations or of the Loan Documents or of any other documents called for hereby or thereby. Neither the Agent nor any director, officer, employee, agent or representative thereof (including any security trustee therefor) shall in any event be liable for any clerical errors or errors in judgment, inadvertence or oversight, or for action taken or omitted to be taken by it or them hereunder or under the Loan Documents or in connection herewith or therewith except for its or their own gross negligence or willful misconduct. The Agent shall not incur any liability to the Lenders under or in respect of this Agreement or any other Loan Documents by acting upon any notice, certificate, warranty, instruction or statement (oral or written) of anyone (including anyone in good faith believed by it to be authorized to act on behalf of the Company), unless it has actual knowledge of the untruthfulness of same. The Agent may execute any of its duties hereunder by or through representatives, employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders for the default or misconduct of any such representatives, employees, agents or attorneys-in-fact selected with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder, and shall incur no liability to the Lenders and be fully protected in acting upon the advice of such counsel. The Agent shall be entitled to assume that no Default or Event of Default exists unless notified to the contrary by a Lender. The Agent shall in all events be fully protected in acting or failing to act in accord with the instructions of the Required Lenders. The Agent shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by the Agent by reason of taking or -38- continuing to take any such action. The Agent may treat the owner of any Note as the holder thereof until written notice of transfer shall have been filed with the Agent signed by such owner in form satisfactory to the Agent. Each Lender acknowledges that it has independently and without reliance on the Agent or any other Lender and based upon such information, investigations and inquiries as it deems appropriate made its own credit analysis and decision to extend credit to the Company. It shall be the responsibility of each Lender to keep itself informed as to the creditworthiness of the Company and the Agent shall have no liability to any Lender with respect thereto. SECTION 10.4. COSTS AND EXPENSES. Each Lender agrees to reimburse the Agent for all costs and expenses (including, without limitation, reasonable attorneys' fees) suffered or incurred by the Agent or any security trustee in performing its duties hereunder and under the other Loan Documents, or in the exercise of any right or power imposed or conferred upon the Agent hereby or thereby, to the extent that the Agent is not promptly reimbursed for same by the Company after making request of the Company for payment thereof, all such costs and expenses to be borne by the Lenders ratably in accordance with their Percentages. If any Lender fails to reimburse the Agent for its share of any such costs and expenses, such costs and expenses shall be paid pro rata by the remaining Lenders, but without in any manner releasing the defaulting Lender from its liability hereunder. SECTION 10.5. INDEMNITY. The Lenders shall ratably indemnify and hold the Agent, and its directors, officers, employees, agents, representatives or attorneys-in-fact (including as such any security trustee therefor), harmless from and against any liabilities, losses, costs or expenses suffered or incurred by it hereunder or under the other Loan Documents or in connection with the transactions contemplated hereby or thereby, regardless of when asserted or arising, except to the extent it is promptly reimbursed for the same by the Company and except to the extent that any event giving rise to a claim was caused by the gross negligence or willful misconduct of the party seeking to be indemnified. If any Lender defaults in its obligations hereunder, its share of the obligations shall be paid pro rata by the remaining Lenders, but without in any manner releasing the defaulting Lender from its liability hereunder. SECTION 11. MISCELLANEOUS. SECTION 11.1. WITHHOLDING TAXES. (a) PAYMENTS FREE OF WITHHOLDING. Except as otherwise required by law and subject to Section 11.1(b) hereof, each payment by the Company under this Agreement or the other Loan Documents shall be made without withholding for or on account of any present or future taxes (other than overall net income taxes on the recipient) imposed by or within the jurisdiction in which the Company is domiciled, any jurisdiction from which the Company makes any payment, or (in each case) any political subdivision or taxing authority thereof or therein. If any such withholding is so required, the Company shall make the withholding, pay the amount withheld to the appropriate governmental authority before penalties attach thereto or interest accrues thereon and forthwith pay such additional amount as may be necessary to ensure that the net amount actually received by each Lender and the Agent free and clear of such taxes (including such taxes on such additional amount) is equal to the amount which that Lender or the Agent (as the case may be) would have received had such withholding not been -39- made. If the Agent or any Lender pays any amount in respect of any such taxes, penalties or interest, the Company shall reimburse the Agent or that Lender for that payment on demand in the currency in which such payment was made. If the Company pays any such taxes, penalties or interest, it shall deliver official tax receipts evidencing that payment or certified copies thereof to the Lender or Agent on whose account such withholding was made (with a copy to the Agent if not the recipient of the original) on or before the thirtieth day after payment. (b) U.S. WITHHOLDING TAX EXEMPTIONS. Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) shall submit to the Company and the Agent on or before the earlier of the date the initial Borrowing is made hereunder and 30 days after the date hereof, two duly completed and signed copies of either Form 1001 (relating to such Lender and entitling it to a complete exemption from withholding under the Code on all amounts to be received by such Lender, including fees, pursuant to the Loan Documents and the Obligations) or Form 4224 (relating to all amounts to be received by such Lender, including fees, pursuant to the Loan Documents and the Obligations) of the United States Internal Revenue Service. Thereafter and from time to time, each Lender shall submit to the Company and the Agent such additional duly completed and signed copies of one or the other of such Forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may be (i) requested by the Company in a written notice, directly or through the Agent, to such Lender and (ii) required under then-current United States law or regulations to avoid or reduce United States withholding taxes on payments in respect of all amounts to be received by such Lender, including fees, pursuant to the Loan Documents or the Obligations. (c) INABILITY OF LENDER TO SUBMIT FORMS. If any Lender determines, as a result of any change in applicable law, regulation or treaty, or in any official application or interpretation thereof, that it is unable to submit to the Company or Agent any form or certificate that such Lender is obligated to submit pursuant to subsection (b) of this Section 11.1 or that such Lender is required to withdraw or cancel any such form or certificate previously submitted or any such form or certificate otherwise becomes ineffective or inaccurate, such Lender shall promptly notify the Company and the Agent of such fact and the Lender shall to that extent not be obligated to provide any such form or certificate and will be entitled to withdraw or cancel any affected form or certificate, as applicable. SECTION 11.2. NON-BUSINESS DAYS. If any payment hereunder becomes due and payable on a day which is not a Business Day, the due date of such payment shall be extended to the next succeeding Business Day on which date such payment shall be due and payable. In the case of any payment of principal falling due on a day which is not a Business Day, interest on such principal amount shall continue to accrue during such extension at the rate per annum then in effect, which accrued amount shall be due and payable on the next scheduled date for the payment of interest. SECTION 11.3. NO WAIVER, CUMULATIVE REMEDIES. No delay or failure on the part of the Agent or any Lender in the exercise of any power or right shall operate as a waiver thereof or as an acquiescence in any default, nor shall any single or partial exercise of any -40- right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies hereunder of the Agent and the Lenders are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. SECTION 11.4. WAIVERS, MODIFICATIONS AND AMENDMENTS. Any provision hereof or of the other Loan Documents may be amended, modified, waived or released and any Default or Event of Default and its consequences may be rescinded and annulled upon the written consent of the Company and the Required Lenders; PROVIDED, HOWEVER, that without the written consent of each Lender no such amendment, modification or waiver shall increase the amount or extend the terms of such Lender's Commitments or reduce the amount of any principal of or interest rate applicable to, or extend the maturity of, any Obligation owed to it or reduce the amount of fees or other amounts to which it is entitled hereunder or release any guaranty of any Obligations or change this Section 11.4 or change the definition of "REQUIRED LENDERS" or change the number of Lenders required to take any action hereunder or under the other Loan Documents. No amendment, modification or waiver of the Agent's protective provisions shall be effective without the prior written consent of the Agent. SECTION 11.5. COSTS AND EXPENSES. The Company agrees to pay on demand all actual and reasonable costs and expenses of the Agent in connection with the negotiation, preparation, execution, delivery of the Loan Documents and in connection with any consents hereunder or thereunder and any waivers or amendments hereto or thereto, including the reasonable fees and expenses of counsel for the Agent with respect to all of the foregoing, and all costs and expenses (including reasonable attorneys' fees) incurred by the Agent, the Lenders or any other holders of the Obligations in connection with a Default or Event of Default or the enforcement of the Loan Documents, and all costs, fees and taxes of the types enumerated above incurred in supplementing (and recording or filing supplements to) the Loan Documents in connection with assignments contemplated by Section 11.10 hereof if counsel to the Agent reasonably believes such supplements to be appropriate or desirable. The Company agrees to indemnify and save the Lenders, the Agent and any security trustee for the Agent or the Lenders harmless from any and all liabilities, losses, costs and expenses incurred by the Lenders or the Agent in connection with any action, suit or proceeding brought against the Agent, any security trustee or any Lender by any Person which arises out of the transactions contemplated or financed by any of the Loan Documents or out of any action or inaction by the Agent, any security trustee or any Lender thereunder, including without limitation those caused by the negligence of any party but except for such thereof as is caused by the gross negligence or willful misconduct of the party indemnified. The provisions of this Section 11.5 and the protective provisions of Section 2 hereof shall survive payment of the Obligations. SECTION 11.6. DOCUMENTARY TAXES. The Company agrees that it will pay any documentary, stamp or similar taxes payable in respect to any Loan Document, including interest and penalties, in the event any such taxes are assessed, irrespective of when such assessment is made and whether or not any credit to it is then in use or available. SECTION 11.7. SURVIVAL OF REPRESENTATIONS. All representations and warranties made herein and in the other Loan Documents and in certificates given pursuant hereto or -41- thereto shall survive the execution and delivery of this Agreement and the other Loan Documents, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. SECTION 11.8. NOTICES. Except as otherwise specified herein, all notices hereunder shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth below, in the case of the Company, or on the appropriate signature page hereof, in the case of the Lenders and the Agent, or such other address or telecopier number as such party may hereafter specify by notice to the Agent and the Company given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder to the Company shall be addressed to: HA-LO Industries, Inc. 5980 West Touhy Avenue Niles, Illinois 60714 Attention Mr. Greg Kilrea Telephone (847) 647-4785 Telecopy: (847) 647-4970 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section; PROVIDED that any notice given pursuant to Section 1 or Section 2 hereof shall be effective only upon receipt. SECTION 11.9. PARTICIPATIONS. Any Lender may grant participations in its extensions of credit hereunder to any other bank or lending institution (a "PARTICIPANT"), provided that (i) no Participant shall thereby acquire any direct rights under this Agreement, (ii) no Lender shall agree with a Participant not to exercise any of its rights hereunder without the consent of such Participant except for rights which under the terms hereof may only be exercised by all Lenders, and (iii) no sale of a participation in extensions of credit shall in any manner relieve the selling Lender of its obligations hereunder. SECTION 11.10. ASSIGNMENT AGREEMENTS. Each Lender may, from time to time upon at least 5 Business Days' notice to the Agent, assign to other banks or lending institutions all or part of its rights and obligations under this Agreement (including, without limitation, the indebtedness evidenced by the Notes then owned by such assigning Lender, together with an equivalent proportion of its obligation to make loans and advances and participate in Letters of Credit hereunder) pursuant to an Assignment Agreement in the form attached hereto as Exhibit F (the "ASSIGNMENT -42- AGREEMENTS"); PROVIDED, HOWEVER, that (i) each such assignment shall be of a constant, and not a varying, percentage of the assigning Lender's rights and obligations under this Agreement and the assignment shall cover the same percentage of such Lender's Commitments, Loans, Notes and interests in Letters of Credit; (ii) unless the Agent otherwise consents, the aggregate amount of the Commitments, Loans, Notes and interests in the Letters of Credit of the assigning Lender being assigned pursuant to each such assignment (determined as of the effective date of the relevant Assignment Agreement) shall in no event be less than $5,000,000 and shall be an integral multiple of $1,000,000 and, unless the assigning Lender shall have assigned all of its Commitments, Loans, Notes and interests in Letters of Credit, the aggregate amount of Commitments, Loans, Notes, and interests in Letters of Credit retained by the assigning Lender shall in no event be less than $5,000,000; (iii) the Agent and, prior to the existence of an Event of Default, the Company must each consent, which consent shall not be unreasonably withheld and shall be evidenced by execution of a counterpart of the relevant