<PAGE> 1
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
-------------------------------
Date of Report (Date of earliest event reported) September 30, 1996
WEST COAST ENTERTAINMENT CORPORATION
------------------------------------
(Exact Name of Registrant as specified in its charter)
Delaware 0-28072 04-3278751
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
9990 Global Road, Philadelphia, Pa. 19115
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 677-1000
--------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 2 Acquisition or Disposition of Assets
- ------ ------------------------------------
Recent Acquisitions
-------------------
On September 30, 1996, West Coast Entertainment Corporation (the "Company")
acquired from an unrelated selling group a total of 14 video specialty stores.
Such acquisition, together with the previous acquisition by the Company of five
video specialty stores on August 26, 1996 and the subsequent acquisition by the
Company of one video specialty store on October 1, 1996 (collectively, the "Fall
1996 Acquisitions") from three unrelated selling groups (the "Fall 1996
Sellers") were of an aggregate size sufficient to require the filing of this
Current Report on Form 8-K. The terms of the Fall 1996 Acquisitions were
negotiated with the Fall 1996 Sellers at arm's length.
The Company intends to extend the West Coast Video(R) name and logo and its
registered trademark The Movie Buff's Movie Store(R) to the acquired stores as
soon as practicable. The Company also intends to integrate the acquired stores
into the Company's management information, telecommunications, management,
marketing, finance and accounting, entertainment purchasing, distribution,
retail operations and merchandising systems as soon as is feasible over an
18-month period following closing of the Fall 1996 Acquisitions. The Company
expects the aggregate costs of converting the acquired stores to West Coast
signage and format to be approximately $0.3 million over an 18-month period
following consummation of the Fall 1996 Acquisitions.
<TABLE>
Set forth below is a brief description of each of the Fall 1996
Acquisitions:
<CAPTION>
Number of Owned
and Operated
Name of Seller(s) Stores Locations
- ----------------- --------------- ---------
<S> <C> <C>
JJ Video Inc., Cincinnati, Ohio (2 stores),
Picture Show Video, Lexington, Kentucky (2 stores)
Inc., Picture Show and Winchester, Kentucky (1
Video #4, Inc., store)
Picture Show Video-
Gardenside, Inc.
and Picture Show
Video-Winchester,
Inc. ("Picture Show").... 5
Group of 15 entities under Lyndhurst, Kearny, New Milford,
common control, each doing Hillsdale, Hackensack, Wayne,
business under the name Bergenfield, Belleville,
Super Video Stores Harrison, Rahway, Wallington,
("Super Video")............ 14 Montclair, Park Ridge and
Emerson, New Jersey
</TABLE>
-2-
<PAGE> 3
<TABLE>
<S> <C> <C>
Reel Entertainment, Inc.
("Reel Entertainment")... 1 Baton Rouge, Louisiana
--
Total............. 20
</TABLE>
The 20 stores typically range in size from 2,300 to 6,500 square feet and
employ approximately 41 persons full-time and approximately 175 persons
part-time. The leases for the stores generally do not vary in important respects
from the typical lease for the Company's existing stores.
After making the Fall 1996 Acquisitions, the Company has 218 owned and
operated stores and 287 franchised stores located in 24 states and three foreign
countries.
Consideration Paid. In connection with the Fall 1996 Acquisitions, the
Company paid aggregate consideration (excluding costs related to the Fall 1996
Acquisitions) of $13,064,982, consisting of $8,180,982 paid in cash and
$4,884,000 paid in shares of Common Stock valued in accordance with the average
closing or bid and asked prices of common Stock on Nasdaq over a 15 trading-day
period ending one to three trading days before the closing date (92,176 shares
at an average formula price of approximately $9.113 per share, in the case of
Picture Show, 427,046 shares at an average formula price of $9.177 per share, in
the case of Super Video, and 13,624 shares at an average formula price of $9.175
per share, in the case of Reel Entertainment, for a total of 531,678 shares at a
weighted average formula price of $9.186 per share). The cash portion of the
purchase price was financed with borrowings under the Company's credit facility.
<TABLE>
The following table sets forth the consideration paid for each chain of
stores acquired in connection with the Fall 1996 Acquisitions:
<CAPTION>
Cash Common Stock
Prospective ----------------------- -----------------------
Seller Amount %(1) Amount %(1) Total
- ----------- ------ ---- ------ ---- -----
<S> <C> <C> <C> <C> <C>
Picture Show $1,240,000 59.6% $ 840,000 40.4% $ 2,080,000
Super Video 6,640,982(2) 62.9% 3,919,000(3) 37.1% 10,559,982
Reel
Entertainment 300,000 70.6% 125,000 29.4% 425,000(4)
---------- ---- ---------- ---- -----------
Total $8,180,982 $4,884,000 $13,064,982
========== ========== ===========
<FN>
- -----------
(1) Percentage of total consideration for each Fall 1996 Acquisition
represented by the cash component and by the stock component, respectively.
(2) Includes $399,982 of liabilities assumed by the Company and adjustments for
certain prepaid expenses.
</TABLE>
-3-
<PAGE> 4
(3) One-third, or 142,349, of these shares will be delivered on March 30, 1997,
another one-third on September 30, 1997, and the remaining one-third on
March 30, 1998. The consideration payable on March 30, 1997, as well as
half of the consideration payable on September 30, 1997, will be subject to
redetermination based on the closing price of Common Stock on Nasdaq on
each such issuance date, if such closing price is less than the originally
determined average price ($9.177 per share). The additional consideration
to be paid to this Fall 1996 Seller in such event would be payable, at the
Company's election, in cash and/or in shares of Common Stock valued for
this purpose on the basis of the subsequent closing price.
(4) Subject to subsequent adjustment based upon proration for rental
prepayments and other prepaid expenses.
Financial statements for the Picture Show and Super Video chains are
described in Item 7 below.
FUTURE CLOSINGS. The Company and the seller of the Reel Entertainment store
have entered into an asset purchase agreement providing for the purchase and
sale of three additional existing Reel Entertainment stores, subject to the
satisfaction of various closing conditions. These stores are located in
Lafayette, Lake Charles and Hammond, Louisiana. An additional $300,000 of cash
and $125,000 of stock will be delivered at the closing of each of the three
stores. These closings are currently expected to occur on or about December 2,
1996 and March 3 and May 1, 1997. At its election, the Company may substitute
cash for stock at any or all of the closings for the three stores.
PUTS AND CALLS ON ADDITION STORES. In August 1996 the Company entered
into a cross purchase agreement with the sellers of the Picture Show chain,
under which the sellers have the right to require the Company to buy, and the
Company has the right to require the sellers to sell, up to four additional
stores operated or to be operated by the sellers. Such options are exercisable
at specified times between August 1997 and October 2000. The purchase prices
for such additional stores will be equal to 3.5 times their respective net
operating cash flow (as defined) for specified periods and will be payable by
delivery, one year following the respective closing dates, of unsecured
promissory notes of the Company each bearing interest at a rate of 2% per annum
and payable in full, both as to principal and interest, four years after such
closing date, subject to the right of such sellers to elect, prior to delivery
of such note, to receive in lieu of such note shares of Common Stock valued for
this purpose at approximately $9.113 per share. Such election may be made only
within ten days after delivery by the Company, on one or more dates selected by
the Company, of a current prospectus covering such stock.
-4-
<PAGE> 5
On October 1, 1996 the Company and the seller of the Reel Entertainment
stores entered into an area development agreement and a related option agreement
with respect to a total of up to 31 franchised stores to be located in
Louisiana. The developer, which will have exclusive rights to a defined
territory in the Louisiana area, paid the Company $100,000 upon execution of the
agreements; will pay an additional $69,000 on October 1, 1997 and an additional
$25,000 on October 1, 1998 and will pay up to an additional $31,000 as stores
are opened. The option agreement gives the Company the right to acquire, at
specified times, the assets of specified numbers of the franchised stores,
during a 39-month period commencing on October 1, 1998, at a purchase price
equal to approximately 4.5 times the stores' aggregate net operating cash flow,
as defined in the option agreement. A portion of the purchase price of each
tranche of eight or more stores, equal to the lesser of $2.0 million or 50% of
such purchase price, will be payable in cash and the balance will be payable, at
the Company's election, in cash or in shares of Common Stock. The price to be
used in calculating the number of shares to be issued will be the average
closing price of Common Stock over the 15 trading-day period ending on the third
trading day prior to the closing date of the store in question. The purchase
price for the first tranche of stores may be reduced or increased based upon the
Net Operating Cash Flow (as defined) for the four stores acquired or to be
acquired from Reel Entertainment under the Asset Purchase Agreement dated
October 1, 1996. Subject to the satisfaction of certain conditions, the area
development agreement also gives the franchisee the right, during a 39-month
period commencing on April 1, 1998, to require the Company to acquire between
eight and 31 of such stores at specified times at the same price and on the same
terms as described above, as well as any additional stores acquired by the
franchisee, the acquisition of which was approved by the Company.
Item 7. Financial Statements, Pro Forma Financial
- ------ Information and Exhibits.
-----------------------------------------
(a) The financial statements of the Picture Show and Super Video chains
acquired in the Fall 1996 Acquisitions, prepared pursuant to Rule 3-05
of Regulation S-X, are included in the Supplement dated September 24,
1996 (the "Supplement") to the definitive Prospectus dated September
23, 1996 (the "Prospectus"), both of which documents were filed
pursuant to Rule 424(b) on September 30, 1996 covering certain shares
of stock registered under the Registration Statement of the Registrant
on Form S-1 (File No. 333-8683) dated August 21, 1996 (pages F-8
through F-40 of the Supplement) filed as Exhibit 28 and are
incorporated by reference herein.
-5-
<PAGE> 6
(b) The pro forma financial information required pursuant to Article 11 of
Regulation S-X is included in the Supplement (pages S-6 through S-17)
filed as Exhibit 29 and is incorporated by reference herein.
(c) Exhibits
EXHIBIT
NO. DESCRIPTION
- ------- -----------
1. Asset Purchase Agreement dated August 23, 1996 by and among
West Coast Entertainment Corporation, a Delaware corporation
formerly known as RKT Acquisition Co. (the "Company") and
J.J. Video Inc. - Film Festival ("JJ"), Picture Show Video -
Gardenside, Inc. ("Gardenside"), Picture Show Video -
Winchester, Inc. ("Winchester"), Picture Show Video No. 4,
Inc. ("Brentwood") and Picture Show Video, Inc. Bernard
("St. Bernard," and collectively with JJ, Gardenside,
Winchester and Brentwood, the "Seller") and Charles Johnson,
as amended.
2. Instrument of Evidence of Indebtedness dated August 23, 1996
between Company and Seller.
3. Cross Purchase Agreement dated August 23, 1996 with Respect
to Additional Stores between Charles Johnson and the
Company.
4. Asset Purchase Agreement dated September 30, 1996 by and
among the Company, Steven Matsakis, Hal Greene and Brian
Miller (collectively, the "Principals" and individually, a
"Principal"), and Lyndhurst Video Inc., Kearny Video Inc.,
New Milford Video Inc., Hillsdale Video Inc., Hack Video
Inc., Bell Video Inc., Bergen Video Inc., Harris Video Inc.,
Rahway Video Inc., Wall Video Inc., Mont Video Inc., Super
Video of Park Ridge, Inc., Emerson Video LLC, Super Video
Management Co., Inc. and Large Corporation (collectively,
the "Super Video Sellers," and individually, a "Super Video
Seller").
5. Instrument of Evidence of Indebtedness dated September 30,
1996 between the Company and the Super Video Sellers.
6. Asset Purchase Agreement dated October 1, 1996 among the
Company, Reel Entertainment, T. George Solomon, Jr. and Bank
One Equity Investors, Inc.
7. Area Development Agreement dated October 1, 1996 between
West Coast Franchising Company and Reel Entertainment, Inc.
8. Retail Store Option Agreement dated October 1, 1996 between
the Company and Reel Entertainment, Inc.
-6-
<PAGE> 7
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.
WEST COAST ENTERTAINMENT
CORPORATION
By: /s/ Donald R. Thomas
---------------------------
Donald R. Thomas
Chief Operating Officer
<PAGE> 1
ASSET PURCHASE AGREEMENT
By and Among
West Coast Entertainment Corporation,
Each of the Entities Identified
On SCHEDULE A Attached Hereto
and
CHARLES JOHNSON, JR.
<PAGE> 2
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Sale and Delivery of the Assets....................... 1
1.1 Delivery of the Assets.......................... 1
1.2 Further Assurances ............................. 3
1.3 Base Purchase Price............................. 3
1.4 Assumption of Liabilities; Etc.................. 4
1.5 Allocation of Base Purchase Price and
Assumed Liabilities............................. 5
1.6 The Closing..................................... 5
1.7 No Apportionment................................ 5
1.8 Post-Closing Adjustments........................ 5
1.9 Additional Stores............................... 7
2. Representations of the Seller and the Principal....... 8
2.1 Organization.................................... 8
2.2 Capitalization of the Seller ................... 9
2.3 Authorization................................... 9
2.4 Ownership of the Assets......................... 9
2.5 Financial Statements............................ 10
2.6 Absence of Undisclosed Liabilities.............. 11
2.7 Litigation...................................... 11
2.8 Insurance....................................... 11
2.9 Inventory....................................... 11
2.10 Fixed Assets.................................... 12
2.11 Leases.......................................... 12
2.12 Change in Financial Condition and Assets........ 13
2.13 Tax Matters..................................... 13
2.14 Accounts Receivable............................. 14
2.15 Books and Records............................... 14
2.16 Contracts and Commitments....................... 14
2.17 Compliance with Agreements and Laws............. 16
2.18 Employee Relations.............................. 17
2.19 Absence of Certain Changes or Events............ 18
2.20 Suppliers....................................... 18
2.21 Prepayments and Deposits........................ 19
2.22 Trade Names and Other Intangible Property....... 19
2.23 Employee Benefit Plans.......................... 19
-i-
<PAGE> 3
Section Page
------- ----
2.24 Regulatory Approvals............................ 20
2.25 Indebtedness to and from Officers, Directors
and Shareholders................................ 20
2.26 Powers of Attorney and Suretyships.............. 20
2.27 Disclosure...................................... 20
3. Representations of the Buyer.......................... 21
3.1 Organization and Authority...................... 21
3.2 Capitalization of the Buyer..................... 21
3.3 Authorization................................... 22
3.4 Regulatory Approvals............................ 22
3.5 Disclosure...................................... 22
3.6 Issuance of Shares.............................. 22
4. Access to Information; Public Announcements........... 22
4.1 Access to Management, Properties and Records.... 22
4.2 Confidentiality................................. 23
4.3 Public Announcements............................ 23
5. Pre-Closing Covenants of the Seller................... 24
5.1 Conduct of Business............................. 24
5.2 Absence of Material Changes..................... 24
5.3 Taxes........................................... 26
5.4 Delivery of Interim Financial Statements ....... 26
5.5 Compliance with Laws............................ 26
5.6 Continued Truth of Representations
and Warranties of the Seller.................... 26
5.7 Continuing Obligation to Inform................. 26
5.8 Exclusive Dealing............................... 26
5.9 No Publicity.................................... 27
6. Satisfaction of Conditions, Liquidated Damages........ 27
6.1 Satisfaction of Conditions...................... 27
6.2 Liquidated Damages.............................. 27
-ii-
<PAGE> 4
Section Page
------- ----
7. Conditions to Obligations of the Buyer................ 28
7.1 Continued Truth of Representations
and Warranties of the Seller; Compliance with
Covenants and Obligations ...................... 28
7.2 Corporate Proceedings........................... 28
7.3 Governmental Approvals.......................... 28
7.4 Consents of Lenders, Lessors and Other
Third Parties................................... 28
7.5 Adverse Proceedings............................. 29
7.6 Opinion of Counsel.............................. 29
7.7 Board of Directors and Shareholder Approval..... 29
7.8 The Assets...................................... 29
7.9 Update.......................................... 29
7.10 Cash Available for Working Capital Purposes..... 20
7.11 Payables........................................ 29
7.12 Engineer's Report............................... 29
7.13 Tax Lien Waivers................................ 29
7.14 Franchise Agreements............................ 30
7.15 Cross Purchase Agreement........................ 30
7.16 Closing Deliveries.............................. 30
8. Conditions to Obligations of the Seller............... 31
8.1 Continued Truth of Representations and
Warranties of the Buyer; Compliance
with Covenants and Obligations.................. 31
8.2 Corporate Proceedings........................... 31
8.3 Governmental Approvals.......................... 31
8.4 Consents of Lenders, Lessors and Other
Third Parties................................... 31
8.5 Adverse Proceedings............................. 32
8.6 Opinion of Counsel.............................. 32
8.7 Closing Deliveries.............................. 32
9. Indemnification....................................... 32
9.1 By the Buyer and the Seller
and the Principal............................... 32
9.2A By the Seller and the Principal................. 33
9.2B By the Buyer.................................... 34
9.3 Claims for Indemnification...................... 34
9.4 Defense by Indemnifying Party.................. 35
-iii-
<PAGE> 5
Section Page
------- ----
9.5 Payment of Indemnification Obligation........... 35
9.6 Survival of Representations; Claims for
Indemnification................................. 35
10. Post-Closing Agreements............................... 36
10.1 Proprietary Information......................... 36
10.2 No Solicitation or Hiring of Former Employees... 36
10.3 Non-Competition Agreement....................... 37
10.4 Sharing of Data................................. 38
10.5 Use of Name.................................... 38
10.6 Cooperation in Litigation....................... 38
11. Termination of Agreement.............................. 39
11.1 Termination by Lapse of Time.................... 39
11.2 Termination by Agreement of the Parties........ 39
11.3 Termination by Reason of Breach................ 39
12. Transfer and Sales Tax................................ 39
13. Brokers............................................... 39
13.1 For the Seller.................................. 39
13.2 For the Buyer................................... 40
14. Notices............................................... 40
15 Arbitration........................................... 40
16. Successors and Assigns................................ 41
17. Entire Agreement; Amendments; Attachments............. 41
18. Expenses.............................................. 42
19. Legal Fees............................................ 42
20. Governing Law......................................... 42
21. Section Headings...................................... 42
22. Severability.......................................... 42
22. Counterparts.......................................... 43
-iv-
<PAGE> 6
ASSET PURCHASE AGREEMENT
------------------------
Agreement made as of August 23, 1996 by and among West Coast
Entertainment Corporation, a Delaware corporation with its principal
office at 9990 Global Road, Philadelphia, Pennsylvania 19115 (the
"Buyer"), each of the entities identified on SCHEDULE A attached hereto
(collectively, the "Seller"), each of which has its principal office at
address specified on SCHEDULE A, and Charles Johnson, Jr. (the
"Principal").
