-----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, VFj3qxO69dzn/VS7PJg63PjoVe8cwqbagBNTDXRY1BFnFJLXf/LZQnd60E51HNB7 D6PEi/CI6pHxxaB+W3OOEA== 0000914121-98-001018.txt : 19981210 0000914121-98-001018.hdr.sgml : 19981210 ACCESSION NUMBER: 0000914121-98-001018 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981207 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTALK TELESERVICES INC CENTRAL INDEX KEY: 0001018730 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 954502740 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-21579 FILM NUMBER: 98765949 BUSINESS ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147642933 MAIL ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 8-K 1 CURRENT REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 7, 1998 SMARTALK TELESERVICES, INC. (Exact name of registrant as specified in its charter) California 0-21579 95-4502740 (State or other jurisdiction (Commission (I.R.S. Employer Identification No.) of incorporation) File Number) 43016-3566 5080 Tuttle Crossing Boulevard (Zip Code) Dublin, Ohio (Address of Principal Executive Offices) Registrant's telephone number, including area code: (614) 789-8500 No change - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) ================================================================================ Item 5 -- Other Events. On Monday, December 7, 1998, SmarTalk TeleServices, Inc. (the "Company") announced that it reached an agreement with Fletcher International Limited ("Fletcher") for a $25 million secured term loan facility, maturing January 31, 1999. The Company expects to access up to $10 million of the facility over the next month, subject to the satisfaction of customary conditions to draw down. The Company can access up to an additional $15 million from the facility over various periods, subject to the discretion of the lender. The Company plans to use the financing for general corporate purposes. An affiliate of Fletcher currently is a shareholder of the Company. In connection with the financing transaction, the Company has granted Fletcher the right to acquire, upon satisfaction of applicable notice periods, up to approximately an additional 15% of the common stock of the Company. Certain statements made herein that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including the Company's plans and ability to access various amounts of the credit facility. Investors are cautioned that all forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. These risks include the risk that actual amounts accessed under the facility depend upon the Company's satisfaction of various conditions detailed in the provisions of the credit agreement including, under certain circumstances, the lender's discretion. Investors who seek more information about the Company's business and relevant risk factors may wish to review the Company's SEC reports, including, without limitation, its Annual Report on Form 10-K for 1997 and its Quarterly Reports on Form 10-Q, as each of such documents may be amended. The foregoing is a summary of the transactions described. Reference is made to the exhibits filed herewith for a complete text of the documents summarized above which exhibits are incorporated by reference herein in their entirety. Item 7 -- Financial Statements, Pro Forma Financial Information and Exhibits (c) The Exhibits furnished in accordance with Item 601 of Regulation S-K are: 10.1 Credit Agreement, dated as of December 4, 1998, between the Company and Fletcher, as lender. 10.2 Pledge and Security Agreement, dated as of December 4, 1998, among the Company, its subsidiaries listed therein, and Fletcher. 10.3 Promissory Note, dated as of December 4, 1998, made by the Company in favor of Fletcher. 10.4 Investment Rights Agreement, dated as of December 4, 1998, between the Company and Fletcher. 99.1 Press Release of the Company, dated December 7, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: December 8, 1998 SMARTALK TELESERVICES, INC. (Registrant) /s/ Thaddeus Bereday ---------------------------------- Thaddeus Bereday Thaddeus Bereday Vice President and General Counsel Exhibit Index (c) The Exhibits furnished in accordance with Item 601 of Regulation S-K are: 10.1 Credit Agreement, dated as of December 4, 1998, between SmarTalk Teleservices, Inc. (the "Company") and Fletcher International Limited ("Fletcher"), as lender. 10.2 Pledge and Security Agreement, dated as of December 4, 1998, among the Company, its subsidiaries listed therein, and Fletcher. 10.3 Promissory Note, dated as of December 4, 1998, made by the Company in favor of Fletcher. 10.4 Investment Rights Agreement, dated as of December 4, 1998, between the Company and Fletcher. 99.1 Press Release of the Company, dated December 7, 1998. EX-10.1 2 CREDIT AGREEMENT CREDIT AGREEMENT DATED AS OF DECEMBER 4, 1998 BETWEEN SMARTALK TELESERVICES, INC., as Borrower AND FLETCHER INTERNATIONAL LIMITED, as Lender TABLE OF CONTENTS Page SECTION 1.DEFINITIONS1 1.1 Certain Defined Terms1 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement.17 1.3 Other Definitional Provisions17 SECTION 2.AMOUNTS AND TERMS OF COMMITMENTS AND LOANS17 2.1 Commitments; Loans17 2.2 Interest on the Loans19 2.3 Commitment Fee.20 2.4 Repayments, Prepayments and Reductions in Commitments; General Provisions Regarding Payments20 2.5 Use of Proceeds22 2.6 Increased Costs.23 2.7 Taxes23 SECTION 3.CONDITIONS TO LOANS24 3.1 Conditions to Loans24 3.2 Conditions to All Loans28 3.3 Sole Discretion of the Lender29 SECTION 4.REPRESENTATIONS AND WARRANTIES29 4.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries29 4.2 Authorization of Borrowing, etc.30 4.3 Financial Condition; Projections31 4.4 No Material Adverse Change32 4.5 Title to Properties; Liens; Real Property; Intellectual Property32 4.6 Litigation; Adverse Facts33 4.7 Payment of Taxes33 4.8 Performance of Agreements; Materially Adverse Agreements34 4.9 Governmental Regulation34 4.10 Securities Activities34 4.11 Employee Benefit Plans34 4.12 Certain Fees35 4.13 Environmental Matters35 4.14 Employee Matters36 4.15 Inactive Subsidiaries.37 4.16 [RESERVED]37 4.17 Disclosure37 4.18 Year 2000 Problems37 SECTION 5.AFFIRMATIVE COVENANTS38 5.1 Financial Statements; Collateral Reports and Other Reports38 5.2 Corporate Existence44 5.3 Payment of Taxes and Claims; Tax Consolidation44 5.4 Maintenance of Properties; Insurance44 5.5 Inspection; Lender Meeting45 5.6 Compliance with Laws, etc.45 5.7 Environmental Disclosure and Inspection45 5.8 The Company's Remedial Action Regarding Hazardous Materials47 5.9 Collateral Matters47 5.10 Further Assurances47 5.11 [RESERVED]47 5.12 Use of Proceeds.48 5.13 Cure of Defaults.48 SECTION 6.NEGATIVE COVENANTS48 6.1 Indebtedness.48 6.2 Liens and Related Matters49 6.3 Investments.50 6.4 Capital Expenditures50 6.5 Restricted Junior Payments51 6.6 Restriction on Fundamental Changes; Asset Sales51 6.7 Sale or Discount of Receivables51 6.8 Transactions with Shareholders and Affiliates51 6.9 Conduct of Business52 6.10 Amendments or Waivers of Certain Agreements52 6.11 Fiscal Year52 SECTION 7.EVENTS OF DEFAULT52 7.1 Failure to Make Payments When Due53 7.2 Default in Other Agreements53 7.3 Breach of Certain Covenants53 7.4 Breach of Warranty53 7.5 Other Defaults Under Loan Documents54 7.6 Involuntary Bankruptcy; Appointment of Receiver, etc.54 7.7 Voluntary Bankruptcy; Appointment of Receiver, etc.54 7.8 Judgments and Attachments55 7.9 Dissolution55 7.10 Employee Benefit Plans55 7.11 Change in Control55 7.12 Failure of Security55 SECTION 8.[RESERVED]56 SECTION 9.MISCELLANEOUS56 9.1 [RESERVED]56 9.2 Expenses56 9.3 Indemnity57 9.4 Set-Off; Security Interest in Deposit Accounts58 9.5 [RESERVED]58 9.6 Amendments and Waivers58 9.7 Independence of Covenants58 9.8 Notices58 9.9 Survival of Representations, Warranties and Agreements59 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative59 9.11 Marshalling; Payments Set Aside59 9.12 Severability60 9.13 [RESERVED]60 9.14 Maximum Amount60 9.15 Headings61 9.16 Applicable Law61 9.17 Successors and Assigns61 9.18 Consent to Jurisdiction and Service of Process61 9.19 Waiver of Jury Trial62 9.20 [RESERVED]63 9.21 Counterparts; Effectiveness63 SMARTALK TELESERVICES, INC. CREDIT AGREEMENT This CREDIT AGREEMENT is dated as of December 4, 1998 and entered into by and among SMARTALK TELESERVICES, INC., a California corporation (the "Company"), and FLETCHER INTERNATIONAL LIMITED, a Cayman Islands company (the "Lender"). R E C I T A L S WHEREAS, the Company desires that the Lender extend certain credit facilities to the Company hereunder, the proceeds of which will be used to provide financing for working capital and other general corporate purposes for the Company and its Subsidiaries, all subject to the terms and conditions contained herein; and WHEREAS, the Lender is willing to make such credit facilities available upon and subject to the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Certain Defined Terms. The following terms used in this Agreement shall have the following meanings: "Accommodation Obligation" means any direct, indirect, contingent or non-contingent guaranty or obligation for the Indebtedness of another, except endorsements in the ordinary course of business. "Accounts" means any and all rights of the Company to payment for goods sold, including accounts, contract rights, general intangibles and any and all such rights evidenced by chattel paper, instruments or documents, whether due or to become due and whether or not earned by performance, and whether now or hereafter acquired or arising in the future and any proceeds arising therefrom or relating thereto. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, that Person; provided, however, the Lender shall not be considered an Affiliate of the Company under this Agreement. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means either (a) the power, directly or indirectly, to vote 5% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person, or (b) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "Agreement" means this Credit Agreement dated as of the date hereof, as it may be amended, restated, supplemented or otherwise modified from time to time. "Applicable Laws" means, collectively, all statutes, laws, rules, regulations, ordinances, decisions, writs, judgments, decrees, and injunctions of any Governmental Authority affecting the Company or any of its Subsidiaries or any Collateral or any of their other assets, whether now or hereafter enacted and in force, and all Governmental Authorizations relating thereto. "Asset Sale" means any sale, lease or other disposition (including any such transaction effected by way of merger or consolidation) by the Company or any of its Subsidiaries of any asset, including without limitation any sale-leaseback transaction, but excluding (i) dispositions of inventory and used, surplus or worn out equipment in the ordinary course of business, (ii) dispositions to a wholly-owned Subsidiary, (iii) cash payments otherwise permitted under this Agreement, or (iv) any other disposition made in the ordinary course of the business of the Company or its Subsidiaries. "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "Blocked Account" has the meaning as defined in Section 3.1B. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Capital Expenditures" for a period means the sum of all expenditures capitalized for financial statement purposes in accordance with GAAP (whether payable in cash or other property or accrued as a liability), including the capitalized portion of capital leases. Capital Expenditures shall exclude proceeds of a Casualty Loss applied to the repair or replacement of the property affected by the Casualty Loss. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), including, without limitation, partnership interests and membership interests, and any and all warrants, rights or options to purchase or other arrangements or rights to acquire any of the foregoing. "Cash" means money, currency or a credit balance in a Deposit Account. "Cash Equivalents" means (i) marketable securities issued or directly and unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either Standard & Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's, issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia having unimpaired capital and surplus of not less than $500,000,000 (each such commercial bank being herein called a "Cash Equivalent Bank"); and (v) Eurodollar time deposits having a maturity of less than one year purchased directly from any Cash Equivalent Bank (provided such deposit is with such Cash Equivalent Bank or any other Cash Equivalent Bank). "Casualty Loss" means (i) the loss, damage, or destruction of any asset owned or used by the Company or any of its Subsidiaries, (ii) the condemnation, confiscation, or other taking, in whole or in part, of any such asset, or (iii) the diminishment of such asset so as to render use for its intended purpose impracticable or unreasonable. "Cleanup" means all actions required to: (1) cleanup, remove, treat or remediate Hazardous Materials in the indoor or outdoor environment; (2) prevent the Release of Hazardous Materials so that they do not migrate, endanger or threaten to endanger public health or welfare or the indoor or outdoor environment; (3) perform pre-remedial studies and investigations and post-remedial monitoring and care; or (4) respond to any government requests for information or documents in any way relating to cleanup, removal, treatment or remediation or potential cleanup, removal, treatment or remediation of Hazardous Materials in the indoor or outdoor environment. "Closing Date" means the date hereof or such earlier date requested by the Company on which the conditions precedent set forth in Section 3 shall be satisfied. "Collateral" means all of the properties and assets in which Liens are purported to be granted pursuant to the Collateral Documents. "Collateral Documents" means the Security Agreement, the Lockbox Agreement and any other documents, instruments or agreements delivered by the Company and its Subsidiaries pursuant to this Agreement or any of the other Loan Documents in order to grant or perfect liens on any assets of the Company and its Subsidiaries as security for all or any of the Obligations. "Collections" means all cash, funds, checks, notes, instruments and any other form of remittance tendered by account debtors in payment of Accounts. "Commitments" means the commitments of the Lender to make Loans as set forth in subsection 2.1A of this Agreement. "Company" has the meaning assigned to that term in the Preamble to this Agreement. "Compliance Certificate" means a certificate substantially in the form of Exhibit IV annexed hereto delivered to the Lender by the Company pursuant to subsection 5.1(iv). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Interest Rate Agreements or other Hedge Agreements. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "Continuing Director" shall mean, as of any date of determination, any member of the Board of Directors of the Company who was a member of such Board of Directors on the Closing Date or any future member of the Board of Directors approved by a majority of Continuing Directors. "Contractual Obligation" means, as applied to any Person, any provision of any indenture, mortgage, deed of trust, contract, undertaking or other agreement or instrument to which such Person is a party or to which such Person or any of its assets is subject. "Debt Incurrence" means any incurrence by the Company or any of its Subsidiaries of any Indebtedness, other than the Indebtedness permitted under Section 6.1. "Default" means a condition or event that, after notice or after any applicable grace period has lapsed, or both, would constitute an Event of Default. "Deposit Account" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "Dollars" and the sign "$" mean the lawful money of the United States of America. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is subject to ERISA and which is maintained or contributed to by the Company or any of its ERISA Affiliates. "Environmental Claim" means any claim, action, cause of action, investigation or notice (written or oral) by any Person alleging potential liability (including, without limitation, potential liability for investigatory costs, Cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or Release of any Hazardous Materials at any location, whether or not owned, leased or operated by the Company, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or protection of human health or the environment, including without limitation, laws relating to Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, disposal, transport or handling of Hazardous Materials and all laws and regulations with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials, and all laws relating to the management or use of natural resources. "Environmental Liabilities" means all liabilities, obligations, responsibilities, obligations to conduct Cleanup, and all Environmental Claims pending or threatened against the Company or any of its Subsidiaries or against any Person whose liability for any Environmental Claim the Company or any of its Subsidiaries may have retained or assumed either contractually or by operation of law, arising from (a) environmental, health or safety conditions, (b) the presence, Release or threatened Release of Hazardous Materials at any location, whether or not owned, leased or operated by the Company or its Subsidiaries, or (c) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Equity Issuance" means the issuance of any equity securities by the Company or any of its Subsidiaries, but excluding equity securities issued to the Company or any Subsidiary and equity securities issued pursuant to employee stock options. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) solely for purposes of obligations under Section 412 of the Internal Revenue Code or under the applicable sections set forth in Section 414(t)(2) of the Internal Revenue Code, any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043(c) of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation or with respect to which no penalty will be assessed by the PBGC for failure to satisfy such notice requirements); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by the Company or any of its ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting, in either case, in liability pursuant to Section 4063 or 4064 of ERISA, respectively; (v) the institution by the PBGC of proceedings to terminate any Pension Plan pursuant to Section 4042 of ERISA; (vi) the imposition of liability on the Company or any of its ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal by the Company or any of its ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan resulting in withdrawal liability pursuant to Section 4201 of ERISA, or the receipt by the Company or any of its ERISA Affiliates of written notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4042 of ERISA or under Section 4041A of ERISA if such termination would result in liability to the Company or any of its ERISA Affiliates; (viii) the imposition on the Company or any of its ERISA Affiliates of fines, penalties or taxes under Chapter 43 of the Internal Revenue Code or under Section 409 or 502(c), (i) or (l) or 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the disqualification by the Internal Revenue Service of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) under Section 401(a) of the Internal Revenue Code, or the determination by the Internal Revenue Service that any trust forming part of any Pension Plan fails to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (x) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "Event of Default" means each of the events set forth in Section 7. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "Facilities" means any and all real property (including, without limitation, all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by the Company or any of its Subsidiaries (but only as to portions of buildings actually leased or used) or any of their respective predecessors or any of their respective Affiliates that are directly or indirectly controlled by the Company. "Fiscal Quarter" means a fiscal quarter of a Fiscal Year. "Fiscal Year" means the fiscal year of the Company and its Subsidiaries ending on December 31 of each calendar year. "Funding Date" means the date of the funding of a Loan. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination and specifically, terms used herein applicable to the Company and its Subsidiaries defined by reference to GAAP shall give effect to the subtraction of minority interests. "Governmental Authority" means any nation or government, any state or any political subdivision of any of the foregoing and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Governmental Authorization" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any Governmental Authority. "Hazardous Materials" means all substances defined as Hazardous Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R. ss. 300.5, or defined as such by, or regulated as such under, any Environmental Law. "Hedge Agreements" means all interest rate swaps, caps or collar agreements or similar arrangements entered into by the Company or any of its Subsidiaries providing for protection against fluctuations in interest rates or currency exchange rates or the exchange of nominal interest obligations, either generally or under specific contingencies. "Indebtedness" means, as applied to any Person, (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money (other than current accounts payable incurred in the ordinary course of business and accrued expenses incurred in the ordinary course of business), (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA and current trade payables incurred in the ordinary course of business), (v) all obligations evidenced by notes, bonds, debentures or other similar instruments, (vi) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to any property or assets acquired by such Person (even though the rights and remedies of the seller or the Lender under such agreement in the event of default are limited to repossession or sale of such property or assets), (vii) all obligations, contingent or otherwise, as an account party under acceptance, letter of credit or similar facilities to the extent not reflected as trade liabilities on the balance sheet of such Person in accordance with GAAP, (viii) all obligations, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Capital Stock, (ix) all guarantee obligations in respect of obligations of the kind referred to in clauses (i) through (viii) above, and (x) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Hedge Agreements, including Interest Rate Agreements, constitute Contingent Obligations and not Indebtedness (except, for purposes of Section 7, such obligations shall constitute Indebtedness). "Indemnitee" has the meaning assigned to that term in subsection 9.3. "Initial Loan" has the meaning assigned to that term in subsection 2.1B. "Interest Payment Date" means the first Business Day of each calendar month. "Interest Rate" initially means (i) for the Initial Loan, twelve percent (12%) per annum; (ii) after the next Loan is made hereunder, thirteen and one half percent (13 1/2%) per annum on such second Loan and all outstanding Loans; (iii) after the next Loan is made hereunder, fifteen percent (15%) per annum on such third Loan and all outstanding Loans; (iv) after the next Loan is made hereunder, sixteen and one half percent (16 1/2%) per annum on such fourth Loan and all outstanding Loans; and (v) after the next Loan is made hereunder, eighteen percent (18%) per annum on such fifth Loan and all outstanding Loans. "Insolvency Event" means, with respect to any Person, the occurrence of any of the following: (i) a voluntary or involuntary petition for bankruptcy or other relief under the Bankruptcy Code or any similar statute, (ii) an assignment for the benefit of creditors, (iii) failure, suspension of business operations, or insolvency, (iv) appointment of a receiver or trustee, or (v) failure to pay debts generally as they become due. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement designed to hedge the Company or any of its Subsidiaries against fluctuations in interest rates. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter and any successor statute. "Investment" means all expenditures made and all liabilities incurred (contingently or otherwise) for or in connection with the acquisition of stock or Indebtedness of, or for loans, advances, or capital contributions or transfers of property to, any Person or in respect of any Accommodation Obligations. In determining the aggregate amount of any Investment outstanding at any particular time, (i) the amount of any Investment represented by a guaranty shall be taken at not less than the principal amount of the obligations guaranteed pursuant to the terms of such guarantee and still outstanding; (ii) there shall be deducted in respect of each such Investment any amount received as a return of capital (but only by repurchases, redemption, retirement, repayment, liquidating dividend or liquidating distribution); (iii) there shall not be deducted in respect of any Investment any amounts received as earnings on such Investment, whether as dividends, interest or otherwise; and (iv) there shall not be deducted from the aggregate amount of Investments any decrease in the market value thereof. "Investment Rights Agreement" means the Investment Rights Agreement of the Company in the form of Exhibit VII annexed hereto. "Lender" means Fletcher International Limited. "Lien" means any lien, mortgage, pledge, assignment, security interest, fixed or floating charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or deposit or other preferential arrangement having the practical effect of any of the foregoing. "Loan" or "Loans" means, as the context requires, one or more of the Loans. "Loan Commitment" means an aggregate of $25,000,000, subject to subsection 3.3. "Loan Documents" means this Agreement, the Notes, the Subsidiary Guaranty, the Investment Rights Agreement and the Collateral Documents. "Loans" means the Loans made by the Lender pursuant to subsection 2.1A. "Lockbox Agreement" means the Lockbox Agreement executed and delivered by the Company, the Lender and the Lockbox Bank on the Closing Date, substantially in the form of Exhibit VI annexed hereto, as such Lockbox Agreement may be amended, restated, supplemented or otherwise modified from time to time. "Lockbox Bank" has the meaning assigned to that term in Section 3.1B. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Material Adverse Effect" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, (ii) the material impairment of the ability of the Company to perform the Obligations, (iii) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document to which it is a party, or (iv) a material adverse effect upon the rights, remedies and benefits available to, or conferred upon, the Lender under any Loan Document. "Material Contracts" means any or all of the following, as the context may require: (i) any Security issued by the Company or any of its Subsidiaries, (ii) any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which the Company or any of its Subsidiaries is a party or by which it or any of its properties is bound or to which it or any of its properties is subject and (iii) any other document, agreement or instrument that is material to the operation or business of the Company and its Subsidiaries. "Maturity Date" means January 31, 1999. "Multiemployer Plan" means a "multiemployer plan", as defined in Section 4001(a)(3) of ERISA which is subject to Title IV of ERISA, to which the Company or any of its ERISA Affiliates is contributing or to which the Company or any of its ERISA Affiliates has an obligation to contribute. "Net Cash Proceeds" means, with respect to any transaction , an amount equal to the cash proceeds received by the Company or any of its Subsidiaries from or in respect of such transaction (including any cash proceeds received as income or other proceeds or any non-cash proceeds of such transaction), less (i) any expenses (including commissions) reasonably incurred by the Company or its Subsidiaries in respect of such transaction; (ii) the amount of any Indebtedness secured by a Lien on a related asset and discharged from the proceeds of such transaction; (iii) any taxes paid or payable by the Company or its Subsidiaries with respect to such transaction (as reasonably estimated by the Company's chief financial officer in good faith); and (iv) appropriate amounts, reasonably determined by the Company in accordance with GAAP, as a reserve against any liabilities retained by such party with respect to such transaction. "Notes" means the promissory notes of the Company issued pursuant to subsection 2.1E on the Closing Date. "Notice of Borrowing" means a notice in the form of Exhibit I annexed hereto delivered by the Company to the Lender pursuant to subsection 2.1B with respect to a proposed borrowing. "Obligations" means all obligations of every nature of the Company from time to time owed to the Lender under the Loan Documents, whether for principal, interest, fees, expenses, indemnification or otherwise. "Officer's Certificate" means, with respect to any Person, a certificate executed on behalf of such Person (x) if such Person is a partnership or limited liability company, by its chairman of the Board (if an officer) or chief executive officer or by the chief financial officer of its general partner or managing member or other Person authorized to do so by its Organizational Documents, (y) if such Person is a corporation, on behalf of such corporation by its chairman of the board (if an officer) or chief executive officer or its chief financial officer or vice president, and (z) if such person is the Company, a Responsible Officer; provided that every Officer's Certificate with respect to the compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officer's Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signer or signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signer or signers, such condition has been complied with. "Organizational Authorizations" means, with respect to any Person, resolutions of its Board of Directors, general partners or members of such Person, and such other Persons, groups or committees (including, without limitation, managers and managing committees), if any, required by the Organizational Certificate or Organization Documents of such Person to authorize or approve the taking of any action or the entering into of any transaction. "Organizational Certificate" means, with respect to any Person, the certificate or articles of incorporation, partnership or limited liability company or any other similar or equivalent organizational, charter or constitutional certificate or document filed with the applicable Governmental Authority in the jurisdiction of its incorporation, organization or formation, which, if such Person is a partnership or limited liability company, shall include such certificates, articles or other certificates or documents in respect of each partner or member of such Person. "Organizational Documents" means, with respect to any Person, the by-laws, partnership agreement, limited liability company agreement, operating agreement, management agreement or other similar or equivalent organizational, charter or constitutional agreement or arrangement, which, if such Person is a partnership or limited liability company, shall include such by-laws, agreements or arrangements in respect of each partner or member of such Person. "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA (or any successor thereto). "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Title IV of ERISA. "Permitted Encumbrances" means the following types of Liens: (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 5.3; (ii) statutory Liens of landlords, statutory Liens of carriers, warehousemen, mechanics and materialmen and other Liens imposed by law (other than any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA) incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith pursuant to appropriate proceedings, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money or other Indebtedness); (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 7.8, so long as such Lien could not reasonably be expected to have a Material Adverse Effect; (v) leases or subleases granted to others (in the ordinary course of business consistent with past practices) not interfering in any material respect with the ordinary conduct of the business or operations of the Company or any of its Subsidiaries; (vi) easements, rights-of-way, restrictions, minor defects, encroachments or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Subsidiaries; (vii) any (a) interest or title of a lessor or sublessor under any Capital Lease permitted by subsection 6.1(iii) or any operating lease not prohibited by this Agreement, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b); (viii) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) deposits in the ordinary course of business to secure liabilities to insurance carriers, lessors, utilities and other service providers; and (xi) bankers liens and rights of setoff with respect to customary depository arrangements entered into in the ordinary course of business. "Person" means and includes natural persons, corporations, limited partnerships, limited liability companies, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof and any other entities of whatever nature. "Projections" has the meaning assigned to that term in subsection 4.3B. "Recovery Event" means the receipt by the Company or any of its Subsidiaries of any insurance or condemnation proceeds payable (i) by reason of theft, physical destruction or damage or any other similar event with respect to any properties or assets of the Company or any of its Subsidiaries, (ii) by reason of any condemnation, taking, seizing or similar event with respect to any properties of the Company or any of its Subsidiaries and (iii) under any policy of insurance. "Register" has the meaning assigned to that term in subsection 2.1D. "Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), or into or out of any property, including the movement of any Hazardous Material through the air, soil, surface water, groundwater or property. "Responsible Officer" means the chief executive officer, president, general counsel or chief financial officer of the Company, but in any event, with respect to financial matters, the chief financial officer or treasurer of the Company. "Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of the Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of the Company now or hereafter outstanding, and (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of the Company now or hereafter outstanding. "Securities" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "Security Agreement" means the Security Agreement entered into by and between the Company and the Lender on and as of the Closing Date, substantially in the form of Exhibit III annexed hereto, as such Security Agreement may heretofore have been or hereafter may be amended, restated, supplemented or otherwise modified from time to time. "Securities Act" means the Securities Act of 1933, as amended from time to time, and any successor statute. "Subsidiary" means, with respect to any Person, any corporation, partnership, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "Subsidiary Guaranty" means the Subsidiary Guaranty entered into by and between the Subsidiaries of the Company and the Lender on and as of the Closing Date, substantially in the form of Exhibit VIII annexed hereto, as such Subsidiary Guaranty may heretofore have been or hereafter may be amended, restated, supplemented or otherwise modified from time to time. "Tax" or "Taxes" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "Tax on the overall net income" of a Person shall be construed as a reference to a tax imposed by the jurisdiction in which that Person's principal office is located or in which that Person is deemed to be doing business on all or part of the net income, profits or gains of that Person (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise). "Terms of Subordination" has the meaning assigned to that term in Subsection 3.1Q. "Unfunded Current Liability" means, with respect to any Pension Plan, the amount, if any, by which the actuarial present value of the accumulated plan benefits under such Pension Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, each determined in accordance with Statement of Financial Accounting Standards No. 87, based upon the actuarial assumptions used by such Pension Plan's actuary in the most recent annual valuation of such Pension Plan. "Year 2000 Problems" means limitations in the capacity or readiness to handle date information (including, without limitation, calculations based on date information) for the Year 1999 or years beginning January 1, 2000 of any of the hardware, firmware or software systems ("Systems") associated with information processing and delivery, operations or services (e.g., security and alarms, elevators, communications, and HVAC), including, without limitation, equipment containing embedded microchips, operated by, provided to or otherwise reasonably necessary to the business or operations of the Company and its Subsidiaries. 