Assignment Agreement in the space provided thereon for such acceptance, to each such assignment to a party which was not an original signatory of this Agreement and (iv) the assigning Lender must pay to the Agent a processing and recordation fee of $3,000 and any reasonable out-of-pocket attorney's fees incurred by the Agent in connection with such Assignment Agreement. Upon the execution of each Assignment Agreement by the assigning Lender thereunder, the assignee lender thereunder, the Agent and, so long as no Event of Default exists, the Company and payment to such assigning Lender by such assignee lender of the purchase price for the portion of the indebtedness of the Company being acquired by it, (i) such assignee lender shall thereupon become a "LENDER" for all purposes of this Agreement with Commitments in the amount set forth in such Assignment Agreement and with all the rights, powers and obligations afforded a Lender hereunder, (ii) such assigning Lender shall have no further liability for funding the portion of its Commitments assumed by such other Lender and (iii) the address for notices to such assignee Lender shall be as specified in the Assignment Agreement executed by it. Concurrently with the execution and delivery of such Assignment Agreement, the Company shall execute and deliver Notes to the assignee Lender in the respective amounts of its Commitments and new Notes to the assigning Lender in the respective amounts of its Commitments after giving effect to the reduction occasioned by such assignment, all such Notes to constitute "NOTES" for all purposes of this Agreement and the other Loan Documents. Upon the delivery of such new Notes, the assigning Lender agrees to return to the Company such Lender's prior Notes marked "CANCELLED" or words of like import. SECTION 11.11. EXTENSION OF THE REVOLVING CREDIT COMMITMENTS. The Company shall have the option to request extensions to -43- the Termination Date pursuant to this Section 11.11. No less than 90 days prior to, but no more than 150 days prior to, January 31, 1998 (and, if the Termination Date has been extended pursuant to this Section 11.11, January 31st of each year thereafter), the Company may advise the Agent in writing of the Company's desire to extend the Termination Date for an additional 12 months and the Agent shall promptly notify the Lenders of each such request. If the Company makes any such request, each Lender agrees to notify the Company and the Agent within 60 days of such request stating whether such Lender is declining or consenting to any such request, or consenting to such request subject to specified terms and conditions. In the event that a Lender fails to so notify the Agent and the Company during such period, such Lender shall be deemed to have refused the requested extension. In the event that each Lender is agreeable to such extension (it being understood that the Lenders may accept or decline such a request in their sole discretion and on such terms as they may elect), the Company and the Lenders shall enter into such documents as the Agent may reasonably deem necessary or appropriate to reflect such extension, and all actual out-of-pocket costs and expenses incurred by the Agent in connection therewith (including reasonable attorneys' fees) shall be paid by the Company. SECTION 11.12. LENDER'S OBLIGATIONS SEVERAL. The obligations of the Lenders hereunder are several and not joint. Nothing contained in this Agreement and no action taken by the Lenders pursuant hereto shall be deemed to constitute the Lenders a partnership, association, joint venture or other entity. SECTION 11.13. HEADINGS. Section headings used in this Agreement are for convenience of reference only and are not a part of this Agreement for any other purpose. SECTION 11.14. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is unenforceable or prohibited in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such unenforceability or prohibition without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. All rights, remedies and powers provided in this Agreement and the other Loan Documents may be exercised only to the extent that the exercise thereof does not violate any applicable mandatory provisions of law, and all the provisions of this Agreement and other Loan Documents are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render this Agreement or the other Loan Documents invalid or unenforceable. SECTION 11.15. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and by different parties hereto on separate counterpart signature pages, and all such counterparts taken together shall be deemed to constitute one and the same instrument. -44- SECTION 11.16. BINDING NATURE AND GOVERNING LAW. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Agent and the Lenders and the benefit of their successors and assigns, including any subsequent holder of an interest of the Obligations. This Agreement and the rights and duties of the parties hereto shall be construed and determined in accordance with, and shall be governed by, the internal laws of the State of Illinois without regard to principles of conflicts of law. The Company may not assign its rights hereunder without the written consent of the Agent and the Lenders. SECTION 11.17. ENTIRE UNDERSTANDING. This Agreement, together with the other Loan Documents, constitute the entire understanding of the parties with respect to the subject matter hereof and any prior agreements, whether written or oral, with respect thereto are superseded hereby. SECTION 11.18. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois State court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Agreement, the other Loan Documents or the transactions contemplated hereby or thereby. The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. THE COMPANY, THE AGENT, AND EACH LENDER HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY. [SIGNATURE PAGES TO FOLLOW] -45- Upon your acceptance hereof in the manner hereinafter set forth, this Agreement shall be a contract between us for the purposes hereinabove set forth. Dated as of this 31st day of January, 1997..c4 Signature Page; HA-LO INDUSTRIES, INC. By Name -------------------------------- Title ------------------------------- -46- Accepted and Agreed to as of the day and year last above written. Each of the Lenders hereby agrees with each other Lender that if it should receive or obtain any payment (whether by voluntary payment, by the exercise of rights of set-off or banker's lien, by counterclaim or cross action, or by the enforcement of any rights under the Agreement or the other Loan Documents or otherwise) in respect of the Obligations, in a greater amount than such Lender would have received had such payment been made to the Agent and been distributed among the Lenders as contemplated by Section 3.7 hereof, then in that event the Lender receiving such disproportionate payment shall purchase for cash without recourse from the other Lenders an interest in the Obligations owed to such Lenders in such amount as shall result in a distribution of such payment as contemplated by Section 3.7 hereof. In the event any payment made to a Lender and shared with the other Lenders pursuant to the provisions hereof is ever recovered from such Lender, the Lenders receiving a portion of such payment hereunder shall restore the same to the payor Lender, but without interest. In the event any amount paid to the Agent under the Applications shall ever be recovered from the Agent, each Lender shall reimburse the Agent for its pro rata share of the amount so recovered. Amount and Percentage of Commitments: Revolving Credit Term Loan AMERICAN NATIONAL BANK AND TRUST Commitment Commitment COMPANY OF CHICAGO, individually and $22,500,000 $10,000,000 as agent By Name ------------------------------ Title: ------------------------------ Address: 33 North LaSalle Street 15th Floor, Corporate Finance Division Chicago, Illinois 60690 Attention: Jeff Armstrong Telephone: (312) 661-6951 Telecopy: (312) 661-6890 -47- Revolving Credit Term Loan HARRIS TRUST AND SAVINGS BANK Commitment Commitment $15,576,923 $6,923,077 By Name ------------------------------ Title: ------------------------------ Address: 111 West Monroe Street, 2E P.O. Box 755 Chicago, Illinois 60690 Attention: Mr. Ray Whitacre Telephone: (312) 461-3436 Telecopy: (312) 765-8348 Revolving Credit Term Loan COMERICA BANK Commitment Commitment $6,923,077 $3,076,923 By Name ------------------------------ Title: ------------------------------ Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Attention: ----------------------------- Telephone: ----------------------------- Telecopy: ----------------------------- -48- EXHIBIT A REVOLVING CREDIT NOTE Chicago, Illinois $___________________ _________________, 19__ On the Termination Date, for value received, the undersigned, HA-LO INDUSTRIES, INC., an Illinois corporation (the "COMPANY") hereby promises to pay to the order of ________________________________________________________ (the "LENDER"), at the principal office of American National Bank and Trust Company of Chicago in Chicago, Illinois, the principal sum of (i) __________________________________________ Dollars ($_________), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Revolving Loans owing from the Company to the Lender under the Credit Agreement hereinafter mentioned. This Note evidences Revolving Loans constituting part of a "BASE RATE PORTION" and "LIBOR PORTIONS" as such terms are defined in that certain Credit Agreement dated as of January 31, 1997, among the Company, American National Bank and Trust Company of Chicago, individually and as Agent, and the other Lenders which are now or may from time to time hereafter become parties thereto (said Credit Agreement, as the same may from time to time be modified, amended or restated being referred to herein as the "CREDIT AGREEMENT") made and to be made to the Company by the Lender under the Credit Agreement, and the Company hereby promises to pay interest at the office specified above on each Revolving Loan evidenced hereby at the rates and times specified therefor in the Credit Agreement. Each Revolving Loan made under the Credit Agreement by the Lender to the Company against this Note, any repayment of principal hereon, the status of each such loan from time to time as part of the Base Rate Portion or a LIBOR Portion, in the case of any LIBOR Portion, and the interest rates and Interest Periods applicable thereto shall be endorsed by the holder hereof on the reverse side of this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on the reverse side hereof prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries so endorsed on the reverse side hereof or recorded on the books and records of the Lender shall be prima facie evidence of the unpaid balance of this Note, the status of each loan from time to time as part of a Base Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion, the interest rates and Interest Periods applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Company hereby promises to pay all actual out-of-pocket costs and expenses (including reasonable attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. HA-LO INDUSTRIES, INC. By Name ------------------------------- Title ------------------------------- -2- EXHIBIT B NOTICE OF PAYMENT REQUEST [Date] [Name of Lender] [Address] Attention: Reference is made to the Credit Agreement, dated as of January_31, 1997, among HA-LO Industries, Inc., the Lenders named therein, and American National Bank and Trust Company of Chicago, as Agent (the "CREDIT AGREEMENT"). Capitalized terms used herein and not defined herein have the meanings assigned to them in the Credit Agreement. [THE COMPANY HAS FAILED TO PAY A REIMBURSEMENT OBLIGATION IN THE AMOUNT OF $__________. YOUR PERCENTAGE OF THE UNPAID REIMBURSEMENT OBLIGATION IS $___________] OR [AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO HAS BEEN REQUIRED TO RETURN A PAYMENT BY THE COMPANY OF A REIMBURSEMENT OBLIGATION IN THE AMOUNT OF $__________. YOUR PERCENTAGE OF THE RETURNED REIMBURSEMENT OBLIGATIONS IS $____________]. Very truly yours, AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Agent By Name ------------------------------- Title ------------------------------- EXHIBIT C TERM NOTE Chicago, Illinois $___________________ _________________, 19__ For Value Received, the undersigned, HA-LO INDUSTRIES, INC., an Illinois corporation (the "COMPANY") hereby promises to pay to the order of __________________________________________ (the "LENDER"), at the principal office of American National Bank and Trust Company of Chicago in Chicago, Illinois, the principal sum of ______________________________________________ Dollars ($_________), in consecutive principal installments commencing on ____________, 199___ and continuing on the ____ day of each ____________, ___________, _____________ and ________ occurring thereafter to and including ____________, 200_, with the first _______ principal installments each to be in an amount equal to 1/20th of the original principal amount of this Note, with the final installment in the amount of all principal not sooner paid due on _______________, 200_, of the final maturity hereof. This Note evidence a Term Loan constituting part of a "BASE RATE PORTION" and "LIBOR PORTIONS" as such terms are defined in that certain Credit Agreement dated as of January 31, 1997, among the Company, American National Bank and Trust Company of Chicago, individually and as Agent, and the other Lenders which are now or may from time to time hereafter become parties thereto (said Credit Agreement, as the same may from time to time be modified, amended or restated being referred to herein as the "CREDIT AGREEMENT") made to the Company by the Lender under the Credit Agreement, and the Company hereby promises to pay interest at the office specified above on the Term Loan evidenced hereby at the rates and times specified therefor in the Credit Agreement. The Term Loan made under the Credit Agreement by the Lender to the Company against this Note, any repayment of principal hereon, the status of such loan from time to time as part of the Base Rate Portion or a LIBOR Portion, in the case of any LIBOR Portion, and the interest rates and Interest Periods applicable thereto shall be endorsed by the holder hereof on the reverse side of this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on the reverse side hereof prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries so endorsed on the reverse side hereof or recorded on the books and records of the Lender shall be prima facie evidence of the unpaid balance of this Note, the status of such loan from time to time as part of a Base Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion, the interest rates and Interest Periods applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Company hereby promises to pay all actual out-of-pocket costs and expenses (including reasonable attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. HA-LO INDUSTRIES, INC. By Name ------------------------------- Title ------------------------------- -2- EXHIBIT D COMPLIANCE CERTIFICATE To: American National Bank and Trust Company of Chicago, as Agent under, and the Lenders party to, the Credit Agreement described below This Compliance Certificate is furnished to the Agent and the Lenders pursuant to that certain Credit Agreement dated as of January 31, 1997, by and among HA-LO Industries, Inc. and you (the "CREDIT AGREEMENT"). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected _________________________________ of the Company; 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Company and its Subsidiaries during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. The financial statements required by Section 7.5 of the Credit Agreement and being furnished to you concurrently with this Certificate are true, correct and complete in all material respects as of the date and for the periods covered thereby; and 5. The Schedule I hereto sets forth financial data and computations evidencing the Company's compliance with certain covenants of the Credit Agreement, all of which data and computations are, to the best of my knowledge, true, complete and correct and have been made in accordance with the relevant Sections of the Credit Agreement. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event: ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this _________ day of __________________ 19___. HA-LO INDUSTRIES, INC. ---------------------------------------- ------------------- , ------------------ (Print or Type Name) (Title) -2- SCHEDULE I COMPLIANCE CALCULATIONS FOR JANUARY 31, 1997 CREDIT AGREEMENT CALCULATIONS AS OF _____________, ____ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A. CURRENT RATIO (SECTION 7.7) 1. Consolidated current assets $___________ 2. Consolidated current liabilities $___________ 3. Ratio of line A1 to A2 _____: 1.0 4. Line A3 ratio must not be less than 1.5: 1.0 5. The Company is in compliance (circle yes or no) yes/no B. TANGIBLE NET WORTH (SECTION 7.10) 1. Stockholders Equity $___________ 2. Sum of: (i) intangible assets $___________ (ii) write-up of assets $___________ (iii) sample inventory $___________ 3. Line B1 minus B2 $___________ (Tangible Net Worth) 4. Line B3 must not be less than $___________ 5. The Company is in compliance (circle yes or no) yes/no C. LEVERAGE RATIO (SECTION 7.9) 1. Total Liabilities $___________ 2. Tangible Net Worth (Line B3 above) $___________ 3. Ratio of Line C1 to Line C2 ___: 1.0 4. Line C3 Ratio must not be more than 2.5: 1.0 5. The Company is in compliance (circle yes or no) yes/no D. CASH FLOW COVERAGE RATIO (SECTION 7.10) 1. Net Income for past 4 quarters $________ 2. Interest Expense for past 4 quarters $________ 3. Depreciation and Amortization Expense for past 4 quarters $________ 4. Federal, state and local income tax expense for past 4 quarters $________ 5. Sum of Lines D1, D2, D3 and D4 $________ 6. Net Capital Expenditures $________ 7. Line D5 minus D6 ("ADJUSTED EBITDA") $________ 8. Principal Payments due over next 4 quarters $________ 9. Interest Expense for past 4 quarters $________ 10. Federal, state and local income tax expense for past 4 quarters $________ 11. Dividends, Redemptions, etc. made during past 4 quarters $________ 12. Sum of Lines D8, D9, D10 and D11 ("FIXED CHANGES") $________ 13. Ratio of Line D7 to Line D12 ______:1.0 14. Line D13 ratio must not to be less than 1.2:1.0 15. The Company is in compliance (circle yes or no) Yes/No -2- EXHIBIT E OPINION OF COUNSEL EXHIBIT F ASSIGNMENT AND ACCEPTANCE Dated _____________,_19_____ Reference is made to the Credit Agreement dated as of January_31, 1997 (the "CREDIT AGREEMENT") among HA-LO Industries, Inc., an Illinois corporation (the "COMPANY"), the Lenders (as defined in the Credit Agreement) and American National Bank and Trust Company of Chicago, as Agent for the Lenders (the "AGENT"). Terms defined in the Credit Agreement are used herein with the same meaning. _____________________________________________________ (the "ASSIGNOR") and _________________________ (the "ASSIGNEE") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, a _______% interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the Effective Date (as defined below), including, without limitation, such percentage interest in the Assignor's Commitments as in effect on the Effective Date and the Loans, if any, owing to the Assignor on the Effective Date and the Assignor's Percentage of any outstanding L/C Obligations, if any. 2. The Assignor (i) represents and warrants that as of the date hereof (A) its Revolving Credit Commitment is $____________, and its Term Loan Commitment is $____________, (B) the aggregate outstanding principal amount of Loans made by it under the Credit Agreement that have not been repaid is $____________ ($____________ Revolving Loans and $___________ Term Loans) and a description of the interest rates and interest periods for such Loans is attached as Schedule 1 hereto, and (C) the aggregate principal amount of Assignor's outstanding L/C Obligations is $___________; (ii) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim, lien, or encumbrance of any kind; (iii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or any Subsidiary or the performance or observance by the Company or any Subsidiary of any of their respective obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered to the Lenders pursuant to in Section 7.5(a) and (b) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and -2- Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as Agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; and (v) specifies as its lending offices (and address for notices) the offices set forth beneath its name on the signature pages hereof. 4. As consideration for the assignment and sale contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds an amount equal to $_______________(1). It is understood that commitment and/or Letter of Credit fees accrued to the - -------------------- (1) Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. -3- date hereof with respect to the interest assigned hereby are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. 5. The effective date for this Assignment and Acceptance shall be _____________, ____ (the "EFFECTIVE DATE"). Following the execution of this Assignment and Acceptance, it will be delivered to the Company for its acceptance on behalf of the Company and to the Agent for acceptance and recording by the Agent. 6. Upon such acceptance and recording, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 7. Upon such acceptance and recording, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement in respect of the -4- interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Effective Date directly between themselves. 8. In accordance with Section 11.10 of the Credit Agreement, the Assignor and the Assignee request and direct that the Agent prepare and cause the Company to execute and deliver to the Assignee Notes payable to the Assignee in the amount of its Commitments and new Notes to the Assignor in the amount of its Commitments after giving effect to the assignment hereunder. 9. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Illinois. [ASSIGNOR LENDER] By Name ----------------------------------- Title ---------------------------------- [ASSIGNEE LENDER] By Name ----------------------------------- Title ---------------------------------- Lending Office (and address for notices): Accepted and consented this ____ day of ___________,19__ HA-LO INDUSTRIES, INC. By ------------------------------------ Name ---------------------------------- -5- Title --------------------------------- Accepted and consented to by the Agent this _______ day of ___________, 19__ AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS AGENT By ------------------------------------ Name ---------------------------------- Title --------------------------------- -6- SCHEDULE I Type of Last day of Principal Amount Loan Interest Rate Interest Period - ---------------- ---- ------------- --------------- SCHEDULE 5.2 SUBSIDIARIES JURISDICTION OF PERCENTAGE NAME INCORPORATION OWNERSHIP Fletcher, Barnhardt & White, Inc. Illinois 100% HA-LO Sports, Inc. Illinois 100% Market U.S.A., Inc. Illinois 100% Creative Concepts in Advertising, Inc. Michigan 100% EX-10.34 12 GUARANTY AGREEEMENT GUARANTY AGREEMENT This Guaranty Agreement (the "GUARANTY") dated as of this 31st day of January, 1997, by the parties who have executed this Guaranty (such parties, along with any other parties who execute and deliver to the Agent hereinafter identified and defined an agreement in the form attached hereto as Exhibit A, being herein referred to collectively as the "GUARANTORS" and individually as a "GUARANTOR"). WITNESSETH: WHEREAS, the Guarantors are subsidiaries of Ha-Lo Industries, Inc., an Illinois corporation (the "COMPANY"); and WHEREAS, the Company, American National Bank and Trust Company of Chicago ("ANB"), individually and as agent (ANB acting as such agent and any successor or successors to ANB in such capacity being hereinafter referred to as the "AGENT"), Harris Trust and Savings Bank ("HTSB") and Comerica Bank ("Comerica") have entered into a Credit Agreement dated as of even date herewith (such Credit Agreement as the same may hereafter be amended or modified from time to time, including amendments and restatements thereof in its entirety, being hereinafter referred to as the "CREDIT AGREEMENT") pursuant to which ANB, HTSB, Comerica and such other lenders from time to time parties thereto (ANB, HTSB, Comerica and such other lenders being hereinafter referred to collectively as the "LENDERS" and individually as a "LENDER") have extended various credit facilities to the Company (the Agent and the Lenders being hereinafter referred to collectively as the "GUARANTEED CREDITORS" and individually as a "GUARANTEED CREDITOR"); and WHEREAS, the Company provides each of the Guarantors with substantial financial, management, administrative, and technical support; and WHEREAS, as a condition to extending the credit facilities to the Company under the Credit Agreement, the Lenders have required, among other things, that the Guarantors execute and deliver this Guaranty; and WHEREAS, each Guarantor will benefit, directly and indirectly, from credit and other financial accommodations extended and to be extended by the Lenders to the Company; and NOW, THEREFORE, FOR VALUE RECEIVED, and in consideration of advances made or to be made, or credit accommodations given or to be given, to the Company by the Lenders from time to time, each Guarantor hereby makes the following representations and warranties to, and hereby covenants and agrees with, the Guaranteed Creditors as follows: SECTION 1. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. SECTION 2. Each Guarantor hereby jointly and severally guarantees to the Guaranteed Creditors, the due and punctual payment when due of (i) any and all indebtedness, obligations and liabilities owing to the Guaranteed Creditors, and any of them individually, by the Company under or in connection with or evidenced by (x) the Credit Agreement or (y) all notes issued by the Company under the Credit Agreement and any and all notes issued in extension or renewal thereof or in substitution or replacement therefor (collectively, the "NOTES"), in each case whether now existing or hereafter arising (and -1- whether arising before or after the filing of a petition in bankruptcy), due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired, (ii) the obligations of the Company to reimburse the Guaranteed Creditors, and any of them individually, for the amount of all drawings on all letters of credit (the "LETTERS OF CREDIT") issued for the account of the Company pursuant to the Credit Agreement, and all other obligations, whether now existing or hereafter arising (and whether arising before or after the filing of a petition in bankruptcy), of the Company under any and all applications for such Letters of Credit (each an "APPLICATION"; the Notes, the Letters of Credit, the Credit Agreement, the Applications, and any guaranty or other instrument or agreement executed by another subsidiary or affiliate of the Company in connection therewith being hereinafter collectively referred to as the "CREDIT DOCUMENTS"), and (iii) any and all expenses and charges, legal or otherwise, suffered or incurred by the Guaranteed Creditors, and any of them individually, in collecting or enforcing any of such indebtedness, obligations and liabilities or in realizing on or protecting or preserving any security therefor. The indebtedness, obligations and liabilities described in the immediately preceding clauses (i), (ii), and (iii) are hereinafter referred to as the "INDEBTEDNESS HEREBY GUARANTEED". In case of failure by the Company punctually to pay any indebtedness hereby guaranteed, each Guarantor hereby jointly and severally agrees to make such payment or to cause such payment to be made punctually as and when the same shall become due and payable, whether at stated maturity, by acceleration or otherwise, and as if such payment were made by the Company. Notwithstanding anything contained in this Guaranty to the contrary, the right of recovery against any Guarantor under this Guaranty shall not exceed $1 less than the amount which would render such Guarantor's Obligations under this Guaranty void or voidable under applicable law, including, without limitation, fraudulent conveyance law. SECTION 3. Each Guarantor further jointly and severally agrees to pay all actual out-of-pocket expenses, legal and/or otherwise (including court costs and reasonable attorneys' fees), paid or incurred by any Guaranteed Creditor in enforcing or endeavoring to collect or enforce the indebtedness hereby guaranteed or the Guarantors' obligations hereunder, or any part thereof, and in protecting, defending or enforcing this Guaranty and the Guarantors' obligations hereunder in any litigation, bankruptcy or insolvency proceedings or otherwise. SECTION 4. Each Guarantor agrees that upon demand, such Guarantor will then pay to the Agent for the benefit of the Guaranteed Creditors the full amount of the indebtedness hereby guaranteed then due whether or not any one or more of the other Guarantors shall then or thereafter pay any amount whatsoever in respect to their obligations hereunder. SECTION 5. Each of the Guarantors agrees that such Guarantor will not exercise or enforce any right of exoneration, contribution, reimbursement, recourse or subrogation available to such Guarantor against any person liable for payment of the indebtedness hereby guaranteed, or as to any security therefor, unless and until the full amount owing to the Guaranteed Creditors of the indebtedness hereby guaranteed has been fully paid and satisfied and each of the commitments by the Guaranteed Creditors to extend any indebtedness hereby guaranteed shall have expired or otherwise terminated. The payment by any Guarantor of any amount or amounts to the Guaranteed Creditors pursuant hereto shall not in any way entitle any such Guarantor, either at law, in equity or otherwise, to any -2- right, title or interest (whether by way of subrogation or otherwise) in and to the indebtedness hereby guaranteed or any part thereof or any collateral security therefor or any other rights or remedies in any way relating thereto or in and to any amounts theretofor, then or thereafter paid or applicable to the payment thereof howsoever such payment may be made and from whatsoever source such payment may be derived unless and until all of the indebtedness hereby guaranteed and all costs and expenses suffered or incurred by the Guaranteed Creditors in enforcing this Guaranty have been paid and satisfied in full and each of the commitments by the Guaranteed Creditors to extend any indebtedness hereby guaranteed shall have expired or otherwise terminated; and, unless and until such payment in full and termination, any payments made by any