Preliminary Statement
---------------------
The Buyer desires to purchase, and the Seller desires to sell,
substantially all of the assets and business of the Seller related to
the Seller's retail video rental and sales business (the "Business"),
for the consideration set forth below and the assumption of certain of
the Seller's liabilities set forth below, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereby agree as
follows:
1. Sale and Delivery of the Assets
-------------------------------
1.1 Delivery of the Assets.
----------------------
(a) Subject to and upon the terms and conditions of this
Agreement, at the closing of the transactions contemplated by this
Agreement (the "Closing"), the Seller shall sell, transfer, convey,
assign and deliver to the Buyer, and the Buyer shall purchase from the
Seller, the following properties, assets and other claims, rights and
interests related to the Business:
(i) all inventories, videotapes, finished goods,
office supplies, maintenance supplies, packaging materials, spare parts
and similar items of the Seller (collectively, the "Inventory") which
exist on the Closing Date (as defined below);
(ii) all accounts, accounts receivable, notes and
notes receivable existing on the Closing Date which are payable to the
Seller, including any security held by the Seller for the payment
thereof (the "Accounts Receivable");
(iii) all prepaid expenses, deposits, bank accounts
and other similar assets of the Seller existing on the Closing Date,
including the cash represented by such assets, but
<PAGE> 7
excluding the cash of Seller held in Seller's bank accounts or at the
Stores, as defined below (other than the $600 per store required to be
transferred to Buyer pursuant to Section 7.10);
(iv) all rights of the Seller under the contracts,
agreements, leases, licenses and other instruments set forth on
SCHEDULE 2.16 attached hereto (collectively, the "Contract Rights");
(v) all books, records and accounts,
correspondence, manuals, customer lists, employment records, studies,
reports or summaries relating to or arising out of the Business;
(vi) all rights of the Seller under express or
implied warranties from the suppliers of the Seller;
(vii) all of the machinery, equipment, furniture,
leasehold improvements and construction in progress owned by the Seller
on the Closing Date, which are reflected as "fixed assets" or "capital
assets" in the accounting records of the Seller (collectively, the
"Fixed Assets");
(viii) all of the Seller's right, title and interest
in and to all intangible property rights, including but not limited to
inventions, discoveries, trade secrets, processes, formulas, know-how,
United States and foreign patents, patent applications, trade names,
including the name "Picture Show" or any derivation thereof,
trademarks, trademark registrations, applications for trademark
registrations, copyrights, copyright registrations, owned or, where not
owned, used by the Seller in its business and all licenses and other
agreements to which the Seller is a party (as licensor or licensee) or
by which the Seller is bound relating to any of the foregoing kinds of
property or rights to any "know-how" or disclosure or use of ideas
(collectively, the "Intangible Property"); and
(ix) except as specifically provided in Subsection
1.1(b) hereof, all other assets, properties, claims, rights and
interests of the Seller which exist on the Closing Date, of every kind
and nature and description, whether tangible or intangible, real,
personal or mixed.
(b) Notwithstanding the provisions of paragraph (a)
above, the assets to be transferred to the Buyer under this Agreement
shall not include any motor vehicles owned, leased or operated by the
Seller, or those assets listed on SCHEDULE 1.1(b) attached hereto or
the Seller's assets which
-2-
<PAGE> 8
relate solely to the Excluded Stores, as described in Section 1.1(c)
below (the "Excluded Assets").
(c) The Inventory, Accounts Receivable, Contract Rights,
Fixed Assets, Intangible Property and other properties, assets and
business of the Seller described in paragraph (a) above, other than the
Excluded Assets, shall be referred to collectively as the "Assets." The
Assets relate to the five retail video stores identified on SCHEDULE I
attached hereto, which constitute all of the retail video stores in
which Seller or the Principal has an interest except for the Excluded
Stores, as defined below. Such stores are sometimes hereinafter
referred to collectively as the "Stores." In addition to the Stores,
the Principal or his Affiliates owns and operates (or is in the process
of developing) the retail video stores described on SCHEDULE II
attached hereto (the "Excluded Stores").
1.2 FURTHER ASSURANCES. At any time and from time to time
after the Closing, at the Buyer's request and without further
consideration, the Seller promptly shall execute and deliver such
instruments of sale, transfer, conveyance, assignment and confirmation,
and take such other action, as the Buyer may reasonably request to more
effectively transfer, convey and assign to the Buyer, and to confirm
the Buyer's title to, all of the Assets, to put the Buyer in actual
possession and operating control thereof, to assist the Buyer in
exercising all rights with respect thereto and to carry out the purpose
and intent of this Agreement.
1.3 Base Purchase Price.
-------------------
(a) The purchase price for the assets shall be an amount
equal to $2,080,000 (the "Base Purchase Price"). The Base Purchase
Price shall be subject to adjustment as provided in Section 1.8 below.
The Base Purchase Price shall be allocated among the entities
identified on SCHEDULE A attached hereto in proportion to the
respective percentages set forth opposite their respective names on
SCHEDULE A.
(b) The Base Purchase Price shall be paid as follows. At
the Closing, the Buyer shall deliver to the Seller (i) $1,240,000 in
cash, by bank or cashiers check, or by wire transfer of immediately
available federal funds, and (ii) delivery of an Instrument of Evidence
of Indebtedness, substantially in the form of EXHIBIT A attached hereto
(the "Instrument") which shall provide for payment of the balance of
the Base Purchase Price on the first anniversary of the Closing Date.
The Instrument shall provide for payment of such amount (x) by delivery
of a promissory note of Buyer with a maturity date four years from the
Closing
-3-
<PAGE> 9
Date (which shall bear simple interest as the rate of 2% per annum, and
shall provide for payment of all principal and interest at maturity,
and not before) or (y) if the Seller so elects (which election shall be
made at the time and on the terms provided below), by delivery of that
number of shares of Common Stock, $.01 par value per share, of the
Buyer ("Common Stock") as is determined by dividing (x) $840,000 by (y)
the Market Value (as defined below). The number of shares issuable
pursuant to the Instrument shall be subject to appropriate adjustment
in the event of a stock dividend, stock split or similar event which
occurs after the issuance of the Instrument, but prior to the issuance
of shares thereunder. The "Market Value" of a share of Common Stock
shall equal the average of the bid and asked prices per share of
Buyer's Common Stock as reported on the Nasdaq Stock Exchange for each
of the fifteen trading days ending on the business day preceding the
Closing Date. Shares of Buyer Common Stock issued pursuant to the
Instrument shall be registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement
(the "Registration Statement") filed with the Securities and Exchange
Commission (the "SEC"). The Seller shall make the election contemplated
by clause (y) above only following delivery to the Seller of a current
prospectus relating to shares of Buyer's Common Stock on the date the
election is made, which prospectus is included in a then effective
Registration Statement (provided such prospectus may include
supplements thereto).
1.4 Assumption of Liabilities; Etc.
------------------------------
(a) At the Closing, the Buyer shall execute and deliver
an Instrument of Assumption of Liabilities (the "Instrument of
Assumption") substantially in the form attached hereto as EXHIBIT B,
pursuant to which it shall assume and agree to perform, pay and
discharge the following liabilities, obligations and commitments of the
Seller related to the Business (the "Assumed Liabilities"):
(i) All obligations of the Seller continuing after
the Closing under the leases and contracts of the Business and set
forth on SCHEDULE 1.4 attached hereto which become due and payable
after the Closing Date;
(ii) Accounts payable incurred in the ordinary
course of business by Seller for purchase of videotapes, to the extent
such videotapes are shipped to the Seller during the 30-day period
prior to the Closing Date; and
-4-
<PAGE> 10
(iii) All other liabilities and obligations of the
Seller, if any, specifically set forth in SCHEDULE 1.4 attached hereto.
Notwithstanding the foregoing, Buyer will not assume (and the Assumed
Liabilities shall exclude) any liabilities, obligations or commitments
of the Seller to the extent such liabilities, obligations and
commitments relate in whole or in part to the Excluded Stores, except
to the extent that the Seller can demonstrate, to Buyer's reasonable
satisfaction, that such liabilities (or a portion thereof) are
attributable to the Stores and the Assets.
(b) The Buyer shall not at the Closing assume or agree
to perform, pay or discharge, and the Seller shall remain
unconditionally liable for, all obligations, liabilities and
commitments, fixed or contingent, of the Seller other than the Assumed
Liabilities.
1.5 ALLOCATION OF BASE PURCHASE PRICE AND ASSUMED
LIABILITIES. The aggregate amount of the Base Purchase Price and the
Assumed Liabilities shall be allocated among the Assets in the manner
reasonably determined by the Buyer's chief financial officer, provided
such allocation shall not be inconsistent with the allocation reflected
on SCHEDULE 1.5 attached hereto.
1.6 THE CLOSING. The Closing shall take place on or before
September 30, 1996, at the offices of Hale and Dorr, 60 State Street,
Boston, Massachusetts, at such time or date as may be selected by
Buyer, or at such other time and date as may be mutually agreed upon in
writing by the parties hereto. The transfer of the Assets by the Seller
to the Buyer shall be deemed to occur at 9:00 a.m., Boston time, on the
date of the Closing (the "Closing Date").
1.7 NO APPORTIONMENT. The purchase price of the assets shall
not be subject to any adjustment for any prepaid expenses of the
Seller, including without limitation: (i) prepaid premiums on
insurance, (ii) water and sewer use charges, (iii) prepaid rent, (iv)
transfer taxes and recording fees, if any, incurred in connection with
the transfer of the Assets contemplated hereby, or (v) real property
taxes or other taxes for the then current tax period, and such prepaid
amounts, if any, shall not be added to or deducted from the Base
Purchase Price.
1.8 Post-Closing Adjustments.
------------------------
(a) Within 90 days following the Closing, the
Buyer shall cause independent certified public accountants for the
-5-
<PAGE> 11
Buyer (the "Accountants"), to review the books and records of the
Business. The Buyer shall cause the Accountants to deliver a statement
setting forth the Net Operating Cash Flow (as defined below) of the
Business to each of the parties to this Agreement (the "Accountants'
Report).
In the event that the Buyer or the Seller dispute the calculation
of the Net Operating Cash Flow, the disputing party shall notify the
other parties hereto in writing (the "Dispute Notice") of the amount,
nature and basis of such dispute, within 10 calendar days after
delivery of the Accountants' Report. In the event of such a dispute,
the parties hereto shall first use their best efforts to resolve such
dispute among themselves. If the parties are unable to resolve the
dispute within 10 business days after delivery of the Accountants'
Report, the dispute shall be submitted to the Accountants and Ron
Switzer, independent accountants for the Seller ("Seller's
Accountants"), for resolution. The Accountants and Seller's Accountants
shall use their best efforts to resolve the dispute within 10 business
days after submission. If they are unable to agree upon a resolution of
the dispute within such 10-business day period, the dispute shall be
submitted to arbitration in accordance with Section 15.
The fees and expenses of the Accountants in connection with the
preparation of the Accountants' Report and the resolution of disputes
pursuant to the preceding paragraph shall be borne by the Buyer and the
fees and expenses of Seller's Accountants in connection with the
resolution of disputes pursuant to the preceding paragraph shall be
borne by the Seller.
Immediately upon the expiration of the 10-business day period for
giving the Dispute Notice, if no Dispute Notice is given, or
immediately upon the resolution of disputes, if any, as provided above,
the Base Purchase Price shall be adjusted by the Cash Flow Adjustment,
as provided below.
A Cash Flow Adjustment shall occur only if the Seller's aggregate
Net Operating Cash Flow for the 12-month period ending December 31,
1995, as determined by the Accountants (the "Audited Cash Flow") is
less than $614,382. A Cash Flow Adjustment shall be a reduction in the
Base Purchase Price by an amount determined as follows:
Base Purchase Price - Base Purchase Price x Audited Cash Flow
---------------------------------------
$614,382
Any such reduction shall reduce the cash portion of the Base Purchase
Price, and the Seller shall, within 10 days following the determination
of the Cash Flow Adjustment, pay such amount to the
-6-
<PAGE> 12
Buyer in cash, or by bank or certified check, or by wire transfer of
immediately available funds.
For purposes of this Subsection 1.8, "Net Operating Cash Flow"
shall be equal to the pre-tax income from the Stores for the 12-month
period ended December 31, 1995, plus all debt-related interest expense
and depreciation and amortization expenses attributable to the Stores
for such 12-month period, plus the amount of all items listed on
SCHEDULE 1.8 for such 12-month period to the extent such items are not
attributable to the day to day operation of the Stores, less all rental
product purchases for the Stores during such 12-month period (including
revenue sharing expenses if not previously expensed), less all earned
income interest for the Stores for such 12-month period, plus all
compensation expenses for all office personnel employed by Seller
during such 12-month period. The Net Operating Cash Flow shall be
determined in accordance with generally accepted accounting principles
applied consistently with the Seller's past practice.
1.9 ADDITIONAL STORES. An Affiliate of the Principal
currently operates a retail video store at 4590 Montgomery Road,
Cincinnati, Ohio (the "Norwood Store"), and the Principal is in the
process of developing retail video stores located at 2475 W. Galbraith
Road, Cincinnati, Ohio, 8121 Plainfield Road, Cincinnati, Ohio, and
4506 Dixie Highway, Erlanger, Kentucky (such three stores being
hereinafter referred to as the "New Stores" and together with the
Norwood Store and any additional stores opened in accordance with this
Section 1.9, the "Additional Stores"). The New Stores shall be operated
as West Coast Entertainment franchisee stores pursuant to a separate
Franchise Agreement, which shall be executed and delivered on the
Closing Date.
The Seller shall be entitled to open additional retail stores from
time to time only subject to the terms and conditions contained in this
Section 1.9. Any such stores shall be opened only with the Buyer's
prior approval, shall be subject to a purchase option on the same terms
as the New Stores, and shall be operated as West Coast Entertainment
Corporation franchisee stores, subject to the terms and conditions of
the Buyer's then standard form of franchising agreement. Without
limiting the foregoing, the Buyer shall have the right to approve the
location of any such additional store, and such store must be in the
greater Cincinnati, Ohio area, unless Buyer and Seller otherwise agree
in writing. Such franchising agreement shall be on the Buyer's
customary terms, including (i) payment by Seller of a $1,000 per store
franchise fee, and (ii) payment of 5% monthly royalty fee commencing on
the date upon which any such new store opens. In connection with each
such new store, if any, Buyer's counsel shall prepare, for execution of
the Buyer and the Seller,
-7-
<PAGE> 13
a franchising agreement embodying the terms contained in this
Section 1.9.
The provisions of this Section 1.9 shall be binding upon the
Seller, the Principal and their respective Affiliates (as such term is
defined in the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder ("Affiliate")).
Seller and its Affiliates shall not, without Buyer's prior written
consent, sell, transfer or dispose of, directly or indirectly, by sale
of stock, assets, merger, consolidation or otherwise, all or any
portion of, or any interest in, any of stores opened pursuant to the
provisions of this Section 1.9, without Buyer's prior written consent,
which may be granted or denied in Buyer's sole and absolute discretion.
All of the Additional Stores shall be subject to a Cross- Purchase
Agreement, substantially in the form and on the terms of EXHIBIT C
hereto, which shall be executed and delivered at the Closing (the
"Cross Purchase Agreement").
2. Representations of the Seller and the Principal
-----------------------------------------------
The Seller and the Principal, jointly and severally, represent and
warrant to the Buyer as follows (it being understood that all
references in this Section 2 to the Seller shall be deemed to include
each and all, as applicable, of the entities listed on SCHEDULE A on a
joint and several basis, unless the context otherwise requires):
2.1 ORGANIZATION. The Seller is a corporation duly organized,
validly existing and in good standing under the laws of the state
indicated on SCHEDULE A attached hereto, and has all requisite power
and authority (corporate and other) to own its properties, to carry on
its business as now being conducted, to execute and deliver this
Agreement and the agreements contemplated herein, and to consummate the
transactions contemplated hereby. The Seller is duly qualified to do
business and in good standing in each of the jurisdictions listed on
SCHEDULE A attached hereto, which constitute all jurisdictions in which
its ownership of property or the character of their business requires
such qualification. Certified copies of the charter, bylaws and other
governing instruments of each of the Seller, each as amended to date,
have been previously delivered to the Buyer, are complete and correct,
and no amendments have been made thereto or have been authorized since
the date thereof. The Seller does not own any capital stock of or other
equity interest in any corporation, partnership, limited liability
company or other entity. SCHEDULE I (the Stores) and SCHEDULE II (the
Excluded Stores) together sets
-8-
<PAGE> 14
forth a list of each retail video rental store (including the location
of each such store and the name and address of all owners (if not
Seller) of each such store) owned, operated or licensed directly or
indirectly by the Seller and its Affiliates.
2.2 CAPITALIZATION OF THE SELLER. The Seller's authorized
capital stock is described on SCHEDULE A. SCHEDULE A accurately
reflects the issued and outstanding capital stock of Seller, and the
legal and beneficial owners thereof. All of such issued and outstanding
shares have been duly and validly issued and are fully paid and
nonassessable.