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement. Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by the Company to the Lender pursuant to clauses (i), (ii), (iii) and (xiii) of subsection 5.1 shall be prepared in accordance with GAAP (except, with respect to interim financial statements, normal year-end audit adjustments and the absence of explanatory footnotes) as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 5.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 4.3A. 1.3 Other Definitional Provisions. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 1.1 may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. The words "includes," "including" and similar forms used in any Loan Document shall be construed as if followed by the words "without limitation." SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 Commitments; Loans. A. Commitments. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Company and its Subsidiaries set forth herein and in the other Loan Documents, the Lender hereby agrees to make the Loans described in this subsection. Subject to the terms and conditions of the Agreement, the Lender agrees to lend to the Company from time to time during the period from the Closing Date to but excluding the Maturity Date an aggregate amount not exceeding the Loan Commitment, to be used for the purposes identified in subsection 2.5A. The Lender's Loan Commitment shall expire on the Maturity Date and all Loans and all other amounts owed hereunder with respect to the Loans and the Loan Commitments shall be paid in full no later than that date. B. Borrowing Mechanics. Subject to the requirements of subsection 3.1Q, on the Closing Date the Company may request that the Lender make a loan of $5,000,000 and thereafter once a week for the next two calendar weeks the Company may request that the Lender make two additional installments of $2,500,000 each (such three installments to be collectively known as the "Initial Loan"). After January 1, 1999, the Company may request one additional Loan each week, subject to the terms and conditions hereof in an amount no greater than $3,750,000. Loans may only be requested once a week. Whenever the Company desires that the Lender make Loans it shall deliver to the Lender a Notice of Borrowing no later than 12:00 Noon (New York time), at least three (3) Business Days in advance of the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day) and (ii) the amount of Loan requested. In lieu of delivering the above-described Notice of Borrowing, the Company may give the Lender telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing to the Lender on or before the applicable Funding Date. The Lender shall not incur any liability to the Company in acting upon any telephonic notice referred to above that the Lender believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of the Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of a Loan by the Lender in accordance with this Agreement pursuant to any such telephonic notice the Company shall have effected Loans hereunder. The Company shall notify the Lender prior to the funding of any Loans in the event that any of the matters to which the Company is required to certify in the applicable Notice of Borrowing are no longer true and correct as of the applicable Funding Date, and the acceptance by the Company of the proceeds of any Loans shall constitute a re-certification by the Company, as of the applicable Funding Date, as to the matters to which the Company is required to certify in the applicable Notice of Borrowing. C. Disbursement of Funds. No later than 2:00 p.m. (New York time) on the applicable Funding Date, upon satisfaction of the conditions precedent specified in subsections 3.1 and 3.2, the Lender shall make the proceeds of the Loan available to the Company by causing an amount of same day funds equal to the Loan to be credited to the account of the Company at the account designated by the Company. D. The Register. (i) The Lender shall maintain, at its address referred to in subsection 9.8, a register for the recordation of the Loans from time to time (the "Register"). The Register shall be available for inspection by the Company at any reasonable time and from time to time upon reasonable prior notice. (ii) The Lender shall record in the Register the Commitments and the outstanding Loans from time to time and each repayment or prepayment in respect of the principal amount of the outstanding Loans. Any such recordation shall be conclusive and binding on the Company and the Lender, absent manifest error; provided that failure to make any such recordation, or any error in such recordation, shall not affect the Company's Obligations in respect of the applicable Loans. (iii) The Company hereby designates the Lender to serve as the Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and the Company hereby agrees that, to the extent the Lender serves in such capacity, the Lender and its officers, directors, employees, agents and affiliates shall constitute Indemnitees for all purposes under subsection 9.3. E. Notes. The Company shall execute and deliver on the Closing Date to the Lender a Note substantially in the form of Exhibit II annexed hereto, respectively, to evidence the Lender's Loans in the principal amount of the Lender's Loans and with other appropriate insertions. The Notes and the Obligations evidenced thereby shall be governed by, subject to and benefit from all of the terms and conditions of this Agreement and the other Loan Documents and shall be secured by the Collateral. 2.2 Interest on the Loans. A. Rate of Interest. Each Loan shall bear interest on the unpaid principal amount thereof from the date made to maturity (whether by acceleration or otherwise) at a rate equal to the Interest Rate. B. [RESERVED] C. Interest Payments. Subject to the provisions of subsection 2.2E, accrued interest on each Loan shall be payable in arrears on each Interest Payment Date, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity, by acceleration or otherwise). D. [RESERVED] E. Post-Default Interest. Upon the occurrence and during the continuation of any Default, the outstanding principal amount of all Loans and, to the extent permitted by Applicable Law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code, or other applicable bankruptcy or insolvency laws) payable upon demand at a rate that is five percent (5%) per annum in excess of the Interest Rate. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Default or otherwise prejudice or limit any rights or remedies of the Lender. F. Computation of Interest. Interest on Loans shall be computed on the basis of a 365 or 366-day year, as applicable, and for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan shall be included, and the date of payment of such Loan shall be excluded; provided that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. 2.3 Commitment Fee. The Company agrees to pay to the Lender commitment fees with respect to the Loans for the period from and including the date hereof to and excluding the Maturity Date, equal to the sum of the average of the daily excess of the Loan Commitments over the sum of the aggregate principal amount of Loans outstanding multiplied by 1.0% per annum. The foregoing commitment fees shall be calculated on the basis of a 360-day year and the actual number of days elapsed and shall be payable in arrears on the Maturity Date. 2.4 Repayments, Prepayments and Reductions in Commitments; General Provisions Regarding Payments. A. Scheduled Payments of Loans. The Company shall repay all outstanding Loans on the Maturity Date. B. Prepayments and Reductions in Commitment. (i) Voluntary Prepayments. The Company may at any time and from time to time prepay, without premium or penalty, the Loans on any Business Day in whole or in part in an aggregate minimum amount of $500,000 and integral multiples of $250,000 in excess of that amount. Notice of prepayment having been given as aforesaid, the Loans shall become due and payable on the prepayment date specified in such notice and in the aggregate principal amount specified therein. Once repaid, Loans may not be reborrowed. (ii) Mandatory Prepayments. (a) On the Maturity Date, the Loan Commitment of the Lender shall automatically reduce to zero and may not be reinstated. The Company may reduce or terminate the Loan Commitment at any time and from time to time in whole or in part. Each such reduction must be in an amount not less than $5,000,000 (and in increments of $1,000,000 thereafter). If the Company seeks to reduce the Commitment to an amount less than $1,000,000, then the Loan Commitment shall be reduced to zero and this Agreement shall be terminated. Once reduced, no portion of the Loan Commitment shall be reinstated. (b) The Loans shall be prepaid in the manner provided in subsection 2.4B from time to time to the extent necessary so that the aggregate principal amount of all Loans outstanding shall not at any time exceed the Commitments then in effect. (c) The Company shall, immediately upon receipt of the Net Cash Proceeds of any Asset Sale, Debt Incurrence, Equity Issuance and Recovery Event prepay the Loans in an amount equal to the amount of such Net Cash Proceeds. C. Application of Proceeds of Collateral. All proceeds received by the Lender, as the case may be, in respect of any sale of, collection from, or other realization upon all or any part of the Collateral under any Collateral Document may, in the discretion of the Lender, be held by the Lender as Collateral for, and/or (then or at any time thereafter) applied in full or in part by the Lender against, the applicable Secured Obligations (as defined in such Collateral Document) in the following order of priority: (a) to the payment of all costs and expenses of such sale, collection or other realization, including without limitation reimbursement of reasonable out-of-pocket expenses including reasonable fees of counsel, and all other reasonable liabilities and advances made or incurred by the Lender in connection therewith, and all amounts for which the Lender is entitled to indemnification under such Collateral Document and all advances made by the Lender thereunder for the account of the Company, and to the payment of all reasonable costs and expenses paid or incurred by the Lender in connection with the exercise of any right or remedy under such Collateral Document, all in accordance with the terms of this Agreement and such Collateral Document; (b) thereafter, to the extent of any excess proceeds, to the payment of all other such Secured Obligations; and (c) thereafter, to the extent of any excess proceeds, to the payment to or upon the order of the Company or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. D. General Provisions Regarding Payments. (i) Manner and Time of Payment. All payments by the Company of principal, interest, fees and other Obligations hereunder and under the Notes shall be made in same day funds and without defense, setoff or counterclaim, free of any restriction or condition, and delivered to the Lender not later than 12:00 Noon (New York time) on the date due at the account of the Lender; funds received by the Lender after that time on such due date shall be deemed to have been paid by the Company on the next succeeding Business Day. (ii) Application of Payments to Principal and Interest. All payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and in any event any payments made in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. (iii) Payments on Business Days. Except if expressly provided otherwise, whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. (iv) Notation of Payment. The Lender agrees that before disposing of any Note held by it, or any part thereof, the Lender will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided that the failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect such disposition or the obligations of the Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note. 2.5 Use of Proceeds. A. Loans. The proceeds of all Loans shall be applied by the Company for working capital and general corporate purpose of the Company and its Subsidiaries. The proceeds of the Loans shall not be used, directly or indirectly, to purchase the stock or assets of any corporation, partnership or other entity. B. Compliance With Laws. The Company undertakes that no portion of the proceeds of any Loans shall be used by the Company or any of its Subsidiaries in any manner which would be illegal under, or which would cause the invalidity or unenforceability (in each case in whole or in part) of any Loan Document under, any Applicable Law. C. Margin Regulations. Without limiting the generality of subsection 2.5B, no portion of the proceeds of any borrowing under this Agreement shall be used by the Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 2.6 Increased Costs. In the event that the Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) at any time, that the relevant Interest Rate applicable to the Loans shall not represent the effective cost to the Lender for funding or maintaining Loans, or the Lender shall incur increased costs or reductions in the amounts received or receivable hereunder in respect of any Loan, in any such case because of (x) any change since the date of this Agreement in any applicable law or governmental rule, regulation, guideline or order or any interpretation thereof and including the introduction of any new law or governmental rule, regulation, guideline or order, whether or not having the force of law and whether or not failure to comply therewith would be unlawful, and/or (y) other reasonable circumstances affecting the Lender, then, and in any such event, the Lender shall, promptly after making such determination, give notice (by telephone confirmed in writing) to the Company of such determination. Thereafter, the Company shall pay to the Lender, upon the Lender's delivery of written demand therefor to the Company, such additional amounts (in the form of an increased rate of interest, or a different method of calculating interest, or otherwise, as the Lender in its sole discretion shall determine) as shall be required to compensate the Lender for such increased costs or reduction in amounts received or receivable hereunder. 2.7 Taxes. A. Payments to Be Free and Clear. All sums payable by the Company under this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income of the Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from which a payment is made by or on behalf of the Company. B. Withholding of Taxes. If the Company or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by the Company to the Lender under any of the Loan Documents: (a) The Company shall notify the Lender of any such requirement or any change in any such requirement as soon as the Company becomes aware of it; (b) The Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on the Company) for its own account or (if that liability is imposed on the Lender) on behalf of and in the name of the Lender; (c) the sum payable by the Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, the Lender receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, the Company shall deliver to the Lender evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to the Lender under clause (c) above except to the extent that any change after the Closing Date in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement in respect of payments to the Lender. SECTION 3. CONDITIONS TO LOANS The obligation of the Lender to make any Loans hereunder is subject to the satisfaction of the following conditions. 3.1 Conditions to Loans. The obligations of the Lender to make the Loans are, in addition to the conditions precedent specified in subsection 3.2, subject to prior or concurrent satisfaction of the following conditions: A. Company Documents. On or before the Closing Date, each of the Company and its Subsidiaries shall deliver or cause to be delivered to the Lender the following, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of its Certificate of Incorporation, together with a good standing certificate from the Secretary of State of the state of its incorporation, each state in which it is qualified as a foreign corporation to do business, each dated a recent date prior to the Closing Date; (ii) Copies of its Bylaws, certified as of the Closing Date by its corporate secretary or an assistant secretary; (iii) Resolutions of its Board of Directors approving and authorizing the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party or by which it or its assets may be bound as of the Closing Date, certified as of the Closing Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; (iv) Incumbency certificates of its officers executing this Agreement and the other Loan Documents to which it is a party as of the Closing Date; (v) Executed originals of this Agreement and the other Loan Documents to which it is a party; and (vi) Such other documents as the Lender may reasonably request. B. Collection of Accounts. The Company shall instruct all account debtors on the Accounts of the Company to remit all Collections to the account specified on Schedule 3.1B (the "Blocked Account") at the financial institution specified on such Schedule or such other financial institution reasonably acceptable to the Lender (the "Lockbox Bank"). The Company, the Lender and the Lockbox Bank shall enter into an agreement substantially in the form of Exhibit VI (the "Lockbox Agreement"). All Collections and other amounts received by the Company from any account debtor shall upon receipt be deposited into the Blocked Account. Termination of such arrangements shall be subject to approval by the Lender. The Lender shall not be entitled to deliver a Redirection Notice (as defined in the Lockbox Agreement) to the Lockbox Bank until the occurrence of an Event of Default. Subject to the terms of this Agreement and the Lockbox Agreement, the Company hereby agrees that all payments received by the Lender, whether by cash, check, wire transfer or any other instrument, made to such Blocked Account or otherwise received by the Lender and whether on the Accounts or as proceeds of other Collateral or otherwise will be sole and exclusive property of the Lender. C. Necessary Consents. The Company shall have obtained all consents of Governmental Authorities and other Persons necessary in connection with the continued operation of the business conducted by the Company and its Subsidiaries, and each of the foregoing shall be in full force and effect and in form and substance reasonably satisfactory to the Lender. D. Perfection of Security Interests. The Company shall have taken or caused to be taken such actions in such a manner so that the Lender has a valid and perfected first priority security interest in the Collateral. Such actions shall include, without limitation, the delivery to the Lender of (a) the Collateral Documents, (b) the results of a recent search, by a Person satisfactory to the Lender, of all effective UCC financing statements and all judgment and tax lien filings which may have been made with respect to any personal property of the Company, together with copies of all such filings disclosed by such search, (c) Uniform Commercial Code financing statements executed by the Company as to all such Collateral granted by the Company for all jurisdictions as may be necessary or desirable to perfect the Lender's security interest in such Collateral, and (d) evidence reasonably satisfactory to the Lender that all other filings, recordings and other actions the Lender deems necessary or advisable to establish, preserve and perfect the Liens granted to the Lender in personal property shall have been made. E. [RESERVED] F. Opinions of Company's Counsel. The Lender and its counsel shall have received originally executed copies of one or more favorable written opinions of the general counsel and special New York counsel for the Company, in form and substance reasonably satisfactory to the Lender and its counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit V and otherwise reasonably satisfactory to the Lender. G. Fees and Expenses. The Company shall have paid to the Lender the fees payable on the Closing Date referred to in subsection 2.3 and any expenses owing to any Person by the Company as of the Closing Date. H. Financial Statements. On or before the Closing Date, the Lender shall have received from the Company the financial information and projections described in subsection 4.3 hereof, together with supporting documentation in respect thereof, all in form and substance satisfactory to Lender. I. Evidence of Insurance. The Lender shall have received satisfactory certificates of insurance with respect to each of the insurance policies required pursuant to subsection 5.4, and the Lender shall be satisfied with the nature and scope of these insurance policies. J. Environmental. (i) The Lender shall have received information in form, scope and substance reasonably satisfactory to the Lender with respect to all Environmental Liabilities to which the Company may be subject, and (ii) the Lender shall be reasonably satisfied that the amount and nature of any such Environmental Liabilities and the plans of the Company with respect thereto, could not be reasonably expected to have a Material Adverse Effect. K. No Material Adverse Effect. (i) After the date of the funding of the Initial Loan, since September 30, 1998, (x) no Material Adverse Effect (in the sole opinion of the Lender) shall have occurred, and (y) there shall not have been any material adverse change, or any event, condition (financial or otherwise) or development that could have a material adverse change, in or affecting the general affairs, industry, management, condition, financial position, prospects, shareholders equity or results of operations of Company, (ii) any information submitted to Lender shall not have been inaccurate, incomplete or misleading in any respect, which the Lender, in its good faith judgment, deems to be material and adverse, and (iii) there shall not have occurred or become known to the Lender any event or events, adverse condition or change that, individually or in the aggregate, could have a Material Adverse Effect. L. Corporate and Capital Structure, Ownership, Management, Etc. (i) Corporate Structure. The corporate organizational structure of the Company shall be as set forth on Schedule 3.1L annexed hereto. (ii) Capital Structure and Ownership. The capital structure and ownership of the Company shall be as set forth on Schedule 3.1L annexed hereto. (iii) Management; Employment Contracts. The management structure of the Company shall be as set forth on Schedule 3.1L annexed hereto. The Lender shall have received copies of, and shall be reasonably satisfied with the form and substance of, any and all employment contracts with senior management of the Company. M. Representations and Warranties; Performance of Agreements. The Company shall have delivered to the Lender an Officer's Certificate, in form and substance satisfactory to the Lender, to the effect that the representations and warranties in Section 4 hereof are true and correct in all material respects on and as of the Closing Date, to the same extent as though made on and as of that date and that the Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by them on or before the Closing Date. N. Completion of Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto shall be satisfactory in form and substance to the Lender and its counsel, and the Lender and such counsel shall have received all such counterpart originals or certified copies of such documents, instruments and legal opinions as the Lender may reasonably request. O. No Litigation. Except as otherwise disclosed to the Lender pursuant to Schedule 3.1(O) or in the Company's securities law filings, there shall be no litigation or administrative proceedings or other legal or regulatory developments, actual or threatened, that, singly or in the aggregate, could have a Material Adverse Effect. P. Investment Rights Agreement. The Company shall have executed and delivered the Investment Rights Agreement Q. Additional Debt. In order to borrow more than an aggregate amount of $10,000,000 under this Agreement, the Company shall have borrowed $3,000,000 from another source, which debt may rank pari passu with the debt borrowed under this Agreement. R. Subsidiary Guaranty. All Subsidiaries of the Company shall have executed a copy of the Subsidiary Guaranty which is attached hereto as Exhibit VIII. 3.2 Conditions to All Loans. The obligations of the Lender to make Loans on each Funding Date are subject to the following further conditions precedent: A. The Lender shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer or the chief financial officer of the Company or by any executive officer of the Company designated by any of the above-described officers on behalf of the Company in a writing delivered to the Lender. B. As of that Funding Date: (i) The representations and warranties contained herein and in the other Loan Documents shall be true and correct in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute a Default or Event of Default; (iii) The Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement and the other Loan Documents provide shall be performed or satisfied by it on or before that Funding Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain the Lender from making the Loan to be made by it, on that Funding Date; (v) The making of the Loans requested on such Funding Date shall not violate any law including, without limitation, Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; (vi) There shall not be pending or, to the knowledge of the Company, threatened, any action, suit, proceeding, Environmental Claim, governmental investigation or arbitration against or affecting the Company or any of its Subsidiaries or any property of the Company or any of its Subsidiaries that has not been disclosed by the Company in writing and that is required to be so disclosed pursuant to subsection 4.6, 4.13 or 5.1(xi) prior to the making of the last preceding Loans, and there shall have occurred no development not so disclosed in any such action, suit, proceeding, Environmental Claim, governmental investigation or arbitration so disclosed that, in either event, in the good faith opinion of the Lender, would be expected to have a Material Adverse Effect; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of any of the transactions contemplated by this Agreement, including the making of Loans hereunder; (vii) Neither the Company nor its Subsidiaries shall have any Hedge Agreements in effect; (viii) Except for the funding of the Initial Loan, for each of the fifteen days prior to any Funding Date the daily volume weighted average per share price of the common stock of the Company shall be at or above $5.00 as determined by Bloomberg, L.P.; (ix) Except for the funding of the Initial Loan, the cash flow of the Company for the fourth quarter of 1998 (as determinable after January 1, 1999) shall match or be more positive than the Projections which the Company has delivered to the Lender prior to the Closing Date; (x) The shareholder's equity of the Company as applied on a consistent basis with GAAP shall be greater than $150,000,000; and (xi) Except for the funding of the Initial Loan, the value of the Collateral shall be greater than $28,000,000, as determined by the Lender in its reasonable discretion. 3.3 Sole Discretion of the Lender. Notwithstanding anything to the contrary herein, after the Initial Loan is made hereunder, the availability of the Loan Commitment and the making of any subsequent Loans shall be made in the sole discretion of the Lender. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement and to make the Loans, the Company represents and warrants to the Lender, on the date of this Agreement, on the Closing Date and on each Funding Date, that the following statements are true and correct. 4.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries. A. Organization and Powers. The Company and each of its Subsidiaries which is a corporation are duly organized, validly existing and in good standing under the laws of their respective states of organization. Each Subsidiary of the Company which is a partnership or limited liability company is a duly organized and validly existing limited partnership or limited liability company under the laws of its jurisdiction of formation and is in good standing in such jurisdiction. The Company and each of its Subsidiaries has all requisite corporate, partnership or limited liability company (as applicable) power and authority to own and operate their respective properties and to carry on their respective business as now conducted and as proposed to be conducted, and the Company and each of its Subsidiaries has all requisite corporate, partnership or limited liability company (as applicable) power and authority to enter into the Loan Documents, to carry out the transactions contemplated thereby and, in the case of the Company, to issue and pay the Notes. B. Qualification and Good Standing. The Company and each of its Subsidiaries are qualified or authorized to do business and in good standing in every jurisdiction where their respective assets are located and wherever necessary to carry out their respective businesses and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect. C. Conduct of Business. The Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 6.9. 4.2 Authorization of Borrowing, etc. A. Authorization of Borrowing. The execution, delivery and performance of the Loan Documents and the issuance, delivery and payment of the Notes have been duly authorized by all necessary corporate and/or partnership (as applicable) action on the part of the Company. B. No Conflict. After giving effect to the consummation of the transactions contemplated hereby to occur on the Closing Date, the execution, delivery and performance by the Company of the Loan Documents, the issuance, delivery and payment of the Notes and the consummation of the transactions contemplated by the Loan Documents do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to the Company, the Organizational Certificate or any other Organizational Documents of the Company or any order, judgment or decree of any court or other agency of government binding on the Company, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of the Company, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of the Company (other than any Liens created under any of the Loan Documents in favor of the Lender), or (iv) require any approval of stockholders, partners or members or any approval or consent of any Person under any Contractual Obligation of the Company, except for such approvals or consents which will be obtained on or before the Closing Date and have been disclosed in writing to the Lender. C. Governmental Consents. The execution, delivery and performance by the Company of the Loan Documents, the issuance, delivery and payment of the Notes and the consummation of the transactions contemplated by the Loan Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body except to the extent obtained on or before the Closing Date. D. Binding Obligation. Each of the Loan Documents has been duly executed and delivered by the Company and is the legally valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. E. Collateral Documents. The security interests created in favor of the Lender under the Collateral Documents will at all times from and after the Closing Date constitute, as security for the obligations purported to be secured thereby, a legal, valid and enforceable security interest in and first priority perfected Lien on all of the Collateral referred to therein in favor of the Lender. The Company has good title to its respective Collateral. No consents, filings or recordings are required in order to perfect (or maintain the perfection or priority of) the security interests purported to be created by any of the Collateral Documents, other than such as have been obtained and which remain in full force and effect and other than the filing of Uniform Commercial Code Financing Statements delivered to the Lender for filing but not yet filed, and the periodic filing of Uniform Commercial Code continuation statements in respect of Uniform Commercial Code financing statements filed by or on behalf of the Lender. F. Absence of Third-Party Filings. Except for Permitted Encumbrances and except as set forth on Schedule 6.2 annexed hereto, no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office. G. Margin Regulations. Neither the making of the Loans nor the pledge of the Collateral pursuant to the Collateral Documents violates Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. 