Guarantor hereunder and any other payments from whatsoever source derived on account of or applicable to the indebtedness hereby guaranteed or any part thereof shall be held and taken to be merely payments in gross to the Guaranteed Creditors reducing pro tanto the indebtedness hereby guaranteed. SECTION 6. To the extent permitted by the Credit Agreement, each Guaranteed Creditor may, without any notice whatsoever to any of the Guarantors, sell, assign, or transfer all of the indebtedness hereby guaranteed, or any part thereof, or grant participations therein, and in that event each and every immediate and successive assignee, transferee, or holder of all or any part of the indebtedness hereby guaranteed, shall have the right through the Agent pursuant to Section 18 hereof to enforce this Guaranty, by suit or otherwise, for the benefit of such assignee, transferee, or holder as fully as if such assignee, transferee, or holder were herein by name specifically given such rights, powers and benefits; but each Guaranteed Creditor through the Agent pursuant to Section 18 hereof shall have an unimpaired right to enforce this Guaranty for its own benefit, as to so much of the indebtedness hereby guaranteed that it has not sold, assigned or transferred. SECTION 7. This Guaranty is a continuing, absolute and unconditional Guaranty, and shall remain in full force and effect until written notice of its discontinuance executed by the Company and all the Guarantors shall be actually received by the Guaranteed Creditors, and also until any and all of the indebtedness hereby guaranteed which was created or existing before receipt of such notice shall be fully paid and satisfied and each of the commitments by the Guaranteed Creditors to extend any indebtedness hereby guaranteed shall have expired or otherwise terminated. The dissolution of any Guarantor shall not terminate this Guaranty as to such Guarantor until notice of such dissolution shall have been actually received by the Guaranteed Creditors, nor until all of the indebtedness hereby guaranteed, created or existing or committed to be extended in each case before receipt of such notice shall be fully paid and satisfied. The Guaranteed Creditors may at any time or from time to time release any Guarantor from its obligations hereunder or effect any compromise with any Guarantor and no such release or compromise shall in any manner impair or otherwise affect the obligations hereunder of the other Guarantors. No release, compromise, or discharge of any one or more of the Guarantors shall release, compromise or discharge the obligations of the other Guarantors hereunder. SECTION 8. In case of the dissolution, liquidation or insolvency (howsoever evidenced) of, or the institution of bankruptcy or receivership proceedings against the Company or any Guarantor, all of the indebtedness hereby guaranteed which is then existing shall, at the -3- option of the Lenders in accordance with the terms of the Credit Agreement, immediately become due or accrued and payable from the Guarantors. All payments received from the Company or on account of the indebtedness hereby guaranteed from whatsoever source, shall be taken and applied as payment in gross, and this Guaranty shall apply to and secure any ultimate balance that shall remain owing to the Guaranteed Creditors. SECTION 9. The liability hereunder shall in no way be affected or impaired by (and the Guaranteed Creditors are hereby expressly authorized to make from time to time, without notice to any of the Guarantors), any sale, pledge, surrender, compromise, settlement, release, renewal, extension, indulgence, alteration, substitution, exchange, change in, modification or other disposition of any of the indebtedness hereby guaranteed, either express or implied, or of any Credit Document or any other contract or contracts evidencing any thereof, or of any security or collateral therefor or any guaranty thereof. The liability hereunder shall in no way be affected or impaired by any acceptance by the Guaranteed Creditors of any security for or other guarantors upon any of the indebtedness hereby guaranteed, or by any failure, neglect or omission on the part of the Guaranteed Creditors to realize upon or protect any of the indebtedness hereby guaranteed, or any collateral or security therefor, or to exercise any lien upon or right of appropriation of any moneys, credits or property of the Company or any Guarantor, possessed by any of the Guaranteed Creditors, toward the liquidation of the indebtedness hereby guaranteed, or by any application of payments or credits thereon. The Guaranteed Creditors shall have the exclusive right to determine how, when and what application of payments and credits, if any, shall be made on said indebtedness hereby guaranteed, or any part of same. In order to hold any Guarantor liable hereunder, there shall be no obligation on the part of the Guaranteed Creditors, at any time, to resort for payment to the Company or to any other Guarantor, or to any other person, its property or estate, or resort to any collateral, security, property, liens or other rights or remedies whatsoever, and the Guaranteed Creditors shall have the right to enforce this Guaranty against any Guarantor irrespective of whether or not other proceedings or steps are pending seeking resort to or realization upon or from any of the foregoing. SECTION 10. In the event the Guaranteed Creditors shall at any time in their discretion permit a substitution of Guarantors hereunder or a party shall wish to become Guarantor hereunder, such substituted or additional Guarantor shall, upon executing an agreement in the form attached hereto as Exhibit A, become a party hereto and be bound by all the terms and conditions hereof to the same extent as though such Guarantor had originally executed this Guaranty and in the case of a substitution, in lieu of the Guarantor being replaced. No such substitution shall be effective absent the written consent of the Guaranteed Creditors nor shall it in any manner affect the obligations of the other Guarantors hereunder. SECTION 11. All diligence in collection or protection, and all presentment, demand, protest and/or notice, as to any and everyone, whether or not the Company or the Guarantors or others, of dishonor and of default and of non-payment and of the creation and existence of any and all of said indebtedness hereby guaranteed, and of any security and collateral therefor, and of the acceptance of this Guaranty, and of any and all extensions of credit and indulgence hereunder, are expressly waived. -4- SECTION 12. No act of commission or omission of any kind, or at any time, upon the part of the Guaranteed Creditors in respect to any matter whatsoever, shall in any way affect or impair this Guaranty. SECTION 13. The Guarantors waive, to the extent permitted by applicable law, any and all defenses, claims and discharges of the Company, or any other obligor, pertaining to the indebtedness hereby guaranteed, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, to the extent permitted by applicable law, the Guarantors will not assert, plead or enforce against the Guaranteed Creditors any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statue of frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to the Company or any other person liable in respect of any of the indebtedness hereby guaranteed, or any set-off available against the Guaranteed Creditors to the Company or any such other person, whether or not on account of a related transaction. The Guarantors agree that the Guarantors shall be and remain jointly and severally liable for any deficiency remaining after foreclosure or other realization on any lien or security interest securing the indebtedness hereby guaranteed, whether or not the liability of the Company or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. SECTION 14. If any payment applied by the Guaranteed Creditors to the indebtedness hereby guaranteed is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of the Company or any other obligor), the indebtedness hereby guaranteed to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such of the indebtedness hereby guaranteed as fully as if such application had never been made. SECTION 15. The liability of the Guarantors under this Guaranty is in addition to and shall be cumulative with all other liabilities of the Guarantors to the Guaranteed Creditors as a guarantor of the indebtedness hereby guaranteed, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. SECTION 16. Any invalidity or unenforceability of any provision or application of this Guaranty shall not affect other lawful provisions and applications hereof, and to this end the provisions of this Guaranty are declared to be severable. Without limiting the generality of the foregoing, any invalidity or unenforceability against any Guarantor of any provision or application of the Guaranty shall not affect the validity or enforceability of the provisions or application of this Guaranty as against the other Guarantors. SECTION 17. Any demand for payment on this Guaranty or any other notice required or desired to be given hereunder to any Guarantor shall be in writing (including, without limitation, notice by telecopy) and shall be given to the relevant party at its address or telecopier number set forth on the appropriate signature page hereof, or such other address or telecopier number as such party may hereafter specify by notice to the Agent given by United States certified or registered mail, by telecopy or by other telecommunication device -5- capable of creating a written record of such notice and its receipt. Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section. SECTION 18. No Lender shall have the right to institute any suit, action or proceeding in equity or at law in connection with this Guaranty for the enforcement of any remedy under or upon this Guaranty; it being understood and intended that no one or more of the Lenders shall have any right in any manner whatsoever to enforce any right hereunder, and that all proceedings at law or in equity shall be instituted, had and maintained by the Agent in the manner herein provided and for the benefit of the Lenders. SECTION 19. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE OF ILLINOIS (without regard to principles of conflicts of laws) in which state it shall be performed by the Guarantors and may not be waived, amended, released or otherwise changed except by a writing signed by the Agent. This Guaranty and every part thereof shall be effective upon delivery to the Agent, without further act, condition or acceptance by the Guaranteed Creditors, shall be binding upon the Guarantors and upon the legal representatives, successors and assigns of the Guarantors, and shall inure to the benefit of the Guaranteed Creditors, their successors, legal representatives and assigns. The Guarantors waive notice of the Guaranteed Creditors' acceptance hereof. This Guaranty may be executed in counterparts, and by different parties hereto on separate counterparts signature pages, each of which shall be an original, but all together to be one and the same instrument. SECTION 20. Each Guarantor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Northern District of Illinois and of any Illinois State court sitting in the City of Chicago for purposes of all legal proceedings arising out of or relating to this Guaranty, the other Credit Documents or the transactions contemplated hereby or thereby. Each Guarantor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such court has been brought in an inconvenient forum. EACH GUARANTOR AND EACH GUARANTEED CREDITOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OTHER CREDIT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. [SIGNATURE PAGES TO FOLLOW] -6- IN WITNESS WHEREOF, the Guarantors have caused this Guaranty to be executed and delivered as of the date first above written. "GUARANTORS" FLETCHER, BARNHARDT & WHITE, INC. By Its --------------------------------- Address: 5980 West Touhy Avenue Niles, Illinois 60714 Attention Mr. Greg Kilrea Telephone (847) 647-4785 Telecopy (847) 647-4970 HA-LO SPORTS, INC. By Its --------------------------------- Address: 5980 West Touhy Avenue Niles, Illinois 60714 Attention Mr. Greg Kilrea Telephone (847) 647-4785 Telecopy (847) 647-4970 -7- MARKET U.S.A., INC. By Its --------------------------------- Address: 5980 West Touhy Avenue Niles, Illinois 60714 Attention Mr. Greg Kilrea Telephone (847) 647-4785 Telecopy (847) 647-4970 CREATIVE CONCEPTS IN ADVERTISING, INC. By Its --------------------------------- Address: 5980 West Touhy Avenue Niles, Illinois 60714 Attention Mr. Greg Kilrea Telephone (847) 647-4785 Telecopy (847) 647-4970 Accepted and agreed to in Chicago, Illinois as of the date first above written. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Agent By Its --------------------------------- Address: 33 North LaSalle Street, 15th Floor Corporate Finance Division Chicago, Illinois 60690 Attention Jeff Armstrong Telephone (312) 661-6951 Telecopy (312) 661-6890 -8- EXHIBIT A TO GUARANTY AGREEMENT ASSUMPTION AND SUPPLEMENT TO GUARANTY AGREEMENT This Assumption and Supplement to Guaranty Agreement (the "AGREEMENT") is dated as of this _____ day of ____________, 199___, made by [NEW GUARANTOR], a ___________ corporation (the "NEW GUARANTOR"); WITNESSETH THAT: WHEREAS, certain parties have executed and delivered to the Guaranteed Creditors that certain Guaranty Agreement dated as of January 31, 1997, or supplements thereto (such Guaranty Agreement, as the same may from time to time be modified or amended, including supplements thereto which add or substitute parties as Guarantors thereunder, being hereinafter referred to as the "GUARANTY") pursuant to which such parties (the "EXISTING GUARANTORS") have guaranteed to the Guaranteed Creditors the full and prompt payment of, among other things, any and all indebtedness, obligations and liabilities of HA-LO Industries, Inc. (the "COMPANY") arising under or relating to the Credit Agreement and the other Credit Documents described therein; and WHEREAS, the Company provides the New Guarantor with substantial financial, managerial, administrative, technical and design support and the New Guarantor will benefit, directly and indirectly, from credit and other financial accommodations extended and to be extended by the Lenders to the Company; NOW, THEREFORE, FOR VALUE RECEIVED, and in consideration of advances made or to be made, or credit accommodations given or to be given, to the Company by the Lenders from time to time, the New Guarantor hereby agrees as follows: 1. The New Guarantor acknowledges and agrees that it shall become a "Guarantor" party to the Guaranty effective upon the date the New Guarantor's execution of this Agreement and the delivery of this Agreement to the Agent on behalf of the Guaranteed Creditors, and that upon such execution and delivery, all references in the Guaranty to the terms "Guarantor" or "Guarantors" shall be deemed to include the New Guarantor. 2. The New Guarantor hereby assumes and becomes liable (jointly and severally with all the other Guarantors) for the indebtedness hereby guaranteed (as defined in the Guaranty) and agrees to pay and otherwise perform all of the obligations of a Guarantor under the Guaranty according to, and otherwise on and subject to, the terms and conditions of the Guaranty to the same extent and with the same force and effect as if the New Guarantor had originally been one of the Existing Guarantors under the Guaranty and had originally executed the same as such an Existing Guarantor. 