2.3 AUTHORIZATION. The execution and delivery of this
Agreement by the Seller, and the agreements provided for herein, and
the consummation by the Seller of all transactions contemplated hereby,
have been duly authorized by all requisite corporate and shareholder
action. This Agreement and all such other agreements and obligations
entered into and undertaken in connection with the transactions
contemplated hereby to which the Seller is a party constitute the valid
and legally binding obligations of the Seller, enforceable against the
Seller in accordance with their respective terms. The execution,
delivery and performance by the Seller of this Agreement and the
agreements provided for herein, and the consummation by the Buyer of
the transactions contemplated hereby and thereby, will not, with or
without the giving of notice or the passage of time or both: (a)
violate the provisions of any law, rule or regulation applicable to the
Seller; (b) violate the provisions of the charter or Bylaws of the
Seller; (c) violate any judgment, decree, order or award of any court,
governmental body or arbitrator; or (d) conflict with or result in the
breach or termination of any term or provision of, or constitute a
default under, or cause any acceleration under, or cause the creation
of any lien, charge or encumbrance upon the properties or assets of the
Seller pursuant to, any indenture, mortgage, deed of trust or other
instrument or agreement to which the Seller is a party or by which the
Seller or any of its properties is or may be bound. SCHEDULE 2.3
attached hereto sets forth a true, correct and complete list of all
consents and approvals of third parties that are required in connection
with the consummation by the Seller of the transactions contemplated by
this Agreement.
2.4 OWNERSHIP OF THE ASSETS. SCHEDULE 2.4(i) attached hereto
sets forth a true, correct and complete list of all claims,
liabilities, liens, pledges, charges, encumbrances and equities of any
kind affecting the Assets (collectively, the "Encumbrances"). The
Seller is, and at the Closing will be, the true and lawful owner of the
Assets, and will have the right to sell and transfer to the Buyer good,
clear, record and marketable title to the
-9-
<PAGE> 15
Assets, free and clear of all Encumbrances of any kind, except as set
forth on SCHEDULE 2.4(ii) attached hereto (the "Permitted
Encumbrances"). The delivery to the Buyer of the instruments of
transfer of ownership contemplated by this Agreement will vest good and
marketable title to the Assets in the Buyer, free and clear of all
liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever,
except for the Permitted Encumbrances.
2.5 Financial Statements.
--------------------
(a) The Seller has previously delivered to the Buyer its
audited balance sheet as of December 31, 1993, 1994 and 1995 (the
"Audited Balance Sheets") and the related statements of income,
shareholders' equity, retained earnings and statements of cash flows of
the Seller for the fiscal years then ended (collectively, including the
Audited Balance Sheet, the "Audited Financial Statements"). The Seller
has also previously delivered to the Buyer its comparative Balance
Sheet (the "Current Balance Sheet") as of June 30, 1996 (the "Balance
Sheet Date") and as of June 30, 1995, and the related comparative
statements of income, shareholders' equity, retained earnings and
statements of cash flows of the Seller for the six-month periods then
ended (collectively, the "Current Financial Statements"). The Seller
has also included in the footnotes to the Audited Financial Statements
and the Current Financial Statements statements of its quarterly
earnings. The Audited Financial Statements, the Current Financial
Statements and the interim financial statements (the "Interim Financial
Statements") to be delivered pursuant to Subsection 5.4 hereof
(collectively, the "Financial Statements") have been (or will be)
prepared in accordance with generally accepted accounting principles
applied consistently with past practice and are certified without
qualification by the Seller's independent public accountants, in the
case of the Audited Financial Statements, and have been (or will be)
certified by the Seller's chief financial officer, in the case of the
Current Financial Statements and the Interim Financial Statements.
(b) The Financial Statements fairly present, as of their
respective dates, the financial condition, retained earnings, assets
and liabilities of the Seller and the results of operations of the
Seller's business for the periods indicated; with respect to the
contracts and commitments for the sale of goods or the provision of
services by the Seller, the Financial Statements contain and reflect
adequate reserves, which are consistent with previous reserves taken,
for all reasonably anticipated material losses and costs and expenses;
and the amounts shown as accrued for current and deferred income and
other taxes in the Financial Statements are sufficient for the payment
-10-
<PAGE> 16
of all accrued and unpaid federal, state and local income taxes,
interest, penalties, assessments or deficiencies applicable to the
Seller, whether disputed or not, for the applicable period then ended
and periods prior thereto.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and to the
extent (a) reflected and reserved against in the Current Balance Sheet,
or (b) incurred in the ordinary course of business after the date of
the Current Balance Sheet and not material in amount, either
individually or in the aggregate, the Seller does not have any
liability or obligation, secured or unsecured, whether accrued,
absolute, contingent, unasserted or otherwise, affecting the Assets.
For purposes of this Subsection 2.6, "material" means any amount in
excess of $10,000.
2.7 LITIGATION. The Seller is not a party to, or to the
Seller's best knowledge threatened with, and none of the Assets are
subject to, any litigation, suit, action, investigation, proceeding or
controversy before any court, administrative agency or other
governmental authority relating to or affecting the Assets or the
business or condition (financial or otherwise) of the Seller. The
Seller is not in violation of or in default with respect to any
judgment, order, writ, injunction, decree or rule of any court,
administrative agency or governmental authority or any regulation of
any administrative agency or governmental authority.
2.8 INSURANCE. Seller maintains fire, theft, casualty,
general liability, workers compensation, business interruption,
environmental impairment, product liability, automobile and other
insurance policies insuring the Assets or business of the Seller in
amounts and of the types which are customary and adequate for the
business conducted by Seller and required by applicable laws
(collectively, the "Insurance Policies"). No claims have been made or
are pending under such Insurance Policies and Seller knows of no basis
therefor. The Insurance Policies are in full force and effect. All
premiums due on the Insurance Policies or renewals thereof have been
paid and there is no default under any of the Insurance Policies.
2.9 INVENTORY. SCHEDULE 2.9 attached hereto sets forth a
true, correct and complete list of the Inventory as of the date hereof,
including a description and the book value thereof. SCHEDULE 2.9, as
updated pursuant to Subsection 7.9 hereof, shall set forth a true,
correct and complete list of such Inventory as of the Closing Date,
including a description and valuation thereof. Such Inventory consists
of items of a quality and quantity which are usable or saleable without
discount in the ordinary course of the business conducted by the
Seller. The
-11-
<PAGE> 17
value of all items of obsolete materials and of materials of below
standard quality has been written down to realizable market value, and
the values at which such Inventory is carried reflect the normal
inventory valuation policy of the Seller of stating the Inventory at
the lower of cost or market value in accordance with generally accepted
accounting principles.
2.10 FIXED ASSETS. SCHEDULE 2.10 attached hereto sets forth a
true, correct and complete list of all Fixed Assets, as of the date
hereof, including a description and the book value thereof. SCHEDULE
2.10, as updated pursuant to Subsection 7.9 hereof, shall set forth a
true, correct and complete list of all such Fixed Assets as of the
Closing Date, including a description and valuation thereof. All of
such Fixed Assets are in good operating condition and repair, normal
wear and tear excepted, are currently used by the Seller in the
ordinary course of business and in the production of products of the
Seller and normal maintenance has been consistently performed with
respect to such Fixed Assets.
2.11 LEASES. SCHEDULE 2.11 attached hereto sets forth a true,
correct and complete list as of the date hereof of all leases of real
property, identifying separately each ground lease, to which the Seller
is a party (the "Leases"). True, correct and complete copies of the
Leases, and all amendments, modifications and supplemental agreements
thereto, have previously been delivered by the Seller to the Buyer. The
Leases are in full force and effect, are binding and enforceable
against each of the parties thereto in accordance with their respective
terms and, except as set forth on SCHEDULE 2.11, have not been modified
or amended since the date of delivery to the Buyer. No party to any
Lease has sent written notice to the other claiming that such party is
in default thereunder, which remains uncured. Except as set forth on
SCHEDULE 2.11 attached hereto, there has not occurred any event which
would constitute a breach of or default in the performance of any
material covenant, agreement or condition contained in any Lease, nor
has there occurred any event which with the passage of time or the
giving of notice or both would constitute such a breach or material
default. The Seller is not obligated to pay any leasing or brokerage
commission relating to any Lease and, except as set forth on SCHEDULE
2.11 attached hereto, will not have any enforceable obligation to pay
any leasing or brokerage commission upon the renewal of any Lease. No
material construction, alteration or other leasehold improvement work
with respect to any of the Leases remains to be paid for or to be
performed by the Seller. The Financial Statements contain adequate
reserves to provide for the restoration of the properties subject to
the Leases at the end of the respective Lease terms, to the extent
required by the Leases.
-12-
<PAGE> 18
2.12 CHANGE IN FINANCIAL CONDITION AND ASSETS. Since the
Balance Sheet Date, there has been no change which materially and
adversely affects the business, properties, assets, condition
(financial or otherwise) or prospects of the Seller. The Seller has no
knowledge of any existing or threatened occurrence, event or
development which, as far as can be reasonably foreseen, could have a
material adverse effect on the Seller or its business, properties,
assets, condition (financial or otherwise) or prospects.
2.13 Tax Matters.
-----------
(a)(i) Within the times and in the manner prescribed
by law, the Seller has filed all Returns which are required to be
filed;
(ii) With respect to all amounts in respect of Taxes
imposed upon the Seller for which it could be liable, whether to Taxing
Authorities (as, for example, under law) or to other persons or
entities (as, for example, under Tax allocation agreements), with
respect to all taxable periods or portions of taxable periods ending on
or before the Closing Date, all applicable tax laws and agreements have
been fully complied with, and all such amounts required to be paid by
the Seller to Taxing Authorities or others on or before the date hereof
have been paid.
(iii) All Returns filed by the Seller constitute
complete and accurate representations of the respective Tax liabilities
of, or attributable to, the Seller for such years;
(iv) No examination of the Returns of the Seller is
currently in progress nor, to the best knowledge of the Seller,
threatened and no unresolved deficiencies have been asserted or
assessed against the Seller as a result of any audit by any Taxing
Authority and no such deficiency has been proposed or threatened;
(v) There are no liens for Taxes (other than
for current Taxes not yet due and payable) upon the assets of the
Seller; and
(vi) The Seller is not a person other than a United
States person within the meaning of the Code.
(b) For purposes of this Section 2.13:
"Return" means any return, declaration, report, statement or other
document required to be filed in respect of any Tax.
-13-
<PAGE> 19
"Tax" or "Taxes" means any federal, state, local, foreign and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, windfall profits, customs duty or other tax, fee,
assessment or charge of any kind whatever, together with interest and
any penalty, addition to tax or additional amount with respect thereto.
"Taxing Authority" means any governmental authority responsible
for the imposition of Taxes.
2.14 ACCOUNTS RECEIVABLE. The Seller has no Accounts
Receivable.
2.15 BOOKS AND RECORDS. The general ledgers and books of
account of the Seller, all federal, state and local income, franchise,
property and other tax returns filed by the Seller, with respect to the
Assets, and all other books and records of the Seller are in all
material respects complete and correct and have been maintained in
accordance with good business practice and in accordance with all
applicable procedures required by laws and regulations.
2.16 CONTRACTS AND COMMITMENTS.
(a) SCHEDULE 2.16 attached hereto contains a true,
complete and correct list and description of the following contracts
and agreements, whether written or oral (collectively, the
"Contracts"):
(i) all loan agreements, indentures,
mortgages and guaranties to which the Seller is a party or by
which the Seller or any of its property is bound;
(ii) all pledges, conditional sale or title
retention agreements, security agreements, equipment obligations,
personal property leases and lease purchase agreements relating to any
of the Assets to which the Seller is a party or by which the Seller or
any of its property is bound;
(iii) all contracts, agreements, commitments,
purchase orders or other understandings or arrangements to which the
Seller is a party or by which the Seller or any of its property is
bound which (A) involve payments or receipts by the Seller of more than
$2,000 in the case of any single contract, agreement, commitment,
understanding or arrangement under which full performance (including
payment) has not been rendered by all parties thereto or (B) which may
materially adversely affect the
-14-
<PAGE> 20
condition (financial or otherwise) or the properties, assets,
business or prospects of the Seller;
(iv) all collective bargaining agreements,
employment and consulting agreements, executive compensation plans,
bonus plans, deferred compensation agreements, pension plans,
retirement plans, employee stock option or stock purchase plans and
group life, health and accident insurance and other employee benefit
plans, agreements, arrangements or commitments to which the Seller is a
party or by which the Seller or any of its property is bound;
(v) all agency, distributor, sales
representative and similar agreements to which the Seller is a
party;
(vi) all contracts, agreements or other
understandings or arrangements between the Seller any stockholder
or Affiliate of the Seller;
(vii) all leases, whether operating, capital or
otherwise, under which the Seller is lessor or lessee; and
(viii) any other material agreement or contract
entered into by the Seller.
(b) Except as set forth on SCHEDULE 2.16 attached
hereto:
(i) each Contract is a valid and binding agreement
of the Seller, enforceable against the Seller in accordance with its
terms, and the Seller does not have any knowledge that any Contract is
not a valid and binding agreement of the other parties thereto;
(ii) the Seller has fulfilled all material
obligations required pursuant to the Contracts to have been performed
by the Seller on its part prior to the date hereof, and the Seller has
no reason to believe that it will not be able to fulfill, when due, all
of its obligations under the Contracts which remain to be performed
after the date hereof;
(iii) the Seller is not in breach of or default under
any Contract, and no event has occurred which with the passage of time
or giving of notice or both would constitute such a default, result in
a loss of rights or result in the creation of any lien, charge or
encumbrance, thereunder or pursuant thereto;
-15-
<PAGE> 21
(iv) to the best knowledge of the Seller, there is
no existing breach or default by any other party to any Contract, and
no event has occurred which with the passage of time or giving of
notice or both would constitute a default by such other party, result
in a loss of rights or result in the creation of any lien, charge or
encumbrance thereunder or pursuant thereto;
(v) the Seller is not restricted by any
Contract from carrying on its business anywhere in the world; and
(vi) the Seller has no written or oral Contracts to
sell products or perform services which are expected to be performed
at, or to result in, a loss.
(c) Except as set forth on SCHEDULE 2.3 or SCHEDULE
2.16, the continuation, validity and effectiveness of each Contract
will not be affected by the transfer thereof to Buyer under this
Agreement and all such Contracts are assignable to Buyer without a
consent.
(d) True, correct and complete copies of all written
Contracts have previously been delivered by the Seller to the Buyer.
2.17 COMPLIANCE WITH AGREEMENTS AND LAWS. The Seller has all
requisite licenses, permits and certificates, including environmental,
health and safety permits, from federal, state and local authorities
necessary to conduct the Business and own and operate the Assets
(collectively, the "Permits"). SCHEDULE 2.17 attached hereto sets forth
a true, correct and complete list of all such Permits, copies of which
have previously been delivered by the Seller to the Buyer. The Seller
is not in violation of any law, regulation or ordinance (including,
without limitation, laws, regulations or ordinances relating to
building, zoning, environmental, disposal of hazardous substances, land
use or similar matters) relating to its properties, the violation of
which could have a material adverse effect on the Seller or its
properties. The business of the Seller does not violate, in any
material respect, any federal, state, local or foreign laws,
regulations or orders (including, but not limited to, any of the
foregoing relating to employment discrimination, occupational safety,
environmental protection, hazardous waste (as defined in the Resource
Conservation and Recovery Act, as amended, and the regulations adopted
pursuant thereto), conservation, or corrupt practices, the enforcement
of which would have a material and adverse effect on the results of
operations, condition (financial or otherwise), assets, properties,
business or prospects of the Seller. Except as set forth on SCHEDULE
2.17 attached hereto, the Seller has not since January 1, 1993 received
any notice or
-16-
<PAGE> 22
communication from any federal, state or local governmental or
regulatory authority or otherwise of any such violation or
noncompliance.
2.18 Employee Relations.
------------------
(a) The Seller is in compliance with all federal, state
and municipal laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours, and is not
engaged in any unfair labor practice, and there are no arrears in the
payment of wages or social security taxes.
(b) (i) none of the employees of the Seller is
represented by any labor union;
(ii) there is no unfair labor practice complaint
against the Seller pending before the National Labor Relations Board or
any state or local agency;
(iii) there is no pending, or to Seller's knowledge,
threatened, labor strike or other material labor trouble affecting the
Seller (including, without limitation, any organizational drive);
(iv) there is no material labor grievance
pending, or to Seller's knowledge, threatened, against the Seller;
(v) there is no pending, or to Seller's
knowledge, threatened, representation question respecting the
employees of the Seller; and
(vi) there are no pending, or to Seller's knowledge,
threatened, arbitration proceedings arising out of or under any
collective bargaining agreement to which the Seller is a party, or to
the best knowledge of the Seller, any basis for which a claim may be
made under any collective bargaining agreement to which the Seller is a
party.
(c) SCHEDULE 2.18 attached hereto sets forth a true,
correct and complete list of (a) the employee benefits provided by the
Seller to its employees and all contracts or agreements between the
Seller and its employees, and (b) the Seller's current payroll,
including the job descriptions and salary or wage rates of each of its
employees, showing separately for each such person who received an
annual salary in excess of $20,000 the amounts paid or payable as
salary and bonus payments for the year ending December 31, 1995.
-17-
<PAGE> 23
(d) For purposes of this Subsection 2.18, the term
"employee" shall be construed to include sales agents and other
independent contractors who spend a majority of their working time on
the Seller's business.
2.19 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Balance
Sheet Date, the Seller has not entered into any transaction which is
not in the usual and ordinary course of business, and, without limiting
the generality of the foregoing, the Seller has not:
(a) Incurred any material obligation or liability
for borrowed money;
(b) Discharged or satisfied any lien or encumbrance or
paid any obligation or liability other than current liabilities
reflected in the Current Balance Sheet;
(c) Mortgaged, pledged or subjected to lien,
charge or other encumbrance any of the Assets;
(d) Sold or purchased, assigned or transferred any of
its tangible assets or cancelled any debts or claims, except for
inventory sold and raw materials purchased in the ordinary course of
business;
(e) Made any material amendment to or termination
of any Contract or done any act or omitted to do any act which
would cause the breach of any Contract;
(f) Suffered any losses, whether insured or uninsured,
and whether or not in the control of the Seller, in excess of $5,000 in
the aggregate, or waived any rights of any value;
(g) Made any changes in compensation of its
officers, directors or employees;
(h) Received notice of any litigation, warranty
claim or products liability claims; or
(i) Made any material change in the terms, status or
funding condition of any Employee Plan, as defined in Subsection 2.23
hereof.
2.20 SUPPLIERS. SCHEDULE 2.20 attached hereto sets forth a
true, correct and complete list of the names and addresses of the ten
suppliers of the Seller which accounted for the largest dollar volume
of purchases by the Company for the fiscal year
-18-
<PAGE> 24
ending December 31, 1995. None of such suppliers has notified the
Seller that it intends to discontinue its relationship with the Seller.