4.3 Financial Condition; Projections. A. Financial Statements. The Company has heretofore delivered to the Lender, at the Lender's request, the following financial statements and information with respect to the Company, pro forma quarterly consolidated balance sheets of the Company as at September 30, 1998, together with a related pro forma consolidated statements of income, operations, stockholder's equity and cash flows for the Fiscal Quarter then ended, together will all supporting documentation for any of the foregoing reasonably requested by the Lender. All such statements are in material compliance with Regulation S-X of the Securities Act, as interpreted by the staff of the Securities and Exchange Commission, for a public offering registered under the Securities Act, and were prepared in conformity with GAAP and fairly present, in all material respects, the financial position of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments and the absence of footnote disclosure required in accordance with GAAP. The Company does not have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the financial statements referred to in the preceding clauses of this subsection, the most recent financial statements delivered pursuant to subsection 5.1 or the notes thereto and which in any such case is material in relation to the business, operations, properties, assets, or financial condition of the Company. B. Projections. On and as of the Closing Date, the projections of the Company delivered to the Lender with the Officer's Certificate on the Closing Date (the "Projections") are based on good faith estimates and assumptions made by the management of the Company, it being recognized, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the Projections may differ from the projected results and that the differences may be material. Notwithstanding the foregoing, as of the Closing Date, management of the Company believed that the Projections were reasonable and attainable. 4.4 No Material Adverse Change. After the date of the funding of the Initial Loan, except, in any case, as disclosed to the Lender in writing prior to the Closing Date, no event or change has occurred that has caused or evidences or could reasonably be expected to cause, either in any case or in the aggregate, a Material Adverse Effect. 4.5 Title to Properties; Liens; Real Property; Intellectual Property. A. Title to Properties; Liens. After giving effect to the transactions contemplated hereby, the Company has good and marketable title in all of their respective properties and assets reflected in the financial statements referred to in subsection 4.3 or in the most recent financial statements delivered pursuant to subsection 5.1, except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 6.7 and except for such defects that neither individually nor in the aggregate could reasonably be expected to have a Material Adverse Effect. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. B. Intellectual Property. The Company and its Subsidiaries own or have the valid right to use all trademarks and service marks, trade names, patents, copyrights, trade secrets and technology used in or necessary to conduct the Company's and its Subsidiaries' business (collectively, the "Intellectual Property"), free and clear of any and all Liens other than Permitted Encumbrances. All registrations therefor are in full force and effect and are valid and enforceable. The conduct of the Company's and its Subsidiaries' business as currently conducted, including, but not limited to, all products, processes or services, made, offered or sold by the Company and its Subsidiaries, does not infringe upon, violate, misappropriate or dilute any intellectual property of any third party which infringement, violation, misappropriation or dilution could reasonably be expected to have a Material Adverse Effect. To the best of the Company's and its Subsidiaries' knowledge, no third party is infringing upon the Intellectual Property in any material respect. There is no pending or to the best of the Company's and its Subsidiaries' knowledge, threatened claim or litigation contesting the Company's right to own or use any material Intellectual Property or the validity or enforceability thereof. 4.6 Litigation; Adverse Facts. Except as set forth in Schedule 4.6, there is no action, suit, proceeding, arbitration or governmental investigation (whether or not purportedly on behalf of the Company or any of its Subsidiaries) at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or, to the knowledge of the Company (after due inquiry), threatened against or affecting the Company or any of its Subsidiaries or any property of the Company or any of its Subsidiaries that, either individually or in the aggregate together with all other such actions, proceedings and investigations, has had, or could reasonably be expected to result in, a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is (i) in violation of any Applicable Law that has had, or could reasonably be expected to result in, a Material Adverse Effect or (ii) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that has had, or could reasonably be expected to result in, a Material Adverse Effect. 4.7 Payment of Taxes. Except to the extent permitted by subsection 5.3, all material tax returns and reports of the Company and its Subsidiaries required to be filed by any of them have been timely filed and are true, correct and complete in all material respects, and all material taxes, assessments, fees and other governmental charges upon the Company and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Neither the Company nor any of its Subsidiaries knows of any proposed tax assessment against the Company or any of its Subsidiaries other than those which are being actively contested by the Company or such Subsidiary in good faith and by appropriate proceedings and for which reserves or other appropriate provisions, if any, as may be required in conformity with GAAP shall have been made or provided therefor. 4.8 Performance of Agreements; Materially Adverse Agreements. Except, in any case, as disclosed in writing to the Lender on or prior to the Closing Date: A. Neither the Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect. B. Neither the Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreement or instrument or any charter or other internal restriction which has had, or could reasonably be expected (based upon assumptions that are reasonable at the time made) to result in, individually or in the aggregate, a Material Adverse Effect. 4.9 Governmental Regulation. Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 4.10 Securities Activities. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. 4.11 Employee Benefit Plans. A. The Company and each of its ERISA Affiliates are in compliance with all applicable provisions and requirements of ERISA with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan, except to the extent that any non-compliance with ERISA or any such failure to perform would not result in material liability of the Company or any of its ERISA Affiliates. B. No ERISA Event has occurred which has resulted or is reasonably likely to result in any material liability of the Company or any of its ERISA Affiliates to the PBGC or to any other Person. C. Except to the extent required under Section 4980B of the Internal Revenue Code and/or Section 601 of ERISA, neither the Company nor any of its Subsidiaries maintains or contributes to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employees of the Company or any of its Subsidiaries other than as set forth on Schedule 4.11 annexed hereto. D. No Pension Plan has an Unfunded Current Liability in an amount that would have a Material Adverse Effect. E. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of the Company, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, could not reasonably be expected to have a Material Adverse Effect. 4.12 Certain Fees. No broker's or finder's fee or commission will be payable with respect to this Agreement or any of the loan transactions contemplated hereby, and the Company hereby indemnifies the Lender against, and agrees that it will hold the Lender harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 4.13 Environmental Matters. (i) The Company, each of its Subsidiaries and, to the knowledge of the Company (after due inquiry), each of the tenants under any leases or occupancy agreements affecting any portion of the Facilities, are in compliance with all applicable Environmental Laws (which compliance includes, but is not limited to, the possession by the Company, each of its Subsidiaries and each of such tenants of all permits and other Governmental Authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof), except where failure to be in compliance would not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries, nor, to the knowledge of the Company (after due inquiry), any of the tenants under any leases or occupancy agreements affecting any portion of the Facilities has received any communication (written or oral), whether from a Governmental Authority, citizens group, employee or otherwise, alleging that the Company, any of its Subsidiaries, or any such tenants is not in such compliance, and there are no past or present (or to the best knowledge of the Company, future) actions, activities, circumstances conditions, events or incidents that may prevent or interfere with such compliance in the future. (ii) There is no Environmental Claim pending or threatened against the Company or any of its Subsidiaries or, to the best knowledge of the Company, against any Person whose liability for any Environmental Claim the Company or any of its Subsidiaries has or may have retained or assumed either contractually or by operation of law which would have a Material Adverse Effect. (iii) There are no past or present (or to the best knowledge of the Company, future) actions, activities, circumstances, conditions, events or incidents, including, without limitation, the Release or presence of any Hazardous Material which could form the basis of any Environmental Claim against the Company or any of its Subsidiaries, or to the best knowledge of the Company, against any Person whose liability for any Environmental Claim the Company or any of its Subsidiaries has or may have retained or assumed either contractually or by operation of law which would have a Material Adverse Effect. (iv) The Company and its Subsidiaries have not, and to the best knowledge of the Company, no other Person has placed, stored, deposited, discharged, buried, dumped or disposed of Hazardous Materials or any other wastes produced by, or resulting from, any business, commercial or industrial activities, operations or processes, on, beneath or adjacent to any property currently or formerly owned, operated or leased by the Company or any of its Subsidiaries, except for inventories of such substances to be used, and wastes generated therefrom, in the ordinary course of business of the Company and its Subsidiaries (which inventories and wastes, if any, were and are stored or disposed of in accordance with applicable Environmental Laws and in a manner such that there has been no Release of any such substances). (v) No Lien in favor of any Person relating to or in connection with any Environmental Claim has been filed or has been attached to any Facility. (vi) Without in any way limiting the generality of the foregoing none of the Facilities contain any: underground storage tanks; asbestos; polychlorinated biphenyls; underground injection wells; radioactive materials; or septic tanks or waste disposal pits in which process wastewater or any Hazardous Materials have been discharged or disposed. 4.14 Employee Matters. There is no strike, work stoppage or other condition relating to the Company's employees in existence or threatened involving the Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 4.15 Inactive Subsidiaries. The Subsidiaries of the Company listed on Schedule 4.15 hereto are inactive and have no material assets. 4.16 [RESERVED] 4.17 Disclosure. The representations and warranties of the Company contained in the Loan Documents and all information contained in any other document, certificate or written statement furnished to the Lender by or on behalf of the Company for use in connection with the transactions contemplated by this Agreement or any other Loan Document, when taken together, do not contain any untrue statement of a material fact or omit to state a material fact (known to the Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. 4.18 Year 2000 Problems. The Company has (i) engaged in a process of assessment of the existence of the Year 2000 Problems reasonably appropriate to the scope and complexity of their respective Systems; (ii) adopted and are successfully implementing a plan of correction ("Plan of Correction") which, the Company reasonably believes will result in a substantial elimination of Year 2000 Problems (and, in any event, all Year 2000 Problems which could reasonably be expected to have a Material Adverse Effect) which might have a Material Adverse Effect and, in the case of all Systems (as defined in the definition of Year 2000 Problems) critical to the business or operations of the Company and its Subsidiaries, elimination in all material respects of Year 2000 Problems prior to any processing failure of a System or Systems due to Year 2000 Problems which might have a Material Adverse Effect; (iii) adopted and are successfully implementing validation procedures calculated to test on an ongoing basis the sufficiency of the Plan of Correction, its implementation, and the correction of Year 2000 Problems in substantially all Systems and all Systems critical to the business or operations of the Company and its Subsidiaries; and (iv) adopted and are successfully implementing policies and procedures requiring regular reports to, and monitoring by, senior management of the Company concerning the foregoing matters. The Company reasonably believes that, as relating to the Company and each of its Subsidiaries, individually and taken as a whole, (x) the assessment and correction of Year 2000 Problems, including, without limitation, the Plan of Correction, and the testing of all Systems and the correction of Year 2000 Problems, in each case, which, individually or in the aggregate, if not corrected could reasonably be expected to have a Material Adverse Effect, will be completed on or prior to December 31, 1998, (y) a Material Adverse Effect will not occur as a result of any Year 2000 Problem, and (z) the aggregate costs and expenses incurred and reasonably expected to be incurred in connection with the assessment and correction of Year 2000 Problems, including, without limitation, the Plan of Correction, and the testing and monitoring of all Systems and the correction of Year 2000 Problems, could not reasonably be expected to have a Material Adverse Effect. SECTION 5. AFFIRMATIVE COVENANTS The Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations, unless the Lender shall otherwise give prior written consent, the Company shall perform, and shall cause each of its Subsidiaries, as applicable, to perform, all covenants in this Section 5. 5.1 Financial Statements; Collateral Reports and Other Reports. The Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. The Company will deliver to the Lender: (i) Monthly Financials: as soon as available and in any event within thirty (30) days after each calendar month-end commencing with the calendar month ending November 30, 1998, or in the case of the third month of any fiscal quarter, within forty-five (45) days after the end of such month, (a) the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of each fiscal month and the related consolidated and consolidating statements of income, and consolidated statement of cash flows of the Company and its Subsidiaries for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth, in the case of statements of income only, in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the consolidated plan and financial forecast for the current Fiscal Year delivered pursuant to subsection 5.1(xiii), all prepared in accordance with GAAP and in reasonable detail and certified by the chief financial officer of the Company that they fairly present, in all material respects, the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; and (b) a narrative report describing the operations of the Company and its Subsidiaries taken as a whole in the form prepared for presentation to senior management for such month and for the period from the beginning of the then current Fiscal Year to the end of such month; (ii) Quarterly Financials: as soon as available and in any event within forty-five (45) days after the end of each Fiscal Quarter commencing with the Fiscal Quarter ending September 30, 1998, (a) the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated and consolidating statements of income and consolidated statement of cash flows of the Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth, in the case of statements of income only, in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the consolidated plan and financial forecast for the current Fiscal Year delivered pursuant to subsection 5.1(xiii), all prepared in accordance with the GAAP and in reasonable detail and certified by the chief financial officer of the Company that they fairly present, in all material respects, the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (b) a narrative report describing the operations of the Company and its Subsidiaries taken as a whole in the form prepared for presentation to senior management for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter; (iii) Year-End Financials: as soon as available and in any event within ninety (90) days after the end of each Fiscal Year, (a) the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated and consolidating statements of income and consolidated statement of cash flows of the Company and its Subsidiaries for such Fiscal Year, setting forth, in the case of statements of income only, in comparative form the corresponding figures for the previous fiscal year and the corresponding figures from the consolidated plan and financial forecast delivered pursuant to subsection 5.1(xiii) for the Fiscal Year covered by such financial statements, all prepared in accordance with the GAAP and in reasonable detail and certified by the chief financial officer of the Company that they fairly present, in all material respects, the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a narrative report describing the operations of the Company and its Subsidiaries taken as a whole in the form prepared for presentation to senior management for such Fiscal Year, and (c) in the case of such consolidated financial statements, a report thereon of independent certified public accountants of recognized national standing selected by the Company and reasonably satisfactory to the Lender, which report shall be unqualified as to going concern and scope of audit, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iv) Officer's and Compliance Certificates: together with each delivery of financial statements of the Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, (a) an Officer's Certificate of the Company stating that the signer has reviewed the terms of this Agreement and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and condition of the Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer did not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event that constitutes an Default or Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken, is taking and proposes to take with respect thereto; and (b) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 6; (v) Reconciliation Statements: if, as a result of any change in accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 4.3, the consolidated financial statements of the Company and its Subsidiaries delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this subsection 5.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made, then (a) together with the first delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 5.1 following such change, consolidated financial statements of the Company and its Subsidiaries for (y) the current Fiscal Year to the effective date of such change and (z) the two (2) full fiscal years immediately preceding the Fiscal Year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 5.1 following such change, a written statement of the chief accounting officer or chief financial officer of the Company setting forth the differences which would have resulted if such financial statements had been prepared without giving effect to such change, if reasonably requested by the Lender; (vi) Accountants' Certification: together with each delivery of consolidated financial statements of the Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit has included a reading of the terms of this Agreement and the other Loan Documents as they relate to the conditions set forth in subsection 3.2B and accounting matters, and (b) stating whether, in connection with their audit examination, any condition or event, insofar as such condition or event relates to the conditions set forth in subsection 3.2B or accounting matters, that constitutes an Default or Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of their audit examination; (vii) Accountants' Reports: promptly upon receipt thereof (unless restricted by applicable professional standards), copies of all reports submitted to the Company by a national independent certified public accountants in connection with each annual, interim or special audit of the financial statements of the Company and its Subsidiaries made by such accountants, including, without limitation, any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon their becoming available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its security holders, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by the Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (c) all press releases and other statements made available generally by the Company or any of its Subsidiaries to the public concerning material developments in the business of the Company or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any officer of the Company obtaining knowledge (a) of any condition or event that constitutes a Default or an Event of Default, (b) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 7.2, (c) of any condition or event that would be required to be disclosed in a current report filed by the Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if the Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences or could be reasonably expected to cause, either in any case or in the aggregate, a Material Adverse Effect, an Officer's Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Default, Event of Default, default, event or condition, and what action the Company (or applicable Subsidiary) has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: (a) promptly upon any officer of the Company obtaining knowledge of (X) the institution of, or threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), Environmental Claim, governmental investigation or arbitration against or affecting the Company or any of its Subsidiaries or any property of the Company or any of its Subsidiaries (collectively, "Proceedings") not previously disclosed in writing by the Company to the Lender or (Y) any material development in any Proceeding that, in any case: (a) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or (b) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to the Company to enable the Lender and its counsel to evaluate such matters; and (b) within forty-five (45) days after the end of each fiscal quarter of the Company, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, the Company or any of its Subsidiaries equal to or greater than $2,500,000 and promptly after request by the Lender such other information as may be reasonably requested by the Lender to enable the Lender and its counsel to evaluate any of such Proceedings; (xi) ERISA Events: promptly upon the Company becoming aware of the occurrence of any ERISA Event that would result in a material liability of the Company or any of its ERISA Affiliates, a written notice specifying the nature thereof, what action the Company or any of its ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) all written notices received by the Company or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (b) such other documents or governmental reports or filings relating to any Employee Benefit Plan as the Lender shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no later than the beginning of each Fiscal Year, a monthly consolidated and consolidating plan and financial forecast for the next succeeding Fiscal Year, including without limitation (a) forecasted consolidated balance sheet and forecasted consolidated and consolidating statements of income and consolidated statement of cash flows of the Company and its Subsidiaries for such Fiscal Year, together with a pro forma Compliance Certificate for such Fiscal Year and an explanation of the assumptions on which such forecasts are based, and (b) such other information and projections as the Lender may reasonably request; (xiv) Insurance: as soon as practicable and in any event by the last day of each Fiscal Year, a report in form and substance satisfactory to the Lender outlining all material insurance coverage maintained as of the date of such report by the Company and its Subsidiaries and all material insurance coverage planned to be maintained by the Company and its Subsidiaries in the immediately succeeding Fiscal Year; (xv) Environmental Audits and Reports: as soon as practicable following receipt thereof, copies of all environmental audits and reports, if any, whether prepared by personnel of the Company or any of its Subsidiaries or by independent consultants, with respect to environmental matters at any Facility or which relate to any Environmental Liabilities which could result in a Material Adverse Effect of which the Company has a copy; (xvi) Regulatory Notices: promptly upon receipt, notification of any non-renewal, cancellation, termination, revocation, suspension, impairment or material modification of, or of any hearing, proceeding or investigation regarding, any license held by the Company or any of its Subsidiaries which is reasonably likely to have a Material Adverse Effect; (xvii) Material Contracts: promptly after (a) any Material Contract is terminated or expires or is renewed or is, amended or otherwise modified in any material manner, (b) any new Material Contract is entered into, or (c) any material notice or other communication is delivered by any party to any Material Contract pursuant thereto or in respect thereof, notice and a copy thereof and, in the case of any such renewal, amendment, other modification or new Material Contract, a description in reasonable detail of the material terms thereof; (xviii) Material Bids: promptly after (a) the Company places a bid which could result in a Material Contract and (b) the Company receives notice that it has failed to receive a bid which would have resulted in a Material Contract, a description in reasonable detail of the material terms of the bid; (xix) Merger/Sale Discussions: promptly upon knowledge of any discussions, negotiations or offers regarding the purchase of all or substantially all of the stock or assets of the Company, or merger of the Company with any other entity, notification regarding such discussions, negotiations or offers together with documentation describing them in reasonable detail; and (xx) Other Information: with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested by the Lender. 5.2 Corporate Existence. Except as permitted under subsection 6.6, the Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to the business of the Company and its Subsidiaries (on a consolidated basis). 5.3 Payment of Taxes and Claims; Tax Consolidation. A. The Company will, and will cause each of its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. B. The Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated, combined or other similar income tax return with any Person (other than Subsidiaries of the Company). 5.4 Maintenance of Properties; Insurance. The Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of the Company and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. The Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds and with respect to liability customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses. Each such policy of casualty insurance covering damage to or loss of property shall name the Lender as additional insured and as the loss payee thereunder for all losses, each such policy of liability insurance coverage shall name the Lender as an additional insured, and all such policies of insurance shall provide for at least thirty (30) days' prior written notice to the Lender of any modification or cancellation of such policy. 5.5 Inspection; Lender Meeting. The Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by the Lender to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances, strategy and accounts with its and their officers and independent public accountants. Without in any way limiting the foregoing, the Company will, upon the request of the Lender, participate in a meeting of the Lender once during each month to be held at the Company's corporate offices (or such other location as may be agreed to by the Company and the Lender) at such time as may be requested by the Lender. 5.6 Compliance with Laws, etc. The Company shall, and shall cause each of its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which could reasonably be expected to cause a Material Adverse Effect. 5.7 Environmental Disclosure and Inspection. A. The Company shall, and shall cause each of its Subsidiaries to, exercise all due diligence in order to comply and cause (i) all tenants under any leases or occupancy agreements affecting any portion of the Facilities and (ii) all other Persons on or occupying such property, to comply with all Environmental Laws, noncompliance with which could reasonably be expected to cause a Material Adverse Effect. B. The Company agrees that the Lender may, from time to time, retain, at the Company's expense, an independent professional consultant reasonably acceptable to the Company to review any report relating to Hazardous Materials prepared by or for the Company and to conduct its own investigation of any Facility currently owned, leased, operated or used by the Company or any of its Subsidiaries, if (x) an Default or Event of Default shall have occurred and be continuing, or (y) the Lender reasonably believes (1) that an occurrence relating to such Facility is likely to give rise to an Environmental Liability or (2) that a violation of an Environmental Law on or around such Facility has occurred or is likely to occur, which could, in either such case, result in a Material Adverse Effect. The Company agrees to use all reasonable efforts to obtain permission for the Lender's professional consultant to conduct its own investigation of any such Facility previously owned, leased, operated or used by the Company or any of its Subsidiaries. The Company shall use its reasonable efforts to obtain for the Lender and its agents, employees, consultants and contractors the right, upon reasonable notice to the Company, to enter into or on to the Facilities currently owned, leased, operated or used by the Company or any of its Subsidiaries to perform such tests on such property as are reasonably necessary to conduct such a review and/or investigation. Any such investigation of any Facility shall be conducted, unless otherwise agreed to by the Company and the Lender, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at any such Facility or to cause any damage or loss to any property at such Facility. The Company and the Lender hereby acknowledge and agree that any report of any investigation conducted at the request of the Lender pursuant to this subsection 5.7B will be obtained and shall be used by the Lender for the purposes of the Lender's internal credit decisions, to monitor and police the Loans and to protect the Lender's security interests, if any, created by the Loan Documents. The Lender agrees to deliver a copy of any such report to the Company with the understanding that the Company acknowledges and agrees that (i) it will indemnify and hold harmless the Lender from any costs, losses or liabilities relating to the Company's use of or reliance on such report, (ii) the Lender makes any representation or warranty with respect to such report, and (iii) by delivering such report to the Company, the Lender is not requiring or recommending the implementation of any suggestions or recommendations contained in such report. C. The Company shall promptly advise the Lender in writing and in reasonable detail of (i) any Release or threatened Release of any Hazardous Materials required to be reported to any federal, state, local or foreign governmental or regulatory agency under any applicable Environmental Laws, (ii) any and all communications (written or oral) with respect to any pending or threatened Environmental Claims that have a reasonable possibility of giving rise to a Material Adverse Effect or with respect to any Release or threatened Release of Hazardous Materials, (iii) any Cleanup performed by the Company or any other Person in response to (x) any Hazardous Materials on, under or about any Facility, the existence of which has a reasonable possibility of resulting in an Environmental Liability having a Material Adverse Effect, or (y) any Environmental Liabilities that could have a Material Adverse Effect, (iv) the Company's discovery of any occurrence or condition on any property that could cause any Facility or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws, and (v) any request for information from any governmental agency that fairly suggests such agency is investigating whether the Company or any of its Subsidiaries may be potentially responsible for a Release or threatened Release of Hazardous Materials. D. The Company shall promptly notify the Lender of (i) any proposed acquisition of stock, assets, or property by the Company or any of its Subsidiaries that could reasonably be expected to expose the Company or any of its Subsidiaries to, or result in, Environmental Liability that could have a Material Adverse Effect or that could reasonably be expected to have a material adverse effect on any Governmental Authorization then held by the Company or any of its Subsidiaries and (ii) any proposed action to be taken by the Company or any of its Subsidiaries to commence manufacturing, industrial or other similar operations that could reasonably be expected to subject the Company or any of its Subsidiaries to additional Environmental Laws, including, without limitation, Environmental Laws requiring additional environmental permits or licenses, that are materially different from the Environmental Laws applicable to the operations of the Company and its Subsidiaries as of the Closing Date. E. The Company shall, at its own expense, provide copies of such documents or information as the Lender may reasonably request in relation to any matters disclosed pursuant to this subsection 5.7. 