3. All capitalized terms used in this Agreement without definition shall have the same meaning herein as such terms have in the Guaranty, except that any reference to the term "Guarantor" or "Guarantors" and any provision of the Guaranty providing meaning to such term shall be deemed a reference to the Existing Guarantors and the New Guarantor. Except as specifically modified hereby, all of the terms and conditions of the Guaranty shall stand and remain unchanged and in full force and effect. 4. The New Guarantor agrees to execute and deliver such further instruments and documents and do such further acts and things as the Agent or the Guaranteed Creditors may deem necessary or proper to carry out more effectively the purposes of this Agreement. 5. No reference to this Agreement need be made in the Guaranty or in any other document or instrument making reference to the Guaranty, any reference to the Guaranty in any of such to be deemed a reference to the Guaranty as modified hereby. 6. This Agreement shall be governed by and construed in accordance with the State of Illinois (without regard to principles of conflicts of law) in which -2- state it shall be performed by the New Guarantor. [NEW GUARANTOR] By Its --------------------------------- Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- Attention ------------------------------ Telephone ------------------------------ Telecopy ------------------------------- Acknowledged and agreed to in Chicago, Illinois as of the date first above written. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as Agent By Its --------------------------------- -3- EX-13 13 ANNUAL REPORT TO SHAREHOLDERS FOR 1996 TO OUR SHAREHOLDERS: We are pleased to conclude another year of growth and achievement. Your company continues to consolidate the promotional products industry while enhancing its other marketing services. By means of internal growth and acquisitions we intend to extend our integrated marketing formula around the world. Sales of $255 million in 1996 were the highest in the 25 year history of the company and earnings increased 101% to $9.4 million. In each of our four years as a public company, HA-LO has achieved record sales and earnings. We have come a long way since 1993 when we reported sales of $36 million and earnings of $224,000. We continue to focus on developing operating efficiencies as we grow the business. Additionally, our shareholders received this year a 3 for 2 stock split in the second quarter and a 25% stock dividend in the fourth quarter. This past year brought us two key acquisitions. Creative Concepts in Advertising, the third largest company in the promotional products industry, allows HA-LO to extend its expertise from a national to an international client base. This acquisition, which closed in January 1997, represents HA-LO's fourth acquisition in the last three years of one of the 25 largest promotional products companies. We also expanded our service capabilities during 1996 by acquiring Market USA, a leading provider of outbound telemarketing services in the United States and Canada. Not only will this acquisition allow HA-LO to capitalize on the current trend toward outsourcing of telemarketing services, but it will also provide HA-LO a greater opportunity to provide integrated marketing solutions to its existing and prospective clients. One of our strategies to differentiate HA-LO is to develop exclusive product arrangements. We are excited by our new exclusive agreement with Champion Products Inc., a division of Sara Lee Corporation. Champion is the premier authentic athletic brand in sports apparel and approached HA-LO to capitalize on the growing demand for corporate logoed apparel. Having exclusive access to products like Champion provides our company with a significant competitive advantage. The promotional products industry continues to demonstrate double-digit revenue growth, outstripping other forms of advertising. This expanding recognition of the effectiveness of promotional products in today's marketing reality will help fuel your company's exciting vision for years to come. In 1997 we celebrate our 25th year anniversary. As I reflect on the growth of the company, I want to take this opportunity to acknowledge the dedication and professionalism of everyone in the HA-LO family. I would also like to thank our shareholders for the confidence you have expressed in us through your investment and look forward to sharing our progress and continued success with you. Sincerely, Lou Weisbach Chairman, President and Chief Executive Officer March 24, 1997 1996 HIGHLIGHTS - Net income per share increased 61% to $.53 in 1996 from $.33 per share in 1995. - Sales increased 21% in 1996 and reached an all-time high of $255 million. - Reached agreement to acquire the third largest promotional products distributor in the industry. This acquisition was closed in January, 1997. - Expanded the Company's service capabilities through the acquisition of a leading telemarketing company. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- --------- STATEMENT OF OPERATIONS DATA (a): Net Sales............................... $ 254,888 $ 211,266 $ 145,821 $ 104,954 $ 99,755 Net Income.............................. $ 9,369 $ 5,380 $ 5,344 $ 2,705 $ 4,870 Pro forma Net Income (b)................ N/A $ 4,673 $ 3,924 $ 1,867 $ 3,007 Net Income Per Share, Fully Diluted (c).................................... $ 0.53 $ 0.33 $ 0.32 $ 0.16 $ 0.31 Weighted Average Shares Out-standing, Fully Diluted (c)...................... 17,581 14,091 12,188 12,030 9,622 BALANCE SHEET DATA (END OF YEAR) (a),(d): Working Capital......................... $ 42,485 $ 30,582 $ 19,456 $ 10,887 $ 7,838 Total Assets............................ $ 87,634 $ 79,340 $ 56,007 $ 39,251 $ 26,955 Long-term Debt.......................... $ 2,902 $ 836 $ 12,591 $ 6,158 $ 671 Shareholders' Equity.................... $ 57,247 $ 44,783 $ 17,389 $ 13,032 $ 10,615
(a)In September, 1996 the Company acquired two affiliated telemarketing companies and in December, 1995 the Company acquired a distributor of promotional products. These acquisitions were accounted for as pooling-of-interests. Accordingly, the financial statements for all periods presented have been restated to include the results of these acquisitions. (b)The Company elected to be treated as an S Corporation for Federal income tax purposes through the initial public offering completed on November 4, 1992. Accordingly, the Company was not subject to Federal income taxes for such periods. Additionally, the acquisitions that were completed in September 1996 and December 1995 and accounted for as pooling-of-interests also had elected to be treated as S Corporations. Pro forma net income and net income per share amounts include an unaudited provision for Federal and state taxes at an effective rate of 38% in 1992, and 40% thereafter. (c)All years presented were retroactively adjusted to reflect shares issued in connection with the acquisitions discussed in note (a). Additionally, all share and per share data have been restated to reflect the three-for-two stock split and 25% stock dividend completed in 1996. (d)Excludes dividends of $3,612,000, $5,238,000, $1,276,000, $651,000, and $2,426,000 declared by the acquired companies in 1996, 1995, 1994, 1993, and 1992, respectively, prior to their acquisition by the Company. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth for the years indicated the percent of net sales represented by each line item presented below from the Company's Statements of Income. All periods presented have been restated to include the results of acquisitions accounted for as pooling-of-interests.
PERCENT OF NET SALES ------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net Sales.......................................................... 100.0% 100.0% 100.0% Cost of Sales...................................................... 71.6% 71.9% 70.3% ----- ----- ----- Gross Profit....................................................... 28.4% 28.1% 29.7% Selling Expenses................................................... 11.9% 12.2% 13.1% General and Administrative Expenses................................ 10.5% 11.7% 11.6% ----- ----- ----- Operating Income................................................. 6.0% 4.2% 5.0% Other Income (Expenses), Net....................................... 0.1% (0.6)% (0.5)% ----- ----- ----- Income Before Income Taxes......................................... 6.1% 3.6% 4.5% Provision for Income Taxes......................................... 2.5% 1.1% 0.8% ----- ----- ----- Net Income......................................................... 3.6% 2.5% 3.7% ----- ----- ----- ----- ----- ----- Pro forma Net Income............................................... 2.2% 2.7% ----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. Net sales increased 20.6% to $254.9 million in 1996 compared to 1995 net sales of $211.3 million. Virtually all of the $43.6 million increase was attributable to internal growth. Gross profit for 1996 was $72.4 million (28.4% of net sales), representing an increase of $13 million from 1995 gross profit of $59.4 million (28.1% of net sales). This increase is the result of the Company's sales growth. Gross profit as a percentage of net sales increased slightly in 1996 due to the Company's continued focus on profitable growth. Selling expenses as a percentage of net sales decreased to 11.9% in 1996 ($30.3 million) compared to 12.2% in 1995 ($25.8 million). The $4.5 million increase relates primarily to commission expense resulting from the Company's sales growth. The .3% decrease as a percentage of net sales is primarily the result of increased sales to a significant customer which are not subject to the payment of the Company's standard commissions. General and administrative expenses as a percentage of net sales decreased to 10.5% in 1996 from 11.7% in 1995. This decrease is reflective of the Company's continued focus on increasing net sales without adding proportionate overhead expenses. Total general and administrative expenses increased to $26.9 million in 1996 from $24.6 million in 1995. This increase relates primarily to increased personnel and facilities costs necessary to support the sales growth achieved in 1996. Included in 1996 and 1995 results are non recurring charges of $1.7 million and $1.8 million related to the acquisitions of Market USA, Inc. and Marusa Marketing, Inc. (together MUSA) and Fletcher-Barnhardt & White, Inc. (FBW), respectively. Net interest income in 1996 was approximately $.4 million compared to net interest expense of $1.2 million in 1995. The difference is the result of proceeds from the Company's public offering in November, 1995 which were used primarily to reduce debt. Remaining proceeds were invested primarily in short term U.S. Government securities. 4 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Net sales increased 44.9% to $211.3 million in 1995 compared to 1994 sales of $145.8 million. Of the $65.5 million increase in sales, approximately $16 million related to acquisitions completed in 1995 and the remainder was due to internal growth. Gross profit for 1995 was $59.4 million (28.1% of net sales), representing an increase of $16.1 million from 1994 gross profit of $43.3 million (29.7% of net sales). This increase is the result of the Company's sales growth. The decrease in gross profit as a percentage of net sales is the result of increased sales to a significant customer, which are lower margin than the Company's other sales. Selling expenses increased to $25.8 million (12.2% of net sales) in 1995 compared to $19.1 million (13.1% of net sales) in 1994. The $6.7 million increase relates primarily to commission expense resulting from the Company's sales growth. The .9% decrease as a percentage of net sales is primarily the result of increased sales to a significant customer which are not subject to payment of the Company's standard commissions. General and administrative expenses as a percentage of sales remained constant in 1995 (11.7%) compared to 1994 (11.6%). Total general and administrative expenses increased to $24.6 million in 1995 from $16.9 million in 1994. The most significant factors in the $7.7 million increase relates to the $1.8 million non recurring charge in 1995 related to the FBW acquisition and a full year of overhead expenses related to acquisitions completed in 1994. Additionally, increased personnel and facilities costs were necessary to support the Company's sales growth. Net interest expense in 1995 was approximately $1.2 million compared to $.8 million in 1994. The increase relates to higher debt levels required primarily to fund the Company's acquisition activity and working capital needs. LIQUIDITY AND CAPITAL RESOURCES In November, 1995, the Company completed a public offering of its common stock and received proceeds of approximately $24.5 million. The majority of the proceeds were used to pay off the Company's debt. To a lesser extent, a portion of the proceeds were used to complete acquisitions and fund capital expenditures. Throughout 1996, the Company had a revolving credit facility with a bank providing for borrowings of up to $16 million. Interest on the facility was either the bank's prime rate or the London Interbank Offered Rate (LIBOR) plus 1.5%. In January, 1997, the Company entered into a new credit facility with three participating banks providing for borrowings of up to $65 million. The new agreement, which is a three year commitment, provides for a revolving line of credit of up to $45 million and an acquisition facility of up to $20 million. Interest on the new facility is either the bank's prime rate less .25% or LIBOR plus .375%-1%, based on a defined ratio. The Company's current ratio, an indication of liquidity, increased to 2.65 to 1 at December 31, 1996 compared to 1.98 to 1 at December 31, 1995. Working capital for the same periods increased to $42.5 million from $30.6 million. A majority of the $11.9 million increase in working capital is attributable to the overall sales growth of the Company in 1996 compared to 1995. Capital expenditures, excluding acquisitions, were approximately $5.0 million in 1996 compared to $2.6 million in 1995. The increase between years relates primarily to expenditures for updating the Company's computer systems and investments to upgrade telemarketing call centers with state of the art technology. Overall, the Company believes that availability from its credit facility and cash flows from operations will be sufficient to satisfy its cash needs for the foreseeable future. INFLATION Management does not believe that inflation had a significant impact on the Company's results of operations for the years presented. 5 HA-LO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- NET SALES......................................... $ 254,887,550 $ 211,265,658 $ 145,821,206 COST OF SALES..................................... 182,442,369 151,858,537 102,473,334 -------------- -------------- -------------- Gross profit.................................. 72,445,181 59,407,121 43,347,872 SELLING EXPENSES.................................. 30,338,182 25,776,848 19,124,057 GENERAL AND ADMINISTRATIVE EXPENSES............... 26,869,824 24,627,623 16,884,118 -------------- -------------- -------------- Income from operations........................ 