2.21 PREPAYMENTS AND DEPOSITS. The Seller is not holding (and
does not have) any prepayments or deposits from customers for products
to be shipped, or services to be performed, after the Closing Date.
2.22 Trade Names and Other Intangible Property.
-----------------------------------------
(a) The Seller's only Intangible Property is the
name "Picture Show Video".
(b) The Seller is making no representation or warranty
as to its ownership rights, if any, in the name "Picture Show Video"
except for those expressly set forth in this Section 2.22. The
Intangible Property owned by the Seller is sufficient to conduct the
Seller's business as presently conducted and, when transferred to the
Buyer pursuant to this Agreement, will be sufficient to permit the
Buyer to conduct the business of the Seller as presently conducted by
the Seller. The Seller has received no notice of, and has no knowledge
of any basis for, a claim against it that any of its operations,
activities, products or publications infringes on any patent,
trademark, trade name, copyright or other property right of a third
party, or that it is illegally or otherwise using the trade secrets,
formulae or any property rights of others. The Seller has no disputes
with or claims against any third party for infringement by such third
party of any trade name or other Intangible Property of the Seller.
2.23 Employee Benefit Plans.
----------------------
(a) The Seller does not now have or otherwise contribute
to or participate in, and has not in the past had or otherwise
contributed to, any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974.
(b) The Buyer assumes no liabilities with respect to any
employee benefit plan operated or sponsored by the Seller or in which
its employees participate, including, without limitation, any
liabilities for taxes, accrued vacation or sick pay (whether or not
vested), accrued vacation, sick and personal leaves, employee policies,
employee benefit claims or liability to the Pension Benefit Guaranty
Corporation.
(c) EMPLOYEE PLANS. The Seller does not now have
(nor has it ever had) and the Seller does not now (or has it ever
-19-
<PAGE> 25
been) a contributor to or participant in any pension, benefit, profit
sharing, retirement, deferred compensation, welfare, insurance,
disability, bonus, vacation pay, severance pay and other similar plans,
programs and agreements, whether reduced to writing or not, relating to
the Seller's employees, or maintained by the Seller or by any other
member of any controlled group of corporations, group of trades or
businesses under common control, or affiliated service group (as
defined for purposes of Section 414(b), (c) and (m), respectively, of
the Internal Revenue Code of 1986, as amended (the "Code")) ("Employee
Plans") and the Seller has no obligations, contingent or otherwise,
past or present, under applicable law or the terms of any Employee
Plan.
2.24 REGULATORY APPROVALS. There are no consents, approvals,
authorizations and other requirements prescribed by any law, rule or
regulation which must be obtained or satisfied by the Seller and which
are necessary for the execution and delivery by the Seller of this
Agreement and the documents to be executed and delivered by the Seller
in connection herewith.
2.25 INDEBTEDNESS TO AND FROM OFFICERS, DIRECTORS AND
SHAREHOLDERS. Except as set forth on SCHEDULE 2.25 attached hereto, the
Seller is not indebted, directly or indirectly, to any person who is an
officer, director or shareholder of the Seller or any affiliate of any
such person in any amount whatsoever other than for salaries for
services rendered or reimbursable business expenses, all of which have
been reflected on the Current Financial Statements, and no such
officer, director, shareholder or affiliate is indebted to the Seller,
except for advances made to employees of the Seller in the ordinary
course of business to meet reimbursable business expenses anticipated
to be incurred by such obligor.
2.26 POWERS OF ATTORNEY AND SURETYSHIPS. The Seller has no
general or special powers of attorney outstanding (whether as grantor
or grantee thereof) and has no obligation or liability (whether actual,
accrued, accruing, contingent or otherwise) as guarantor, surety,
co-signor, endorser, co-maker, indemnitor or otherwise in respect of
the obligation of any person, corporation, partnership, joint venture,
association, organization or other entity, except as endorser or maker
of checks or letters of credit, respectively, endorsed or made in the
ordinary course of business.
2.27 DISCLOSURE. No representation or warranty by the Seller
in this Agreement or in any Exhibit hereto, or in any list, statement,
document or information set forth in or attached to any Schedule
delivered or to be delivered pursuant to this Agreement, contains or
will contain any untrue statement of a material fact
-20-
<PAGE> 26
or omits or will omit any material fact necessary in order to make the
statements contained therein not misleading. The Seller has disclosed
to the Buyer all material facts pertaining to the transactions
contemplated by this Agreement.
3. Representations of the Buyer
----------------------------
The Buyer represents and warrants to the Seller as follows:
3.1 ORGANIZATION AND AUTHORITY. The Buyer is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware, and has requisite power and authority (corporate
and other) to own its properties and to carry on its business as now
being conducted. The Buyer has full power to execute and deliver this
Agreement and the Instrument of Assumption of Liabilities and to
consummate the transactions contemplated hereby and thereby. Certified
copies of the Certificate of Incorporation and the Bylaws of the Buyer,
as amended to date, have been previously delivered to the Seller, are
complete and correct, and no amendments have been made thereto or have
been authorized since the date thereof.
3.2 CAPITALIZATION OF THE BUYER. On the date hereof, the
Buyer's authorized capital stock consists of 25,000,000 shares of
Common Stock, $.01 par value ("Common Stock"), and 2,000,000 shares of
Preferred Stock, $.01 par value per share. All of the outstanding
shares of capital stock of the Buyer have been and on the Closing Date
will be duly and validly issued and are, or will be, fully paid and
nonassessable.
3.3 AUTHORIZATION. The execution and delivery of this
Agreement by the Buyer, and the agreements provided for herein, and the
consummation by the Buyer of all transactions contemplated hereby, have
been duly authorized by all requisite corporate action. This Agreement
and all such other agreements and written obligations entered into and
undertaken in connection with the transactions contemplated hereby
constitute the valid and legally binding obligations of the Buyer,
enforceable against the Buyer in accordance with their respective
terms. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by the Buyer
of the transactions contemplated hereby and thereby, will not, with or
without the giving of notice or the passage of time or both, (a)
violate the provisions of any law, rule or regulation applicable to the
Buyer; (b) violate the provisions of the Buyer's Certificate of
Incorporation or Bylaws; (c) violate any judgment, decree, order or
award of any court, governmental body or arbitrator; or (d) conflict
with or result in the breach or termination of any term or provision
of, or constitute a default under, or cause any
-21-
<PAGE> 27
acceleration under, or cause the creation of any lien, charge or
encumbrance upon the properties or assets of the Buyer pursuant to, any
indenture, mortgage, deed of trust or other agreement or instrument to
which it or its properties is a party or by which the Buyer is or may
be bound. No consents or approvals of third parties are required in
connection with the consummation by the Buyer of the transactions
contemplated by this Agreement.
3.4 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule or
regulation which must be obtained or satisfied by the Buyer and which
are necessary for the consummation of the transactions contemplated by
this Agreement have been, or will be prior to the Closing Date,
obtained and satisfied.
3.5 DISCLOSURE. No representation or warranty by the Buyer in
this Agreement or in any Exhibit hereto, or in any list, statement,
document or information set forth in or attached to any Schedule
delivered or to be delivered pursuant hereto, contains or will contain
any untrue statement of a material fact or omits or will omit any
material fact necessary in order to make the statements contained
therein not misleading.
3.6 ISSUANCE OF SHARES. The issuance and delivery of the
shares of Common Stock in accordance with this Agreement, if any, have
been, or prior to the Closing, will be, duly authorized by all
necessary corporate action on the part of the Buyer, and all such
shares of Common Stock have been duly reserved for issuance. The shares
of Common Stock, when issued and delivered in accordance with the
provisions of this Agreement will be duly and validly issued, fully
paid and non-assessable.
4. Access to Information; Public Announcements
-------------------------------------------
4.1 ACCESS TO MANAGEMENT, PROPERTIES AND RECORDS.
(a) From the date of this Agreement until the Closing
Date, the Seller shall afford the officers, attorneys, accountants and
other authorized representatives of the Buyer free and full access upon
reasonable notice and during normal business hours to all management
personnel, offices, properties, books and records of the Seller, so
that the Buyer may have full opportunity to make such investigation as
it shall desire to make of the management, business, properties and
affairs of the Seller, and the Buyer shall be permitted to make
abstracts from, or copies of, all such books and records. The Seller
shall furnish to the Buyer such financial and operating data and other
information as to the Assets and the business of the Seller as the
Buyer shall reasonably request.
-22-
<PAGE> 28
(b) If the Buyer, at its option and expense, prior to
the Closing Date, elects to have a report or reports prepared by an
engineer or other professional selected by the Buyer, certifying that
the real property associated with the Assets (i) complies with all
applicable federal, state and local environmental and wetlands laws,
rules and regulations and that there is not now, and never has been,
manufacture, storage, or disposal of hazardous wastes at the real
estate in violation of said laws, rules and regulations, (ii) complies
with all applicable building, health and fire codes, and subdivision
control laws, rules and regulations, the Seller shall cooperate with
such engineer or professional to the extent necessary to prepare such
reports, including, without limitation, providing such engineer or
professional access to such real property and necessary records, and
arranging interviews with employees of the Seller.
(c) The Seller shall authorize the release to the Buyer
of all files pertaining to the Seller, the Assets or the business or
operations of the Seller held by any federal, state, county or local
authorities, agencies or instrumentalities.
4.2 CONFIDENTIALITY. All information not previously disclosed
to the public or generally known to persons engaged in the respective
businesses of the Seller or the Buyer which shall have been furnished
by the Buyer or the Seller to the other party in connection with the
transactions contemplated hereby or as provided pursuant to this
Section 4 shall not be disclosed to any person other than their
respective employees, directors, attorneys, accountants or financial
advisors or other than as contemplated herein. In the event that the
transactions contemplated by this Agreement shall not be consummated,
all such information which shall be in writing shall be returned to the
party furnishing the same, including, to the extent reasonably
practicable, all copies or reproductions thereof which may have been
prepared, and neither party shall at any time thereafter disclose to
third parties, or use, directly or indirectly, for its own benefit, any
such information, written or oral, about the business of the other
party hereto. Notwithstanding the above, the Buyer (i) may include in
any Registration Statement or periodic report filed by it with the
Securities and Exchange Commission or any state securities commission
or with any stock market, and (ii) may disclose in order to comply with
applicable law or upon advice of Buyer's counsel, any information
regarding the Seller, the business of the Seller, the financial
condition of the Seller and the terms of this Agreement.
4.3 PUBLIC ANNOUNCEMENTS. The parties agree that prior to
the Closing Date, except as otherwise required by law, any and
-23-
<PAGE> 29
all public announcements or other public communications concerning this
Agreement and the purchase of the Assets by the Buyer shall be subject
to the approval of the Buyer.
5. Pre-Closing Covenants of the Seller
-----------------------------------
From and after the date hereof and until the Closing Date:
5.1 CONDUCT OF BUSINESS. The Seller shall carry on its
business diligently and substantially in the same manner as heretofore
and shall not make or institute any unusual or new methods of purchase,
sale, shipment or delivery, lease, management, accounting or operation,
except as agreed to in writing by the Buyer. All of the property of the
Seller shall be used, operated, repaired and maintained in a normal
business manner consistent with past practice.
5.2 ABSENCE OF MATERIAL CHANGES. Without the prior written
consent of the Buyer, the Seller shall not:
(a) Take any action to amend its charter or Bylaws;
(b) Issue any stock, bonds or other corporate securities
or grant any option or issue any warrant to purchase or subscribe to
any of such securities or issue any securities convertible into such
securities;
(c) Incur any obligation or liability (absolute or
contingent), except current liabilities incurred and obligations under
contracts entered into in the ordinary course of business;
(d) Declare or make any payment or distribution to its
shareholders with respect to their stock or purchase or redeem any
shares of its capital stock;
(e) Mortgage, pledge, or subject to any lien, charge or
any other encumbrance any of the Assets;
(f) Sell, assign, or transfer any of the Assets, except
for inventory sold in the ordinary course of business, at a normal
profit margin, and for not less than replacement cost;
(g) Cancel any debts or claims, except in the ordinary
course of business;
(h) Merge or consolidate with or into any corporation or
other entity;
-24-
<PAGE> 30
(i) Make, accrue or become liable for any bonus, profit
sharing or incentive payment, except for accruals under existing plans,
if any, or increase the rate of compensation payable or to become
payable by it to any of its officers, directors or employees, other
than increases in the ordinary course of business consistent with past
practice;
(j) Make any election or give any consent under the Code
or the tax statutes of any state or other jurisdiction or make any
termination, revocation or cancellation of any such election or any
consent or compromise or settle any claim for past or present Taxes;
(k) Modify, amend, alter or terminate any of its
executory contracts of a material value or which are material in
amount;
(l) Take or permit any act or omission constituting a
breach or default under any contract, indenture or agreement by which
it or its properties are bound;
(m) Fail to (i) preserve the possession and control of
its assets and business, (ii) keep in faithful service its present
officers and key employees, (iii) preserve the goodwill of its
customers, suppliers, agents, brokers and others having business
relations with it, and (iv) keep and preserve its business existing on
the date hereof until after the Closing Date;
(n) Fail to operate its business and maintain its books,
accounts and records in the customary manner and in the ordinary or
regular course of business and maintain in good repair its business
premises, fixtures, furniture and equipment;
(o) Enter into any leases, contracts, agreements or
understandings other than those entered into in the ordinary course of
business calling for payments which in the aggregate do not exceed
$5,000 for each such lease, contract, agreement or understanding;
(p) Engage any employee for a salary in excess of
$10,000 per annum, except in connection with Additional Stores
(authorized pursuant to Section 1.9);
(q) Materially alter the terms, status or funding
condition of any Employee Plan;
(r) Make any loans to any person or entity; or
-25-
<PAGE> 31
(s) Commit or agree to do any of the foregoing in the
future.
5.3 TAXES. The Seller will, on a timely basis, file all tax
returns for and pay any and all taxes which shall become due or shall
have accrued (a) on account of the operation of the business of the
Seller or the ownership of the Assets on or prior to the Closing Date
or (b) on account of the sale of the Assets (including all personal
property and excise taxes payable with respect to the Assets by the
Seller).
5.4 DELIVERY OF INTERIM FINANCIAL STATEMENTS. As promptly as
possible following the last day of each month after the date hereof,
and in any event within 15 days after the end of each such month, the
Seller shall deliver to the Buyer its balance sheet and related
statements of income, shareholders' equity, retained earnings and
statement of cash flows for the one-month period then ended, all
certified by the chief financial officer. In addition, within 60 days
following the closing, the Seller shall provide its balance sheet and
related statements of income, shareholders' equity, retained earnings
and statement of cash flows for the period from the first day of the
month in which the Closing occurred through the Closing Date, all
certified by the chief financial officer (collectively, with all other
financial statements delivered pursuant to this Section 5.4, the
"Interim Financial Statements").
5.5 COMPLIANCE WITH LAWS. The Seller will comply with all
laws and regulations which are applicable to it, its ownership of the
Assets or to the conduct of its business and will perform and comply
with all contracts, commitments and obligations by which it is bound.
5.6 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES OF THE
SELLER. The Seller will not take any actions which would result in any
of the representations or warranties set forth in Section 2 hereof
being untrue.
5.7 CONTINUING OBLIGATION TO INFORM. From time to time prior
to the Closing, the Seller will deliver or cause to be delivered to the
Buyer supplemental information concerning events subsequent to the date
hereof which would render any statement, representation or warranty in
this Agreement or any information contained in any Schedule inaccurate
or incomplete in any material respect at any time after the date hereof
until the Closing Date.
5.8 EXCLUSIVE DEALING. The Seller will not, directly or
indirectly, through any officer, director, agent or otherwise, (a)
solicit, initiate or encourage submission of proposals or
-26-
<PAGE> 32
offers from any person relating to any acquisition or purchase of all
or a material portion of the Assets, or any equity interest in, the
Seller or any equity investment, merger, consolidation or business
combination with the Seller, or (b) participate in any discussions or
negotiations regarding, or furnish to any other person, any non-public
information with respect to, or otherwise cooperate in any way with, or
assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any of the foregoing. The
Seller shall promptly notify the Buyer if any such proposal or offer,
or any inquiry or contact with any person with respect thereto, is
made.
5.9 NO PUBLICITY. The Seller shall make no public
announcement with respect to this Agreement or the transactions
contemplated hereby without the express prior written consent of the
Buyer. The Seller shall hold in confidence, and use its best efforts to
have all of its officers, directors and personnel hold in confidence,
the terms of this Agreement and the transactions contemplated hereby.
6. Satisfaction of Conditions; Liquidated Damages.
----------------------------------------------
6.1 SATISFACTION OF CONDITIONS. The Seller and the Buyer
covenant and agree to use their commercially reasonable efforts to
obtain the satisfaction of the conditions specified in this Agreement.
6.2 Liquidated Damages.
------------------
(a) The parties hereto agree that the harm suffered by
the Buyer as a result of a breach of this Agreement by the Seller and
the failure by the Seller to consummate the transactions contemplated
hereby is difficult to accurately estimate. The parties agree, based on
all present circumstances, that $1,000,000 represents a reasonable
estimate of the damages, excluding lost opportunity costs, which would
be suffered by the Buyer upon a failure to close due to a breach of the
Seller.
(b) If Seller (i) willfully or intentionally breaches
any representation, warranty or covenant under this Agreement,
willfully or intentionally fails to perform any condition or obligation
required to be performed hereunder, or fails to disclose a material
fact pertaining to the Assets or the transactions contemplated by this
Agreement to the Buyer; or (ii) either elects not to sell the Assets to
the Buyer pursuant to the terms of this Agreement, sells or otherwise
transfers the Assets or enters into an agreement (in principle or
otherwise) with any other person or entity to sell any shares of the
capital stock of Seller, to merge with or into, or consolidate Seller
with any
-27-
<PAGE> 33
person or entity other than the Buyer, to sell more than 10% of the
Assets to any other person or entity or to effect any other transaction
with any other person or entity that would preclude or otherwise
frustrate the transfer of the Assets to the Buyer (a "Willful Breach"),
the Seller will pay to the Buyer the sum of $1,000,000, as liquidated
damages, and Seller will pay the Buyer the additional sum of
$1,000,000, which the parties agree would be a reasonable estimate of
Buyer's lost opportunity cost.