5.8 The Company's Remedial Action Regarding Hazardous Materials. The Company shall promptly take, and shall cause each of its Subsidiaries promptly to take, any and all necessary remedial action in connection with the presence, handling, storage, use, disposal, transportation or Release or threatened Release of any Hazardous Materials on, under or affecting any Facility in order to comply with all applicable Environmental Laws and Governmental Authorizations unless the failure to so comply could not reasonably be expected to have a Material Adverse Effect. In the event the Company or any of its Subsidiaries undertakes any cleanup action with respect to the presence, Release or threatened Release of any Hazardous Materials on or affecting any Facility, the Company or such Subsidiary shall conduct and complete such cleanup action in material compliance with all applicable Environmental Laws, and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, the Company's or such Subsidiary's liability for such presence, handling, storage, use, disposal, transportation or Release or threatened Release of any Hazardous Materials is being contested in good faith by the Company or such Subsidiary. 5.9 Collateral Matters. The Company shall deliver at least thirty (30) Business Days' prior written notice to the Lender of any change in the location of the chief executive office or place of business of the Company or any of its Subsidiaries from the locations specified in Schedule 5.9. At least twenty (20) Business Days prior to any such change, the Company shall cause to be executed and delivered to the Lender any financing statements or other documents required by the Lender, all in form and substance satisfactory to the Lender. 5.10 Further Assurances. At any time or from time to time upon the request of the Lender, the Company will, at its expense, promptly execute, acknowledge and deliver such further documents and do such other acts and things as the Lender may reasonably request in order to effect fully the purposes of the Loan Documents and to provide for payment of the Obligations in accordance with the terms of this Agreement, the Notes and the other Loan Documents. 5.11 [RESERVED] 5.12 Use of Proceeds. The proceeds of all Loans shall be applied by the Company for working capital and general corporate purposes of the Company and its Subsidiaries. The proceeds of the Loans shall not be used, directly or indirectly, to purchase the stock or assets of any corporation, partnership or other entity. No portion of the proceeds of any Loans shall be used by the Company or any of its Subsidiaries in any manner which would be illegal under, or which would cause the invalidity or unenforceability (in each case in whole or in part) of any Loan Document under, any Applicable Law. Without limiting the generality of the preceding sentence, no portion of the proceeds of any borrowing under this Agreement shall be used by the Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 5.13 Cure of Defaults. Within five Business Days of the Closing Date, the Borrower shall have cured, or obtained waivers of, any defaults under all Material Contracts and shall promptly have provided Lender with evidence thereof. SECTION 6. NEGATIVE COVENANTS The Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations unless the Lender shall otherwise give prior written consent, the Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 Indebtedness. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness or preferred stock, except: (i) The Company may become and remain liable with respect to its Obligations; (ii) The Company may remain liable with respect to Indebtedness described in Schedule 6.1 annexed hereto; (iii) The Company and its Subsidiaries may become and remain liable with respect to Indebtedness under Capital Leases capitalized on the consolidated balance sheet of the Company and its Subsidiaries and other Indebtedness secured by Liens permitted under subsection 6.2A(ii); provided, that the aggregate amount of all Indebtedness outstanding under this clause (ii) at any time shall not exceed $4,000,000; (iv) The Company may become and remain liable with respect to Indebtedness to any of its Subsidiaries, any Subsidiary may become and remain liable with respect to Indebtedness to the Company; provided that all such intercompany Indebtedness owed by the Company to any of its respective Subsidiaries shall be unsecured and subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement that in any such case, are reasonably satisfactory to the Lender; (v) The Company and its Subsidiaries may become and remain liable with respect to the Indebtedness referred to in subsection 3.1Q in an aggregate principal amount not to exceed at any time outstanding $3,000,000; (vi) The Company and its Subsidiaries may become and remain liable with respect to Indebtedness subordinated to the amounts owed to the Lender under this Agreement pursuant to the terms of subordination attached hereto as Exhibit IX in an aggregate principal amount not to exceed at any time outstanding $5,000,000; and (vii) The Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed at any time outstanding $100,000. 6.2 Liens and Related Matters A. Prohibition on Liens. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or assets of any kind (including any document or instrument in respect of goods or accounts receivable) of the Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement, or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any state or under any similar recording or notice statute, except: (i) Permitted Encumbrances; (ii) Liens described in Schedule 6.2 annexed hereto; (iii) Liens in favor of the Lender granted pursuant to the Collateral Documents or granted in favor of the Lender pursuant to subsection 9.4 hereof; and (iv) Liens on assets of the Company and its Subsidiaries not otherwise permitted under this subsection 6.2A, securing obligations (other than Indebtedness) in an aggregate amount not to exceed $100,000 at any time outstanding. B. No Further Negative Pledges. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to a sale of assets, neither the Company nor any of its Subsidiaries shall enter into any agreement (other than the Loan Documents) prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. C. No Restrictions on Subsidiary Distributions to the Company or Other Subsidiaries. The Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance, limitation or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's Capital Stock owned by the Company or any other Subsidiary of the Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to the Company or any other Subsidiary of the Company, (iii) make loans or advances to the Company or any other Subsidiary of the Company, or (iv) transfer any of its property or assets to the Company or any other Subsidiary of the Company. 6.3 Investments. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any joint venture, except: (i) The Company may continue to own the Investments owned by it as of the Closing Date and make and own additional Investments in any Subsidiary; (ii) The Company and its Subsidiaries may make intercompany loans to the extent permitted by subsection 6.1(iv); (iii) The Company and its Subsidiaries may make extensions of trade credit in the ordinary course of business; (iv) The Company and its Subsidiaries may make and own Investments in Cash Equivalents; and (v) The Company and its Subsidiaries may make Capital Expenditures permitted by subsection 6.4. 6.4 Capital Expenditures. The Company and its Subsidiaries shall not make payments for Capital Expenditures in excess of an aggregate of $3,000,000 per fiscal quarter. To the extent that all or any portion of such amount is not used in any fiscal quarter, it may not be carried forward to the immediately following fiscal year to be used for Capital Expenditures. The Company and its Subsidiaries shall not make any Capital Expenditures that are not directly related to the business conducted on the Closing Date by the Company. 6.5 Restricted Junior Payments. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; provided that this subsection will not restrict the ability of the Company to make Restricted Junior Payments to the Lender or any of its affiliates; provided that, so long as no Default or Event of Default has occurred and is continuing or would result therefrom, the Company and its Subsidiaries may repurchase shares of, or options to purchase shares of, Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such common stock; provided, further, that the aggregate amount of such repurchases shall not exceed $100,000 in the aggregate. 6.6 Restriction on Fundamental Changes; Asset Sales. The Company shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of the Company or any of its Subsidiaries, create any new Subsidiaries or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or otherwise dispose of all or any substantial part of its business or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or a substantial part of the business or assets of, or Capital Stock or other evidence of beneficial ownership of, any Person or any unit or division thereof, except the Company and its Subsidiaries may acquire inventory, equipment and other assets in the ordinary course of business. 6.7 Sale or Discount of Receivables. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. 6.8 Transactions with Shareholders and Affiliates. The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity Securities of the Company or with any Affiliate of the Company or of any such holder, on terms that are less favorable to the Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; provided that the foregoing restriction shall not apply to (i) the Company and any wholly owned Subsidiary of the Company, and (ii) reasonable and customary fees paid to members of the boards of directors of the Company and its Subsidiaries. 6.9 Conduct of Business. The Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by the Company and its Subsidiaries on the Closing Date and (ii) such other lines of business as may be reasonably related thereto. 6.10 Amendments or Waivers of Certain Agreements. A. Amendments or Waivers of Certain Agreements and Documents. None of the Company nor any of its respective Subsidiaries shall agree to any amendment, restatement, supplement or other modification to, or waive any of its rights under, any (i) Organizational Certificate or Organizational Document, or (ii) other Material Contract, if such amendment, restatement, supplement, modification or waiver could be materially adverse to the Lender. B. Stock. Neither the Company nor any Subsidiary of the Company shall (i) amend, restate, supplement or otherwise modify its Certificate of Incorporation if the effect of such amendment, restatement, supplement or modification is to provide for the issuance of any preferred stock of the Company or of any of its Subsidiaries or the filing or amendment of any certificate of designation with respect thereto or (ii) issue any additional equity interests or securities which are convertible into equity interests; provided, however, this provision shall not preclude the operation of any employee stock plans consistent with past practice. 6.11 Fiscal Year. Neither the Company nor any of its Subsidiaries shall change its Fiscal Year-end from December 31. SECTION 7. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 7.1 Failure to Make Payments When Due. Failure by the Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise; or failure by the Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within two (2) days after the date due; or 7.2 Default in Other Agreements. Except, in each case, as disclosed in writing to the Lender or as otherwise disclosed in the Company's securities law filings (in each case on or prior to the Closing Date): (i) Failure of the Company or any of its Subsidiaries to pay when due (a) any principal of or interest on any Indebtedness in an individual principal amount of $100,000 or more or any items of Indebtedness with an aggregate principal amount of $250,000 or more or (b) any Contingent Obligation in an individual principal amount of $100,000 or more or any Contingent Obligations with an aggregate principal amount of $250,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by the Company or any of its Subsidiaries with respect to any other term of (a) any evidence of any Indebtedness in an individual principal amount of $100,000 or more or any items of Indebtedness with an aggregate principal amount of $250,000 or more or any Contingent Obligation in an individual principal amount of $100,000 or more or any Contingent Obligations with an aggregate principal amount of $250,000 or more or (b) any loan agreement, mortgage, indenture or other agreement relating to such Indebtedness or Contingent Obligation(s), or the occurrence of any other event, condition or circumstance in respect of any such Indebtedness or Contingent Obligations if in any case under this clause (ii) the effect of such breach or default or event, condition or circumstance is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable (or redeemable) prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 7.3 Breach of Certain Covenants. Failure of the Company or any of its Subsidiaries to perform or comply with any term or condition contained in subsection 2.4, 2.5, 5.1 or 5.2 or Section 6 of this Agreement; or 7.4 Breach of Warranty. Any representation, warranty, certification or other statement made by the Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by the Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 7.5 Other Defaults Under Loan Documents. The Company or any of its Subsidiaries shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 7, and such default shall not have been remedied or waived within thirty (30) days after the occurrence of such default; or 7.6 Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against the Company or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over the Company or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of the Company or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of the Company or any of its Subsidiaries, and any such event described in this clause (ii) shall continue for sixty (60) days unless dismissed, bonded or discharged; or 7.7 Voluntary Bankruptcy; Appointment of Receiver, etc. (i) The Company or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or the Company or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) the Company or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of the Company or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or 7.8 Judgments and Attachments. Any money judgment, writ or warrant of attachment or similar process involving (i) in any individual case an amount in excess of $250,000 or (ii) in the aggregate at any time an amount in excess of $500,000 (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance the Company has acknowledged coverage) shall be entered or filed against the Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days (or in any event later than five days prior to the date of any proposed sale thereunder); or 7.9 Dissolution. Any order, judgment or decree shall be entered against the Company or any of its Subsidiaries decreeing the dissolution or split up of the Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days; or 7.10 Employee Benefit Plans. There shall occur one or more ERISA Events which individually or in the aggregate results in or could reasonably be expected to result in a Material Adverse Effect; or there shall exist an Unfunded Current Liability, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which there is no Unfunded Current Liability), which will have or could reasonably be expected to result in a Material Adverse Effect; or 7.11 Change in Control. (a) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors; or (b) any Person, including a "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) which includes such Person, shall purchase or otherwise acquire, directly or indirectly, beneficial ownership of Securities of the Company and, as a result of such purchase or acquisition, any Person (together with its associates and Affiliates), shall directly or indirectly beneficially own in the aggregate Securities representing more than 20% of the combined voting power of the Company's voting Securities; or 7.12 Failure of Security. Any Collateral Document shall, at any time, cease to be in full force and effect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or the validity or enforceability thereof shall be contested in writing by the Company or any of its Subsidiaries, or the Lender shall not have or shall cease to have a valid security interest in any Collateral purported to be covered thereby, perfected and with the priority required by the relevant Collateral Document, for any reason other than the failure of the Lender to take any action within its control, subject only to Liens permitted under the applicable Collateral Documents; THEN (i) upon the occurrence of any Event of Default described in subsection 7.6 or 7.7 each of (a) the unpaid principal amount of and accrued interest on the Loans, and (b) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by the Company, and the obligation of the Lender to make any Loan shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, the Lender may, by written notice to the Company, declare all or any portion of the amounts described in clauses (a) and (b) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of the Lender to make any Loan shall thereupon terminate. SECTION 8. [RESERVED] SECTION 9. MISCELLANEOUS 9.1 [RESERVED] 9.2 Expenses. Whether or not the transactions contemplated hereby shall be consummated, the Company agrees to pay promptly (i) all the actual and reasonable costs and out of pocket expenses of the Lender in connection with the preparation of the Loan Documents; (ii) all the actual and reasonable costs of furnishing all opinions by counsel for the Company (including without limitation any opinions requested by the Lender as to any legal matters arising hereunder) and of the Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents including, without limitation, with respect to confirming compliance with environmental and insurance requirements; (iii) the reasonable fees, expenses and disbursements of counsel to the Lender in connection with the negotiation, preparation, execution and administration of the Loan Documents and the Loans and any consents, amendments, waivers or other modifications hereto or thereto and any other documents or matters requested by the Company; (iv) all other actual and reasonable costs and expenses incurred by the Lender in connection with the negotiation, preparation and execution of the Loan Documents and the transactions contemplated hereby and thereby; and (v) after the occurrence of a Default or Event of Default, all the respective costs and expenses, including reasonable attorneys' fees and costs of settlement, incurred by the Lender in enforcing any Obligations of or in collecting any payments due from the Company hereunder or under the other Loan Documents by reason of such Default or Event of Default or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings. 9.3 Indemnity. In addition to the payment of expenses pursuant to subsection 9.2, whether or not the transactions contemplated hereby shall be consummated, the Company agrees to defend, indemnify, pay and hold harmless the Lender, and the officers, directors, employees, agents, attorneys and affiliates of the Lender (collectively called the "Indemnitees") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including without limitation securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including without limitation the Lender's agreement to make the Loans hereunder or the use or intended use of the proceeds of any of the Loans) or any Environmental Liabilities that arise from or relate to the management, use, control, ownership, occupancy or operation of any Facility or assets of the Company or any of its Subsidiaries (including without limitation, all on-site and off-site activities involving Hazardous Materials), or the Release or threatened Release of any Hazardous Materials (or allegations of the same) on or from any of the Facilities or on or from any other property where Hazardous Materials are or were (or are or were alleged to be) Released or threatened to be Released in connection with any of the Facilities or the business of any of the Company or any of its Subsidiaries, or any predecessor in interest to the Company or any of its Subsidiaries (collectively called the "Indemnified Liabilities"); provided that the Company shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent, and only to the extent, of any particular liability, obligation, loss, damage, penalty, claim, cost, expense or disbursement that arose from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction. To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. 9.4 Set-Off; Security Interest in Deposit Accounts. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized by the Company at any time or from time to time, without notice to the Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by the Lender to or for the credit or the account of the Company against and on account of the obligations and liabilities of the Company to the Lender under this Agreement, the Notes and participations therein, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement, the Notes and participations therein or any other Loan Document, irrespective of whether or not (i) the Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any other amounts due hereunder shall have become due and payable pursuant to Section 7 and although said obligations and liabilities, or any of them, may be contingent or unmatured. 9.5 [RESERVED] 9.6 Amendments and Waivers. No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, or consent to any departure by the Company or any of its subsidiaries therefrom, shall in any event be effective without the written consent of the Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 9.6 shall be binding upon the Lender and the Company. 9.7 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another such covenant shall not avoid the occurrence of a Default or Event of Default if such action is taken or condition exists. 9.8 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telecopy or telex, or four Business Days after depositing it in the United States mail, registered or certified, with postage prepaid and properly addressed; provided that notices to the Lender shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth on Schedule 9.8 attached hereto, or such other address as shall be designated by such party in a written notice delivered to the Lender and the Company. 9.9 Survival of Representations, Warranties and Agreements. A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of the Company set forth in subsections 2.6, 2.7, 9.2, 9.3 and 9.4 and the agreements of the Lender set forth in subsection 9.4 shall survive the payment of the Loans and the termination of this Agreement. 9.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of the Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 9.11 Marshalling; Payments Set Aside. The Lender shall not be under any obligation to marshal any assets in favor of the Company or any other party or against or in payment of any or all of the Obligations. To the extent that the Company makes a payment or payments to the Lender, or the Lender enforces any security interests or exercise its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 9.12 Severability. In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 9.13 [RESERVED] 9.14 Maximum Amount. A. It is the intention of the Company and the Lender to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements between the Loan Parties and their respective Subsidiaries and the Lender, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid in the aggregate to the Lender as interest (whether or not designated as interest, and including any amount otherwise designated but deemed to constitute interest by a court of competent jurisdiction) hereunder or under the other Loan Documents or in any other agreement given to secure the indebtedness or obligations of the Company to the Lender, or in any other document evidencing, securing or pertaining to the indebtedness evidenced hereby, exceed the maximum amount permissible under applicable usury or such other laws (the "Maximum Amount"). If under any circumstances whatsoever fulfillment of any provision hereof, or any of the other Loan Documents, at the time performance of such provision shall be due, shall involve exceeding the Maximum Amount, then, ipso facto, the obligation to be fulfilled shall be reduced to the Maximum Amount. For the purposes of calculating the actual amount of interest paid and/or payable hereunder in respect of laws pertaining to usury or such other laws, all sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of the Company evidenced hereby, outstanding from time to time shall, to the extent permitted by Applicable Law, be amortized, pro-rated, allocated and spread from the date of disbursement of the proceeds of the Notes until payment in full of all of such indebtedness, so that the actual rate of interest on account of such indebtedness is uniform through the term hereof. The terms and provisions of this subsection shall control and supersede every other provision of all agreements between the Company or any endorser of the Notes and the Lender. B. If under any circumstances the Lender shall ever receive an amount which would exceed the Maximum Amount, such amount shall be deemed a payment in reduction of the principal amount of the Loans and shall be treated as a voluntary prepayment under subsection 2.4B(i) and shall be so applied in accordance with subsection 2.4 hereof or if such excessive interest exceeds the unpaid balance of the Loans and any other indebtedness of the Company in favor of such Lender, the excess shall be deemed to have been a payment made by mistake and shall be refunded to the Company. 9.15 Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 9.16 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 9.17 Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of the Lender. The Company's rights or obligations hereunder nor any interest therein may not be assigned or delegated by the Company without the prior written consent of the Lender. 9.18 Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY AND THE LENDER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY DESIGNATES, APPOINTS AND EMPOWERS CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT 1633 BROADWAY, NEW YORK, NEW YORK 10019 AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, ACCEPT AND ACKNOWLEDGE FOR AND ON ITS BEHALF, AND IN RESPECT OF ITS PROPERTY, SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING. IF FOR ANY REASON SUCH DESIGNEE, APPOINTEE AND AGENT SHALL CEASE TO BE AVAILABLE TO ACT AS SUCH, THE COMPANY AGREES TO DESIGNATE A NEW DESIGNEE, APPOINTEE AND AGENT IN NEW YORK CITY ON THE TERMS AND FOR THE PURPOSES OF THIS PROVISION SATISFACTORY TO THE LENDER UNDER THIS AGREEMENT. THE COMPANY HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK JURISDICTION OVER THE COMPANY, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH COURT LACKS JURISDICTION OVER THE COMPANY. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE COMPANY, AT ITS ADDRESS FOR NOTICES PURSUANT TO SECTION 9.8. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN THE COURTS REFERRED TO ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 9.19 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP OR OTHER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 9.19 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 9.20 [RESERVED] 9.21 Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: SMARTALK TELESERVICES, INC. By:____________________________ Name:__________________________ Title:_________________________ LENDER: FLETCHER INTERNATIONAL LIMITED as Lender By:____________________________ Name:__________________________ Title:_________________________ By:____________________________ Name:__________________________ Title:_________________________ EX-10.2 3 PLEDGE AND SECURITY AGREEMENT PLEDGE AND SECURITY AGREEMENT This PLEDGE AND SECURITY AGREEMENT, dated as of December 4, 1998, is made by SmarTalk Teleservices, Inc. ("SmarTalk") and the Subsidiaries listed on the signature page hereto, as Borrower (the "Borrower"), in favor of Fletcher International Limited, as Secured Party (the "Secured Party"). RECITALS: WHEREAS, the parties hereto have entered into a Credit Agreement, dated as of December 4, 1998, between SmarTalk and the Secured Party (said Agreement, as it may hereafter be amended or otherwise modified from time to time, the "Credit Agreement"); WHEREAS, pursuant to the Credit Agreement, the Secured Party has agreed to make extensions of credit to SmarTalk upon the terms and subject to the conditions set forth therein; WHEREAS, it is a condition precedent to the obligations of the Secured Party to extend credit to SmarTalk under the Credit Agreement that the obligations of SmarTalk thereunder be secured as provided herein; NOW, THEREFORE, in consideration of the premises and in order to induce the Secured Party to enter into the Credit Agreement and to make its extensions of credit to SmarTalk thereunder, and in consideration of other Secured Obligations hereinafter incurred, the Borrower hereby agrees with the Secured Party, as follows: ARTICLE II DEFINITIONS 2.2 Definitions. Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement. The following terms shall have the following meanings: "Account Debtor" shall mean the person who is obligated on a Receivable. "Accounts" shall mean "accounts" as such term is defined in Section 9-106 of the UCC. "Agreement" shall mean this Pledge and Security Agreement, as the same may from time to time be amended, supplemented or otherwise modified. "Capital Stock" shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "Chattel Paper" shall mean "chattel paper" as such term is defined in Section 9-105(b) of the UCC. "Collateral" shall have the meaning assigned to it in Section 2 hereof. "Collateral Account" shall mean the account (which may be a securities account) maintained pursuant to this Agreement by the Secured Party entitled "[Wells Fargo Account # 4091382788 ]," and all funds, investment property and instruments or other items from time to time credited to such account and all interest thereon. "Collateral Records" shall mean books, records, computer software, computer printouts, customer lists, blueprints, technical specifications, manuals, and similar items which relate to any Collateral other than such items obtained under license or franchise agreements which prohibit assignment or disclosure of such items. "Contracts" shall mean all contracts to which any Borrower now is, or hereafter will be, bound, or a party, beneficiary or assignee (including without limitation Copyright Licenses, Patent Licenses, Trademark Licenses and Trade Secret Licenses), and all other instruments, agreements and documents executed and delivered with respect to such contracts, and all revenues, rentals, Proceeds and other sums of money due and to become due from any of the foregoing, as the same may be modified, supplemented or amended from time to time in accordance with their terms. "Copyright Licenses" shall mean all of any Borrower's right, title, and interest in and to any and all agreements providing for the granting of any right in or to Copyrights (whether the Borrower is licensee or licensor thereunder) including, without limitation, each agreement referred to in Item B of Schedule IV. "Copyrights" shall mean all of any Borrower's right, title, and interest in and to all United States and foreign copyrights, all mask works fixed in semi-conductor chip products (as defined under 17 U.S.C. 901 of the U.S. Copyright Act), whether registered or unregistered, now or hereafter in force throughout the world, all registrations and applications therefor including, without limitation, the registrations and applications referred to in Item A of Schedule IV, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof, the right to sue for past infringements of any of the foregoing, and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit. "Deposit Accounts" shall mean the Collateral Account and any deposit account, including without limitation, "deposit accounts" as such term is defined in Section 9-105(e) of the UCC and any other deposit or securities account, together with any funds, instruments or other items credited to any such account from time to time, and all interest thereon. "Documents" shall mean "documents" as such term is defined in Section 9-105(f) of the UCC. "Equipment" shall mean "equipment" as such term is defined in Section 9-109(2) of the UCC, including, without limitation, machinery, manufacturing equipment, data processing equipment, computers, office equipment, furniture, appliances, tools, furnishings, fixtures, vehicles, motor vehicles, and any manuals, instructions, blueprints, computer software and similar items which relate to the above, and any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all improvements thereon and all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Event of Default" shall have the meaning assigned thereto in the Credit Agreement. "Fixtures" shall mean "fixtures" as such term is defined in Section 9-313 of the UCC. "General Intangibles" shall mean "general intangibles" as such term is defined in Section 9-106 of the UCC, including, without limitation, rights to the payment of money (other than Receivables), Trademarks, Copyrights, Patents and Contracts, licenses including, without limitation, Trademark Licenses, Copyright Licenses, Patent Licenses and Trade Secret Licenses and franchises, partnership interests, joint venture interests, federal income tax refunds, computer software, databases, inventions, designs, Trade Secrets, goodwill, tradenames, fictitious business names, business names, company names, business identifiers, trade styles and service marks (whether or not registered), proprietary rights, customer lists, supplier and customer contracts, sale orders, correspondence, advertising materials, payments due in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property, reversionary interests in pension and profit-sharing plans and reversionary, beneficial and residual interests in trusts, credits with and other claims against any Person, together with any collateral for any of the foregoing and the rights under any security agreement granting a security interest in such collateral. "Instruments" shall mean "instruments" as such term is defined in Section 9-105(1)(i) of the UCC. "Insurance Policies" shall mean insurance policies, including without limitation the following insurance policies: attached hereto on Schedule VII. "Intellectual Property" shall mean, collectively, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks, the Trademark Licenses, the Trade Secrets and the Trade Secret Licenses. "Interest Rate Agreements" shall mean interest rate or currency protection or hedging arrangements, including without limitation, caps, collars, floors, forwards and any other similar or dissimilar interest rate or currency exchange agreements or other interest rate or currency hedging arrangements (including the Hedge Agreements). "Inventory" shall mean "inventory" as such term is defined in ss. 9-109(4) of the UCC, including without limitation, all goods (whether such goods are in the possession of any Borrower or of a bailee or other Person for sale, lease, storage, transit, processing, use or otherwise and whether consisting of whole goods, spare parts, components, supplies, materials or consigned or returned or repossessed goods), including without limitation, all such goods whether raw, in process or finished, all materials usable in processing the same and all documents of title covering any inventory, including but not limited to work in process, materials used or consumed in Borrower's business, now owned or hereafter acquired or manufactured by any Borrower and held for sale in the ordinary course of its business; all present and future substitutions therefor, parts and accessories thereof and all additions thereto; and all proceeds thereof and products of such inventory in any form whatsoever. "Money" shall mean "money" as such term is defined in Section 1-201(24) of the UCC. "Motor Vehicles" shall mean motor vehicles, tractors, trailers and other like property, if title thereto is governed by a certificate of title ownership. "Patent Licenses" means all of any Borrower's right, title, and interest in and to any and all agreements providing for the granting of any right in or to Patents (whether the Borrower is licensee or licensor thereunder) including, without limitation, each agreement referred to in Item D of Schedule IV. "Patents" means all of any Borrower's right, title, and interest in and to all United States and foreign patents and applications for letters patent throughout the world, including, but not limited to each patent and patent application referred to in Item C of Schedule IV, all reissues, divisions, continuations, continuations-in-part, and reexaminations of any of the foregoing, all rights corresponding thereto throughout the world, and all proceeds of the foregoing including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit and the right to sue for past infringements of any of the foregoing. "Person" shall mean and include any individual, partnership, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or agency, department or instrumentality thereof. "Pledged Notes" shall mean any promissory notes listed on Schedule I hereto, all intercompany notes at any time issued to any Borrower and all other promissory notes issued or held by any Borrower (other than promissory notes to be issued in connection with extensions of trade credit by any Borrower in the ordinary course of business). "Pledged Stock" shall mean any shares of Capital Stock listed on Schedule I hereto, together with any other shares, stock certificates, options or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Borrower while this Agreement is in effect; provided, only the outstanding capital stock of a foreign controlled corporation possessing up to but not exceeding 65% of the total voting power of all classes of capital stock of such foreign controlled foreign corporation entitled to vote shall be deemed to be pledged hereunder. "Proceeds" shall mean "proceeds" as such term is defined in Section 9-306(1) of the UCC. "Receivables" shall mean all rights to payment for goods sold or leased or services rendered, whether or not earned by performance and all rights in respect of the Account Debtor, including without limitation, all such rights in which the Borrower has any right, title or interest by reason of the purchase thereof by the Borrower, and including without limitation all such rights constituting or evidenced by any Account, Chattel Paper, Instrument, General Intangible, note, contract, invoice, purchase order, draft, acceptance, intercompany account, security agreement, or other evidence of indebtedness or security, together with (a) any collateral assigned, hypothecated or held to secure any of the foregoing and the rights under any security agreement granting a security interest in such collateral, (b) all goods, the sale of which gave rise to any of the foregoing, including, without limitation, all rights in any returned or repossessed goods and unpaid seller's rights, (c) all guarantees, endorsements and indemnifications on, or of, any of the foregoing, and (d) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith. "Receivables Records" shall mean (a) all original copies of all documents, instruments or other writings evidencing the Receivables, (b) all books, correspondence, credit or other files, records, ledger sheets or cards, invoices, and other papers relating to Receivables, including without limitation all tapes, cards, computer tapes, computer discs, computer runs, record keeping systems and other papers and documents relating to the Receivables, whether in the possession or under the control of the Borrower or any computer bureau or agent from time to time acting for the Borrower or otherwise, (c) all evidences of the filing of financing statements and the registration of other instruments in connection therewith and amendments, supplements or other modifications thereto, notices to other creditors or secured parties, and certificates, acknowledgments, or other writings, including, without limitation, lien search reports, from filing or other registration officers, (d) all credit information, reports and memoranda relating thereto, and (e) all other written or non-written forms of information related in any way to the foregoing or any Receivable. "Secured Obligations" shall mean (a) all obligations, liabilities (including, without limitation, contingent obligations) and indebtedness of every nature of the Borrower, now existing or hereafter incurred, arising under or in connection with the Credit Agreement, any Note, any other Credit Document or this Agreement; (b) all obligations, liabilities (including, without limitation, contingent obligations) and indebtedness of every nature of the Borrower, now existing or hereafter incurred, arising under or in connection with Hedge Agreements entered into in connection with the Credit Agreement and prior to the termination thereof; and (c) all other obligations, liabilities of every kind, nature or description, direct or indirect, primary or secondary, joint or several, absolute or contingent of the Borrower to the Secured Party whether due or to become due and whether now existing or hereafter incurred and whether similar or dissimilar to the obligations described in clauses (a) and (b) hereof, and including, without limitation, all consumer or commercial transactions, all purchase money and nonpurchase money transactions, all overdrafts, all letters of credit, all lines of credit and all other extensions of credit, regardless of how they may be evidenced. "Secured Party" shall mean Fletcher International Limited. "Security Collateral" shall mean: (i) any Pledged Stock and the certificates representing the Pledged Stock, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Stock; (ii) any Pledged Notes and the instruments evidencing the Pledged Notes, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Notes; (iii) all additional shares of stock (of any issuer of the Pledged Stock) from time to time acquired by any Borrower in any manner, and the certificates representing such additional shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares; and (iv) all additional indebtedness from time to time owed to any Borrower by any obligor of the Pledged Notes and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness. "Trademark Licenses" shall mean all of the Borrower's right, title and interest in, and to any and all agreements providing for the granting of any right in or to Trademarks (whether such Borrower is licensee or licensor thereunder) including, without limitation, any agreement referred to in Item F of Schedule IV. "Trademarks" shall mean all of the Borrower's right, title and interest in, and to all United States and foreign trademarks, trade names, corporate names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source or business identifiers, designs, internet domain names and general intangibles of a like nature, all registrations and applications for any of the foregoing including, but not limited to the registrations and applications referred to in Item E of Schedule IV, all extensions or renewals of any of the foregoing; rights of publicity and privacy relating to the use of names, likenesses, signatures and biographical information of real persons; all of the goodwill of the business connected with the use of and symbolized by the foregoing; the right to sue for past infringement or dilution of any of the foregoing or for any injury to goodwill, and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit. "Trade Secret Licenses" shall mean all of the Borrower's right, title and interest in and to any and all payments providing for the granting of any right in or to Trade Secrets (whether the Borrower is licensee or licensor thereunder) including, without limitation, any agreement referred to in Item G of Schedule IV. "Trade Secrets" shall mean all of the Borrower's right, title and interest in and to trade secrets and all other confidential or proprietary information and know-how now or hereafter owned or used in, or contemplated at any time for use in, the business of the Borrower (all of the foregoing being collectively called a "Trade Secret"), whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, the right to sue for past infringement of any Trade Secret and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit. "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the State of New York. ARTICLE IV GRANT OF SECURITY INTERESTS 4.2 As security for the prompt and complete payment and performance in full of all the Secured Obligations when due (whether at stated maturity, by acceleration or otherwise), the Borrower hereby grants to the Secured Party a security interest in and lien on all of such Borrower's right, title and interest in, to and under the following, in each case, whether now owned or existing or hereafter acquired or arising and wherever located (all of which being hereinafter collectively called the "Collateral"): (1) all Accounts; (2) all Chattel Paper; (3) all Contracts; (4) the Collateral Account; (5) all Collateral Records; (6) all Deposit Accounts; (7) all Documents; (8) all Equipment; (9) all Fixtures; (10) all General Intangibles; (11) all Intellectual Property; (12) all Interest Rate Agreements; (13) all Instruments; (14) all Insurance Policies; (15) all Inventory; (16) all Money; (17) all Motor Vehicles; (18) all Receivables; (19) all Receivables Records; (20) all other tangible and intangible personal property; (21) all of the Security Collateral; and (22) all accessions and additions to any or all of the foregoing, all substitutions and replacements for any or all of the foregoing and all Proceeds or products of any or all of the foregoing. ARTICLE VI REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Secured Party, which representations and warranties shall survive execution and delivery of this Agreement, as follows: 6.2 Credit Agreement Representations and Warranties. Each of the representations and warranties made by and/or in respect of such Borrower in Section 4 of the Credit Agreement is true and correct as of the date hereof. 6.4 No Other Liens. (a) Except for the Lien granted to the Secured Party hereunder, the Borrower owns and, as to all Collateral whether now existing or hereafter acquired will continue to own, each item of the Collateral pledged by it free and clear of any and all Liens, rights or claims of all other Persons other than Permitted Liens, and the Borrower shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Secured Party. (b) No effective financing statement or other evidence of lien covering or purporting to cover any of the Collateral is on file in any public office other than (i) financing statements filed or to be filed in connection with the security interests granted to the Secured Party hereunder, (ii) financing statements for which proper termination statements have been delivered to the Secured Party for filing and (iii) financing statements filed in connection with Permitted Liens. The Borrower has not consented to any other Person other than the Secured Party having "control" (within the meaning of Section 8-106 of the UCC) over the Collateral Account. 6.6 Perfected Liens; Priority. (a) The security interests in the Collateral granted to the Secured Party hereunder constitute valid security interests in the Collateral. (b) (i) Upon filing financing statements naming the Borrower as "debtor" and the Secured Party as "secured party" and describing the Collateral in the filing offices set forth on Schedule V hereto and (ii) to the extent not subject to Article 9 of the UCC, (x) in the case of Intellectual Property, upon the recordation of the security interests granted hereunder in Patents, Trademarks and Copyrights in the applicable patent, trademark and copyright registries or (y) in the case of the Security Collateral, upon the delivery of the Security Collateral and Investments to the Secured Party, the security interests in the Collateral granted to the Secured Party hereunder will constitute perfected security interests therein superior and prior to all Liens (other than Permitted Liens), rights or claims of all other Persons. 6.8 Security Collateral. (a) The Pledged Stock has been duly authorized and validly issued and is fully paid and non-assessable. The Pledged Notes have been duly authorized, authenticated or issued and delivered, and is the legal, valid and binding obligation of the issuers thereof, and is not in default. (b) The Pledged Stock constitutes the percentage of the issued and outstanding shares of stock of the respective issuers thereof indicated on Schedule I. The Pledged Notes are outstanding in the principal amount indicated on Schedule I. 6.10 Chief Executive Office; Records. The chief executive office of the Borrower is located at the location specified on Schedule III. The Receivables Records and all Contracts and Collateral Records are located at the locations identified on Schedule III as such or at the chief executive office of the Borrower. All Receivables and Contracts are maintained at and controlled and directed (including, without limitation, for general accounting purposes) from the chief executive office of the Borrower or the offices identified on Schedule III as such. 6.12 Location of Inventory and Equipment. All Inventory and Equipment now or from time to time included in the Collateral is kept only at the locations listed on Schedule IV. None of such Inventory or Equipment is in the possession of an issuer of a negotiable document (as defined in UCC Section 7-104) therefor or otherwise in the possession of a bailee. 6.14 Receivables. (a) Each Receivable (i) is and will be the legal, valid and binding obligation of the Account Debtor in respect thereof, representing an unsatisfied obligation of such Account Debtor, (ii) is and will be enforceable in accordance with its terms, (iii) is not and will not be subject to any setoffs, defenses, taxes or counterclaims (except (x) with respect to refunds, returns and allowances in the ordinary course of business with respect to damaged merchandise and (y) to the extent that such Receivable may not yet have been earned by performance) and (iv) is and will be in compliance with all applicable laws, whether federal, state, local or foreign. (b) None of the Account Debtors in respect of any Receivable is the United States Government or an instrumentality thereof. (c) No Receivables which are evidenced by Chattel Paper require the consent of the Account Debtor in respect thereof in connection with assignment hereunder and no other receivable purports to prohibit assignment or require the consent of the Account Debtor thereunder in connection with assignment. (d) No Receivables are evidenced by any Instrument or Chattel Paper which has not been delivered to the Secured Party. (e) The Borrower has delivered to the Secured Party a complete and correct copy of each form of document under which a Receivable may arise, including without limitation, a form of each invoice, security agreement, contract, master contract, promissory note, order form or similar document used by the Borrower in the ordinary course of its business. The representations and warranties contained in this Section 3.7 shall be deemed to be repeated by the Borrower as of the time when each Receivable pledged by it arises. 6.16 Contracts. (a) Each Contract (i) is and will be the legal, valid and binding obligation of each of the parties thereto, (ii) is and will be enforceable against each party thereto in accordance with its terms, (iii) is and will be in full force and effect and is not subject to any setoffs, defenses, taxes, counterclaims or other claims, nor have any of the foregoing been asserted or alleged as to any Contract and (iv) is and will be in compliance with all applicable laws, whether federal, state, local or foreign. (b) No consent or authorization or filing with or other act by or in respect of any governmental authority is required in connection with the execution, delivery, performance, validity or enforceability of any Contract by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any Contract to any material adverse limitation, either specific or general in nature. (c) Neither the Borrower nor any other party to any Contract is in default or likely to become in default in the performance or observance of any of the terms thereof. (d) The Borrower has fully performed all of its obligations under each Contract to which it is a party. (e) The Borrower has delivered to the Secured Party a complete and correct copy of each Contract, including all amendments, supplements and other modifications thereto. (f) No payments due the Borrower under any Contract are evidenced by any Instrument or Chattel Paper which has not been delivered to the Secured Party. (g) No party to any Contract is the United States government or an instrumentality thereof. (h) Except as set forth in Schedule VI, no Contract prohibits assignment or requires or purports to require consent of or notice to any Person in connection with assignment hereunder. 6.18 Farm Products. None of the Collateral constitutes, or is the proceeds of, Farm Products (as defined in the UCC). 6.20 Fair Labor Standards Act. Any goods now or hereafter produced by the Borrower included in the Collateral have been and will be produced in compliance with the requirements of the Fair Labor Standards Act, as amended. 6.22 Intellectual Property Collateral. Except as disclosed in Item H of Schedule IV: (a) all Intellectual Property is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and the Borrower has performed all acts and has paid all renewal, maintenance and other fees and taxes required to maintain each and every registration and application of Intellectual Property Collateral in full force and effect; (b) all Intellectual Property is valid and enforceable; no holding, decision or judgment has been rendered in any action or proceeding before any court or administrative authority challenging the validity or enforceability of the Borrower's right to register, own or use any Intellectual Property and no such action or proceeding is pending or, to the best of the Borrower's knowledge, threatened; (c) all registrations and applications for Copyrights, Patents and Trademarks are standing in the name of the Borrower and none of the Trademarks, Patents, Copyrights or Trade Secret Collateral has been licensed by the Borrower to any affiliate or third party, except as disclosed in Items B, D, F or G of Schedule IV; (d) the Borrower has been using appropriate statutory notice of registration in connection with its use of registered Trademarks, proper marking practices in connection with the use of Patents and appropriate notice of copyright in connection with the publication of Copyrighted works which are material to the business of the Borrower; (e) the Borrower uses adequate standards of quality in the manufacture, distribution and sale of all products sold and in the provision of all services rendered under or in connection with all Trademark Collateral in order to protect the value of such Trademarks and has taken all action necessary to insure that all licensees of any portion of the Trademark Collateral owned by the Borrower has been used with such adequate standards of quality. (f) Schedule IV sets forth a true and accurate list of (i) all United States, state and foreign registrations of and applications for Patents, Trademarks and Copyrights owned by the Borrower and (ii) all Patent Licenses, Trademark Licenses and Copyright Licenses material to the business of the Borrower; (g) the Borrower is the sole and exclusive owner of the entire right, title and interest in and to all Intellectual Property on Schedule IV, and owns or has the valid right to use all other Intellectual Property used in or necessary to conduct its business free and clear of all Liens, claims and encumbrances or licenses, except for Permitted Liens and the licenses set forth on Schedule IV items B, D, F and G; (h) the conduct of the Borrower's business does not infringe upon any trademark, patent, copyright, trade secret or similar intellectual property right owned or controlled by a third party; and no claim has been made that the use of any Intellectual Property owned or used by Borrower (or any of its respective licensees) violates the asserted rights of any third party; (i) to the best of the Borrower's knowledge, no third party is infringing in any material respect upon any Intellectual Property owned or used by Borrower or any of its respective licensees; (j) no settlement or consents, covenants not to sue, non-assertion assurances or releases have been entered into by Borrower or to which the Borrower is bound that adversely affect the Borrower's rights to own or use any Intellectual Property; and (k) the Borrower has not made a previous assignment, sale, transfer or agreement constituting a present or future assignment sale or transfer of any Intellectual Property that has not been terminated or released. There is no effective financing statement or other document or instrument now executed or on file or recorded in any public office, granting a security interest in or otherwise encumbering any part of the Intellectual Property, other than in favor of the Secured Party. ARTICLE VIII COVENANTS The Borrower covenants and agrees with the Secured Party that from and after the date of this Agreement: 8.2 Further Assurances. At any time and from time to time, upon the request of the Secured Party and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver any and all such further instruments, endorsements, powers of attorney and other documents, make such filings, give such notices and take such further action as the Secured Party may reasonably deem desirable in obtaining the full benefits of this Agreement and of the rights, remedies and powers herein granted, including, without limitation, the following: (a) the filing of any financing statements, in a form acceptable to the Secured Party under the Uniform Commercial Code in effect in any jurisdiction with respect to the liens and security interests granted hereby. The Borrower also hereby authorizes the Secured Party to file any such financing statement without the signature of the Borrower to the extent permitted by applicable law. A photocopy or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in lieu of the original to the extent permitted by applicable law. The Borrower will pay or reimburse the Secured Party for all filing fees and related expenses; (b) the recordation of appropriate evidence of the liens and security interests granted hereunder in the Intellectual Property with any intellectual property registry in which said Intellectual Property is registered or in which an application for registration is pending including, without limitation, the United States Patent and Trademark Office, the United States Copyright Office, the various Secretaries of State and the foreign counterparts on any of the foregoing; (c) will make or reimburse the Secured Party for making all searches deemed necessary by the Secured Party to establish and determine the priority of the security interests of the Secured Party or to determine the presence or priority of other secured parties; (d) upon request of the Secured Party, cause the Secured Party to be listed as the lienholder on the certificate of title or ownership covering any Collateral covered by such a certificate of title or ownership and to deliver evidence thereof to the Secured Party promptly; and (e) furnish to the Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request, all in reasonable detail and in a form satisfactory to the Secured Party. 8.4 Delivery of Security Collateral. All certificates or instruments representing or evidencing the Security Collateral shall be delivered to and held by or on behalf of the Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Secured Party. The Secured Party shall have the right, at any time in its discretion and without notice to the Borrower, to transfer to or to register in the name of the Secured Party any or all of the Security Collateral, subject only to the revocable rights specified in Section 6.1(b). For the better perfection of the Secured Party's rights in and to the Security Collateral, the Borrower shall forthwith, upon the pledge of any Security Collateral hereunder, cause such Security Collateral to be registered in the name of such nominee or nominees as the Secured Party shall direct, subject only to the revocable rights specified in Section 6.1(b). In addition, the Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Security Collateral for certificates or instruments of smaller or larger denominations. 8.6 Change of Chief Executive Office. The Borrower will not move its chief executive office except to such new location as the Borrower may establish in accordance with the last sentence of this Section. The originals of all Receivables Records and Contracts and all Collateral Records will continue to be kept at such chief executive office or at the locations identified on Schedule III as such, or at such new locations as the Borrower may establish in accordance with the last sentence of this Section. All Receivables, Receivables Records and Contracts of the Borrower will continue to be maintained at and controlled and directed (including, without limitation, for general accounting purposes) from, a location identified as such on Schedule III or such new locations as the Borrower may establish in accordance with the last sentence of this Section. The Borrower shall not establish a new location for its chief executive office or such activities (or move any such activities form the location listed in Schedule III therefor) until (i) it shall have given to the Secured Party not less than 30 days' prior written notice of its intention to do so, clearly describing such new location and providing such other information in connection therewith as the Secured Party may reasonably request and (ii) with respect to such new location, it shall have taken all action satisfactory to the Secured Party as the Secured Party may reasonably request, to maintain the security interest of the Secured Party in the Collateral intended to be granted hereby at all times fully perfected, with the same or better priority and in full force and effect. 8.8 Change of Location of Inventory and Equipment. The Borrower agrees that all Inventory and Equipment now held or subsequently acquired by it shall be kept at (or shall be in transport to) any one of the locations shown on Schedule II or such new location as the Borrower may establish in accordance with the last sentence of this Section. The Borrower may establish a new location for Inventory and Equipment only if (i) it shall have given to the Secured Party not less than 30 days' prior written notice of its intention to do so, clearly describing such new location and providing such other information in connection therewith as the Secured Party may reasonably request and (ii) with respect to such new location, it shall have taken all action satisfactory to the Secured Party, as the Secured Party may reasonably request, to maintain the security interest of the Secured Party in the Collateral intended to be granted hereby at all times fully perfected, with the same or better priority and in full force and effect. 8.10 Change of Name; Identity or Corporate Structure. The Borrower shall not change its name (or conduct any significant portion of its business under any new tradenames), identity or corporate structure until (i) it shall have given to the Secured Party not less than 30 days' prior written notice of its intention to do so, clearly describing such new name, identity or corporate structure or such new trade name and providing such other information in connection therewith as the Secured Party may reasonably request and (ii) with respect to such new name, identify or corporate structure or such new trade name, it shall have taken all action satisfactory to the Secured Party as the Secured Party may reasonably request, to maintain the security interest of the Secured Party in the Collateral intended to be granted hereby at all times fully perfected, with the same or better priority and in full force and effect. 8.12 Delivery of Instruments and Chattel Paper. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Secured Party, duly indorsed in a manner satisfactory to the Secured Party, to be held as Collateral pursuant to this Agreement. 8.14 Maintain and Mark Records and Receivables. The Borrower will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, but not limited to, the originals of all documentation with respect to all Receivables and records of all payments received and all credits granted on the Receivables and all merchandise returned and all other dealings therewith. The Borrower shall legend, in form and manner reasonably satisfactory to the Secured Party, all Chattel Paper and other evidence of Receivables, as well as the Receivables Records, with an appropriate reference to the fact that the Chattel Paper and all other Receivables have been assigned to the Secured Party and that the Secured Party has a security interest therein. 8.16 Right of Inspection. The Secured Party shall at all times have full and free access during normal business hours to all the books, correspondence and records of the Borrower and the Secured Party and its representatives may examine the same, take extracts therefrom and make photocopies thereof and the Borrower agrees to render to the Secured Party, at the Borrower's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. The Secured Party and its respective representatives shall at all times have the right to enter and inspect any property of the Borrower and enter into and upon any premises where any of the Inventory or Equipment is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests therein. 8.18 Insurance. The Borrower shall maintain insurance as required by the Credit Agreement. 8.20 Receivables. (a) The Borrower shall perform in all material respects all of its obligations with respect to the Receivables. (b) The Borrower shall not amend, modify, terminate or waive any provision of any Receivable in any manner which could reasonably be expected to materially adversely affect the value of such Receivable as Collateral. Other than (i) in the ordinary course of business and (ii) while no Default or Event of Default shall have occurred and be continuing, the Borrower shall not (w) grant any extension or renewal of the time of payment of any Receivable, (x) compromise or settle any dispute, claim or legal proceeding with respect to any Receivable for less than the total unpaid balance thereof, (y) release, wholly or partially, any Person liable for the payment thereof or (z) allow any credit or discount thereon. (c) The Borrower shall use its best efforts (including, without limitation, prompt and diligent exercise of each material right it may have under any Receivable (other than any right of termination)) to cause to be collected from each Account Debtor, as and when due (including, without limitation, amounts which are delinquent, such amounts to be collected in accordance with generally accepted lawful collection procedures), any and all amounts owing under or on account of any Receivable and apply all collected amounts to the outstanding balance of such Receivable immediately upon receipt thereof. 