15,237,175 9,002,650 7,339,697 -------------- -------------- -------------- OTHER INCOME (EXPENSE): Interest expense................................ (224,236) (1,309,402) (871,099) Interest income................................. 604,839 95,365 71,378 -------------- -------------- -------------- Total other income (expense), net............. 380,603 (1,214,037) (799,721) -------------- -------------- -------------- Income before income taxes.................... 15,617,778 7,788,613 6,539,976 PROVISION FOR INCOME TAXES........................ 6,248,279 2,408,541 1,195,712 -------------- -------------- -------------- NET INCOME FOR THE YEAR........................... $ 9,369,499 $ 5,380,072 $ 5,344,264 -------------- -------------- -------------- -------------- -------------- -------------- PRO FORMA INCOME DATA (unaudited): Net income as reported.......................... $ 5,380,072 $ 5,344,264 Pro forma adjustment to income taxes............ 706,844 1,420,012 -------------- -------------- PRO FORMA NET INCOME.............................. $ 4,673,228 $ 3,924,252 -------------- -------------- -------------- -------------- NET INCOME PER SHARE (unaudited pro forma for 1995 and 1994) Primary....................................... $ 0.54 $ 0.34 $ 0.32 Fully diluted................................. $ 0.53 $ 0.33 $ 0.32 -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Primary....................................... 17,364,198 13,577,749 12,188,184 Fully diluted................................. 17,580,741 14,090,516 12,188,184 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these statements. 6 HA-LO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- ASSETS 1996 1995 - --------------------------------------------------------------------- ------------- ------------- CURRENT ASSETS: Cash and equivalents............................................... $ 3,862,958 $ 2,264,594 Short-term investments............................................. 2,908,370 3,549,717 Receivables- Trade............................................................ 49,357,356 44,518,900 Corporate fulfillment program.................................... 2,380,537 3,665,877 Advances due from salesmen....................................... 813,561 1,166,462 Inventories........................................................ 5,776,350 5,494,974 Prepaid expenses and deposits...................................... 3,116,050 1,225,793 ------------- ------------- Total current assets........................................... 68,215,182 61,886,317 ------------- ------------- PROPERTY AND EQUIPMENT, net.......................................... 9,682,494 7,674,505 ------------- ------------- OTHER ASSETS: Intangible assets, net............................................. 6,743,690 7,887,243 Samples............................................................ 1,216,429 1,026,588 Other.............................................................. 1,776,207 865,592 ------------- ------------- Total other assets............................................. 9,736,326 9,779,423 ------------- ------------- $ 87,634,002 $ 79,340,245 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Book overdraft..................................................... $ 1,218,122 $ 2,161,161 Accounts payable................................................... 13,277,100 16,269,312 Accrued expenses- Commissions and wages............................................ 6,684,616 6,334,419 Other............................................................ 3,492,029 5,473,669 Due to related parties............................................. -- 123,910 Deferred taxes-current............................................. 1,058,087 941,996 ------------- ------------- Total current liabilities...................................... 25,729,954 31,304,467 ------------- ------------- LONG-TERM DEBT....................................................... 2,901,785 836,336 ------------- ------------- DEFERRED LIABILITIES................................................. 1,755,335 2,416,689 ------------- ------------- COMMITMENTS AND CONTINGENCIES........................................ SHAREHOLDERS' EQUITY: Preferred stock, no par value; 10,000,000 shares authorized and none issued....................................................... -- -- Common stock, no par value; 25,000,000 shares authorized and 16,756,109 and 16,181,863 issued and outstanding in 1996 and 1995, respectively...................................................... 47,535,271 42,737,806 Unearned compensation-restricted stock............................. (794,375) (1,000,000) Deferred marketing costs........................................... (1,448,000) (1,448,000) Cumulative translation adjustment.................................. 33,904 22,249 Retained earnings.................................................. 11,920,128 4,470,698 ------------- ------------- Total shareholders' equity..................................... 57,246,928 44,782,753 ------------- ------------- $ 87,634,002 $ 79,340,245 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these balance sheets. 7 HA-LO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK --------------------------- SHARES RETAINED ISSUED AMOUNT OTHER EARNINGS ------------ ------------- ------------ ------------- BALANCE, December 31, 1993................................... 12,091,895 $ 8,485,764 $ 5,198 $ 4,542,240 Transfer of S Corporation retained earnings................ -- 7,476,546 -- (7,476,546) Dividends paid by acquired companies....................... -- (392,000) -- (884,416) Stock bonus in connection with acquisition of business..... 13,022 31,251 -- -- Issuance of contingent shares for acquisition of business.................................................. 93,750 262,500 -- -- Translation adjustment..................................... -- -- (5,452) -- Net income for the year.................................... -- -- -- 5,344,264 ------------ ------------- ------------ ------------- BALANCE, December 31, 1994................................... 12,198,667 15,864,061 (254) 1,525,542 Dividends paid by acquired companies....................... -- (2,802,648) -- (2,434,916) Issuance of shares in connection with acquisitions......... 227,484 852,068 -- -- Issuance of stock warrants................................. -- 1,448,000 (1,448,000) -- Issuance of restricted stock............................... 300,000 1,200,000 (1,200,000) -- Amortization of unearned compensation...................... -- -- 200,000 -- Recognition of tax benefits from stock options and restricted stock.......................................... -- 495,466 -- -- Exercise of stock options.................................. 80,852 214,529 -- -- Issuance of shares for cash................................ 3,374,860 25,466,330 -- -- Translation adjustment..................................... -- -- 22,503 -- Net income for the year.................................... -- -- -- 5,380,072 ------------ ------------- ------------ ------------- BALANCE, December 31, 1995................................... 16,181,863 42,737,806 (2,425,751) 4,470,698 Dividends paid by acquired companies....................... -- (1,691,579) -- (1,920,069) Stock bonus in connection with acquisition of business..... 5,435 62,500 -- -- Issuance of shares in connection with acquisitions......... 429 9,866 -- -- Issuance of restricted stock............................... 1,562 34,375 (34,375) -- Amortization of unearned compensation...................... -- -- 240,000 -- Recognition of tax benefits from stock options and restricted stock.......................................... -- 5,243,790 -- -- Exercise of stock options and warrants..................... 614,305 2,000,013 -- -- Repurchase of common stock................................. (47,485) (861,500) -- -- Translation adjustment..................................... -- -- 11,655 -- Net income for the year.................................... -- -- -- 9,369,499 ------------ ------------- ------------ ------------- BALANCE, December 31, 1996................................... 16,756,109 $ 47,535,271 $ (2,208,471) $ 11,920,128 ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- TOTAL SHAREHOLDERS' EQUITY --------------- BALANCE, December 31, 1993................................... $ 13,033,202 Transfer of S Corporation retained earnings................ -- Dividends paid by acquired companies....................... (1,276,416) Stock bonus in connection with acquisition of business..... 31,251 Issuance of contingent shares for acquisition of business.................................................. 262,500 Translation adjustment..................................... (5,452) Net income for the year.................................... 5,344,264 --------------- BALANCE, December 31, 1994................................... 17,389,349 Dividends paid by acquired companies....................... (5,237,564) Issuance of shares in connection with acquisitions......... 852,068 Issuance of stock warrants................................. -- Issuance of restricted stock............................... -- Amortization of unearned compensation...................... 200,000 Recognition of tax benefits from stock options and restricted stock.......................................... 495,466 Exercise of stock options.................................. 214,529 Issuance of shares for cash................................ 25,466,330 Translation adjustment..................................... 22,503 Net income for the year.................................... 5,380,072 --------------- BALANCE, December 31, 1995................................... 44,782,753 Dividends paid by acquired companies....................... (3,611,648) Stock bonus in connection with acquisition of business..... 62,500 Issuance of shares in connection with acquisitions......... 9,866 Issuance of restricted stock............................... -- Amortization of unearned compensation...................... 240,000 Recognition of tax benefits from stock options and restricted stock.......................................... 5,243,790 Exercise of stock options and warrants..................... 2,000,013 Repurchase of common stock................................. (861,500) Translation adjustment..................................... 11,655 Net income for the year.................................... 9,369,499 --------------- BALANCE, December 31, 1996................................... $ 57,246,928 --------------- ---------------
The accompanying notes are an integral part of these statements. 8 HA-LO INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income for the year................................... $9,369,499 $ 5,380,072 $ 5,344,264 Adjustments to reconcile net income to net cash provided by (used for) operating activities- Depreciation and amortization........................... 3,885,328 3,005,295 1,869,168 Deferred taxes.......................................... (541,953) (858,652) (286,000) Increase in cash surrender value........................ (14,837) -- (106,531) Loss on lease buyout.................................... -- 2,772 -- Increase in deferred liabilities-other.................. 30,040 192,054 268,805 Stock issued in connection with bonus................... -- -- 31,251 Changes in assets and liabilities, net of effects of acquired companies- Receivables............................................. (2,908,203) (10,221,876) (10,858,233) Inventories............................................. (252,944) (1,033,105) (2,055,271) Prepaid expenses and deposits........................... (1,933,217) 365,130 (224,632) Accounts payable and accrued expenses................... 1,080,495 6,858,817 3,192,222 ---------- ----------- ----------- Net cash provided by (used for) operating activities......................................... 8,714,208 3,690,507 (2,824,957) ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (4,950,703) (2,598,519) (1,988,113) Purchases of samples...................................... (518,924) (543,236) (280,957) (Increase) decrease in short-term investments............. 641,347 (3,549,717) -- (Increase) decrease in other assets....................... (181,864) 10,402 40,910 Decrease in deferred liabilities.......................... (628,802) (570,777) (497,541) Cash paid for acquisitions................................ (9,988) (1,845,890) (844,756) ---------- ----------- ----------- Net cash used for investing activities.............. (5,648,934) (9,097,737) (3,570,457) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt and notes payable.............. -- (5,504,197) (1,973,057) Net borrowings (payments) under line of credit............ 2,023,693 (10,724,252) 7,825,540 Advances to (repayments from) related party............... (123,910) 157,839 (67,622) Policy loan proceeds...................................... -- -- 1,030,747 Decrease (increase) in book overdraft..................... (943,039) 1,357,257 803,904 Cash dividends paid by acquired entities.................. (3,573,822) (5,237,564) (1,412,147) Net proceeds from issuance of common stock................ 2,000,013 25,680,859 -- Repurchase of common stock................................ (861,500) -- -- ---------- ----------- ----------- Net cash provided by (used for) financing activities......................................... (1,478,565) 5,729,942 6,207,365 ---------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS................................................ 11,655 22,503 (5,452) ---------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 1,598,364 345,215 (193,501) CASH AND EQUIVALENTS, beginning of year..................... 2,264,594 1,919,379 2,112,880 ---------- ----------- ----------- CASH AND EQUIVALENTS, end of year........................... $3,862,958 $ 2,264,594 $ 1,919,379 ---------- ----------- ----------- ---------- ----------- -----------
The accompanying notes are an integral part of these statements. 9 HA-LO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF THE BUSINESS HA-LO Industries, Inc. and Subsidiaries (the "Company") is engaged in the business of providing integrated marketing and promotions solutions to corporate clients primarily in the United States. The Company's core business is the distribution of promotional products. These products are provided by more than 2,500 vendors and marketed by the Company's national network of sales representatives. In addition, the Company provides telemarketing and customer management services for clients primarily in the financial services, insurance and telecommunications industries. The Company also provides sports marketing, event planning and advertising agency services to its clientele. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of HA-LO Industries, Inc. and its subsidiaries. All intercompany transactions and accounts have been eliminated. The financial statements are prepared on the accrual basis of accounting. The principal accounting policies of the Company follow. B. REVENUE RECOGNITION The majority of the Company's revenues are derived from the distribution of promotional products. Revenues from such services are recognized when merchandise is shipped to customers. The Company's telemarketing revenues are recognized as services are performed. C. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated for financial reporting purposes over the estimated useful lives on a straight-line basis as follows:
Buildings..................................................... 15-39 years Furniture, fixtures and equipment............................. 5-10 years Computer and telephone equipment.............................. 5-7 years Vehicles...................................................... 5 years Life of Leasehold improvements........................................ lease ----------- -----------
Property and equipment at December 31 are composed of the following:
1996 1995 ------------- ------------- Land............................................................. $ 136,000 $ 136,000 Buildings........................................................ 349,000 654,000 Furniture, fixtures and equipment................................ 5,754,000 4,743,000 Computer and telephone equipment................................. 9,625,000 6,706,000 Vehicles......................................................... 50,000 95,000 Leasehold improvements........................................... 594,000 472,000 ------------- ------------- 16,508,000 12,806,000 Less - Accumulated depreciation.................................. 6,826,000 5,131,000 ------------- ------------- Property and equipment, net.......................................... $ 9,682,000 $ 7,675,000 ------------- ------------- ------------- -------------
D. INTANGIBLES Intangible assets consist primarily of the cost of purchased businesses in excess of the fair value of net assets acquired and are amortized on a straight-line basis over periods ranging from seven to fifteen years. The Company regularly reviews the performance of acquired businesses to evaluate the realizability of the underlying goodwill. Amortization 10 NOTES TO FINANCIAL STATEMENTS (CONTINUED) expense in 1996, 1995 and 1994 was approximately $1,284,000 $1,129,000, and $543,000, respectively. Accumulated amortization of goodwill as of December 31, 1996 and 1995 was $3,016,000 and $1,796,000, respectively. E. INVENTORIES Inventories are valued at the lower of first-in, first-out (FIFO) cost or market. F. SAMPLES Samples are an integral part of the Company's core business and are used to generate sales growth. The Company's policy is to capitalize purchased samples and amortize them on a straight-line basis over a six-year useful life. Amortization expense in 1996, 1995 and 1994 was approximately $329,000, $304,000 and $189,000, respectively. G. SIGNIFICANT CUSTOMERS Approximately 15% and 14% of net sales in 1996 and 1995, were from one customer. In 1994, another customer accounted for approximately 11% of net sales. As of December 31, 1996 approximately $9.5 million of the Company's accounts receivable was from a significant customer substantially all of which was collected during the first two months of 1997. H. STATEMENTS OF CASH FLOWS The Company considers investments purchased with an original maturity of three months or less to be cash equivalents. Supplemental cash flow information includes the following:
1996 1995 1994 ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-- Cash paid during the year for interest................... $ 224,000 $ 1,300,000 $ 879,000 Cash paid during the year for income taxes............... $ 1,616,000 $ 1,846,000 $ 1,223,000 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES-- Recognition of common shares issued in connection with acquisitions............................................ $ 10,000 $ 852,000 $ 263,000 Recognition of tax benefits from exercise of stock options and restricted stock............................ $ 5,244,000 $ 495,000 -- ------------ ------------ ------------ ------------ ------------ ------------
I. SHORT-TERM INVESTMENTS The Company classifies investments purchased with an original maturity of three to twelve months as short-term investments. Such investments, which are held-to-maturity, relate primarily to tax exempt securities and are carried at cost plus accrued interest. J. FOREIGN CURRENCY TRANSLATION One of the Company's wholly-owned telemarketing subsidiaries has operations in Canada. Revenues and expenses are translated at average rates in effect at the time of the underlying transaction, with gains or losses included in income. Assets and liabilities of this entity are translated at year-end exchange rates with gains and losses resulting from such translation included in shareholders' equity. K. 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, the 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. 11 NOTES TO FINANCIAL STATEMENTS (CONTINUED) L. NEW ACCOUNTING PRONOUNCEMENTS In 1996, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting For The Impairment of Long-Lived Assets and For Long-Lived Assets To Be Disposed Of". Adoption of this statement did not have a material impact on the financial statements. M. RECLASSIFICATION Certain amounts in previously issued financial statements have been reclassified to conform to 1996 classifications. NOTE 3. RECEIVABLES: The Company provides services to customers in diversified industries and grants unsecured trade credit to customers in the normal course of business. Receivables in the accompanying consolidated balance sheets are net of reserves for doubtful accounts of approximately $429,000 as of December 31, 1996 and $904,000 as of December 31, 1995. The Company also makes advances to its sales representatives, which are applied against commissions to be earned. NOTE 4. INCOME TAXES: The Company's provision for income taxes consists of the following amounts:
1996 1995 1994 ------------ ------------ ------------ Current provision........................................ $ 6,790,000 $ 3,268,000 $ 1,482,000 Deferred benefit......................................... (542,000) (859,000) (286,000) ------------ ------------ ------------ Total provision........................................ $ 6,248,000 $ 2,409,000 $ 1,196,000 ------------ ------------ ------------ ------------ ------------ ------------
The Company's effective tax rate is reconciled to the Federal statutory rate as follows:
1996 1995 1994 --------- --------- --------- Federal statutory rate....................................................... 34.0% 34.0% 34.0% State income taxes (net of Federal benefit).................................. 5.0 5.0 4.3 Non-taxable S Corporation earnings (Note 9).................................. -- (9.0) (21.7) Other........................................................................ 1.0 1.0 1.7 --- --- --------- Effective tax rate......................................................... 40.0% 31.0% 18.3% --- --- --------- --- --- ---------
12 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes result from temporary differences in the recognition of revenue and expense items for income tax and financial reporting purposes and are summarized as follows:
(ASSET)/LIABILITY ------------------------- 1996 1995 ------------ ----------- Deferred taxes -current Guaranteed sales, net of related commissions.......................... $ 260,000 $ 411,000 Credits due........................................................... 913,000 545,000 Advanced commissions.................................................. 136,000 78,000 Non-deductible reserves............................................... (291,000) (242,000) Other................................................................. 40,000 150,000 ------------ ----------- Total deferred taxes -current....................................... 1,058,000 942,000 ------------ ----------- Deferred taxes -long-term Samples............................................................... 487,000 400,000 Acquisition costs..................................................... (669,000) (256,000) Depreciation and amortization......................................... (336,000) (215,000) Deferred costs........................................................ (327,000) (107,000) Other................................................................. (1,000) (10,000) ------------ ----------- Total deferred taxes -non-current................................... (846,000) (188,000) ------------ ----------- Total deferred tax liability........................................ $ 212,000 $ 754,000 ------------ ----------- ------------ -----------
Non-current deferred taxes are included in other assets on the accompanying consolidated balance sheets. NOTE 5. PRO FORMA NET INCOME PER SHARE (UNAUDITED): The unaudited pro forma income data in the consolidated statements of income for 1995 and 1994 provide information as if the companies acquired (see Note 9) had been C Corporations for income tax purposes. Pro forma net income per share is based on the weighted average number of shares of common stock outstanding, including shares issued in connection with the above mentioned acquisitions. NOTE 6. DEBT: Throughout 1996, the Company had a $16 million credit facility with a bank bearing interest at either prime or the London Interbank Offered Rate ("LIBOR") plus 1.5%. Subsequent to year end, the Company refinanced the credit facility described above. The new agreement provides for an unsecured credit facility totaling $65 million, consisting of a $45 million revolving line of credit (the "Revolver") and a $20 million term acquisition loan (the "Term"). The Revolver matures on January 31, 1999 and Term borrowings mature on the sooner of five years from the date of borrowing or June 30, 2003. The facility bears interest at either prime less .25% or LIBOR plus between .375% and 1% based on a defined ratio. The agreement contains certain financial covenants which the Company must meet, including minimum tangible net worth, maximum leverage, and minimum cash flow coverages. The accompanying balance sheets give effect to the refinancing as if it occurred prior to year end. Outstanding debt as of December 31, 1996 and 1995 was $2,901,785 and $836,336. As of December 31, 1996, the prime rate was 8.25% and LIBOR was 5.5%. NOTE 7. RELATED-PARTY TRANSACTIONS: A member of the Board of Directors renders acquisition consulting services to the Company pursuant to an agreement. The director's compensation is strictly contingent upon 13 NOTES TO FINANCIAL STATEMENTS (CONTINUED) the successful completion of an acquisition. During 1996, the director earned cash compensation of approximately $307,000 and was granted 129,909 options exercisable at fair market value at the date of grant. During 1995, the director earned cash compensation of approximately $850,000 and was granted 46,419 options exercisable at fair market value at the date of grant. During 1994, the director earned cash compensation of approximately $154,000 and was granted 14,344 options. NOTE 8. COMMITMENTS AND CONTINGENCIES: The Company leases facilities from unrelated parties under operating leases expiring at various dates through April, 2007. Rent expense charged for these facilities totaled approximately $2,207,000, $2,263,000 and $1,590,000 for 1996, 1995 and 1994, respectively. The future aggregate annual minimum lease rentals at December 31, 1996, are as follows: Year ending December 31- 1997............................................................. $2,459,000 1998............................................................. 2,239,000 1999............................................................. 2,225,000 2000............................................................. 1,953,000 2001............................................................. 1,761,000 thereafter....................................................... 3,271,000 ---------- $13,908,000 ---------- ----------
At December 31, 1996, the Company has approximately $1,494,000 in outstanding letters of credit issued in the ordinary course of business. The Internal Revenue Service (the "IRS") has commenced and is currently engaged in a field audit examination of the Company's federal employment tax returns for the years ended December 31, 1993, 1994, and 1995 which includes a review of the facts, circumstances and legal authority supporting the Company's position that its independent sales representatives have properly been treated as independent contractors for federal employment tax purposes. To date, the IRS has proposed adjustments to increase the Company's federal withholding, federal unemployment and social security tax liabilities for 1993 and 1994, and similar proposed adjustments are possible for subsequent periods. However, the Company believes its characterization of its sales representatives as independent contractors is proper and is evaluating its various alternatives, including appeal. This process could take several years to resolve. Nonetheless, management does not believe an unfavorable outcome would have a material effect on the financial position of the Company. NOTE 9. BUSINESS COMBINATIONS: During 1996, the Company acquired two companies. One of the companies was accounted for under the purchase method of accounting and was not material to the Company's consolidated financial statements. The second acquisition was completed on September 30, 1996 and was accounted for as a pooling-of-interests. The Company issued 3,187,500 shares of its common stock in exchange for all the outstanding shares of Market USA, Inc. and its affiliate, Marusa Marketing, Inc. (together "MUSA"), two telemarketing companies. Accordingly, the consolidated financial statements for all periods presented have been restated to include the results of MUSA. During 1995, the Company acquired three companies. Two of the three acquisitions were accounted for under the purchase method of accounting and were not material to the Company's consolidated financial statements. 14 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The third acquisition was completed on December 28, 1995 and was accounted for as a pooling-of-interests. The Company issued 751,596 shares of its common stock in exchange for all operating assets of Fletcher-Barnhardt & White (FBW), a distributor of promotional products. Accordingly the consolidated financial statements for all periods presented have been restated to include the results of FBW. During 1994, the Company acquired two companies. These acquisitions were not material to the Company's consolidated financial statements. NOTE 10. CAPITAL STOCK AND EARNINGS PER SHARE: On May 2, 1996, the Company's Board of Directors declared a 3-for-2 stock split on the Company's common stock in the form of a 50 percent stock dividend effective on June 3, 1996 to holders of record on May 17, 1996. In addition, on November 7, 1996, the Company's Board of Directors declared a 25 percent stock dividend payable on December 11, 1996 to holders of record on November 21, 1996. All share and per share data, including stock option, warrant and stock plan information, have been retroactively adjusted to give effect to the stock split and the stock dividend. In November, 1995, the Company sold, through a public offering, 3,093,750 shares of its common stock. The Company realized net proceeds of approximately $24.5 million from this offering. In connection with the MUSA and FBW acquisitions (Note 9) and the termination of both predecessor companies' S Corporation status, the Company was required to transfer undistributed retained earnings to common stock. Dividends of the predecessor companies paid subsequently are shown as a reduction to retained earnings to the extent of their net income, with the remainder reducing common stock. Earnings per share are computed on the basis of the weighted average number of common and common equivalent shares outstanding during each year. The following table reconciles the number of common shares shown as outstanding in the consolidated balance sheets and the number of common shares used in computing fully diluted earnings per share.