7. Conditions to Obligations of the Buyer
--------------------------------------
The obligations of the Buyer under this Agreement are subject
to the fulfillment, at the Closing Date, of the following conditions
precedent, each of which may be waived in writing in the sole
discretion of the Buyer:
7.1 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES OF THE
SELLER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The representations
and warranties of the Seller shall be true on and as of the Closing
Date as though such representations and warranties were made on and as
of such date, except for any changes permitted by the terms hereof or
consented to in writing by the Buyer. The Seller shall have performed
and complied with all terms, conditions, covenants, obligations,
agreements and restrictions required by this Agreement to be performed
or complied with by it prior to or at the Closing Date.
7.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Seller to authorize
or carry out this Agreement and to convey, assign, transfer and deliver
the Assets shall have been taken.
7.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any applicable
law, rule, order or regulation for the consummation by the Seller of
the transactions contemplated by this Agreement and the operation of
the Seller's business by the Buyer shall have consented to, authorized,
permitted or approved such transactions.
7.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD PARTIES. The
Seller shall have received all requisite consents and approvals of all
lenders, lessors and other third parties whose consent or approval is
required in order for the Seller to consummate the transactions
contemplated by this Agreement, including, without limitation, those
set forth on SCHEDULE 2.3 attached hereto.
-28-
<PAGE> 34
7.5 ADVERSE PROCEEDINGS. No action or proceeding by or before
any court or other governmental body shall have been instituted or
threatened by any governmental body or person whatsoever which shall
seek to restrain, prohibit or invalidate the transactions contemplated
by this Agreement or which might affect the right of the Buyer to own
or use the Assets after the Closing.
7.6 OPINION OF COUNSEL. The Buyer shall have received an
opinion of Stoll, Keenon & Park, LLP, counsel to the Seller, dated as
of the Closing Date, in substantially the form attached hereto as
EXHIBIT D, and as to such other matters as may be reasonably requested
by the Buyer or its counsel.
7.7 BOARD OF DIRECTORS AND SHAREHOLDER APPROVAL. The Board
of Directors and shareholders of the Seller shall have duly authorized
the transactions contemplated by this Agreement.
7.8 THE ASSETS. Except for the Permitted Encumbrances, at the
Closing the Buyer shall receive good, clear, record and marketable
title to the Assets, free and clear of all liens, liabilities, security
interests and encumbrances of any nature whatsoever.
7.9 UPDATE. The Seller shall have provided the Buyer with a
true, correct and complete list and amount, as of the Closing Date, of:
(a) the Inventory; and
(b) the Fixed Assets.
7.10 CASH AVAILABLE FOR WORKING CAPITAL PURPOSES. On the
Closing Date, the Seller will have available cash for customary
operations of the Stores of not less than $600 per Store (in a secured
cashbox at each Store), which cash will be transferred to the Buyer
pursuant to the terms of this Agreement.
7.11 PAYABLES. On the Closing Date, the Seller will have no
obligations to suppliers and vendors of goods and services to the
Business and other trade creditors of the Business which are past due
in accordance with their terms.
7.12 ENGINEER'S REPORT. On or prior to the Closing Date, the
Buyer shall have received the engineer's report, if any, referred to in
Subsection 4.1(b) hereof.
7.13 TAX LIEN WAIVERS. On or prior to the Closing Date, the
Seller shall have obtained and delivered to the Buyer tax lien
-29-
<PAGE> 35
waivers (or similar instruments) from all jurisdictions in which Assets
are located and which provide such tax lien waivers.
7.14 FRANCHISE AGREEMENTS. The Buyer and Affiliates of the
Seller shall have entered into Franchise Agreements for each of the
Additional Stores, as contemplated by Section 1.9 of this Agreement.
7.15 CROSS PURCHASE AGREEMENT. The Buyer and the Principal
shall have executed and delivered the Cross Purchase Agreement.
7.16 CLOSING DELIVERIES. The Buyer shall have received at or
prior to the Closing each of the following documents:
(a) a bill of sale substantially in the form
attached hereto as EXHIBIT E;
(b) such instruments of conveyance, assignment and
transfer, in form and substance satisfactory to the Buyer, as shall be
appropriate to convey, transfer and assign to, and to vest in, the
Buyer, good, clear, record and marketable title to the Assets;
(c) such contracts, files and other data and
documents pertaining to the Assets or the Seller's business as the
Buyer may reasonably request;
(d) copies of the general ledgers and books of account
of the Seller, and all federal, state and local income, franchise,
property and other tax returns filed by the Seller with respect to the
Assets since January 1, 1991;
(e) such certificates of the Seller's officers and such
other documents evidencing satisfaction of the conditions specified in
Section 7 as the Buyer shall reasonably request;
(f) certificates of the Secretary of State of the states
of organization of each of the entities comprising Seller, and from
comparable authorities, as to the legal existence and good standing
(including tax) of each such entity in such states and in each state in
which they are qualified to transact business;
(g) certificates of the Secretary of the Seller
attesting to the incumbency of the Seller's officers, respectively, the
authenticity of the resolutions authorizing the transactions
contemplated by the Agreement, and the authenticity
-30-
<PAGE> 36
and continuing validity of the charter documents delivered
pursuant to Subsection 2.1;
(h) estoppel certificates from each lessor from whom the
Seller leases real or personal property and instruments reflecting such
lessor's consent to the assumption of such lease by the Buyer and
representing that there are no outstanding claims against the Seller
under any such lease;
(i) the schedules listed in Subsection 7.9;
(j) such other documents, instruments or certificates
as the Buyer may reasonably request
8. Conditions to Obligations of the Seller
---------------------------------------
The obligations of the Seller under this Agreement are subject to
the fulfillment, at the Closing Date, of the following conditions
precedent, each of which may be waived in writing at the sole
discretion of the Seller:
8.1 ONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES OF THE
BUYER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The representations
and warranties of the Buyer in this Agreement shall be true on and as
of the Closing Date as though such representations and warranties were
made on and as of such date, except for any changes consented to in
writing by the Seller. The Buyer shall have performed and complied with
all terms, conditions, obligations, agreements and restrictions
required by this Agreement to be performed or complied with by it prior
to or at the Closing Date.
8.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Buyer to authorize
or carry out this Agreement shall have been taken.
8.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any applicable
law, rule, order or regulation for the consummation by the Buyer of the
transactions contemplated by this Agreement shall have consented to,
authorized, permitted or approved such transactions.
8.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD PARTIES.
The Buyer shall have received all requisite consents and approvals of
all lenders, lessors and other third parties whose consent or approval
is required in order for the Buyer to consummate the transactions
contemplated by this Agreement.
-31-
<PAGE> 37
8.5 ADVERSE PROCEEDINGS. No action or proceeding by or
before any court or other governmental body shall have been
instituted or threatened by any governmental body or person whatsoever
which shall seek to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or which might affect the right of the
Seller to transfer the Assets.
8.6 OPINION OF COUNSEL. The Seller shall have received an
opinion of Hale and Dorr, counsel to the Buyer, dated as of the Closing
Date, in substantially the form attached hereto as EXHIBIT F, and as to
such other matters as may be reasonably requested by the Seller or its
counsel.
8.7 CLOSING DELIVERIES. The Seller shall have received at or
prior to the Closing each of the following documents:
(a) such certificates of the Buyer's officers and such
other documents evidencing satisfaction of the conditions specified in
this Section 8 as the Seller shall reasonably request;
(b) a certificate of the Secretary of State of the
State of Delaware as to the legal existence and good standing
(including tax) of the Buyer in Delaware;
(c) a certificate of the Secretary of the Buyer
attesting to the incumbency of the Buyer's officers, the authenticity
of the resolutions authorizing the transactions contemplated by this
Agreement, and the authenticity and continuing validity of the charter
documents delivered pursuant to Subsection 3.1;
(d) Instrument of Assumption of Liabilities executed by
the Buyer and accepted by the Seller;
(e) payment of the Base Purchase Price; and
(f) such other documents, instruments or certificates
as the Seller may reasonably request.
9. Indemnification
---------------
9.1 BY THE BUYER AND THE SELLER AND THE PRINCIPAL. The Buyer
on the one hand, and each entity comprising the Seller and the
Principal, jointly and severally, on the other hand, each hereby
indemnifies and holds harmless the other against all claims, damages,
losses, liabilities, costs and expenses (including, without limitation,
settlement costs and any legal, accounting or other expenses for
investigating or defending any
-32-
<PAGE> 38
actions or threatened actions) reasonably incurred by the Buyer or the
Seller in connection with each and all of the following:
(a) Any breach by the indemnifying party of any
representation or warranty made by the indemnifying party in this
Agreement;
(b) Any breach of any covenant, agreement or obligation
of the indemnifying party contained in this Agreement or any other
agreement, instrument or document contemplated by this Agreement; and
(c) Any misrepresentation contained in any statement,
certificate or schedule furnished by the indemnifying party pursuant to
this Agreement or in connection with the transactions contemplated by
this Agreement.
9.2A BY THE SELLER AND THE PRINCIPAL. Each entity comprising
the Seller and the Principal, on a joint and several basis, further
agree to indemnify and hold harmless the Buyer from any and all claims,
damages, losses, liabilities, costs and expenses (including, without
limitation, settlement costs and any legal, accounting or other
expenses for investigating or defending any actions or threatened
actions) reasonably incurred by the Buyer, in connection with each and
all of the following:
(a) Any claims against, or liabilities or obligations
of, the Seller or against the Assets not specifically assumed by the
Buyer pursuant this Agreement;
(b) The failure of the Buyer to obtain the protections
afforded by compliance with the notification and other requirements of
the bulk sales laws in force in the jurisdictions in which such laws
may be applicable to either the Seller, the Assets or the transactions
contemplated by this Agreement;
(c) Any violation by the Seller of, or any failure by
the Seller to comply with, any law, ruling, order, decree, regulation
or zoning, environmental or permit requirement applicable to the
Seller, the Assets or its business, whether or not any such violation
or failure to comply has been disclosed to the Buyer (including the
failure of the Seller to qualify to transact business as a foreign
corporation in any state), including any costs incurred by the Buyer
(i) in order to bring the Assets into compliance with environmental
laws as a consequence of noncompliance with such laws on the Closing
Date or (ii) in connection with the transfer of the Assets;
-33-
<PAGE> 39
(d) Any claim relating to the Seller's business or
operation, or the operation of the Assets, prior to the Closing
Date;
(e) Any Taxes of the Seller; and
(f) Any claims against, or liabilities or obligations
of, the Seller with respect to obligations under Employee Plans or in
respect of Seller's obligations to its employees (including obligations
for accrued vacation, sick or personal days).
9.2B BY THE BUYER. The Buyer further agrees to indemnify and
hold harmless the Seller and the Principal from any and all claims,
damages, losses, liabilities, costs and expenses (including, without
limitation, settlement costs and any legal, accounting or other
expenses for investigating or defending any actions or threatened
actions) reasonably incurred by the Seller and the Principal, in
connection with each and all of the following:
(a) Any claims against, or liabilities or obligations
of, the Seller specifically assumed by the Buyer pursuant this
Agreement;
(b) Any violation by the Buyer of, or any failure by the
Buyer to comply with, any law, ruling, order, decree, regulation or
zoning, environmental or permit requirement applicable to the Buyer or
its business, whether or not any such violation or failure to comply
has been disclosed to the Seller;
(c) Any claim relating to the conduct of the Business
or the operation of the Assets after the Closing Date; and
(d) Any Taxes of the Buyer.
9.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall
arise for indemnification hereunder the party seeking indemnification
(the "Indemnified Party"), shall promptly notify the party from whom
indemnification is sought (the "Indemnifying Party") of the claim and,
when known, the facts constituting the basis for such claim. In the
event of any such claim for indemnification hereunder resulting from or
in connection with any claim or legal proceedings by a third-party, the
notice to the Indemnifying Party shall specify, if known, the amount or
an estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a third
party for which it is entitled to indemnification hereunder
-34-
<PAGE> 40
without the prior written consent of the Indemnifying Party, which
shall not be unreasonably withheld, unless suit shall have been
instituted against it and the Indemnifying Party shall not have taken
control of such suit after notification thereof as provided in
Subsection 9.4 of this Agreement.
9.4 DEFENSE BY INDEMNIFYING PARTY. In connection with any
claim giving rise to indemnity hereunder resulting from or arising out
of any claim or legal proceeding by a person who is not a party to this
Agreement, the Indemnifying Party at its sole cost and expense may,
upon written notice to the Indemnified Party, assume the defense of any
such claim or legal proceeding if it acknowledges to the Indemnified
Party in writing its obligations to indemnify the Indemnified Party
with respect to all elements of such claim. The Indemnified Party shall
be entitled to participate in (but not control) the defense of any such
action, with its counsel and at its own expense. If the Indemnifying
Party does not assume the defense of any such claim or litigation
resulting therefrom within 30 days after the date such claim is made,
(a) the Indemnified Party may defend against such claim or litigation,
in such manner as it may deem appropriate, including, but not limited
to, settling such claim or litigation, after giving notice of the same
to the Indemnifying Party, on such terms as the Indemnified Party may
deem appropriate, and (b) the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with its
counsel and at its own expense. If the Indemnifying Party thereafter
seeks to question the manner in which the Indemnified Party defended
such third party claim or the amount or nature of any such settlement,
the Indemnifying Party shall have the burden to prove by a
preponderance of the evidence that the Indemnified Party did not defend
or settle such third party claim in a reasonably prudent manner.
9.5 PAYMENT OF INDEMNIFICATION OBLIGATION. All
indemnification by the Buyer, the Seller or the Principal hereunder
shall be effected by payment of cash or delivery of a cashier's or
certified check in the amount of the indemnification liability.
9.6 SURVIVAL OF REPRESENTATIONS; CLAIMS FOR
INDEMNIFICATION. All representations and warranties made by the
parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any investigation at
any time made by or on behalf of the parties hereto. All such
representations and warranties shall expire on the third anniversary
of the Closing Date, except for claims, if any, asserted in writing
prior to such third anniversary, which shall survive until finally
resolved and satisfied in full. All
-35-
<PAGE> 41
claims and actions for indemnity pursuant to this Section 9 for breach
of any representation or warranty shall be asserted or maintained in
writing by a party hereto on or prior to the expiration of such
three-year period. Notwithstanding the above, claims resulting from the
failure by the Seller to pay any Tax when due or for breach of the
representations made in Section 2.13 hereof, shall expire six months
after any applicable statute of limitations.
10. Post-Closing Agreements
-----------------------
The Seller agrees that from and after the Closing Date:
10.1 Proprietary Information.
-----------------------
(a) The Seller shall hold in confidence, and use its
best efforts to have all of its officers, directors and personnel hold
in confidence, all knowledge and information of a secret or
confidential nature with respect to the business of the Seller and
shall not disclose, publish or make use of the same without the consent
of the Buyer, except to the extent that such information shall have
become public knowledge other than by breach of this Agreement by the
Seller.
(b) The Seller agrees that the remedy at law for any
breach of this Subsection 10.1 would be inadequate and that the Buyer
shall be entitled to injunctive relief in addition to any other remedy
it may have upon breach of any provision of this Subsection 10.1.
10.2 NO SOLICITATION OR HIRING OF FORMER EMPLOYEES. Except
as provided below in this Section 10.2 or by law, for a period of five
years after the Closing Date, neither the Seller nor any Affiliate
thereof (including the Principal) shall solicit any person who was an
employee of the Seller on the Closing Date to terminate his employment
with the Buyer or to become an employee of the Seller or hire any
person who was such an employee on the date hereof or on the Closing
Date (except that persons who, on the Closing Date, were employed by
the Seller and provided services exclusively to the Excluded Stores,
may provide such services (but no other services) to the Seller after
the Closing Date).
The provisions of this Section 10.2 shall not apply to the
following employees of Seller: Trisha Reynolds, Brandt Ely, Jennifer
Hoffman or Keith Gregor.
-36-
<PAGE> 42
10.3 Non-Competition Agreement.
-------------------------
(a) Subject to the provisions of Section 10.3(c) below,
without the prior approval of the Buyer, for a period of five years
after the Closing Date, neither the Seller nor any Affiliate (including
the Principal) thereof shall (i) market, rent or sell any product which
has the same or substantially the same form, function and primary
application as any existing or proposed product marketed, rented or
sold by the Seller on or prior to the Closing Date or (ii) engage in
any business competitive with the business of the Buyer or Seller as
conducted on the date hereof or on the Closing Date, in the United
States or any other country in which the Buyer conducted its business
during the two years prior to the Closing Date.
(b) The parties hereto agree that the duration and
geographic scope of the non-competition provision set forth in this
Subsection 10.3 are reasonable. In the event that any court determines
that the duration or the geographic scope, or both, are unreasonable
and that such provision is to that extent unenforceable, the parties
hereto agree that the provision shall remain in full force and effect
for the greatest time period and in the greatest area that would not
render it unenforceable. The parties intend that this non-competition
provision shall be deemed to be a series of separate covenants, one for
each and every county of each and every state of the United States of
America and each and every political subdivision of each and every
country outside the United States of America where this provision is
intended to be effective. The Seller agrees that damages are an
inadequate remedy for any breach of this provision and that the Buyer
shall, whether or not it is pursuing any potential remedies at law, be
entitled to equitable relief in the form of preliminary and permanent
injunctions without bond or other security upon any actual or
threatened breach of this non-competition provision.
(c) The Buyer hereby waives the provisions of this
Section 10.3 to the extent necessary to enable the Seller, the
Principal and their respective Affiliates to operate the Norwood Store,
the New Stores and any other Stores which Seller, the Principal or such
Affiliates may own, operate or acquire in accordance with the
provisions of Section 1.9, but only to the extent the Seller, the
Principals and their respective Affiliates own and operate such stores
in the manner and in accordance with the provisions of such Section 1.9
and of any franchising agreements related thereto.