8.22 Contracts. (a) The Borrower shall perform in all material respects all of its obligations under each Contract. (b) The Borrower shall deliver promptly to the Secured Party a copy of each material demand, notice or document received by it relating in any way to any Contract. (c) Without the prior written consent of the Secured Party, the Borrower shall not amend, modify, terminate or supplement any provision of any Contract or compromise or settle any dispute, claim or legal proceeding with respect to any Contract, in any such case in any manner which could reasonably be expected to materially adversely affect the value of such Contract as Collateral and shall not terminate any Contract. Each such permitted amendment, modification, termination, supplement, compromise or settlement shall be in writing, a copy of which shall be delivered promptly to the Secured Party. (d) The Borrower shall promptly and diligently exercise each material right it may have under any Contract (except the right of termination). All costs and expenses in connection therewith, whether incurred by the Borrower or the Secured Party, shall be borne by the Borrower. 8.24 Warehouse Receipts Non-negotiable. The Borrower agrees that if any warehouse receipt or receipt in the nature of a warehouse receipt or other Document is issued with respect to any of its Inventory, such warehouse receipt or receipt in the nature thereof or other Document shall not be "negotiable" (as such term is used in Section 7-104 of the UCC or under other relevant law). 8.26 No Impairment. The Borrower will not take or permit to be taken any action which could impair the Secured Party's rights in the Collateral. 8.28 Limitations on Dispositions of Collateral. The Borrower will not sell, transfer, lease, license or otherwise dispose of any of the Collateral or any rights therein or attempt, offer or contract to do so, except as permitted in the Credit Agreement. 8.30 Intellectual Property. (a) The Borrower shall not do any act or omit to do any act, whereby any of the Intellectual Property which is used in or otherwise material to the business of the Borrower may lapse or become abandoned, dedicated to the public, or unenforceable, or which would adversely affect the validity, grant, or enforceability of the security interest granted therein. (b) The Borrower shall not, with respect to any Trademarks which are used in or otherwise material to the business of the Borrower, cease the use of any of such Trademarks or fail to maintain the level of the quality of products sold and services rendered under any of such Trademark at a level at least substantially consistent with the quality of such products and services as of the date hereof, and the Borrower shall take all steps necessary to insure that licensees of such Trademarks use such consistent standards of quality. (c) The Borrower shall, within thirty (30) days of the creation or acquisition of any Copyrightable work which is material to the business of the Borrower, apply to register the Copyright in the United States Copyright Office; the Borrower shall, within thirty (30) days of the acquisition of any registrations or applications for any Patents or Trademarks from any third party, record its interest in the United States Patent and Trademark Office. (d) The Borrower shall promptly notify the Secured Party if it knows or has reason to know, that any item of the Intellectual Property that is used in or otherwise material to its business may become or has become (a) abandoned or dedicated to the public or placed in the public domain, (b) invalid or unenforceable or (c) subject to any adverse determination or development (including the institution of proceedings) in any action or proceeding in the United States Patent and Trademark Office, the United States Copyright Office any state registry or international or foreign counterpart of the foregoing or any court. (e) The Borrower shall take all reasonable steps in the United States Patent and Trademark Office, the United States Copyright Office, any state registry or international or foreign counterpart of the foregoing, to pursue any application and maintain any registration of each Trademark, Patent or Copyright owned by the Borrower and used in or otherwise material to its business, which is now or shall become included in the Intellectual Property including, but not limited to, those items on Schedule IV Items A, C or E. (f) In the event that any Intellectual Property owned by or exclusively licensed to the Borrower is infringed, misappropriated or diluted by a third party, the Borrower shall promptly take all reasonable actions to stop such infringement, misappropriation or dilution and protect its exclusive rights in such Intellectual Property including, but not limited to, the initiation of a suit to obtain injunctive relief and to recover damages. (g) The Borrower shall promptly (but in no event more than thirty (30) days after the Borrower obtains knowledge thereof) report to the Secured Party (i) the filing of any application to register any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any state registry or international or foreign counterpart of the foregoing (whether such application is filed by the Borrower or through any agent, employee, licensee or designee thereof) and (ii) the registration of any Intellectual Property by any such office. The Borrower hereby authorizes the Secured Party to modify this Agreement by amending Schedule IV and will otherwise cooperate with the Secured Party in effecting any such amendment to include any item of Intellectual Property which shall become part of the Intellectual Property after the date hereof. (h) The Borrower shall, promptly upon the reasonable request of the Secured Party, execute and deliver to the Secured Party any document required to acknowledge, confirm, register, record or perfect the Secured Party's interest in any part of the Intellectual Property, whether now owned or hereafter acquired. (i) Except with the prior consent of the Secured Party or as permitted under the Credit Agreement, the Borrower will not execute and there will not be on file in any public office, any effective financing statement or other document or instruments, except financing statements or other documents or instruments filed or to be filed in favor of the Secured Party and the Borrower will not sell, assign, transfer, license, grant any option or create or suffer to exist any Lien upon or with respect to the Intellectual Property, except for the Lien created by and under this Agreement and the other Loan Documents. 8.32 Notice. The Borrower will advise the Secured Party promptly, in reasonable detail and in accordance with the provisions hereof (a) of any Lien (other than Permitted Liens) on, or claim asserted against, any of the Collateral and (b) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder. 8.34 Performance by Secured Party of Borrower's Obligations; Reimbursement. If the Borrower fails to perform or comply with any of its agreements contained herein, the Secured Party may, without notice to or consent by the Borrower, perform or comply or cause performance or compliance therewith and the expenses of the Secured Party incurred in connection with such performance or compliance, together with interest thereon at a rate per annum 2% above the Interest Rate, shall be payable by the Borrower to the Secured Party on demand and such reimbursement obligation shall be secured hereby. ARTICLE X SPECIAL PROVISIONS REGARDING RECEIVABLES AND CONTRACTS 10.2 Borrower Remains Liable under Receivables and Contracts. Anything herein to the contrary notwithstanding (including, without limitation, the grant of any rights to the Secured Party), the Borrower shall remain liable under each of the Receivables and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Receivable or Contract. The Secured Party shall have no obligation or liability under any Receivable (or any agreement giving rise thereto) or Contract by reason of or arising out of this Agreement or the receipt by the Secured Party of any payment relating to such Receivable or Contract pursuant hereto, nor shall the Secured Party be obligated in any manner to perform any of the obligations of the Borrower under or pursuant to any Receivable (or any agreement giving rise thereto) or under or pursuant to any Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Receivable (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 10.4 Notice to Account Debtors and Contracting Parties. At any time after an Event of Default has occurred and is continuing, the Secured Party may, and upon request of the Secured Party, the Borrower shall notify Account Debtors and parties to the Contracts that the Accounts and the Contracts have been assigned to the Secured Party and that payments in respect thereof shall be made directly to the Secured Party. The Secured Party may in its own name or in the name of others, communicate with Account Debtors and parties to the Contracts to verify with them to the Secured Party's satisfaction the existence, amount and terms of any Receivables or Contracts. 10.6 Collections on Receivables and Contracts. The Secured Party hereby authorizes the Borrower to collect the Receivables and Contracts and, at any time after an Event of Default has occurred and is continuing, the Secured Party may curtail or terminate said authority and by itself or by its agents, collect all Receivables and amounts owing under the Contracts. After an Event of Default has occurred and is continuing, if required by the Secured Party, any payments of Receivables and Contracts, when collected by the Borrower, shall be forthwith (and, in any event, within two Business Days) delivered by the Borrower to the Secured Party in the exact form received, duly indorsed to the Secured Party if required, for deposit into the Collateral Account, and until so turned over, shall be held by the Borrower in trust for the Secured Party, segregated from other funds of the Borrower. All Proceeds, while held by the Secured Party (or by the Borrower in trust for the Secured Party) shall continue to be Collateral securing all of the Secured Obligations and shall not constitute payment thereof until applied as hereinafter provided. ARTICLE XII SPECIAL PROVISIONS REGARDING SECURITY COLLATERAL 12.2 Voting Rights; Dividends; Etc. (a) So long as no Event of Default or event which, with the giving of notice or the lapse of time or both, would become an Event of Default, shall have occurred and be continuing: (i) The Borrower shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Security Collateral or any part thereof, for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement; provided, however, that such Borrower shall not exercise or refrain from exercising any such right if, in the Secured Party's judgment, such action would have a material adverse effect on the value of the Security Collateral or any part thereof, and, provided further, that the Borrower shall give the Secured Party at least five days' written notice of the manner in which it intends to exercise or the reasons for refraining from exercising, any such right; (ii) The Borrower shall be entitled to receive and retain any and all dividends and interest paid in respect of the Security Collateral, provided, however, that any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Security Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Security Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Security Collateral, shall be forthwith delivered to the Secured Party to hold as Security Collateral and shall, if received by the Borrower, be received in trust for the benefit of the Secured Party, be segregated from the other property or funds of the Borrower and be forthwith delivered to the Secured Party as Security Collateral in the same form as so received (with any necessary indorsement or assignment); and (iii) The Secured Party shall execute and deliver (or cause to be executed and delivered) to the Borrower all such proxies and other instruments as the Borrower may reasonably request for the purpose of enabling the Borrower to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of an Event of Default or an event which, with the giving of notice or the lapse of time or both, would become an Event of Default: (i) All rights of the Borrower (x) to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) shall, upon notice to the Borrower by the Secured Party cease and (y) to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) shall automatically cease and all such rights shall thereupon become vested in the Secured Party who shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Security Collateral such dividends and interest payments; and (ii) All dividends and interest payments which are received by the Borrower contrary to the provisions of paragraph (i) of this Section 6.1(b), shall be received in trust for the benefit of the Secured Party, shall be segregated from other funds of the Borrower and shall be forthwith paid over to the Secured Party as Security Collateral in the same form as so received (with any necessary indorsement). 12.4 Additional Shares. The Borrower agrees that it will (i) cause each issuer of the Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to the Borrower and (ii) immediately upon its acquisition (directly or indirectly) thereof, deliver to the Secured Party as additional security hereunder any and all additional shares of stock or other securities of each issuer of the Pledged Shares. ARTICLE XIV COLLATERAL ACCOUNT 14.2 Collateral Account. There is hereby established with [name of bank] the Collateral Account. The Collateral Account shall be under the sole and exclusive dominion and control of the Secured Party and the Borrower shall have no rights with respect to the Collateral Account, except as specifically set forth below with regard to determination of the nature of investments to be made with amounts credited to the Collateral Account. Without limiting the generality of the foregoing, the Borrower shall have no right of withdrawal or transfer from the Collateral Account. 14.4 Deposit of Proceeds. There shall be deposited in the Collateral Account from time to time the cash proceeds (as defined in Section 9-306(1) of the UCC) of any of the Collateral (including insurance proceeds thereon) required to be delivered to the Secured Party pursuant hereto. All amounts and investments and other items credited to the Collateral Account from time to time shall constitute Collateral hereunder and shall not constitute payment of the Secured Obligations until applied as hereinafter provided. At any time following the occurrence and during the continuance of an Event of Default, the Secured Party may in its discretion apply or cause to be applied (subject to collection) the balance from time to time outstanding to the credit of the Collateral Account to the payment of the Secured Obligations in the manner specified herein. 14.6 Investment of Balance in Collateral Account. Amounts credited to the Collateral Account shall be invested from time to time in such Permitted Investments as the Borrower (or, after the occurrence and during the continuance of a Default or Event of Default, the Secured Party) shall determine, which Permitted Investments shall be held in the name and be under the control of the Secured Party. ARTICLE XVI POWER OF ATTORNEY 16.2 Secured Party's Appointment as Attorney-in-Fact. (a) The Borrower hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, the Borrower hereby gives the Secured Party the power and right, on behalf of the Borrower, without notice to or assent by the Borrower, to do the following: (i) in the case of any Receivable, at any time when the authority of the Borrower to collect the Receivables has been curtailed or terminated pursuant hereto, or in the case of any other Collateral, at any time when any Event of Default shall have occurred and be continuing, in the name of the Borrower or its own name or otherwise, (A) to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under or with respect to, any Collateral; (B) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Secured Party or as the Secured Party shall direct; and (C) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (ii) to prepare, sign and file any UCC financing statements in the name of the Borrower as debtor; (iii) to prepare, sign, and file for recordation in any intellectual property registry, appropriate evidence of the lien and security interest granted herein in the Intellectual Property in the name of the Borrower as the Borrower; (iv) to take or cause to be taken all actions necessary to perform or comply or cause performance or compliance with the terms of this Agreement, including, without limitation, actions to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect any repairs or obtain any insurance called for by the terms of this Agreement and to pay all or any part of the premiums therefor and the costs thereof; (v) upon the occurrence and during the continuance of any Event of Default (A) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (B) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any Proceeds thereof and to enforce any other right in respect of any Collateral; (C) to defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (D) to settle, compromise or adjust any suit, action or proceeding described in the preceding clause and, in connection therewith, to give such discharges or releases as the Secured Party may deem appropriate; and (E) generally, to sell or transfer and make any agreement with respect to, or otherwise deal with, any of the Collateral as fully and completely as though the Secured Party were the absolute owner thereof for all purposes, and to do, at the Secured Party's option and the Borrower's expense, at any time or from time to time, all acts and things which the Secured Party deems necessary to protect, preserve or realize upon the Collateral and the Liens of the Secured Party thereon and to effect the intent of this Agreement, all as fully and effectively as the Borrower might do; and (vi) at any time and from time to time, to execute, in connection with any foreclosure, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. The Borrower hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. The Borrower hereby acknowledges and agrees that in acting pursuant to this power-of-attorney, the Secured Party shall be acting in its own interest and the Borrower acknowledges and agrees that the Secured Party shall have no fiduciary duties to the Borrower and the Borrower hereby waives any claims to the rights of a beneficiary of a fiduciary relationship hereunder. (b) No Duty on the Part of Secured Party. The powers conferred on the Secured Party hereunder are solely to protect the interests of the Secured Party in the Collateral and shall not impose any duty upon the Secured Party to exercise any such powers. The Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. ARTICLE XVIII REMEDIES; RIGHTS UPON DEFAULT 18.2 Rights and Remedies Generally. If an Event of Default shall occur and be continuing, then and in every such case, the Secured Party shall have all the rights of a secured party under the UCC, shall have all rights now or hereafter existing under all other applicable laws or in equity and, subject to any mandatory requirements of applicable law then in effect, shall have all the rights set forth in this Agreement and all the rights set forth with respect to the Collateral or this Agreement or in any other agreement between the parties. No enumeration of rights in this Article or elsewhere in this Agreement or in any related document or other agreement, shall be deemed to in any way limit the rights of the Secured Party as described in this Article. 18.4 Collection of Receivables and other Proceeds. If an Event of Default shall occur and be continuing, in addition to the rights of the Secured Party specified in Section 5.3 with respect to the collection of Receivables and Contracts, all Proceeds received by the Borrower consisting of cash, checks and other near-cash items shall be held by the Borrower in trust for the Secured Party, segregated from other funds of the Borrower and shall forthwith upon receipt by the Borrower, be turned over to the Secured Party, in the same form received by the Borrower (appropriately indorsed or assigned by the Borrower to the order of the Secured Party or in such other manner as shall be satisfactory to the Secured Party) for deposit into the Collateral Account. 18.6 Direct Borrower to Dispose of Collateral. If an Event of Default shall occur and be continuing, the Secured Party may direct the Borrower to sell, assign or otherwise liquidate or dispose of all, or from time to time any, portion of the Collateral and the Borrower shall do so, and the Secured Party may, at its option, take possession of the Proceeds of such Collateral. The Secured Party may direct the Borrower to direct that all Proceeds of such Collateral be paid directly to the Secured Party or may permit the Proceeds of such Collateral to be paid to the Borrower and, if directed by the Secured Party, all such Proceeds consisting of cash, checks or near-cash items shall be held by the Borrower in trust for the Secured Party, segregated from other funds of the Borrower and shall forthwith upon receipt by the Borrower, be turned over to the Secured Party, in the same form received by the Borrower (appropriately indorsed or assigned by the Borrower to the order of the Secured Party or in such other manner as shall be satisfactory to the Secured Party) for deposit into the Collateral Account. 18.8 Collateral Account. If an Event of Default shall occur and be continuing, the Secured Party may liquidate any securities credited to the Collateral Account (including any Permitted Investments) and apply the proceeds thereof and any other amounts credited to the Collateral Account to the Secured Obligations (whether matured or unmatured), in such order as the Secured Party may elect. Any balance of such Proceeds remaining after the Secured Obligations have been paid and performed in full, shall be paid over to the Borrower or to whomsoever may lawfully be entitled to receive the same or as a court of competent jurisdiction may direct. 18.10 Possession of Collateral. (a) If an Event of Default shall occur and be continuing: ( i) the Secured Party may, personally or by agents or attorneys, immediately retake possession of the Collateral (including the originals of all or any Receivables or Receivables Records) or any part thereof, from the Borrower or any other Person who then has possession of any part thereof, with or without notice or judicial process and for that purpose may enter upon the Borrower's premises where any of the Collateral is located and remove the same and, the Secured Party may use in connection with such removal, any and all services, supplies, aids and other facilities of the Borrower; and (ii) upon five (5) days notice to the Borrower, the Borrower shall, at its own expense, assemble the Collateral, including, without limitation, the originals of all Receivables Records (or from time to time any portion thereof) and make it available to the Secured Party at any place or places designated by the Secured Party which is reasonably convenient to both parties, whether at the Borrower's or the Secured Party's premises or elsewhere. The Borrower, shall at its sole expense, store and keep any Collateral so assembled at such place or places pending further action by the Secured Party and while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain the Collateral in good condition. The Borrower's obligation so to assemble and deliver the Collateral is of the essence of this Agreement and, accordingly, upon application to a court of equity having jurisdiction, the Secured Party shall be entitled to a decree requiring specific performance by the Borrower of said obligation. (b) When Collateral is in the Secured Party's possession, (i) the Borrower shall pay (or reimburse the Secured Party on demand for) all reasonable expenses (including the cost of any insurance and payment of taxes or other charges) incurred in the custody, preservation, use or operation of the Collateral and the obligation to reimburse all such expenses shall be secured hereby and (ii) the risk of accidental loss or damage shall be on the Borrower to the extent of any deficiency in any effective insurance coverage. 18.12 Disposition of the Collateral. If an Event of Default shall occur and be continuing, the Secured Party may sell, assign, lease, license (on an exclusive or non-exclusive basis) give an option or options to purchase or otherwise dispose of the Collateral (or contract to do any of the foregoing) under one or more contracts or as an entirety and without the necessity of gathering at the place of sale the property to be sold, at public or private sale or sales, conducted by any Officer, nominee or agent of, or auctioneer or attorney for, the Secured Party at any location of any third party conducting or otherwise involved in such sale or any office of the Secured Party or elsewhere and in general, in such manner, at such time or times and upon such terms and conditions and at such prices as it may consider commercially reasonable, for cash or on credit or for future delivery without assumption of any credit risk. The Secured Party may in its sole discretion restrict prospective bidders as to their number, nature of their business and investment intention. Any of the Collateral may be sold, leased, assigned or options or contracts entered to do so or otherwise disposed of, in the condition in which the same existed when taken by the Secured Party or after any overhaul or repair which the Collateral Agent shall determine to be commercially reasonable. To the extent permitted by applicable law, the Secured Party may bid for and become the purchaser of the Collateral or any item thereof, offered for sale in accordance with this Section without accountability to the Borrower (except to the extent of surplus money received) as provided below. In the payment of the purchase price of the Collateral, the purchaser shall be entitled to have credit on account of the purchase price thereof of amounts owing to such purchaser on account of any of the Obligations and any such purchaser may deliver notes, claims for interest or claims for other payment with respect to such Obligations in lieu of cash up to the amount which would, upon distribution of the net proceeds of such sale, be payable thereon. Such notes, if the amount payable hereunder shall be less than the amount due thereon, shall be returned to the holder thereof after being appropriately stamped to show partial payment. 18.14 Registration Rights. If the Secured Party shall determine to exercise its right to sell all or any of the Security Collateral pursuant to Section 9.6, the Borrower agrees that, upon request of the Secured Party, the Borrower will, at its own expense: (a) execute and deliver, and cause each issuer of the Security Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Secured Party, advisable to register such Security Collateral under the provisions of the Securities Act of 1933, as from time to time amended (the "Securities Act"), and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Secured Party, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Security Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Security Collateral, as requested by the Secured Party; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earning statement which will satisfy the provisions of Section 11(a) of the Securities Act; and (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Security Collateral or any part thereof valid and binding and in compliance with applicable law. The Borrower further acknowledges the impossibility of ascertaining the amount of damages which would be suffered by the Secured Party or the Secured Party by reason of the failure by the Borrower to perform any of the covenants contained in this Section and, consequently, agrees that, if the Borrower shall fail to perform any of such covenants, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Security Collateral on the date the Secured Party shall demand compliance with this Section. 18.16 Recourse. The Borrower shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to satisfy the Secured Obligations. The Borrower shall also be liable for all expenses of the Secured Party incurred in connection with collecting such deficiency including, without limitation, the fees and disbursements of any attorneys employed by the Secured Party to collect such deficiency. 18.18 Intellectual Property License. Solely for the purpose of enabling the Secured Party to exercise rights and remedies under this Article IX, the Borrower hereby grants to the Secured Party, to the extent it has the right to do so, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Borrower) to use, operate under, license or sublicense any Intellectual Property now owned or hereafter acquired by the Borrower and wherever the same may be located, subject, in the case of Trademarks, to sufficient rights to quality control and inspection in favor of the Borrower to avoid the risk of invalidation of said Trademarks. 18.20 Expenses; Attorneys' Fees. The Borrower shall reimburse the Secured Party for all its expenses in connection with the exercise of its rights hereunder, including, without limitation, all reasonable attorneys' fees and legal expenses incurred by the Secured Party. 18.22 Application of Proceeds. The proceeds of any disposition of Collateral shall be applied as follows: (a) to the payment of any and all expenses and fees (including reasonable attorneys' fees and disbursements) incurred by the Secured Party in connection with the exercise of its rights and remedies hereunder, including, without limitation, expenses and fees in connection with obtaining, taking possession of, removing, holding, insuring, repairing, preparing for sale or lease, storing and disposing of Collateral; (b) to the satisfaction of the Secured Obligations (in such order as the Secured Party may decide); (c) any other payment of any amount required to be paid by the Secured Party by law; (d) the satisfaction of indebtedness secured by any subordinate security interest in the Collateral if written notification of demand therefor is received before distribution of the proceeds is completed, but only to the extent of the proceeds undistributed when such notification is received; and (e) upon termination of the Commitments and the expiration, cancellation or return to the issuer thereof undrawn upon of any letters of credit, to the Borrower or as a court of competent jurisdiction may direct. 18.24 Limitation on Duties Regarding Preservation of Collateral. (a) The Secured Party's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Secured Party deals with similar property for its own account. (b) The Secured Party shall have no obligation to take any steps to preserve rights against prior parties to any Collateral. (c) Neither the Secured Party nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or otherwise. 18.26 Waiver of Claims. Except as otherwise provided in this Agreement, THE BORROWER HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE SECURED PARTY'S TAKING POSSESSION OR THE SECURED PARTY'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH BORROWER WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE STATES OR OF ANY STATE, and the Borrower hereby further waives, to the extent permitted by law: (a) all damages occasioned by such taking of possession except any damages which are the direct result of the Secured Party's gross negligence or willful misconduct; (b) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Secured Party's rights hereunder; (c) demand of performance or other demand, notice of intent to demand or accelerate, notice of acceleration presentment, protest, advertisement or notice of any kind to or upon the Borrower or any other Person; and (d) all rights of redemption, appraisement, valuation, diligence, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement, the absolute sale of the Collateral or any portion thereof and the Borrower, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws. 18.28 Discontinuance of Proceedings. In case the Secured Party shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Secured Party's_____, then and in every such case the Borrower and the Secured Party shall be returned to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Secured Party shall continue as if no such proceeding had been instituted. ARTICLE XX INDEMNITY 20.2 Indemnity and Expenses. (a) The Borrower agrees to indemnify, reimburse and hold the Secured Party and its respective officers, directors, employees, representatives and agents (hereinafter in this Section referred to individually as "Indemnitee" and collectively as "Indemnitees") harmless from any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, costs, expenses or disbursements (including reasonable attorneys' fees and expenses) (for the purposes of this Section the foregoing are collectively called "expenses") for whatsoever kind or nature which may be imposed on, asserted against or incurred by any of the Indemnitees in any way relating to or arising out of this Agreement or the documents executed in connection herewith or in any other way connected with the administration of the transactions contemplated hereby or the enforcement of any of the terms of or the preservation of any rights hereunder or in any way relating to or arising out of the manufacture, ownership, ordering, purchase, delivery, control, acceptance, lease, financing, possession, operation, condition, sale, return or other disposition or use of the Collateral (including, without limitation, latent or other defects, whether or not discoverable), the violation of the laws of any country, state or other governmental body or unit, any tort (including, without limitation, claims arising or imposed under the doctrine of strict liability, or for or on account of injury to or the death of any Person (including any Indemnitee), or for property damage) or any contract claim; provided that no Indemnitee shall be indemnified pursuant to this Section for expenses to the extent caused by the gross negligence or wilful misconduct of such Indemnitee. The Borrower agrees that upon written notice by any Indemnitee of any assertion that could give rise to an expense, the Borrower shall assume full responsibility for the defense thereof. Each Indemnitee agrees to use its best efforts to promptly notify the Borrower of any such assertion of which such Indemnitee has knowledge. (b) Without limiting the application of clause (a) of this Section, the Borrower agrees to pay, or reimburse the Secured Party for any and all fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation or protection of the Secured Party's Liens on, and security interest for the benefit of the Secured Party in, the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or Liens upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Secured Party's interest therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral. (c) Without limiting the application of clause (a) or (b) of this Section, the Borrower agrees to pay, indemnify and hold each Indemnitee harmless from and against any expenses which such Indemnitee may suffer, expend or incur in consequence of or growing out of any misrepresentation by the Borrower in this Agreement or in any statement or writing contemplated by or made or delivered pursuant to or in connection with this Agreement. (d) If and to the extent that the obligations of the Borrower under this Section are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 20.4 Indemnity Obligations Secured by Collateral; Survival. Any amounts paid by any Indemnitee as to which such Indemnitee has the right to reimbursement shall constitute Secured Obligations secured by the Collateral. The indemnity obligations of the Borrower contained in this Article shall continue in full force and effect notwithstanding the full payment and performance of the Secured Obligations and notwithstanding the discharge thereof. ARTICLE XXII MISCELLANEOUS 22.2 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. 