1996 1995 ------------ ------------ Common shares outstanding per balance sheets........................... 16,756,109 16,181,863 Effect of shares issuable under stock options after applying the "treasury stock" method............................................... 1,326,163 926,541 Effect of using weighted average common shares outstanding during the year.................................................................. (421,954) (2,866,078) Other.................................................................. (79,577) (151,810) ------------ ------------ Common shares used in computing fully diluted earnings per share....... 17,580,741 14,090,516 ------------ ------------ ------------ ------------
In January 1995, the Company issued 300,000 shares of restricted common stock to a sales representative in lieu of cash commission payments on sales to a significant customer. These shares were issued under the stock plan described in Note 13 and have been included as a component of shareholders' equity. The Company expects these shares to be earned ratably through 1999. NOTE 11. UNAUDITED SUPPLEMENTARY EARNINGS PER SHARE: The net proceeds from the public offering discussed in Note 10 were used to repay substantially all of the Company's outstanding bank debt. Assuming the debt retirement occurred on January 1, 1995, the unaudited supplementary pro forma primary earnings per share would have been $.45 for the year ended December 31, 1995. This per share 15 NOTES TO FINANCIAL STATEMENTS (CONTINUED) amount reflects the reduction of interest expense of approximately $1,302,000 ($781,000 after tax). Weighted average shares used in computing the per share amount were increased by 1,800,000 to approximate the number of shares sold in the offering to retire the debt. NOTE 12. STOCK WARRANTS: In January, 1995, the Company signed a multi-year exclusive agreement to provide premium promotional products to Montgomery Ward & Co., Inc. The initial term of the agreement was five years, but was extended through 2004 in December, 1995. In connection with the initial term of the agreement, Merchant Partners Limited Partnership (Merchant Partners), an entity of which Montgomery Ward is a limited partner, was granted warrants to purchase 749,434 shares of the Company's common stock at fair market value on the date of grant. These warrants vest at the end of nine years but can be accelerated to five years if minimum purchase levels are achieved. The Company also issued 374,806 warrants to Merchant Partners in connection with the extension of the agreement. These warrants also have an exercise price at the fair market value on the date of grant and expire January 11, 2011. These warrants have been accounted for under the provisions of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation", which requires warrants issued to non-employees be recorded at fair market value. Accordingly, the value of these warrants has been recorded as a deferred marketing cost and included as a component of shareholders' equity. This cost will be charged against income over the five year term of the extension, beginning in January, 2000. NOTE 13. STOCK OPTIONS: The Company has a stock plan (the Plan) which provides for reservation and issuance of options to purchase shares of the Company's common stock, restricted stock, stock appreciation rights and phantom stock awards. The number of options, shares or rights to be granted or issued and the terms thereof are at the discretion of the Compensation Committee of the Company's Board of Directors. Pursuant to the Plan, as amended, 3,889,881 shares of the Company's common stock have been reserved. At December 31, 1996, there were 207,863 shares available for future grant under the Plan. The exercise price for incentive stock options and non-qualified stock options granted under the Plan may not be less than 100% and 85%, respectively, of the fair market value of the common stock at the date of grant. Options issued under the Plan generally vest 50% annually, commencing upon completion of one year of employment subsequent to the date of grant. All options granted under the plan expire ten years from the date of grant. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Financial Accounting Standards Board (FASB) Statement No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") was issued by the FASB in 1995. As permitted, the Company will continue its current method of accounting for stock-based compensation while complying with the new disclosure requirements of SFAS 123. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation cost for awards under the Plan and warrants issued discussed in Note 12 been determined 16 NOTES TO FINANCIAL STATEMENTS (CONTINUED) based on the fair value at their grant dates consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ------------ ------------ Net income As reported........................................................ $ 9,369,499 $ 4,673,228 Pro forma.......................................................... $ 7,027,931 $ 4,169,940 Primary earnings per share As reported........................................................ $ 0.54 $ 0.34 Pro forma.......................................................... $ 0.40 $ 0.31 Fully diluted earnings per share As reported........................................................ $ 0.53 $ 0.33 Pro forma.......................................................... $ 0.40 $ 0.30
Because the method of accounting prescribed in SFAS 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions; risk free interest rates between 5.2% and 6.2% in 1996 and between 5.9% and 6.9% in 1995; zero dividend yield for both years; expected lives of 5 years for both years; and volatility of 30 percent for both years. A summary of the status of the Company's fixed stock option plan and warrants issued as of December 31, 1996, 1995, and 1994, and changes during the years ending on those dates is presented below:
1996 -------------------------- 1995 1994 WEIGHTED ---------------------------- ---------------------------- AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- --------------- --------- ----------------- --------- ----------------- BEGINNING OF YEAR............ 2,497,405 $ 5.47 1,058,717 $ 3.02 692,490 $ 2.81 GRANTED: Price equal to fair value..................... 1,152,464 $ 16.53 1,523,372 $ 7.01 386,129 $ 3.37 Price in excess of fair value..................... 500,938 $ 33.57 2,813 $ 5.53 1,875 $ 3.87 EXERCISED.................... (614,302) $ 3.26 (78,982) $ 2.65 -- -- CANCELLED.................... (34,965) $ 10.52 (8,515) $ 2.72 (21,777) $ 2.63 --------- --------- --------- END OF YEAR.................. 3,501,540 $ 13.47 2,497,405 $ 5.47 1,058,717 $ 3.02 EXERCISABLE AS OF 12/31...... 1,174,396 1,194,580 594,585 Weighted average fair value of options and warrants granted: Price equal to fair value.... $ 6.12 $ 3.18 Price in excess of fair value....................... $ 7.88 $ 2.00
17 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about fixed stock options and warrants outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE RANGE OF EXERCISE NUMBER REMAINING EXERCISE EXERCISABLE EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 PRICE - ----------------------- ------------ ----------------- ------------- ----------- ------------- $2.20 - $3.53 466,414 7.28 $ 3.18 459,568 $ 3.17 $3.56 - $3.56 700,785 8.03 $ 3.56 326,107 $ 3.56 $5.23 - $13.33 778,141 10.77 $ 10.97 244,751 $ 9.27 $13.60 - $15.33 691,270 9.10 $ 14.13 1,875 $ 13.67 $18.00 - $30.60 364,930 9.66 $ 22.13 142,095 $ 22.83 $33.60 - $33.60 500,000 9.89 $ 33.60 -- $ -- ------------ ----- ------ ----------- ------ $2.20 - $33.60 3,501,540 9.19 $ 13.47 1,174,396 $ 6.95
NOTE 14. BUSINESS SEGMENT INFORMATION: Segment information by industry for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994 ---------- ---------- ---------- (IN 000'S) REVENUES: Promotional Products........................................... $ 205,764 $ 172,866 $ 110,396 Telemarketing.................................................. 49,123 38,399 35,425 ---------- ---------- ---------- Total Consolidated........................................... $ 254,887 $ 211,265 $ 145,821 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME(1): Promotional Products........................................... $ 10,275 $ 6,239 $ 3,201 Telemarketing.................................................. 4,962 2,763 4,139 ---------- ---------- ---------- Total Consolidated........................................... $ 15,237 $ 9,002 $ 7,340 ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS(2): Promotional Products........................................... $ 58,207 $ 54,258 $ 36,953 Telemarketing.................................................. 11,019 9,276 9,034 ---------- ---------- ---------- Total Consolidated........................................... $ 69,226 $ 63,534 $ 45,987 ---------- ---------- ---------- ---------- ---------- ----------
(1)Promotional Products operating income includes corporate overhead expenses for all periods and non-recurring charges related to acquisitions in 1996 and 1995. (2)Consists primarily of receivables and property and equipment. Cash and other assets are considered to be corporate assets and are therefore not included. NOTE 15. SUBSEQUENT EVENTS: In January, 1997, the Company completed the acquisition of a Detroit-based distributor of promotional products with operations in the United States, Europe and Canada. The purchase price was 2,835,632 shares of the Company's common stock. The acquisition will be accounted for as a pooling of interests. In February, 1997, the Company's shareholders approved an amendment to the Company's by-laws increasing the number of shares of common stock authorized from 25,000,000 to 100,000,000. 18 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 16. UNAUDITED SELECTED QUARTERLY OPERATING RESULTS: The following table represents unaudited selected financial information for the eight quarters ended December 31, 1996. This information has been prepared by the Company on a basis consistent with the Company's audited financial statements and includes all adjustments (consisting of normal recurring accruals) which management considers necessary for a fair presentation of the results for such periods. The operating results for any quarter are not necessarily indicative of the results for any future period. All periods presented have been adjusted to reflect the effects of an acquisition accounted for under the pooling-of-interests method of accounting, a three-for-two stock split and a 25% stock dividend. A reconciliation of previously reported amounts follows:
QUARTER ENDED ------------------------------------------------------------------------------------------------------ 1996 1995 -------------------------------------------------- -------------------------------------------------- MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Net sales Previously reported....... $ 38,459 $ 47,513 $ 53,120 $ 66,671 $ 28,207 $ 38,107 $ 48,005 $ 58,547 Effect of acquired company.................. 11,453 13,280 11,990 12,400 8,081 9,665 9,992 10,662 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total net sales......... 49,912 60,793 65,110 79,071 36,288 47,772 57,997 69,209 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Profit Previously reported....... 10,692 14,578 15,740 20,150 9,397 11,283 13,219 15,985 Effect of acquired company.................. 2,661 3,029 2,793 2,802 1,935 2,213 2,602 2,772 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total gross profit...... 13,353 17,607 18,533 22,952 11,332 13,496 15,821 18,757 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income per share, fully diluted (Pro forma in 1995) Previously reported....... 0.01 0.08 0.07 0.21 0.01 0.04 0.07 0.09 Effect of acquired company.................. 0.05 0.04 0.03 0.06 0.02 0.04 0.03 0.03 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total net income per share.................. $ 0.06 $ 0.12 $ 0.10 $ 0.27 $ 0.03 $ 0.08 $ 0.10 $ 0.12 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The Company's net sales have increased each quarter within a fiscal year and, in particular, its fourth quarter net sales have been higher than net sales in previous quarters. This is primarily a result of the Company's customer's buying patterns. NOTE 17. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: The Company's common stock, which is quoted on the Nasdaq National Market under the symbol "HALO", was held by approximately 240 shareholders of record as of March 24, 1997. The following table sets forth the range of high and low bid quotations for each quarterly period in 1996 and 1995 and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW ------ ------ 1996 First Quarter................................................................... 153/8 103/4 Second Quarter.................................................................. 2313/16 143/8 Third Quarter................................................................... 25 151/4 Fourth Quarter.................................................................. 323/16 213/4 1995 First Quarter................................................................... 55/8 31/4 Second Quarter.................................................................. 53/4 43/4 Third Quarter................................................................... 93/4 53/8 Fourth Quarter.................................................................. 163/8 73/4
19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of HA-LO Industries, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of HA-LO Industries, Inc. (an Illinois corporation) and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HA-LO Industries, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 14, 1997 20 EX-21 14 SUBSIDIARIES OF HA-LO d Exhibit 21 SUBSIDIARIES OF HA-LO INDUSTRIES, INC. The following is a list of all direct and indirect subsidiaries of the registrant as of March 24, 1997. The state or other jurisdiction of incorporation or organization is indicated in parentheses followingn each subsidiary's name. The names of the divisions or other business units of each subsidiary are indented and listed below the relevant subsidiary's name. Fletcher, Barnhardt & White, Inc. (Illinois) Market U.S.A., Inc. (Illinois) Marusa Marketing, Ltd. (Canada) HA-LO Sports, Inc. (Illinois) Creative Concepts in Advertising, Inc. (Michigan) Creadis Group, Inc. (British Columbia) 1132832 Ontario, Corp. (Ontario) 1132831 Ontario, Corp. (Ontario) EX-23.1 15 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-64878 on Form S-8, 33-89820 on Form S-8, 33-99946 on Form S-8, 333-00358 on Form S-3, 333-03928 on Form S-8, 333-10481 on Form S-4, and 333-19301 on Form S-3. ARTHUR ANDERSEN LLP Chicago, Illinois March 28, 1997 EX-27 16 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 3862958 2908370 53409454 429000 5776350 68215182 16508494 6826000 87634002 25729954 2901785 0 0 47535271 9711657 87634002 254887550 254887550 182442369 182442369 57208006 0 224236 15617778 6248279 9369499 0 0 0 9369499 .54 .53
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