-37-
<PAGE> 43
10.4 Sharing of Data.
---------------
(a) The Seller shall have the right for a period of
three years following the Closing Date to have reasonable access to
such books, records and accounts, including financial and tax
information, correspondence, production records, employment records and
other similar information as are transferred to the Buyer pursuant to
the terms of this Agreement for the limited purposes of concluding its
involvement in the Business prior to the Closing Date and for complying
with its obligations under applicable securities, tax, environmental,
employment or other laws and regulations. The Buyer shall have the
right for a period of three years following the Closing Date to have
reasonable access to those books, records and accounts, including
financial and tax information, correspondence, employment records and
other records which are retained by the Seller pursuant to the terms of
this Agreement to the extent that any of the foregoing relates to the
Business transferred to the Buyer hereunder or is otherwise needed by
the Buyer in order to comply with its obligations under applicable
securities, tax, environmental, employment or other laws and
regulations.
(b) The Seller and the Buyer agree that from and after
the Closing Date they shall cooperate fully with each other to
facilitate the transfer of the Assets from the Seller to the Buyer and
the operation thereof by the Buyer.
10.5 USE OF NAME. The Seller agrees not to use the name
"Picture Show" or any derivation thereof after the Closing Date in
connection with any business related to, competitive with, or an
outgrowth of, the business conducted by the Seller on the date hereof,
except in connection with the operation of the Norwood Store.
10.6 COOPERATION IN LITIGATION. Each party hereto will fully
cooperate with the other in the defense or prosecution of any
litigation or proceeding already instituted or which may be instituted
hereafter against or by such party relating to or arising out of the
conduct of the business of the Seller prior to or after the Closing
Date (other than litigation arising out the transactions contemplated
by this Agreement). The party requesting such cooperation shall pay the
out-of-pocket expenses (including legal fees and disbursements) of the
party providing such cooperation and of its officers, directors,
employees and agents reasonably incurred in connection with providing
such cooperation, but shall not be responsible to reimburse the party
providing such cooperation for such party's time spent in such
cooperation or the salaries or costs of fringe benefits or similar
expenses paid by the party providing such cooperation to its
-38-
<PAGE> 44
officers, directors, employees and agents while assisting in the
defense or prosecution of any such litigation or proceeding.
11. Termination of Agreement
------------------------
11.1 TERMINATION BY LAPSE OF TIME. This Agreement shall
terminate at 5:00 p.m., Boston time, on September 30, 1996, if the
transactions contemplated hereby have not been consummated, unless such
date is extended by the written consent of all of the parties hereto.
11.2 TERMINATION BY AGREEMENT OF THE PARTIES. This Agreement
may be terminated by the mutual written agreement of the parties
hereto. In the event of such termination by agreement, the Buyer shall
have no further obligation or liability to the Seller under this
Agreement, and the Seller shall have no further obligation or liability
to the Buyer under this Agreement.
11.3 TERMINATION BY REASON OF BREACH. This Agreement may be
terminated by the Seller, if at any time prior to the Closing there
shall occur a breach of any of the representations, warranties or
covenants of the Buyer or the failure by the Buyer to perform any
condition or obligation hereunder, and may be terminated by the Buyer,
if at any time prior to the Closing there shall occur a breach of any
of the representations, warranties or covenants of the Seller or the
failure of the Seller to perform any condition or obligation hereunder.
12. Transfer and Sales Tax
----------------------
Notwithstanding any provisions of law imposing the burden of
such taxes on the Seller or the Buyer, as the case may be, the Seller
shall be responsible for and shall pay (a) all sales, use and transfer
taxes, and (b) all governmental charges, if any, upon the sale or
transfer of any of the Assets hereunder. If the Seller shall fail to
pay such amounts on a timely basis, the Buyer may pay such amounts to
the appropriate governmental authority or authorities, and the Seller
shall promptly reimburse the Buyer for any amounts so paid by the
Buyer.
13. Brokers
-------
13.1 FOR THE SELLER. The Seller represents and warrants that
it has not engaged any broker or finder or incurred any liability for
brokerage fees, commissions or finder's fees in connection with the
transactions contemplated by this Agreement. The Seller agrees to
indemnify and hold harmless the Buyer against any claims or liabilities
asserted against it by any person acting or claiming to act as a broker
or finder on behalf of the Seller.
-39-
<PAGE> 45
13.2 FOR THE BUYER. The Buyer agrees to pay all fees,
expenses and compensation owed to any person, firm or corporation who
has acted in the capacity of broker or finder on its behalf in
connection with the transactions contemplated by this Agreement. The
Buyer agrees to indemnify and hold harmless the Seller against any
claims or liabilities asserted against it by any person acting or
claiming to act as a broker or finder on behalf of the Buyer.
14. Notices
-------
Any notices or other communications required or permitted
hereunder shall be sufficiently given if delivered personally or sent
by telex, federal express, registered or certified mail, postage
prepaid, addressed as follows or to such other address of which the
parties may have given notice:
To the Seller: c/o Charles Johnson, Jr.
2623 Regency Road
Lexington, Kentucky 40503
With a copy to: Daniel Rose, Esq.
201 East Main Street
Suite 1000
Lexington, Kentucky 40507
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other communications
shall be deemed received (a) on the date delivered, if delivered
personally; (b) one business day after delivery to an overnight
courier, if sent by overnight courier; or (c) three business days after
being sent, if sent by registered or certified mail.
15. Arbitration
-----------
(a) Any dispute, controversy or claim between the parties
arising out of or relating to this Agreement, a breach hereof or the
transactions contemplated hereby, shall be settled by arbitration in
accordance with the provisions of this Section 15. Any arbitration
pursuant to this Section 15 shall be
-40-
<PAGE> 46
conducted by a single arbitrator appointed by the Boston, Massachusetts
office of the American Arbitration Association upon the request of
either party. The arbitrator shall have a minimum of five years of
experience in the area of business relevant to the particular dispute.
Each party shall be permitted to submit only one proposal to the
arbitrator, and the arbitrator shall be required to choose one of such
two proposals as the resolution of the dispute. The arbitrator may
proceed to a resolution notwithstanding the failure of a party to
participate in the proceedings. Each of the parties shall pay its own
costs and expenses in connection with any such arbitration, and the
parties shall share equally in the fees and expenses of the arbitrator.
(b) The parties agree that any such arbitration will occur in
Boston, Massachusetts, any such arbitration award shall be final and
binding upon the parties, may be entered in any court having
jurisdiction and shall not be appealable by either party in any court.
16. Successors and Assigns
----------------------
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns,
except that the Buyer and the Seller may not assign their respective
obligations hereunder without the prior written consent of the other
party; provided, however, that the Buyer may assign this Agreement, and
its rights and obligations hereunder, to a subsidiary or Affiliate. Any
assignment in contravention of this provision shall be void. No
assignment shall release the Buyer from any obligation or liability
under this Agreement.
17. Entire Agreement; Amendments; Attachments
-----------------------------------------
(a) This Agreement, all Schedules and Exhibits hereto, and all
agreements and instruments to be delivered by the parties pursuant
hereto represent the entire understanding and agreement between the
parties hereto with respect to the subject matter hereof and supersede
all prior oral and written and all contemporaneous oral negotiations,
commitments and understandings between such parties. The Buyer, the
Seller and the Principal may amend or modify this Agreement, in such
manner as may be agreed upon, by a written instrument executed by the
Buyer and the Seller.
(b) If the provisions of any Schedule or Exhibit to this
Agreement are inconsistent with the provisions of this Agreement, the
provision of the Agreement shall prevail. The Exhibits and Schedules
attached hereto or to be attached hereafter are hereby incorporated as
integral parts of this Agreement.
-41-
<PAGE> 47
18. Expenses
--------
Except as otherwise expressly provided herein, the Buyer and
the Seller shall each pay their own expenses in connection with this
Agreement and the transactions contemplated hereby. Buyer shall pay the
costs and expenses of any audit conducted by, or at the request of, the
Buyer, and Seller shall pay the costs and expenses of any accounting
services provided to the Seller in connection with the transactions
contemplated hereby. Notwithstanding the foregoing, the Buyer shall pay
up to $15,000 of the fees payable by the Seller to its independent
certified public accountants for accounting and auditing services
provided by them in connection with the preparation of the audited
financial statements and the quarterly and interim financial statements
of the Seller delivered to the Buyer pursuant to this Agreement, and
delivery of such accountants' written reports and consents to be
included by the Buyer in its prospectuses and registration statements,
provided that the Seller provides to the Buyer such accountants'
invoices for such services and fees which reflect in reasonable detail
the services provided.
19. Legal Fees
----------
In the event that legal or arbitration proceedings are
commenced by the Buyer against the Seller, or by the Seller against the
Buyer, in connection with this Agreement or the transactions
contemplated hereby, the party or parties which do not prevail in such
proceedings shall pay the reasonable attorneys' fees and other costs
and expenses, including investigation costs, incurred by the prevailing
party in such proceedings.
20. Governing Law
-------------
This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
21. Section Headings
----------------
The section headings are for the convenience of the parties
and in no way alter, modify, amend, limit, or restrict the contractual
obligations of the parties.
22. Severability
------------
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
-42-
<PAGE> 48
23. Counterparts
------------
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which shall
be one and the same document.
-43-
<PAGE> 49
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of and on the date first above written.
SELLER:
J.J. VIDEO INC. - FILM FESTIVAL
By: /s/ Charles Johnson, Jr.
--------------------------------
Title: President
-----------------------------
PICTURE SHOW VIDEO - GARDENSIDE, INC.
By: /s/ Charles Johnson, Jr.
--------------------------------
Title: President
-----------------------------
PICTURE SHOW VIDEO - WINCHESTER, INC.
By: /s/ Charles Johnson, Jr.
--------------------------------
Title: President
-----------------------------
PICTURE SHOW VIDEO NO. 4, INC.
By: /s/ Charles Johnson, Jr.
--------------------------------
Title: President
-----------------------------
-44-
<PAGE> 50
PICTURE SHOW VIDEO, INC.
By: /s/ Charles Johnson, Jr.
--------------------------------
Title: President
-----------------------------
PRINCIPAL:
/s/ Charles Johnson, Jr.
-----------------------------------
Charles Johnson, Jr.
BUYER:
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ Ralph W. Standley III
--------------------------------
Title: Chairman
-----------------------------
-45-
<PAGE> 51
Schedule A
----------
Seller Entity Names and Principal Office Addresses
--------------------------------------------------
and Stockholders
----------------
Entity Percentage of
------ Total Consideration
-------------------
J.J. VIDEO INC. - FILM FESTIVAL 16.8%
2623 REGENCY ROAD
LEXINGTON, KENTUCKY 40503
State of Organization: Kentucky
States in Which Qualified
To Transact Business: None.
Authorized Stock: 1,000 shares of Common Stock, no par value
per share
Outstanding Stock: 111 shares of Common Stock
Stockholders:
Charles Johnson Jr. 100 shares
Brandt Ely 11 shares
PICTURE SHOW VIDEO - GARDENSIDE, INC. 15.0%
2623 REGENCY ROAD
LEXINGTON, KENTUCKY 40503
State of Organization: Kentucky
States in Which Qualified
To Transact Business: None.
Authorized Stock: 1,000 shares of Common Stock, no par value
per share
Outstanding Stock: 111 shares of Common Stock
Stockholders:
Charles Johnson Jr. 100 shares
Brandt Ely 11 shares
-46-
<PAGE> 52
PICTURE SHOW VIDEO - WINCHESTER, INC. 14.5%
2623 REGENCY ROAD
LEXINGTON, KENTUCKY 40503
State of Organization: Kentucky
States in Which Qualified
To Transact Business: None.
Authorized Stock: 1,000 shares of Common Stock, no par
value per share
Outstanding Stock: 111 shares of Common Stock
Stockholders:
Charles Johnson Jr. 100 shares
Brandt Ely 11 shares
PICTURE SHOW VIDEO NO. 4, INC. 35.8%
2623 REGENCY ROAD
LEXINGTON, KENTUCKY 40503
State of Organization: Kentucky
States in Which Qualified
To Transact Business: Ohio
Authorized Stock: 1,000 shares of Common Stock, no par
value per share
Outstanding Stock: 100 shares of Common Stock
Stockholders:
Charles Johnson Jr. 100 shares
PICTURE SHOW VIDEO, INC. 17.9%
2623 REGENCY ROAD
LEXINGTON, KENTUCKY 40503
State of Organization: Kentucky
States in Which Qualified
To Transact Business: None.
-47-
<PAGE> 53
Authorized Stock: 1,000 shares of Common Stock, no par value
per share
Outstanding Stock: 100 shares of Common Stock
Stockholders:
Charles Johnson Jr. 100 shares
-48-
<PAGE> 54
Schedule I
----------
Stores
------
1. J. J. Video, Inc. - Film Festival
3735 Harrodsburg Road, #200
Lexington, Kentucky 40513
2. Picture Show Video - Gardenside, Inc.
1753 Alexandria Drive
Lexington, Kentucky 40504
3. Picture Show Video - Winchester, Inc.
921 By-Pass Road
Winchester, Kentucky 40391
4. Picture Show Video, Inc.
4901-05 Vine Street
Cincinnati, Ohio 45217
4. Picture Show Video No. 4, Inc.
8568 Winton Road
Cincinnati, Ohio 45231
-49-
<PAGE> 55
Schedule II
-----------
Excluded Stores
---------------
2475 W. Galbraith Road
Cincinnati
8121 Plainfield Road
Cincinnati
4506 Dixie Highway
Erlanger, Kentucky
-50-
<PAGE> 1
INSTRUMENT OF EVIDENCE OF INDEBTEDNESS
THIS INSTRUMENT OF EVIDENCE OF INDEBTEDNESS dated as of the 26th day of
August, 1996, is by and between West Coast Entertainment Corporation, a Delaware
corporation (the "Buyer"), and the entities named on SCHEDULE A attached hereto
(collectively, the "Seller"), in connection with the transactions contemplated
by that certain Asset Purchase Agreement dated as of August 23, 1996, by and
among the Buyer, the Seller and Charles Johnson, Jr. (the "Purchase Agreement").
Capitalized terms used herein, and not otherwise defined herein, shall have the
respective meanings ascribed to them in the Purchase Agreement.
WHEREAS, the Buyer has acquired substantially all of the assets and
business of the Seller pursuant to the Purchase Agreement; and
WHEREAS, in partial consideration for such assets and business, the Buyer
has agreed to issue this Instrument, pursuant to which it will deliver to the
Seller cash or shares of its Common Stock, at the times and on the terms
described herein.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Buyer and the Seller hereby agree as follows:
1. Payment of Indebtedness.
-----------------------
(a) Unless the Seller makes the election described in Section l(b)
below, in accordance with the terms thereof, the Buyer shall deliver to the
Seller, on the first anniversary date hereof, an unsecured promissory note of
the Buyer, in the principal amount of $840,000 (the "Note"). Amounts outstanding
under the Note shall bear interest at the rate of 2% per annum, noncompounded.
The Note shall mature on the fourth anniversary of the date hereof (but shall be
prepayable, without premium or penalty, at any time in the Buyer's sole
discretion), and shall provide for no payments (of principal or interest) during
the term thereof, but for payment of the entire principal amount due thereunder,
and accrued and unpaid interest thereon, at maturity.
(b) In lieu of delivery of the Note, as provided in Section l(a)
above, if the Seller so elects, the Buyer may deliver to the Seller on the first
anniversary date hereof, that number of shares of Common Stock, $.01 par value
per share, of the Buyer ("Common Stock") as is determined by dividing (x)
$840,000 by (y) the Market Value. The "Market Value" shall equal the average of
<PAGE> 2
the bid and asked prices per share of Buyer's Common Stock as reported on the
Nasdaq Stock Exchange for each of the fifteen trading days ending on the
business day preceding the date on which the Closing of the transaction
contemplated by the Purchase Agreement occurred. Such shares of Buyer Common
Stock shall be registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission (the "SEC") . The
Seller shall make the election contemplated by this clause (b) only following
delivery to the Seller of a then current prospectus relating to shares of
Buyer's Common Stock, which prospectus is included in a then effective
Registration Statement (provided such prospectus may include supplements
thereto). Buyer may deliver any such prospectus at any time during the one-year
period following the date hereof. If, within 10 business days following delivery
of such a prospectus, the Seller notifies the Buyer that it has made such
election, such election shall be irrevocable unless the Buyer and the Seller
mutually agree otherwise.
(c) If the Seller has made the election contemplated by Section
l(b) above, and prior to the issuance of shares of Buyer Common Stock pursuant
to Section l(b) above, the Buyer shall:
(x) declare a dividend of Common Stock on its Common Stock,
(y) subdivide outstanding Common Stock into a larger number
of shares of Common Stock by reclassification, stock split or
otherwise, or
(z) combine outstanding Common Stock into a smaller number of
shares of Common Stock by reclassification or otherwise,
then the number of shares of Buyer Common Stock issuable pursuant to Section
l(b) shall be adjusted proportionately so that thereafter the Seller shall be
entitled to receive the number of shares of Common Stock which the Seller would
have been entitled to receive after the happening of any of the events described
above had the shares to be issued been issued immediately prior to the happening
of such events. An adjustment made pursuant to this Section l(c) shall become
effective immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision or combination.
(d) Amounts deliverable to the entities listed on SCHEDULE A
hereto shall be allocated among them in proportion to
-2-
<PAGE> 3
the percentages set forth opposite their respective names on SCHEDULE A.
2. RIGHT OF SET-OFF. The Buyer shall be permitted to set off, against the
cash or the number of shares deliverable to the Seller hereunder, amounts or
obligations owed by the Principal or the Seller to the Buyer pursuant to the
Purchase Agreement. In order to calculate the reduction in the number of shares
which may be issuable by the Buyer hereunder for this purpose, each share shall
be deemed to have a value equal to the Market Value.
3. ALLOCATION OF SHARES DELIVERABLE TO THE ASSETS. The Buyer and the
Seller hereby agree and acknowledge that the value of the consideration issuable
pursuant to this Instrument shall be allocated for tax purposes solely to
goodwill of the Sellers being acquired by the Buyer pursuant to the Purchase
Agreement, and not to any of the Sellers other Assets.