22.4 Submission to Jurisdiction. Any legal action or proceeding with respect to this Agreement and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, the Borrower at its address set forth under its signature below. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of the Secured Party to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. 22.6 Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE BORROWER AND THE SECURED PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER. 22.8 Limitation of Liability. No claim may be made by the Borrower or any other Person against the Secured Party or the affiliates, directors, officers, employees, attorneys or agents of any of them for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or any act, omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 22.10 Notices. Except as otherwise expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy, telex, or cable communication) and shall be deemed to have been duly given or made when delivered by hand, or five days after being deposited in the United States mail, postage prepaid, or, in the case of telex notice, when sent, answerback received, or, in the case of telecopy notice, when sent, or, in the case of a nationally recognized overnight courier service, one Business Day after delivery to such courier service, addressed, in the case of each party hereto, at its address specified opposite its signature below, or to such other address as may be designated by any party in a written notice to the other party hereto, provided that notices and communications to the Secured Party shall not be effective until received by the Secured Party. 22.12 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Secured Party, all future holders of the Secured Obligations and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Secured Party. 22.14 Waivers and Amendments. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Borrower and the Secured Party, provided that any provision of this Agreement may be waived by the Secured Party in a written letter or agreement executed by the Secured Party or by telex or facsimile transmission from the Secured Party. Any such amendment, supplement, modification or waiver shall be binding upon the Borrower and the Secured Party and all future holders of the Secured Obligations. In the case of any waiver, the Borrower and the Secured Party shall be restored to their former position and rights hereunder and under the outstanding Secured Obligations, and any Default or Event of Default waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 22.16 No Waiver; Remedies Cumulative. No failure or delay on the part of the Secured Party in exercising any right, power or privilege hereunder and no course of dealing between the Borrower and the Secured Party shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Secured Party would otherwise have on any future occasion. The rights and remedies herein expressly provided are cumulative and may be exercised singly or concurrently and as often and in such order as the Secured Party deems expedient and are not exclusive of any rights or remedies which the Secured Party would otherwise have whether by agreement or now or hereafter existing under applicable law. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Secured Party to any other or further action in any circumstances without notice or demand. 22.18 Termination; Release. When the Secured Obligations have been indefeasibly paid and performed in full this Agreement shall terminate and the Secured Party, at the request and sole expense of the Borrower, will execute and deliver to the Borrower the proper instruments (including UCC termination statements) acknowledging the termination of this Agreement, and will duly assign, transfer and deliver to the Borrower, without recourse, representation or warranty of any kind whatsoever, such of the Collateral as may be in possession of the Secured Party and has not theretofore been disposed of, applied or released. 22.20 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 22.22 Effectiveness. This Agreement shall become effective on the date on which the Borrower shall have signed a counterpart hereof and shall have delivered the same to the Secured Party. 22.24 Headings Descriptive. The headings of the several Sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 22.26 Severability. In case any provision in or obligation under this Agreement or the Secured Obligations shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 22.28 Survival. All indemnities set forth herein shall survive the execution and delivery of this Agreement and the making and repayment of the Secured Obligations. 22.30 Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 22.32 [RESERVED] IN WITNESS WHEREOF, the Borrower and the Secured Party have caused this Agreement to be duly executed and delivered as of the date first above written. SMARTALK TELESERVICES, INC. By________________________ Name: Title: [_________________________] By________________________ Name: Title: [_________________________] By________________________ Name: Title: [_________________________] By________________________ Name: Title: FLETCHER INTERNATIONAL LIMITED By________________________ Name: Title: EX-10.3 4 PROMISSORY NOTE EXHIBIT II [FORM OF NOTE] PROMISSORY NOTE $25,000,000.00 New York, New York December 4, 1998 FOR VALUE RECEIVED, SMARTALK TELESERVICES, INC., a Delaware Corporation ("Company"), promises to pay to FLETCHER INTERNATIONAL LIMITED ("Payee") or its assign, the lesser of (x) TWENTY-FIVE MILLION DOLLARS ($25,000,000.00 ) and (y) the unpaid principal amount of all advances made by Payee to Company as Loans under the Credit Agreement referred to below at the Maturity Date (as defined in the Credit Agreement). Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of the date hereof (as it may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"; the terms defined therein and not otherwise defined herein being used herein as therein defined), by and between Company and the Payee. This Note is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at such place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(ii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. This Note is secured pursuant to the Collateral Documents. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsection 9.17 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all costs and expenses, including reasonable attorneys' fees, all as provided in subsection 9.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. SMARTALK TELESERVICES, INC. By: __________________________ Name: Title: EX-10.4 5 INVESTMENT RIGHTS AGREEMENT INVESTMENT RIGHTS AGREEMENT This Investment Rights Agreement (this "Agreement") dated as of December 4, 1998 is entered into by and between SmarTalk TeleServices, Inc., a California corporation (together with its successors, "SmarTalk"), and Fletcher International Limited, a company organized under the laws of the Cayman Islands (together with its successors, "Fletcher"). The parties hereto agree as follows: 1. Purchase and Sale. In consideration of and upon the basis of the representations, warranties and agreements and subject to the terms and conditions set forth in this Agreement: a. [RESERVED]. b. Investment Right. (i) SmarTalk hereby grants Fletcher the right to purchase ( the "Investment Rights"), and agrees to sell to Fletcher, at Fletcher's sole option, newly issued shares of SmarTalk common stock (the "Common Stock"), no par value, in an aggregate amount equal to the greater of (x) 6,060,606 and (y) such number which would equal at the time of any Investment Closing (as defined below) fifteen percent (15%) of the Common Stock of SmarTalk as determined on a Fully-Diluted basis after giving effect to Fletcher's exercise of its Investment Rights hereunder (collectively, such number of shares of Common Stock as determined pursuant hereto, subject to any adjustments made pursuant to this Agreement, the "Shares") at a purchase price per Share of $4.125 (such sum, subject to any adjustments made pursuant to this Agreement, the "Investment Right Price"). "Fully-Diluted" shall mean, at any time, the then outstanding Common Stock plus (without duplication) all shares of Common Stock issuable, whether at such time or upon the passage of time or the occurrence of future events, upon the exercise, conversion or exchange of all then-outstanding rights, warrants, options, convertible securities or exchangeable securities or indebtedness, or other rights exercisable for or convertible or exchangeable into, directly or indirectly, Common Stock, and securities convertible or exchangeable into Common Stock, whether at the time of issuance or upon the passage of time or the occurrence of some future event. (ii) Fletcher shall be entitled to exercise its Investment Rights hereunder in whole or in part from time to time for a period commencing on the date of this Agreement and ending on the first trading day which is five (5) years from the date of this Agreement (the "Expiration Date"); provided, however, that any exercise hereunder is subject to Fletcher making available to SmarTalk $5,000,000 as a Loan (as defined in the Credit Agreement (as defined below)) pursuant to the Credit Agreement on December 7, 1998. c. To exercise the Investment Rights, Fletcher shall deliver one or more written notices in the form attached hereto as Annex A (an "Investment Notice") to SmarTalk from time to time prior to the Expiration Date. The date upon which Fletcher causes an Investment Notice to be delivered to SmarTalk, by hand, facsimile, electronic transmission or otherwise, shall be the "Notice Date" with respect to such exercise of the Investment Rights. If the Investment Rights are exercised, such sale shall take place on an Investment Closing Date (as defined below) upon satisfaction of the terms and conditions described herein. Upon satisfaction or, if applicable, waiver of the relevant conditions set forth in Sections 9 and 10 hereof, the closing of the sale or delivery of Shares (the "Investment Closing") shall take place three (3) business days following the Notice Date (such date and time being referred to herein as the "Investment Closing Date"). To the extent such Investment Closing Date occurs after the 3 day period referred to in the preceding sentence (each day a "Default Day") due to a failure of the relevant conditions set forth in Sections 9 and 10 hereof on the part of SmarTalk, Fletcher shall be entitled to receive an amount of additional shares of Common Stock equal to 10% of the number of Shares determined pursuant to Section 1.b(i) for each such Default Day at no additional cost to Fletcher. d. Notwithstanding anything else contained in this Agreement, solely in limitation of Fletcher's rights, the aggregate number of Shares issuable immediately upon exercise of the Investment Rights, together with all Shares previously issued, shall be less than or equal to the lower of (i) the Exercisable Number (as defined below) or (ii) the number of shares of Common Stock otherwise issuable upon the exercise of Investment Rights. Any Shares not issued as a result of the previous sentence shall be issuable when and to the extent the Exercisable Number is thereafter increased. The "Exercisable Number" is initially zero (0) and thereafter may be increased upon expiration of a sixty-five day period (the "65 Day Notice Period") after Fletcher delivers a notice (a "65 Day Notice") to SmarTalk designating an aggregate number of shares of Common Stock in excess of the then existing Exercisable Number. A 65 Day Notice may be given at any time. One or more 65 Day Notice(s) may be given from time to time at any time after the date of this Agreement, provided that any increase in the Exercisable Number designated by any 65 Day Notice shall be effective only upon expiration of the 65 Day Notice Period with respect to such 65 Day Notice. 2. Closing. a. [RESERVED]. b. At any Investment Closing, the following deliveries shall be made: (i). Shares. SmarTalk shall deliver the stock certificate(s) representing the Shares, duly registered on the books of SmarTalk in the name of Fletcher or its nominee, against payment by Fletcher of the Investment Right Price (if any) by wire transfer in immediately available funds, to the account identified in the Investment Notice; provided, however, that notwithstanding anything to the contrary herein, Fletcher may set-off against such Investment Right Price any and all amounts owing to Fletcher under that certain Credit Agreement dated as of the date hereof between Fletcher and SmarTalk (the "Credit Agreement") (including without limitation any principal, interest and accrued fees thereunder). (ii). Closing Documents. The closing documents required by Sections 9 and 10 shall be delivered to Fletcher and SmarTalk, respectively. (iii). Delivery Notice. An executed copy of the delivery notice in the form attached hereto as Annex C shall be delivered in accordance therewith, with a copy delivered to Fletcher. The foregoing deliveries shall be deemed to occur simultaneously as part of a single transaction, and no delivery shall be deemed to have been made until all such deliveries have been made. The original certificates representing the Shares shall be delivered via Federal Express to Fletcher at the address set forth in Section 15 hereof, unless Fletcher shall have delivered to SmarTalk a written notice specifying a different address. 3. Representations and Warranties of SmarTalk. SmarTalk hereby represents and warrants to Fletcher on the date hereof and on each Investment Closing Date, if any, as follows: a. SmarTalk has been duly incorporated and is validly existing in good standing under the laws of California, or after the date hereof, if another entity has succeeded SmarTalk in accordance with the terms hereof, under the laws of one of the United States. b. The execution, delivery and performance of this Agreement (including the issuance of the Shares (when and if issued)) by SmarTalk have been duly authorized by all requisite corporate action and no further consent or authorization of SmarTalk, its Board of Directors or its shareholders is required. This Agreement has been duly executed and delivered by SmarTalk and, when this Agreement is duly authorized, executed and delivered by Fletcher, will be a valid and binding agreement enforceable against SmarTalk in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. c. SmarTalk has full corporate power and authority necessary to execute and deliver this Agreement and to perform its obligations hereunder (including the issuance of the Shares). The transaction evidenced and contemplated by this Agreement and the issuance of the Shares is a separate and distinct transaction and shall not be integrated with any other transaction between Fletcher and SmarTalk. d. Except as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), no consent, approval, authorization or order of any court, governmental agency or other body is required for execution and delivery by SmarTalk of this Agreement or the performance by SmarTalk of any of its obligations hereunder other than such as may already have been received. e. Except as may be required under the HSR Act, neither the execution and delivery by SmarTalk of this Agreement nor the performance by SmarTalk of any of its obligations hereunder: (1) violates, conflicts with, results in a breach of, or constitutes a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the Articles of Incorporation or by-laws of SmarTalk or any of its subsidiaries, (B) any decree, judgment, order, law, treaty, rule, regulation or determination of which SmarTalk is aware (after due inquiry) of any court, governmental agency or body, or arbitrator having jurisdiction over SmarTalk or any of its subsidiaries or any of their respective properties or assets, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which SmarTalk or any of its subsidiaries is a party, by which SmarTalk or any of its subsidiaries is bound, or to which any of the properties or assets of SmarTalk or any of its subsidiaries is subject, (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which SmarTalk or any of its subsidiaries is a party or (E) any rules of the National Association of Securities Dealers, Inc. or the NASDAQ National Market applicable to SmarTalk or the transactions contemplated hereby; or (2) results in the creation or imposition of any lien, charge or encumbrance upon (A) any Share or (B) any of the properties or assets of SmarTalk or any of its subsidiaries. f. SmarTalk has validly reserved for issuance to Fletcher (i) the shares of Common Stock for issuance from time to time as Shares and (ii) any additional shares of Common Stock as required under this Agreement. When issued to Fletcher against payment therefor in accordance with the terms of this Agreement, each Share: (1) will have been duly and validly authorized, duly and validly issued, fully paid and non-assessable; (2) will be free and clear of any security interests, liens, claims or other encumbrances (other than encumbrances that may be imposed under federal securities laws); and (3) will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of SmarTalk. g. SmarTalk satisfies all quantitative maintenance criteria of the NASDAQ National Market or, after the date hereof, has a valid exemption from such criteria. Following any Investment Closing, the Shares (when and if issued) will be, duly listed and admitted for trading on the principal exchange or market for the Common Stock. h. On the date hereof, except as disclosed in the schedules to the Credit Agreement, there is no pending or, to the best knowledge of SmarTalk, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over SmarTalk or any of its affiliates that would materially affect the execution by SmarTalk of, or the performance by SmarTalk of its obligations under, this Agreement, provided, however, that the representations and warranties contained in this Section 3.1(h) shall not apply to any action, threatened action, suit, proceeding or investigation initiated by Fletcher. i. None of SmarTalk's filings with the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"), or under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (each an "SEC Filing") contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. j. Since the date of SmarTalk's most recent SEC Filing, there has not been, and SmarTalk is not aware of, any development that would require an amendment to SmarTalk's most recent effective Registration Statement in order to permit public offers and sales of shares of Common Stock thereunder. k. The offer and sale of the Shares to Fletcher pursuant to this Agreement will, subject to compliance by Fletcher with the applicable representations and warranties contained in Section 4 hereof and with the applicable covenants and agreements contained in Section 8 hereof, be made in accordance with the provisions and requirements of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act") and any applicable state law. l. As of the date hereof, the authorized capital stock of SmarTalk consists of 100,000,000 shares of Common Stock, and 10,000,000 shares of preferred stock, no par value, of SmarTalk ("Preferred Stock"). As of November 30, 1998, (i) 27,607,379 shares of Common Stock (including the treasury shares described in clause (iii) below) and no shares of Preferred Stock were issued and outstanding, (ii) less than 10,000,000 shares of Common Stock were reserved for issuance upon exercise of outstanding stock options, warrants or other convertible rights and (iii) no shares of Common Stock were held in the treasury of SmarTalk. All of the outstanding shares of Common Stock are, and all shares which may be issued pursuant to stock options, warrants or other convertible rights will be, when issued and paid for in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable and free of any preemptive rights in respect thereof. As of the date hereof, except as set forth above, and except for shares of Common Stock or other securities issued upon conversion, exchange, exercise or purchase associated with the securities, options, warrants, rights and other instruments referenced above, (i) no shares of capital stock or other voting securities of SmarTalk were outstanding, (ii) no equity equivalents, interests in the ownership or earnings of SmarTalk or other similar rights were outstanding and (iii) there were no existing options, warrants, calls, subscriptions or other rights or agreements or commitments relating to the capital stock of SmarTalk or any of its subsidiaries or obligating SmarTalk or any of its subsidiaries to issue, transfer, sell or redeem any shares of capital stock, or other equity interest in, SmarTalk or any of its subsidiaries or obligating SmarTalk or any of its subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement or commitment. No provision of this Section 3(l) is intended to relate to any transaction, including but not limited to options traded by third parties on the Chicago Board of Exchange, in which SmarTalk is not a party and by which neither SmarTalk nor any of its properties are bound. 3.A Registration Provisions. a. SmarTalk shall as soon as practicable and in any event in no later than 30 days from the date of this Agreement and at its own expense, file a registration statement (the "Registration Statement") under the Securities Act covering the sale or resale of the sum of all Shares (which for such purposes shall be deemed to be not less than the number of Shares subject to the Investment Rights) (each, a "Covered Security"), shall use its best efforts to cause such Registration Statement to be declared effective not later than 90 calendar days (the "Required Registration Date") after the date of this Agreement and shall promptly amend such Registration Statement from time to time if the maximum number of Shares is greater than the number of shares of Common Stock registered pursuant to such Registration Statement, provided that Fletcher shall have provided such information and cooperation in connection therewith as SmarTalk may reasonably request. If the Registration Statement has not been declared effective by the Required Registration Date, the Investment Right Price as determined pursuant to Section 1.b. for shares of Common Stock issuable upon exercise of the Investment Rights exercised following the Required Registration Date shall be reduced by 2.5% for each month (or portion thereof) following the Required Registration Date that such Registration Statement shall not have been declared effective. b. SmarTalk will use its best efforts to: (i) keep such registration effective until the earlier of (A) the second anniversary of the issuance of each Covered Security (provided that, Fletcher may freely resell such Covered Securities), (B) the later of the date all of the Covered Securities shall have been sold by Fletcher and the Expiration Date or (C) such time as all of the Covered Securities held by Fletcher can be sold by Fletcher or any of its affiliates within a three-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 under the Securities Act ("Rule 144"); (ii) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement (as so amended and supplemented from time to time, the "Prospectus") as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Covered Securities by Fletcher or any of its affiliates; (iii) furnish such number of Prospectuses and other documents incident thereto, including any amendment of or supplement to the Prospectus, as Fletcher from time to time may reasonably request; (iv) cause all Covered Securities to be listed on each securities exchange and quoted on each quotation service on which similar securities issued by SmarTalk are then listed or quoted; (v) provide a transfer agent and registrar for all Covered Securities and a CUSIP number for all Covered Securities; (vi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC; and (vii) file the documents required of SmarTalk and otherwise use its best efforts to obtain and maintain requisite blue sky clearance in (A) New York, California and all other jurisdictions in which any of the shares of Common Stock were originally sold and (B) all other states specified in writing by Fletcher, provided, however, that as to this clause (B), SmarTalk shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented. c. SmarTalk shall furnish to Fletcher upon request a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary in order to facilitate the public sale or other disposition of all or any of the Covered Securities by Fletcher or any of its affiliates pursuant to the Registration Statement. d. With a view to making available to Fletcher and its affiliates the benefits of Rule 144 and Form S-3 under the Securities Act, SmarTalk covenants and agrees to: (i) make and keep available adequate current public information (within the meaning of Rule 144(c)) concerning SmarTalk, until the earlier of (A) the second anniversary of the issuance of each Covered Security (provided that, Fletcher may freely resell such Covered Securities) or (B) such date as all of the Covered Securities shall have been resold by Fletcher or any of its affiliates; and (ii) furnish to Fletcher upon request, as long as Fletcher owns any Covered Securities, (A) a written statement by SmarTalk that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (B) a copy of the most recent annual or quarterly report of SmarTalk, and (C) such other information as may be reasonably requested in order to avail Fletcher and its affiliates of Rule 144 or Form S-3 with respect to such Covered Securities. e. Notwithstanding anything else in this Section 3.A, if, at any time during which a Prospectus is required to be delivered in connection with the sale of any Covered Securities, SmarTalk determines in good faith that a development has occurred or a condition exists as a result of which the Registration Statement or the Prospectus contains a material misstatement or omission, SmarTalk will immediately notify Fletcher thereof by telephone and in writing. Upon receipt of such notification, Fletcher and its affiliates will immediately suspend all offers and sales of any Covered Securities pursuant to the Registration Statement. In such event, SmarTalk will amend or supplement the Registration Statement as promptly as practicable and will take such other steps as may be required to permit sales of the Covered Securities thereunder by Fletcher and its affiliates in accordance with applicable federal and state securities laws. SmarTalk will promptly notify Fletcher after it has determined in good faith that such sales have become permissible in such manner and will promptly deliver copies of the Registration Statement and the Prospectus (as so amended or supplemented) to Fletcher in accordance with paragraph (b) of this Section 3.A. Notwithstanding the foregoing, (A) under no circumstances shall SmarTalk be entitled to exercise its right to suspend sales of any Covered Securities pursuant to the Registration Statement more than two times in any twelve-month period, (B) the period during which such sales may be suspended (each a "Blackout Period") shall not exceed thirty days and (C) no Blackout Period may commence less than 30 days after the end of the preceding Blackout Period. Upon the commencement of a Blackout Period pursuant to this Section 3.A, Fletcher will notify SmarTalk of any contracts to sell any Covered Securities (each a "Sales Contract") that Fletcher or any of its affiliates has entered into prior to the commencement of such Blackout Period and that would require delivery of such Covered Securities during such Blackout Period, which notice will contain the aggregate sale price and volume of Covered Securities pursuant to such Sales Contract. Upon receipt of such notice, SmarTalk will immediately notify Fletcher of its election either (i) to terminate the Blackout Period and, as promptly as practicable, amend or supplement the Registration Statement or the Prospectus in order to correct the material misstatement or omission and deliver to Fletcher copies of such amended or supplemented Registration Statement and Prospectus in accordance with paragraph (b) of this Section 3.A or (ii) to continue the Blackout Period in accordance with this paragraph. If SmarTalk elects to continue the Blackout Period, and Fletcher or any of its affiliates is therefore unable to consummate the sale of Covered Securities pursuant to the Sales Contract (such unsold Covered Securities being hereinafter referred to herein as the "Unsold Securities"), SmarTalk will promptly indemnify each Fletcher Indemnified Party (as such term is defined in Section 13 below) against any Proceeding (as such term is defined in Section 13 below) that each Fletcher Indemnified Party may incur arising out of or in connection with Fletcher's breach or alleged breach of any such Sales Contract, and SmarTalk shall reimburse each Fletcher Indemnified Party for any reasonable costs or expenses (including reasonable legal fees) incurred by such party in investigating or defending any such Proceeding (collectively, the "Indemnification Amount"); provided, however, that each Fletcher Indemnified Party shall take all actions reasonably necessary or appropriate to mitigate such Indemnification Amount; and provided further, however, that the Indemnification Amount shall be reduced by an amount equal to the number of Unsold Securities multiplied by the difference between (x) the actual per share price received by Fletcher or any of its affiliates upon the sale of the Unsold Securities (if such sale occurs within three Trading Days of the end of the Blackout Period) or the closing sale price of the Common Stock on the NASDAQ National Market or other national securities exchange on which the Common Stock is then listed on the third Trading Day after the end of the Blackout Period (if the Unsold Securities are not sold by Fletcher or any of its affiliates within three Trading Days of the end of the Blackout Period), and (y) the per share sale price for the Unsold Securities provided in the Sales Contract. As used herein, the term "Trading Day" means any day on which SmarTalk's Common Stock is quoted on the NASDAQ National Market or, if applicable, other national securities exchange. 4. Representations and Warranties of Fletcher. Fletcher hereby represents and warrants to SmarTalk on the date hereof and on each Investment Closing Date, if any, as follows: a. Fletcher has been duly incorporated and is validly existing in good standing under the laws of the Cayman Islands, or after the date hereof, under the laws of the jurisdiction of its organization. b. The execution, delivery and performance of this Agreement by Fletcher have been duly authorized by all requisite corporate action and no further consent or authorization of Fletcher, its Board of Directors or its stockholders is required. This Agreement has been duly executed and delivered by Fletcher and, when duly authorized, executed and delivered by SmarTalk, will be a valid and binding agreement enforceable against Fletcher in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. c. Fletcher understands that no United States federal or state agency has passed on, reviewed or made any recommendation or endorsement of the Shares. d. Subject to Section 3.A hereof, Fletcher understands that the Shares have not been registered under the Securities Act and may not be re-offered or resold other than pursuant to registration thereunder or an available exemption therefrom. e. Fletcher is an "accredited investor" as such term is defined in Regulation D promulgated under the Securities Act. f. Fletcher shall be purchasing the Shares for its own account for investment only and not with a view to, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered under the Securities Act. g. Fletcher understands that the Shares are being or will be offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal securities laws and that SmarTalk is relying on the truth and accuracy of, and Fletcher's compliance with, the representations, warranties, agreements, acknowledgments and understandings of Fletcher set forth herein in order to determine the availability of such exemptions and the eligibility of Fletcher to acquire the Shares. h. The transactions contemplated by this Agreement are not part of a plan or scheme on the part of Fletcher, any of its affiliates or any person acting on its or their behalf to evade the registration requirements of the Securities Act. i. As of the date hereof, Fletcher intends to purchase any Additional Shares within the Investment Purposes Only exemption of the HSR Act, 16 C.F.R Section 802-9 and will take any action required by the HSR Act in connection with any such purchase. 5. [RESERVED.] 