4. General.
--------
(a) SUCCESSORS AND ASSIQNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns, except that the Buyer and the Seller may not assign their
respective rights and obligations hereunder without the prior written consent of
the other party. Any assignment in contravention of this provision shall be
void. The Seller may not transfer to any other person the right to receive cash
or shares of Buyer Common Stock hereunder without the prior consent of the
Buyer.
(b) NOTICES. Any notices or other communications required or
permitted hereunder shall be sufficiently given if delivered personally or sent
by federal express or other reputable nationwide overnight courier service,
registered or certified mail, postage prepaid, addressed as follows or to such
other address of which the parties may have given notice:
To the Seller: c/o Mr. Charles Johnson, Jr.
2623 Regency Road
Lexington, KY 40503
With a copy to: Daniel Rose, Esq.
201 East Main Street
Suite 1000
Lexington, Kentucky 40507
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
-3-
<PAGE> 4
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other communications shall be
deemed received (1) on the date delivered, if delivered personally; (2) on the
business day following delivery to an overnight courier; (3) three business days
after being sent, if sent by registered or certified mail; or (4) on the date of
actual delivery, if sent by any other method.
(c) Arbitration.
-----------
(i) Any dispute, controversy or claim between the parties
arising out of or relating to this Agreement, a breach hereof or the
transactions contemplated hereby, shall be settled by arbitration in accordance
with the provisions of this Section 4(c). Any arbitration pursuant to this
Section 4 (c) shall be conducted by a single arbitrator appointed by the
Philadelphia, Pennsylvania office of the American Arbitration Association upon
the request of any party. The arbitrator shall have a minimum of five years of
experience in the area of business relevant to the particular dispute. Each of
the two parties to the dispute shall be permitted to submit only one proposal to
the arbitrator, and the arbitrator shall be required to choose one of such two
proposals as the resolution of the dispute. The arbitrator may proceed to a
resolution notwithstanding the failure of a party to participate in the
proceedings. Each of the parties shall pay its own costs and expenses in
connection with any such arbitration, and the parties shall share equally in the
fees and expenses of the arbitrator.
(ii) The parties agree that any such arbitration will occur in
Philadelphia, Pennsylvania, any such arbitration award shall be final and
binding upon the parties, may be entered in any court having jurisdiction and
shall not be appealable by either party in any court.
(d) ENTIRE AGREEMENT; AMENDMENTS; ATTACHMENTS. The Buyer and the
Sellers may amend or modify this Agreement, in such manner as may be agreed
upon, only by a written instrument executed by the Buyer and the Seller.
(e) SECTION HEADINGS. The section headings contained in this
Instrument are for the convenience of the parties and in no way alter, modify,
amend, limit, or restrict the contractual obligations of the parties.
-4-
<PAGE> 5
(f) SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(g) COUNTERPARTS. This Instrument and any amendment hereto may be
executed in one or more counterparts, each of which shall be deemed to be an
original, but all of which shall be one and the same document.
(h) GOVERNING LAW. This Instrument shall be construed and
enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the State of Delaware.
(end of page)
-5-
<PAGE> 6
IN WITNESS WHEREOF, this Instrument has been executed and delivered as a
sealed instrument on the date first above written by the duly authorized
representative of the Buyer.
WEST COAST ENTERTAINMENT CORPORATION
By /s/ Ralph W. Standley III
---------------------------------
Chairman
AGREED TO AND ACCEPTED AS OF
THE DATE FIRST SET FORTH ABOVE:
EACH OF THE ENTITIES IDENTIFIED ON
SCHEDULE A HERETO
- ----------
BY /s/ Charles Johnson, Jr.
--------------------------------
Title President
-----------------------------
-6-
<PAGE> 7
Schedule A
----------
Seller Names and Allocation of
------------------------------
Amounts Deliverable Hereunder
-----------------------------
Entity Percentage
------ ----------
J.J. Video Inc. - 16.8%
Film Festival
Picture Show Video -
Gardenside, Inc. 15.0%
Picture Show Video - 14.5%
Winchester, Inc.
Picture Show 35.8%
Video No. 4, Inc.
Picture Show 17.9%
Video, Inc.
-7-
<PAGE> 1
CROSS PURCHASE AGREEMENT
AGREEMENT made this 26th day of August, 1996, by and among Charles
Johnson, Jr. ("Developer") and West Coast Entertainment Corporation, a Delaware
corporation with its principal office at 9990 Global Road, Philadelphia,
Pennsylvania 19115 ("Buyer").
WHEREAS, the Developer and certain business entities of which he is the
sole or principal stockholder have, on the date hereof, consummated the sale of
the assets and businesses of such entities to Buyer, pursuant to an Asset
Purchase Agreement dated of even date herewith (the "Purchase Agreement"); and
WHEREAS, pursuant to the Purchase Agreement, the Developer and his
Affiliates (as defined therein) agreed with Buyer that they would not engage in
business activities competitive with Buyer, except with the approval of the
Buyer, and subject to the terms of this Agreement; and
WHEREAS, the execution and delivery of this Agreement was a condition to
the consummation of the transactions contemplated by the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Developer and the Buyer hereby
agree as follows.
1. OPTION TO SELL. On the terms and conditions specified in the Purchase
Agreement, (i) Buyer has agreed to allow Developer and its Affiliates to own and
operate (as a "Picture Show Video" store) a certain retail video store located
at 4590 Montgomery Road, Cincinnati, Ohio (the "Norwood Store"), (ii) Buyer has
agreed to allow Developer and its Affiliates to develop, own operate or
otherwise acquire interests in up to three additional retail video stores which
will be operated as franchisees of an Affiliate of the Buyer (the "New Stores")
pursuant to one or more franchise agreements with an Affiliate of the Buyer, and
(iii) Developer and his Affiliates, with the prior consent and approval of the
Buyer, may open, operate, develop or own, additional retail video stores in
accordance with the provisions of Section 1.9 of the Purchase Agreement (the
"Additional Stores"). The Norwood Store, the New Stores and the Additional
Stores are hereinafter referred to collectively as the "Retail Stores."
Upon written notice to the Buyer from the Developer delivered at any time
beginning after the first day of the nineteenth full calendar month following
the date on which the last to open of the Retail Stores is opened (the
"Developer Commencement Date") and ending on the last day of the sixteenth
succeeding whole calendar
<PAGE> 2
month following the Developer Commencement Date (the "End Date"), the Developer
shall have the option (the "Sell Option") to require the Buyer to purchase from
the Developer or his Affiliates, and the Buyer shall be required to purchase
from the Developer or his Affiliates, all of the assets of all (but not less
than all) of the Retail Stores (the "Assets") pursuant to an asset purchase
agreement substantially in the form and on the terms of the Purchase Agreement
(the "Option Store Purchase Agreement"). If the Developer fails to timely
provide such notice, the Developer shall be deemed to have elected not to cause
the Buyer to purchase the Assets. Notwithstanding the foregoing, the Developer
may exercise the Sell Option with respect to the Norwood Store (and the Norwood
Store only) during the 16-month period commencing on the first day of the
thirteenth whole calendar month following the date on which the Norwood Store is
opened.
2. OPTION TO BUY. Upon written notice to the Developer from the Buyer
delivered at any time beginning after the first day of the twenty-first full
calendar month following the date on which the last to open of the Retail Stores
is opened (the "Buyer Commencement Date") and ending on the last day of the
sixteenth succeeding whole calendar month following the Buyer Commencement Date
(the "End Date"), the Buyer shall have the option (the "Buy Option") to require
the Developer to sell to the Buyer, and the Developer shall be required to sell
to the Buyer, all of the Assets pursuant to the terms of the Option Store
Purchase Agreement. If the Buyer fails to timely provide such notice, the Buyer
shall be deemed to have elected not to cause the Developer to sell the Assets.
3. THE CLOSING. The closing of the acquisition by the Buyer of the Assets
(the "Closing") shall take place within 45 days following the date of delivery
of the Sell Option or Buy Option, as applicable, and the determination of the
Purchase Price (in accordance with Sections 4 and 6 below) or as soon as
practicable thereafter, at the offices of Hale and Dorr, 60 State Street,
Boston, Massachusetts, at such time or date as may be selected by Buyer, on not
less than two days prior notice to Developer (which notice may be given orally),
or at such other time and date as may be mutually agreed upon in writing by the
parties hereto. If the Sell Option with respect to the Norwood Store is
exercised separately, there shall be held a separate Closing for the purchase of
the Norwood Store.
4. PURCHASE PRICE. The purchase price for the Assets (the "Purchase
Price") shall be equal to the product of (x) 3.5 multiplied by (y) the aggregate
amount of the Net Operating Cash Flow for all of the Retail Stores (except that
if the Sell Option with respect to the Norwood Store is exercised separately,
the purchase price for the Norwood Store assets alone shall be payable
- 2 -
<PAGE> 3
(i.e., 3.5 times the Net Operating Cash Flow for the Norwood Store)). The
Purchase Price shall be paid in the manner provided in Section 5 below.
For purposes hereof, the Net Operating Cash Flow for each Retail Store
shall be equal to the pre-tax income from such Retail Store during the 12-month
period ending on the last day of the eighteenth full calendar month following
the opening of such Retail Store, plus all debt-related interest expense and
depreciation and amortization expenses attributable to such Retail Store for
such 12-month period, less all rental product purchases for such Retail Store
during such 12-month period (including revenue sharing expenses if not
previously expensed), less all earned income interest for such Retail Store for
such 12-month period, plus all compensation expenses for all persons employed by
Developer spending less than 75% of their employment time serving customers at
such Retail Store during such 12-month period. The Net Operating Cash Flow shall
be determined in accordance with generally accepted accounting principles
applied consistently with the Developer's past practice. If the purchase price
for the Norwood Store is calculable prior to the end of the eighteenth full
month of operations, the applicable period for calculation of the Net Operating
Cash Flow shall be the first twelve full calendar months after opening of the
Norwood Store.
5. PAYMENT OF PURCHASE PRICE. (a) Unless the Developer makes the election
described in Section 5(b) below, in accordance with the terms thereof, the Buyer
shall pay the Purchase Price for the Assets by delivery of an unsecured
promissory note of the Buyer, in the principal amount of the Purchase Price (the
"Note"). Amounts outstanding under the Note shall bear interest at the rate of
2% per annum, noncompounded. The Note shall mature on the third anniversary of
the Closing date (but shall be prepayable, without premium or penalty, at any
time in the Buyer's sole discretion), and shall provide for no payments (of
principal or interest) during the term thereof, but for payment of the entire
principal amount due thereunder, and accrued and unpaid interest thereon, at
maturity.
(b) In lieu of delivery of the Note, as provided in Section 5(a)
above, if the Developer so elects, the Buyer may deliver to the Developer on the
Closing Date, or as soon as practicable thereafter, that number of shares of
Common Stocks, $.01 par value per share, of the Buyer ("Common Stock") as is
determined by dividing (x) the Purchase Price by (y) the Market Value. The
"Market Value" shall equal the average of the average of the bid and asked
prices per share of Buyer's Common Stock as reported on the Nasdaq Stock
Exchange for each of the fifteen trading days ending on the business day
preceding the date on which the closing of the transaction contemplated by the
Purchase
-3-
<PAGE> 4
Agreement occurred. Such shares of Buyer Common Stock shall be registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (the "Registration Statement") filed with the Securities
and Exchange Commission (the "SEC"). The Developer shall make the election
contemplated by this clause (b) only following delivery to the Developer of a
then current prospectus relating to shares of Buyer's Common Stock, which
prospectus is included in a then effective Registration Statement (provided such
prospectus may include supplements thereto). Buyer may deliver any such
prospectus at any time (and more than one time) following the date hereof. If,
within 10 business days following any such delivery of such a prospectus, the
Developer notifies the Buyer that it has made such election, such election shall
be irrevocable unless the Buyer and the Developer mutually agree otherwise.
(c) If the Developer has made the election contemplated by Section
5(b) above, and prior to the issuance of shares of Buyer Common Stock pursuant
to Section 5(b) above, the Buyer shall:
(x) declare a dividend of Common Stock on its Common Stock,
(y) subdivide outstanding Common Stock into a larger number
of shares of Common Stock by reclassification, stock split or
otherwise, or
(z) combine outstanding Common Stock into a smaller number of
shares of Common Stock by reclassification or otherwise,
then the number of shares of Buyer Common Stock issuable pursuant to Section
5(b) shall be adjusted proportionately so that thereafter the Developer shall be
entitled to receive the number of shares of Common Stock which the Developer
would have been entitled to receive after the happening of any of the events
described above had the shares to be issued been issued immediately prior to the
happening of such events. An adjustment made pursuant to this Section 5(c) shall
become effective immediately after the record date in the case of a dividend and
shall become effective immediately after the effective date in the case of a
subdivision or combination.
(d) The Buyer shall not assume any liabilities of the Developer in
connection with the acquisition of the Retail Stores, except that, if the
Developer so elects, up to two-sevenths of the total purchase price shall be
paid by assumption by the Buyer of the Developer's liabilities, the amount so
assumed to reduce, on a
-4-
<PAGE> 5
dollar-for-dollar basis, the amount of the other consideration deliverable to
the Developer in payment of the Purchase Price.
6. DETERMINATION OF PURCHASE PRICE. Promptly following the delivery of
the Buy Option or Sell Option, as applicable, the Buyer shall cause independent
certified public accountants for the Buyer (the "Accountants"), to review the
books and records of the Developer and its Affiliates which relate to the Retail
Stores. Not later than 90 days after the delivery of the Buy Option or Sell
Option, as applicable, the Buyer shall cause the Accountants to deliver a
statement setting forth the Net Operating Cash Flow for the Retail Stores to be
acquired to each of the parties to this Agreement (the "Accountants' Report).
In the event that the Buyer or the Developer dispute the calculation of
the Net Operating Cash Flows, the disputing party shall notify the other party
hereto in writing (the "Dispute Notice") of the amount, nature and basis of such
dispute, within 10 calendar days after delivery of the Accountants' Report. In
the event of such a dispute, the parties hereto shall first use their best
efforts to resolve such dispute among themselves. If the parties are unable to
resolve the dispute within 10 business days after delivery of the Accountants'
Report, the dispute shall be submitted to the Accountants and Ron Switzer,
independent accountants for the Developer ("Developer's Accountants"), for
resolution. The Accountants and Developer's Accountants shall use their best
efforts to resolve the dispute within five business days after submission. If
they are unable to agree upon a resolution of the dispute within such
five-business day period, the dispute shall be submitted to arbitration in
accordance with Section 9.
The fees and expenses of the Accountants in connection with the
preparation of the Accountants' Report and the resolution of disputes pursuant
to the preceding paragraph shall be borne by the Buyer and the fees and expenses
of Developer's Accountants in connection with the resolution of disputes
pursuant to the preceding paragraph shall be borne by the Developer.
Promptly upon the expiration of the 10-business day period for giving the
Dispute Notice, if no Dispute Notice is given, or promptly upon the resolution
of disputes, if any, as provided above, the Closing shall occur.
7. RESTRICTIONS ON TRANSFER OF RETAIL STORES. Developer and its
Affiliates hereby agree that they shall not, without Buyer's prior written
consent (which may be granted or denied in Developer's sole and absolute
discretion), sell, transfer or dispose of, directly or indirectly, by sale of
stock, assets, merger, consolidation or otherwise, all or any portion of, or any
- 5 -
<PAGE> 6
interest in, any of the Retail Stores which are now owned or may hereafter be
developed or acquired by Developer or such Affiliates, until such time as the
options contained in this Agreement have expired unexercised.
8. NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if delivered personally or sent by telex,
federal express, registered or certified mail, postage prepaid, addressed as
follows or to such other address of which the parties may have given notice:
To the Developer: Mr. Charles Johnson, Jr.
2623 Regency Road
Lexington, KY 40503
With a copy to: Daniel Rose, Esq.
201 East Main Street
Suite 1000
Lexington, Kentucky 40507
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other communications shall be
deemed received (a) on the date delivered, if delivered personally; (b) one
business day after delivery to an overnight courier, if sent by overnight
courier; or (c) three business days after being sent, if sent by registered or
certified mail.
9. Arbitration.
-----------
(a) Any dispute, controversy or claim between the parties arising
out of or relating to this Agreement, a breach hereof or the transactions
contemplated hereby, shall be settled by arbitration in accordance with the
provisions of this Section. Any arbitration pursuant to this Section shall be
conducted by a single arbitrator appointed by the Boston, Massachusetts office
of the American Arbitration Association upon the request of either party. The
arbitrator shall have a minimum of five years of experience in the area of
business relevant to the particular dispute. Each party shall be permitted to
submit only one proposal to the arbitrator, and the arbitrator shall be required
- 6 -
<PAGE> 7
to choose one of such two proposals as the resolution of the dispute. The
arbitrator may proceed to a resolution notwithstanding the failure of a party to
participate in the proceedings. Each of the parties shall pay its own costs and
expenses in connection with any such arbitration, and the parties shall share
equally in the fees and expenses of the arbitrator.
(b) The parties agree that any such arbitration will occur in
Boston, Massachusetts, any such arbitration award shall be final and binding
upon the parties, may be entered in any court having jurisdiction and shall not
be appealable by either party in any court.
10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, except that the Buyer and the Developer may not assign their respective
obligations hereunder without the prior written consent of the other party;
provided, however, that the Buyer may assign this Agreement, and its rights and
obligations hereunder, to a subsidiary or Affiliate. Any assignment in
contravention of this provision shall be void. No assignment shall release the
Buyer from any obligation or liability under this Agreement.
11. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, all Schedules and
Exhibits hereto, and all agreements and instruments to be delivered by the
parties pursuant hereto represent the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and supersede all
prior oral and written and all contemporaneous oral negotiations, commitments
and understandings between such parties. The Buyer and the Developer may amend
or modify this Agreement, in such manner as may be agreed upon, by a written
instrument executed by the Buyer and the Developer.
12. EXPENSES. Except as otherwise expressly provided herein, the Buyer
and the Developer shall each pay their own expenses in connection with this
Agreement and the transactions contemplated hereby.
13. LEGAL FEES. In the event that legal or arbitration proceedings are
commenced by the Buyer against the Developer, or by the Developer against the
Buyer, in connection with this Agreement or the transactions contemplated
hereby, the party or parties which do not prevail in such proceedings shall pay
the reasonable attorneys' fees and other costs and expenses, including
investigation costs, incurred by the prevailing party in such proceedings.