6. Consolidation, Merger, Etc. In case SmarTalk shall be a party to any transaction providing for (i) any acquisition of SmarTalk by means of merger or other form of corporate reorganization in which outstanding shares of SmarTalk are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation (the "Acquirer") or its subsidiary or (ii) a sale of all or substantially all of the assets of SmarTalk (on a consolidated basis) or (iii) any other transaction or series of related transactions by SmarTalk in which in excess of 50% of SmarTalk's voting power is transferred to a single entity or group acting in concert (each of the foregoing being referred to as a "Combination"), Fletcher, at its sole option, may choose to (1) exercise the Investment Rights (in whole or in part) before the Combination is closed (the "Combination Closing") or (2) exercise the Investment Rights (in whole or in part) simultaneously with the Combination Closing, in which event, it shall receive a number of shares of Acquirer Common Stock (as defined below) on terms identical to those set forth in Section 1 (and Section 5 and 3.A, if applicable) and any other consideration that it would have received had it exercised the Investment Rights immediately prior to the Combination Closing; and (3) with respect to any portion of the Investment Rights that are not exercised by Fletcher, Fletcher shall be entitled to purchase from the Acquirer (i) a right to purchase a number of shares of common stock of the Acquirer equal to the remaining amount of Shares subject to the Investment Rights (the "Number of Shares") at a price per share determined by multiplying (a) the Number of Shares times (b)(x) 4.125 divided by the consideration received in the Combination from or on behalf of the Acquirer times (y) the market price of Acquirer Common Stock on the day of the Combination Closing and/or (ii) receive cash in an amount equal to the Black-Scholes value of the Investment Rights based on the 260-day volatility as reported by Bloomberg, L.P. and based on the time remaining until the Expiration Date. The "Acquirer Common Stock" shall mean the class of publicly traded common stock of the Acquirer having the largest market capitalization as of the date of the Combination Closing. SmarTalk shall provide Fletcher with written notice of any proposed Combination as soon as the existence of a proposed Combination is made public by any person (the "Combination Notice"). SmarTalk will cause the surviving party in a Combination to assume all of the obligations of SmarTalk pursuant to this Agreement. It shall be a condition that all Acquirer common stock issued to Fletcher in any Combination shall have been registered under the Securities Act. 7. Covenants of SmarTalk. SmarTalk covenants and agrees with Fletcher as follows: a. For so long as Fletcher owns any Shares or any Investment Rights exist, and in any case for a period of 90 days thereafter, SmarTalk will use its best efforts to (i) maintain the eligibility of the Common Stock for quotation on the NASDAQ National Market or listing on a national securities exchange (as defined in the Exchange Act) and (ii) regain the eligibility of the Common Stock for quotation on the NASDAQ National Market in the event that the Common Stock is delisted by the NASDAQ National Market. b. SmarTalk will provide Fletcher with an opportunity to review and comment on any public disclosure by SmarTalk of information regarding this Agreement and the transactions contemplated hereby. Beginning on the date hereof and for so long as any Investment Rights exist, and in any case for a period of 90 days thereafter, SmarTalk will (i) promptly notify Fletcher if there is any public disclosure by SmarTalk of material information regarding SmarTalk or its financial condition, prospects or results of operation and (ii) provide Fletcher with copies of all SEC Filings. c. As soon as such information is available (but in no event later than December 10, 1998), SmarTalk shall deliver to Fletcher a written notice stating the number of outstanding shares of Common Stock as of the date hereof. d. SmarTalk will make all filings required by law with respect to the transactions contemplated hereby. e. SmarTalk will cause the Common Stock issuable as Shares to be duly listed and admitted for trading on the NASDAQ National Market or, if the NASDAQ National Market is not then the principal trading market for the Common Stock, on a national securities exchange (as defined in the Exchange Act) or the principal exchange or market for the Common Stock. f. [RESERVED] g. For a period beginning on the date hereof and ending on the day which is one year after the date hereof (the "One Year Period"), SmarTalk will not offer or sell any of its or its subsidiaries' Preferred Stock, Common Stock or other equity securities (or any securities convertible into or exchangeable for such Preferred Stock, Common Stock or other equity securities) in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder or under Regulation S promulgated under the Securities Act (an "Equity Placement"), unless SmarTalk shall have given Fletcher prior written notice (a "Notice Obligation") of its intention to engage in any such Equity Placement or other capital raising transaction in advance of soliciting or negotiating with any prospective investor and Fletcher has given its written approval thereof (which such approval shall be in Fletcher's sole discretion); and for one additional year after the One Year Period SmarTalk shall still have a Notice Obligation, and the parties hereto shall be obligated to negotiate in good faith with respect to the terms of any such proposed Equity Placement before the same shall occur. Except during the five trading days immediately prior to and following the date hereof and during the three trading days immediately prior to, and the five trading days immediately following, any Investment Closing Date, the above restrictions shall not apply to (i) the sale of 50% or more of the outstanding common stock of a subsidiary of SmarTalk (other than a sale which would constitute all or substantially all of the assets of SmarTalk and its subsidiaries), (ii) any strategic partnership or arrangement or joint venture entered into by SmarTalk or any of its subsidiaries, (iii) the merger or consolidation of SmarTalk with or into any other corporation or entity (other than a merger or consolidation that in substance results in the issuance of SmarTalk's securities for cash), (iv) any registered, underwritten public offering of SmarTalk's equity securities, (v) any issuances of Common Stock (including warrants and options exercisable for or convertible into Common Stock) in connection with any employee, consultant or director compensation plan or arrangement, (vi) any acquisition of any other corporation or entity by SmarTalk or any of its subsidiaries or merger or consolidation of any other corporation or entity with or into SmarTalk or any of its subsidiaries, provided such corporation or entity engages in a substantial trade or business; (vii) any issuance of warrants or other similar instrument with a fixed exercise price at or above the then current market price in connection with the offer and sale of non-convertible debt securities by SmarTalk and (viii) any issuance in connection with bona fide bank or equipment financing by or on behalf of SmarTalk or any of its subsidiaries. h. If on any Notice Date, the aggregate number of Shares issuable pursuant to Investment Rights (without regard to any notice periods), when added to the aggregate number of Shares previously issued and any other shares of Common Stock required to be included by NASDAQ, would exceed the number of shares equal to 20% of the total number of shares of Common Stock outstanding (adjusted to reflect any split, subdivision, combination or consolidation of the Common Stock, whether by reclassification, distribution of a dividend with respect to the outstanding Common Stock payable in shares of Common Stock, or otherwise, or any recapitalization of the Common Stock) on the date of this Agreement (the "Original Number") and such circumstance would require the approval (the "Required Consent") of the holders of the Common Stock pursuant to the listing requirements or rules of the NASDAQ National Market (or such other national securities exchange on which the Common Stock is then listed), SmarTalk (A) shall not issue shares of Common Stock (the "Issuance Blockage") to the extent that the total number of shares of Common Stock issued hereunder would exceed 19.9% of the Original Number, and (B) shall use its best efforts to obtain, within 90 days from the Notice Date, the Required Consent approval for the issuance of 20% or more of SmarTalk's Common Stock under this Agreement. In the event the Required Consent is not obtained in accordance with the preceding sentence, Fletcher shall have the right to convert up to that amount of the Investment Rights, the exercise of which would result in the total number of shares issued hereunder to exceed 19.9% of the Original Number into a note (an "Excess Note") by delivery of an Excess Notice (as defined below) in an amount equal the product of (x) the positive excess of the closing price (the "Excess Closing Price") as reported by Bloomberg, L.P. of the Common Stock on the NASDAQ National Market (or such other national securities exchange on which the Common Stock is then listed) on the Excess Notice Date (as defined below) over the applicable Investment Right Price and (y) the number of shares of Common Stock that would be issuable in respect of the complete exercise of the Initial Investment Right but for the Issuance Blockage. All computations in the preceding sentence with respect to the Investment Right Price and the number of shares of Common Stock issuable shall be determined as if the Excess Notice Date were the Notice Date. In addition, in the event the Required Consent is not obtained and any Excess Note is outstanding, SmarTalk shall not issue any securities or incur any indebtedness for borrowed money (other than indebtedness incurred pursuant to a revolving bank credit agreement ("Bank Debt") or in the ordinary course of SmarTalk's business), except in connection with the repurchase of Excess Notes. The Excess Note(s) shall be subordinated in right of payment to the Bank Debt, provided that such subordination shall not affect SmarTalk's obligation to pay such Excess Note(s) when due. To convert Investment Rights into an Excess Note, Fletcher shall deliver one or more written notices in the form attached hereto as Annex D (an "Excess Notice") to SmarTalk from time to time. The date upon which Fletcher causes an Excess Notice to be delivered to SmarTalk, by hand, facsimile, electronic transmission or otherwise, shall be the "Excess Notice Date" with respect to such exercise of the Investment Rights, which date shall be deemed to be an Investment Closing Date for purposes of Section 3 hereof. Each Excess Note shall be due and payable 90 days after the date of issuance and bear interest at an interest rate of 15% per annum. Notwithstanding anything else in this section 7(h), if at any time Fletcher delivers an Investment Notice and SmarTalk is unable to issue all or any portion of the shares identified therein as a result of the Issuance Blockage, SmarTalk shall issue to Fletcher an Excess Note in amount equal to the product of (x) the positive excess of the closing price as reported by Bloomberg of the Common Stock on the NASDAQ National Market (or such other national securities exchange on which the Common Stock is then listed) on the Excess Notice Date over the applicable Investment Right Price and (y) the number of shares of Common Stock that would be issuable in respect of such exercise of the Initial Investment Right but for the Issuance Blockage. 8. Covenants of Fletcher. Fletcher hereby covenants and agrees with SmarTalk as follows: a. Neither Fletcher nor any of its affiliates nor any person acting on its or their behalf will at any time offer or sell any Shares other than pursuant to registration under the Securities Act or pursuant to an available exemption therefrom. b. Fletcher will provide SmarTalk with an opportunity to review and comment on its filings pursuant to Regulation 13D-G under the Exchange Act regarding this Agreement and the transactions contemplated hereby. c. [RESERVED]. 8.A. Legend. Subject to Section 3.A., Fletcher understands that the certificates or other instruments representing the Shares shall bear a restrictive legend in the following form (and a stop transfer order may be placed against transfer of such certificates or other instruments): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. The legend set forth above shall be removed and SmarTalk shall issue a certificate without such legend to any holder of Shares if, unless otherwise required by state securities laws, (a) such shares are sold pursuant to an effective registration statement under the Securities Act, or (b) such holder provides SmarTalk with assurances reasonably satisfactory to SmarTalk that such shares may be publicly sold pursuant to Rule 144 (or similar regulation hereinafter adopted) without restriction. 8.B. Adjustments. In the event that SmarTalk shall declare a dividend or make a distribution on or with respect to the outstanding shares of its Common Stock in shares of its Common Stock, subdivide its outstanding shares of Common Stock into a greater number of shares, or combine its outstanding shares of Common Stock into a smaller number of shares, then, in each such event, the number of shares issuable and the per share price stated in this Agreement in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision or combination shall be proportionately adjusted, if necessary, as determined in good faith by the Board of Directors of SmarTalk, so that Fletcher shall be entitled to receive the aggregate number of shares of Common Stock that Fletcher would have received immediately following such action if Fletcher had exercised its rights immediately prior to such action. Such adjustment shall be made successively whenever any event specified above shall occur. 9. Conditions Precedent to Fletcher's Obligations. The obligations of Fletcher hereunder are subject to the performance by SmarTalk of its obligations hereunder and to the satisfaction of the following additional conditions precedent, unless expressly waived in writing by Fletcher: a. On the date hereof and each Investment Closing Date, if any, (i) to the extent provided in Section 3 hereof, the representations and warranties made by SmarTalk in this Agreement shall be true and correct, and (ii) SmarTalk shall have complied fully with all the covenants and agreements in this Agreement; and Fletcher shall have received on each such date a certificate of the Chief Executive Officer or the Chief Financial Officer of SmarTalk dated such date and to such effect. b. On the date hereof and each Investment Closing Date, if any, SmarTalk shall have delivered to Fletcher an opinion of the general counsel reasonably satisfactory to Fletcher, dated the date of delivery, confirming in substance the matters covered in paragraphs (a), (b), (c), (d), (e), (f), and (h) of Section 3 hereof. c. [RESERVED]. d. On each Investment Closing Date, if any, SmarTalk shall have delivered to Fletcher an opinion of the general counsel reasonably satisfactory to Fletcher, dated the date of delivery, to the effect that the offer and sale of the Shares to Fletcher do not require registration under the Securities Act. e. In addition, as of each Investment Closing, SmarTalk shall have delivered an opinion of outside counsel reasonably satisfactory to Fletcher, dated the date of delivery, confirming in substance the matter covered in paragraph (d) of this Section 9. 10. Conditions Precedent to SmarTalk's Obligations. The obligations of SmarTalk hereunder are subject to the performance by Fletcher of its obligations hereunder and to the satisfaction of the following additional conditions precedent, unless expressly waived in writing by SmarTalk: a. On the date hereof and each Investment Closing, if any, (i) the representations and warranties made by Fletcher in this Agreement shall be true and correct, and (ii) Fletcher shall have complied fully with all the covenants and agreements in this Agreement; and SmarTalk shall have received on each such date a certificate of an appropriate officer of Fletcher dated such date and to such effect. 11. Fees and Expenses. SmarTalk agrees to pay all expenses incident to the performance of its obligations hereunder, including, but not limited to the fees, expenses and disbursements of Fletcher's counsel. 12. Non-Performance. If, on the date hereof or on any Investment Closing, SmarTalk shall fail to deliver the Shares to Fletcher required to be delivered pursuant to this Agreement for any reason other than the failure of any condition precedent to SmarTalk's obligations hereunder or the failure by Fletcher to comply with its obligations hereunder, then SmarTalk shall: a. hold Fletcher harmless against any loss, claim or damage (including without limitation, incidental and consequential damages) arising from or as a result of such failure by SmarTalk; and b. reimburse Fletcher for all of its reasonable out-of-pocket expenses, including fees and disbursements of its counsel, incurred by Fletcher in connection with this Agreement and the transactions contemplated herein and therein; provided, however, that SmarTalk shall then be under no further liability to Fletcher except as provided in this Section 12 and Section 13 hereof. 13. Indemnification. a. Indemnification of Fletcher. SmarTalk hereby agrees to indemnify Fletcher and each of its officers, directors, employees, agents and affiliates and each person that controls (within the meaning of Section 20 of the Exchange Act) any of the foregoing persons (each a "Fletcher Indemnified Party") against any claim, demand, action, liability, damages, loss, cost or expense (including, without limitation, reasonable legal fees) (a "Proceeding"), that it may incur in connection with any of the transactions contemplated hereby arising out of or based upon: (1) any untrue or alleged untrue statement of a material fact in an SEC filing or this Agreement by SmarTalk or any of its affiliates or any person acting on its or their behalf or omission or alleged omission to state therein or herein any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading by SmarTalk or any of its affiliates or any person acting on its or their behalf; (2) any of the representations or warranties made by SmarTalk herein being untrue or incorrect at the time such representation or warranty was made; and (3) any breach or non-performance by SmarTalk of any of its covenants, agreements or obligations under this Agreement; and SmarTalk hereby agrees to reimburse each Fletcher Indemnified Party for any reasonable legal or other expenses incurred by such Fletcher Indemnified Party in investigating or defending any such Proceeding; provided, however, that the foregoing indemnity shall not apply to any Proceeding to the extent that it arises out of or is based upon the gross negligence or wilful misconduct of Fletcher in connection therewith. Furthermore, the foregoing indemnity rights will not take effect unless or until the total amount of the indemnification is $10,000. b. Indemnification of SmarTalk. Fletcher hereby agrees to indemnify SmarTalk and each of its officers, directors, employees, agents and affiliates and each person that controls (within the meaning of Section 20 of the Exchange Act) any of the foregoing persons (each a "SmarTalk Indemnified Party") against any Proceeding, that it may incur in connection with any of the transactions contemplated hereby arising out of or based upon: (1) any untrue or alleged untrue statement of a material fact by Fletcher or any of its affiliates or any person acting on its or their behalf or omission or alleged omission to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading by Fletcher or any of its affiliates or any person acting on its or their behalf; (2) any of the representations or warranties made by Fletcher herein being untrue or incorrect; and (3) any breach or non-performance by Fletcher of any of its covenants, agreements or obligations under this Agreement; and Fletcher hereby agrees to reimburse each SmarTalk Indemnified Party for any reasonable legal or other expenses incurred by such SmarTalk Indemnified Party in investigating or defending any such Proceeding; provided, however, that the foregoing indemnity shall not apply to any Proceeding to the extent that it arises out of or is based upon the gross negligence or wilful misconduct of SmarTalk in connection therewith. Furthermore, the foregoing indemnity rights will not take effect unless or until the total amount of the indemnification is $10,000. c. Conduct of Claims. (1) Whenever a claim for indemnification shall arise under this Section, the party seeking indemnification (the "Indemnified Party"), shall notify the party from whom such indemnification is sought (the "Indemnifying Party") in writing of the Proceeding and the facts constituting the basis for such claim in reasonable detail; (2) Upon delivery of such notice, such Indemnified Party shall have a duty to take all reasonable steps to mitigate any losses, liabilities, costs, charges and expenses relating to any such Proceeding; (3) Such Indemnifying Party shall have the right to retain the counsel of its choice in connection with such Proceeding and to participate at its own expense in the defense of any such Proceeding; provided, however, that counsel to the Indemnifying Party shall not (except with the consent of the relevant Indemnified Party) also be counsel to such Indemnified Party. In no event shall the Indemnifying Party be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from its own counsel for all Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances; and (4) No Indemnifying Party shall, without the prior written consent of the Indemnified Parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification could be sought under this Section unless such settlement, compromise or consent (A) includes an unconditional release of each Indemnified Party from all liability arising out of such litigation, investigation, proceeding or claim and (B) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any Indemnified Party. 14. Survival of the Representations, Warranties, etc. The respective representations, warranties, and agreements made herein by or on behalf of the parties hereto shall remain in full force and effect, regardless of any investigation made by or on behalf of the other party to this Agreement or any officer, director or employee of, or person controlling or under common control with, such party and will survive delivery of and payment for any Shares issuable hereunder. 15. Notices. All communications hereunder shall be in writing, and a. if sent to Fletcher, shall be delivered by hand, sent by registered mail or transmitted and confirmed by facsimile to Fletcher, unless otherwise notified in writing of a substitute address, at: Original Copy: Fletcher International Limited c/o Midland Bank Trust Corporation (Cayman) Limited P.O. Box 1109 Mary Street Grand Cayman, Cayman Islands, B.W.I. Attn: Pamela Clements Telephone: (345) 914-7515 Facsimile: (345) 949-7634 with a copy to: Fletcher Asset Management 22 East 67th Street New York, NY 10022 Attn: Peter Zayfert Telephone: (212) 758-7000 Facsimile: (212) 758-7090 with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 Attention: Robert A. Copen Telephone: (212) 735-3536 Facsimile: (212) 735-2000 b. if sent to SmarTalk, shall be delivered by hand, sent by registered mail or transmitted and confirmed by facsimile to SmarTalk, unless otherwise notified in writing of a substitute address, at: SmarTalk TeleServices, Inc. 5080 Tuttle Crossing Blvd. Dublin, Ohio 43017 Attention: General Counsel Telephone: (614) 764-2933 Facsimile: (614) 764-4801 with a copy to: Cadwalader, Wickersham & Taft 100 Maiden Lane New York, NY 10038 Attention: Lawrence A. Larose Telephone: (212) 404-6000 Facsimile: (212) 504-6666 To the extent that any funds shall be delivered to SmarTalk by wire transfer, unless otherwise instructed by SmarTalk, such funds should be delivered in accordance with the following wire instructions provided by SmarTalk. 16. Miscellaneous a. This Agreement may be executed in one or more counterparts and it is not necessary that signatures of all parties appear on the same counterpart, but such counterparts together shall constitute but one and the same agreement. b. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors and assigns and, with respect to Section 13 hereof, their respective officers, directors, employees, agents, affiliates and controlling persons, and no other person shall have any right or obligation hereunder. SmarTalk may not assign this Agreement. Fletcher may assign any of its rights, in whole or in part, at its sole discretion (including, without limitation, the Investment Rights). c. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, and each of the parties hereto hereby submits to the non-exclusive jurisdiction of any State or Federal court in the State of Delaware and any court hearing any appeal therefrom, over any suit, action or proceeding against it arising out of or based upon this Agreement (a "Related Proceeding"). Each of the parties hereto hereby waives any objection to any Related Proceeding in such courts whether on the grounds of venue, residence or domicile or on the ground that the Related Proceeding has been brought in an inconvenient forum. d. This Agreement shall not limit SmarTalk's ability to issue options under or to enter into, adopt or amend any stock option, bonus, incentive, deferred compensation, hospitalization, medical insurance, severance or other plan, fund, program or policy providing director, officer, employee or similar person benefits maintained or contributed to by SmarTalk in the ordinary course of business consistent with past practice. e. This Agreement shall not limit SmarTalk's ability to adopt a shareholders rights plan or similar agreement or arrangement (any of which, a "Rights Plan") provided that SmarTalk shall not adopt a Rights Plan unless in connection therewith SmarTalk delivers to Fletcher a legal opinion from outside counsel reasonable satisfactory to Fletcher confirming that no Fletcher Party (as defined below) shall be adversely affected by such Rights Plan either at such time or with the passage of time, as a result of its being the beneficial owner of any securities issued or issuable pursuant to this Agreement (any such securities, "Fletcher Securities," including any Common Stock which have been or may be issued upon exercise of the Investment Rights), where a "Fletcher Party" shall include (i) Fletcher, Fletcher Asset Management, Inc., Polaris Fund, L.P., and The Fletcher Fund, L.P., (ii) any affiliate of Fletcher, (iii) any creditor of Fletcher who acquires Fletcher Securities upon the exercise of creditor rights in connection with a bona fide credit arrangement, and (iv) any other person who acquires Fletcher Securities provided that such person stated or intends to state in a timely fashion in a filing pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended, or any successor provision thereto, that such person has acquired such securities in the ordinary course of business and not with the purpose or effect of changing or influencing control of SmarTalk, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b). SmarTalk shall not take any actions inconsistent with the rights of Fletcher Parties as of the date hereof. f. The headings of the sections of this document have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter of this Agreement. This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder or under the terms of the term sheets between such parties. 17. Time of Essence. Time shall be of the essence in this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement, all as of the day and year first above written. SMARTALK TELESERVICES, INC. By:___________________________ Name: Title: FLETCHER INTERNATIONAL LIMITED By:___________________________ Name: Title: By:___________________________ Name: Title: ANNEX A [FORM OF INVESTMENT NOTICE] -------------, -- SmarTalk TeleServices, Inc. [ADDRESS] Ladies and Gentlemen: Fletcher International Limited ("Fletcher") hereby elects to exercise the _________ Right (as defined in the Investment Rights Agreement (the "Agreement") dated as of December __, 1998 by and between SmarTalk TeleServices, Inc. ("SmarTalk") and Fletcher) and, if applicable, herewith tenders $_________ by check or wire transfer to the account of SmarTalk as payment for __________ Shares in accordance with the terms of the Agreement. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Agreement. In accordance with the terms of the Agreement, the Investment Closing shall be ___________, and the total number of Shares issuable in respect of this exercise is ________________. Fletcher requests that stock certificates representing the Shares purchased hereby be registered in the name of Fletcher and delivered to the following address in accordance with the terms of the Agreement: [To Come] FLETCHER INTERNATIONAL LIMITED By:___________________________ Name: Title: By:___________________________ Name: Title: AGREED AND ACKNOWLEDGED: SMARTALK TELESERVICES, INC. By:________________________ Name: Title: [ANNEX B RESERVED] ANNEX C [FORM OF SHARE DELIVERY NOTICE] Fletcher International Limited c/o Fletcher Asset Management 22 East 67th Street New York, NY 10021 Attn: Peter Zayfert Telephone: (212) 758-7000 Facsimile: (212) 758-7090 RE: Investment Rights Agreement (the "Agreement") dated December __ , 1998 by and between Fletcher International Limited ("Fletcher") and SmarTalk TeleServices, Inc. ("SmarTalk"). Ladies and Gentlemen: Attached are copies of the original stock certificates representing the __________ Shares (as defined in the Agreement) purchased by Fletcher, together with a copy of the overnight courier air bill which will be used to ship the certificates. We have the executed originals of the stock certificates and other documents required to be delivered in connection with the Investment Closing. Upon our confirmation of the payment of the $_____________ aggregate Investment Right Price by Fletcher to SmarTalk, if applicable, for the Shares on the Notice Date, we will send the stock certificates by overnight courier to the following address: [INSERT ADDRESS] and we will send the other original documents by overnight courier to the following address: Fletcher International Limited c/o Midland Bank Trust Corporation (Cayman) Limited P.O. Box 1109 Mary Street Grand Cayman, Cayman Islands, B.W.I. Attn: Pamela Clements Telephone: (345) 914-7515 Facsimile: (345) 949-7634 with a copy to: Fletcher International Limited c/o Fletcher Asset Management 22 East 67th Street New York, NY 10021 Attn: Peter Zayfert Telephone: (212) 758-7000 Facsimile: (212) 758-7090 Capitalized terms not otherwise defined in this letter have the meanings set forth in the Agreement. Very truly yours, SMARTALK TELESERVICES, INC. ANNEX D [FORM OF EXCESS NOTES NOTICE] -------------, -- SmarTalk TeleServices, Inc. [ADDRESS] Ladies and Gentlemen: Fletcher International Limited ("Fletcher") hereby elects to exercise its right to convert some or all of its Investment Rights (as defined in the Investment Rights Agreement (the "Agreement") dated as of December __, 1998 by and between SmarTalk TeleServices, Inc. ("SmarTalk") and Fletcher) and, if applicable, herewith tenders $_________ by check or wire transfer to the account of SmarTalk as payment for $ __________ of Excess Notes in accordance with the terms of the Agreement. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Agreement. In accordance with the terms of the Agreement, the Investment Closing Date shall be ___________, and the amount of issuable Excess Notes in respect of this exercise is ________________. Fletcher requests that the Excess Notes be registered in the name of Fletcher and delivered to the following address in accordance with the terms of the Agreement: [To Come] FLETCHER INTERNATIONAL LIMITED By:___________________________ Name: Title: By:___________________________ Name: Title: AGREED AND ACKNOWLEDGED: SMARTALK TELESERVICES, INC. By:________________________ Name: Title: EX-99.1 6 PRESS RELEASE SmarTalk[tm] NEWS RELEASE FOR IMMEDIATE RELEASE Contact: SmarTalk TeleServices Pamela Bennett Manager, Corporate Communications (614) 789-8650 Fletcher Asset Management Jonathan Schindel (212) 284-4800 SMARTALK ANNOUNCES NEW CREDIT FACILITY Monday, December 7, 1998 (Columbus, Ohio): SmarTalk TeleServices, Inc. (Nasdaq:SMTK) today announced that it has reached an agreement with Fletcher International Limited for a $25 million secured term loan facility, maturing January 31, 1999. The Company expects to access up to $10 million of the facility over the next month, subject to the satisfaction of customary conditions to draw down. The Company could access up to an additional $15 million from the facility over various periods, subject to the discretion of the lender. SmarTalk plans to use the financing for general corporate purposes. An affiliate of Fletcher Asset Management currently is a shareholder of SmarTalk. In connection with the financing transaction, SmarTalk has granted Fletcher the right to acquire, upon satisfaction of applicable notice periods, up to approximately an additional 15% of the common stock of SmarTalk. SmarTalk TeleServices, Inc. is a leading provider of prepaid calling cards and prepaid wireless services. Based in Dublin, Ohio, SmarTalk maintains distribution agreements with the U.S. Postal Service and leading mass merchandisers, consumer electronics retailers, supermarkets, hotels, home office superstores and convenience stores throughout North America and the U.K. SmarTalk also creates promotional card programs for advertisers and corporate clients. Visit the SmarTalk website at www.smartalk.com. Note: Certain statements made herein that are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including the Company's plans and ability to access various amounts of the credit facility. Investors are cautioned that all forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. These risks include the risk that actual amounts accessed under the facility depend upon the Company's satisfaction of various conditions detailed in the provisions of the credit agreement including, under certain circumstances, the lender's discretion. Investors who seek more information about the Company's business and relevant risk factors may wish to review the Company's SEC reports, including, without limitation, its Annual Report on Form 10-K for 1997 and its Quarterly Reports on Form 10-Q, as each of such documents may be amended, and the Form 8-K which the Company is preparing to file with the SEC, which will include the complete text of the credit agreement. -----END PRIVACY-ENHANCED MESSAGE-----