-7-
<PAGE> 8
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
15. SECTION HEADINGS. The section headings are for the convenience of the
parties and in no way alter, modify, amend, limit, or restrict the contractual
obligations of the parties.
16. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
18. CAPITALIZED TERMS. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings ascribed to them in the
Purchase Agreement.
(end of page)
-8-
<PAGE> 9
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of and on the date first above written.
DEVELOPER:
/s/ Charles Johnson, Jr.
-------------------------------------------
Charles Johnson, Jr. (for himself, and on
behalf of his Affiliates which may own
Retail Stores)
BUYER:
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ Ralph W. Standley III
----------------------------------------
Title: Chairman
-------------------------------------
-9-
<PAGE> 1
ASSET PURCHASE AGREEMENT
By and Among
West Coast Entertainment Corporation,
the Entities Named on SCHEDULE A Attached Hereto
and
Steven Matsakis, Hal Greene and Brian Miller
<PAGE> 2
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Sale and Delivery of the Assets....................... 1
1.1 Delivery of the Assets.......................... 1
1.2 Further Assurances ............................. 3
1.3 Base Purchase Price............................. 3
1.4 Assumption of Liabilities; Etc.................. 5
1.5 Allocation of Base Purchase Price and
Assumed Liabilities............................. 7
1.6 The Closing..................................... 7
1.7 No Apportionment................................ 7
1.8 Deposit ........................................ 7
1.9 New Stores...................................... 8
2. Representations of the Sellers and the Principals..... 8
2.1 Organization.................................... 8
2.2 Capitalization of the Sellers .................. 8
2.3 Authorization................................... 9
2.4 Ownership of the Assets......................... 9
2.5 Financial Statements............................ 10
2.6 Absence of Undisclosed Liabilities.............. 12
2.7 Litigation...................................... 12
2.8 Insurance....................................... 12
2.9 Inventory....................................... 12
2.10 Fixed Assets.................................... 13
2.11 Leases.......................................... 13
2.12 Change in Financial Condition and Assets........ 14
2.13 Tax Matters..................................... 14
2.14 Accounts Receivable............................. 15
2.15 Books and Records............................... 15
2.16 Contracts and Commitments....................... 16
2.17 Compliance with Agreements and Laws............. 17
2.18 Employee Relations.............................. 18
2.19 Absence of Certain Changes or Events............ 19
2.20 Suppliers....................................... 20
2.21 Prepayments and Deposits........................ 20
2.22 Trade Names and Other Intangible Property....... 20
2.23 Employee Benefit Plans.......................... 21
2.24 Regulatory Approvals............................ 22
2.25 Indebtedness to and from Officers, Directors
and Shareholders................................ 22
2.26 Powers of Attorney and Suretyships.............. 22
2.27 Disclosure...................................... 22
<PAGE> 3
3. Representations of the Buyer.......................... 23
3.1 Organization and Authority...................... 23
3.2 Capitalization of the Buyer..................... 23
3.3 Authorization................................... 23
3.4 Regulatory Approvals............................ 24
3.5 Disclosure...................................... 24
3.6 Issuance of Shares.............................. 24
4. Access to Information; Public Announcements........... 24
4.1 Access to Management, Properties and Records.... 24
4.2 Confidentiality................................. 25
4.3 Public Announcements............................ 26
4.4 Registration Statement.......................... 26
5. Pre-Closing Covenants of the Seller................... 26
5.1 Conduct of Business............................. 27
5.2 Absence of Material Changes..................... 27
5.3 Taxes........................................... 28
5.4 Delivery of Interim Financial Statements ....... 29
5.5 Compliance with Laws............................ 29
5.6 Continued Truth of Representations
and Warranties of the Sellers................... 29
5.7 Continuing Obligation to Inform................. 29
5.8 Exclusive Dealing............................... 29
5.9 No Publicity.................................... 30
6. Satisfaction of Conditions, Liquidated Damages........ 30
6.1 Satisfaction of Conditions...................... 30
6.2 Liquidated Damages.............................. 30
7. Conditions to Obligations of the Buyer................ 31
7.1 Continued Truth of Representations
and Warranties of the Seller; Compliance with
Covenants and Obligations ...................... 31
7.2 Corporate Proceedings........................... 31
7.3 Governmental Approvals.......................... 31
7.4 Consents of Lenders, Lessors and Other
Third Parties................................... 32
7.5 Adverse Proceedings............................. 32
7.6 Opinion of Counsel.............................. 32
7.7 Board of Directors and Shareholder and Member and
Manager Approval................................ 32
7.8 The Assets...................................... 32
-ii-
<PAGE> 4
7.9 Update.......................................... 32
7.10 Cash Available.................................. 33
7.11 Payables........................................ 33
7.12 Tax Holdback Agreement.......................... 33
7.13 Closing Deliveries.............................. 33
8. Conditions to Obligations of the Sellers.............. 34
8.1 Continued Truth of Representations and
Warranties of the Buyer; Compliance
with Covenants and Obligations.................. 34
8.2 Corporate Proceedings........................... 35
8.3 Governmental Approvals.......................... 35
8.4 Consents of Lenders, Lessors and Other
Third Parties................................... 35
8.5 Adverse Proceedings............................. 35
8.6 Opinion of Counsel.............................. 35
8.7 Closing Deliveries.............................. 35
9. Indemnification....................................... 36
9.1 By the Buyer and the Sellers
and the Principals.............................. 36
9.2A By the Sellers and the Principals............... 36
9.2B By the Buyer.................................... 37
9.3 Claims for Indemnification...................... 38
9.4 Defense by Indemnifying Party.................. 39
9.5 Payment of Indemnification Obligation........... 39
9.6 Survival of Representations; Claims for
Indemnification................................. 39
9.7 Indemnification Limitations..................... 40
10. Post-Closing Agreements............................... 40
10.1 Proprietary Information......................... 40
10.2 No Solicitation or Hiring of Former Employees... 40
10.3 Non-Competition Agreement....................... 40
10.4 Sharing of Data................................. 41
10.5 Use of Name.................................... 42
10.6 Cooperation in Litigation....................... 43
11. Termination of Agreement.............................. 43
11.1 Termination by Lapse of Time.................... 43
11.2 Termination by Agreement of the Parties........ 43
11.3 Termination by Reason of Breach................ 43
-iii-
<PAGE> 5
12. Transfer and Sales Tax................................ 43
13. Brokers............................................... 44
13.1 For the Sellers................................. 44
13.2 For the Buyer................................... 44
14. Notices............................................... 44
15 Arbitration........................................... 45
16. Successors and Assigns................................ 46
17. Entire Agreement; Amendments; Attachments............. 46
18. Expenses.............................................. 47
19. Legal Fees............................................ 47
20. Governing Law......................................... 47
21. Section Headings...................................... 47
22. Severability.......................................... 47
23. Counterparts.......................................... 47
-iv-
<PAGE> 6
ASSET PURCHASE AGREEMENT
------------------------
Agreement made as of September 30, 1996 by and among West
Coast Entertainment Corporation, a Delaware corporation with its
principal office at 9990 Global Road, Philadelphia, Pennsylvania
19115 (the "Buyer"), each of the entities named on Schedule A
attached hereto, each of whom has a principal office as indicated
on SCHEDULE A (collectively, the "Sellers" and individually, a
"Seller"), and Steven Matsakis, Hal Greene and Brian Miller
(collectively, the "Principals" and individually, a "Principal").
Preliminary Statement
---------------------
The Buyer desires to purchase, and the Sellers desire to
sell, substantially all of the assets and businesses of the
Sellers, each of which is engaged in the retail video rental and
sales business (the "Business"), for the consideration set forth
below and the assumption of certain of the Sellers' liabilities
set forth below, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth and other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby
agree as follows:
1. Sale and Delivery of the Assets
-------------------------------
1.1 Delivery of the Assets.
----------------------
(a) Subject to and upon the terms and conditions
of this Agreement, at the closing of the transactions contemplated
by this Agreement (the "Closing"), the Sellers shall sell,
transfer, convey, assign and deliver to the Buyer, and the Buyer
shall purchase from the Sellers, the following properties, assets
and other claims, rights and interests:
(i) all inventories, videotapes, finished
goods, office supplies, maintenance supplies, packaging materials,
spare parts and similar items of the Sellers (collectively, the
"Inventory") which exist on the Closing Date (as defined below);
(ii) all accounts, accounts receivable, notes
and notes receivable existing on the Closing Date which are
payable to the Sellers, including any security held by the Sellers
for the payment thereof (the "Accounts Receivable");
<PAGE> 7
(iii) all prepaid expenses, prepaid rent,
prepaid insurance, deposits, security deposits and other similar
assets of the Sellers existing on the Closing Date;
(iv) all rights of the Sellers under the
contracts, agreements, leases, licenses and other instruments set
forth on SCHEDULE 2.16 attached hereto (collectively, the
"Contract Rights");
(v) subject to the provisions of Section
10.4, copies of all books, records and accounts, correspondence,
studies, reports or summaries relating to or arising out of the
Business, and originals of all manuals and customer lists;
(vi) all rights of the Sellers under express
or implied warranties from the suppliers of the Sellers;
(vii) all of the machinery, equipment,
furniture, leasehold improvements and construction in progress
owned by the Sellers on the Closing Date, regardless of whether
reflected as "fixed assets" or "capital assets" in the accounting
records of the Sellers (collectively, the "Fixed Assets");
(viii) all of the Sellers' right, title and
interest in and to all intangible property rights, including but
not limited to inventions, discoveries, trade secrets, processes,
formulas, know-how, United States and foreign patents, patent
applications, trade names, including the name "Super Video Store",
and the service mark "More Movies, More Copies, More Fun!" or any
derivation of any of the foregoing, trademarks, trademark
registrations, applications for trademark registrations,
copyrights, copyright registrations, owned or, where not owned,
used by the Sellers (or any of them) in the Business and all
licenses and other agreements to which any Seller is a party (as
licensor or licensee) or by which any Seller is bound relating to
any of the foregoing kinds of property or rights to any "know-how"
or disclosure or use of ideas (collectively, the "Intangible
Property");
(ix) except as specifically provided in
Subsection 1.1(b) hereof, all other assets, properties, claims,
rights and interests of the Sellers which exist on the Closing
Date, of every kind and nature and description, whether tangible
or intangible, real, personal or mixed.
(b) Notwithstanding the provisions of
paragraph (a) above, the assets to be transferred to the Buyer
under this Agreement shall not include (i) cash of the Sellers,
other than (x) an aggregate of $14,000 of cash on hand at the
Stores (as defined below) and (y) deposits and prepayments from
-2-
<PAGE> 8
customers (which shall be transferred to the Buyer to be held as
such), (ii) any motor vehicles or other rolling stock owned by the
Sellers on the Closing Date, or (iii) the those assets listed on
SCHEDULE 1.1(ii) attached hereto (collectively, the items referred
to in clauses (i), (ii) and (iii) are hereinafter referred to as
the "Excluded Assets").
(c) The Inventory, Accounts Receivable, Contract
Rights, Fixed Assets, Intangible Property and other properties,
assets and business of the Sellers described in paragraph (a)
above, other than the Excluded Assets, shall be referred to
collectively as the "Assets." The Assets relate to the 14 retail
video stores identified on SCHEDULE B attached hereto, which
constitute all of the retail video stores in which each Seller has
an interest. All of such stores are sometimes hereinafter
referred to collectively as the "Stores."
1.2 FURTHER ASSURANCES. At any time and from time to
time after the Closing, at the Buyer's request and without further
consideration, the Sellers promptly shall execute and deliver such
instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as the Buyer may
reasonably request to more effectively transfer, convey and assign
to the Buyer, and to confirm the Buyer's title to, all of the
Assets, to put the Buyer in actual possession and operating
control thereof, to assist the Buyer in exercising all rights with
respect thereto and to carry out the purpose and intent of this
Agreement. If the Buyer requests the Sellers to take any such
action more than 180 days after the Closing Date, the Buyer shall
reimburse the Sellers for their reasonable, documented out-of-
pocket expenses associated therewith.
1.3 Base Purchase Price.
-------------------
(a) The purchase price for the Assets shall be an
amount equal to (i) $10,550,000 minus (ii) the amount of the
current accounts payable of the Sellers assumed by the Buyer on
the Closing Date pursuant to clauses (i) and (ii) of Section
1.4(a) below (the "Base Purchase Price"). The Base Purchase Price
shall be subject to adjustment as provided in Section 1.7 below.
Any such adjustment shall increase or reduce the portion of the
Base Purchase Price which is payable by delivery of cash, as
described in Section 1.3(b)(ii) below.
(b) The Base Purchase Price shall be paid as
follows. At the Closing, the Buyer shall deliver to the Sellers
(i) $3,919,000 by delivery of an instrument of evidence of
indebtedness pursuant to which the Buyer shall issue shares of its
Common Stock, $.01 par value per share ("Common Stock"), which
instrument shall be on the terms described below (the
-3-
<PAGE> 9
"Instrument"), and (ii) the balance by wire transfer of
immediately available federal funds, to an account designated by
the Sellers. The Base Purchase Price (as adjusted in the manner
provided in this Agreement) shall be allocated among each Seller
in the manner provided on SCHEDULE C attached hereto.
The Instrument shall provide for issuance to the Sellers of a
number of shares of Buyer Common Stock equal to (I) $3,919,000
divided by (II) the average of the bid and asked prices per share
of Buyer's Common Stock as reported on the Nasdaq Stock Exchange
for each of the fifteen trading days ending on the business day
preceding the Closing Date (the "Market Value"). The Instrument
shall provide for issuance of one-third (in number of shares) of
the total number of shares of Buyer Common Stock issuable pursuant
to the Instrument on the date which is 180 days following the
Closing Date (the "First Issue Date"); one-third (in number of
shares) of such shares on the date which is 365 days following the
Closing Date (the "Second Issue Date"); and the balance on the
date which is 545 days following the Closing Date (the "Third
Issue Date").
The Instrument shall further provide that:
(x) If, on the First Issue Date, the closing price of a
share of Buyer Common Stock as reported on The Nasdaq Stock
Market (the "First Issue Date Price"), is less than the
Market Value, the Buyer shall deliver, within three business
days following the First Issue Date, (1) cash or (2)
additional shares of registered Buyer Common Stock, valued at
the First Issue Date Price, which stock shall not be subject
to any restrictions whatsoever, or (3) some combination of
items (1) and (2), in any event, with an aggregate value
equal to (A) the number of shares of Buyer Common Stock
issued on the First Issue Date multiplied by (B) the excess
of the Market Value over the First Issue Date Price.
(y) If, on the Second Issue Date, the closing price of
a share of Buyer Common Stock as reported on the Nasdaq Stock
Market (the "Second Issue Date Price"), is less than the
Market Value, the Buyer shall deliver, within three business
days following the Second Issue Date, (1) cash or (2)
additional shares of registered Buyer Common Stock, valued at
the Second Issue Date Price, which stock shall not be subject
to any restrictions whatsoever, or (3) some combination of
items (1) and (2), in any event, with an aggregate value
equal to 50% of (A) the number of shares of Buyer Common
Stock issued on the Second Issue Date multiplied by (B) the
excess of the Market Value over the Second Issue Date Price.
-4-
<PAGE> 10
The Instrument shall permit set off, against amounts payable
thereunder, of amounts or obligations owed by the Principals or
the Sellers to the Buyer. All shares issued pursuant to the
Instrument shall be registered under the Securities Act of 1933,
as amended (the "Securities Act"), pursuant to a Registration
Statement filed with the Securities and Exchange Commission (the
"SEC"), which Registration Statement shall, at the time of each
issuance of such shares, be effective.
The Instrument shall provide that if the Buyer defaults in
the delivery of shares on any such date, the Sellers shall provide
notice thereof to the Buyer and an opportunity to cure such
default during a 30-day period thereafter. If the Buyer then
fails to deliver such shares, the Buyer's obligation to deliver
all unissued shares as provided in the Instrument shall
accelerate. The obligation to issue shares under the Instrument
shall also accelerate upon a Bankruptcy Event (as defined in the
Instrument) with respect to Buyer.
Following any acceleration of the Instrument, the Instrument
shall become, at the election of the Sellers, payable not in
shares of Buyer Common Stock, but in cash in a dollar amount equal
the number of Unissued Shares multiplied by the Market Value.
The Instrument shall provide that the consideration issuable
thereunder is allocable (for income tax purposes) solely to
goodwill to be acquired by the Buyer from the Sellers, and not to
any other assets of the Sellers.
The Instrument shall also provide that if, prior to the
issuance of all shares to the Sellers pursuant to the Instrument
(any such shares so unissued, the "Unissued Shares"), the Buyer
registers shares of Buyer Common Stock owned by Ralph T. Standley,
III or T. Kyle Standley (the "Standleys") pursuant to a
Registration Statement, and the Standleys sell such shares, the
Buyer shall, at the written election of the Sellers, issue all
Unissued Shares pursuant to the Instrument within 30 days
following the date on which the Standleys sell such shares.
1.4 ASSUMPTION OF LIABILITIES; ETC.
(a) At the Closing, the Buyer shall execute and
deliver an Instrument of Assumption of Liabilities (the
"Instrument of Assumption") substantially in the form attached
hereto as EXHIBIT 1, pursuant to which it shall assume and agree
to perform, pay and discharge the following liabilities,
obligations and commitments of the Sellers related to the Business
(the "Assumed Liabilities"):
-5-
<PAGE> 11
(i) All accounts payable incurred in the
ordinary course of business and reflected on the balance sheets of
the Sellers as of December 31, 1995 previously delivered to the
Buyer (the "Balance Sheet"), less (w) any payments made from
December 31, 1995 (the "Balance Sheet Date") to the Closing Date,
(x) any accounts payable of the Sellers to any Affiliate of any
Seller as such term is defined in the Securities Act, as amended,
and the rules and regulations promulgated thereunder, (y) any
accounts payable which are, as of the Closing Date, past due and
(z) any accounts payable which, as of the Closing Date, have been
outstanding for greater than 60 days (regardless of whether past
due), provided that, in no event shall the aggregate amount of the
liabilities assumed pursuant to this clause (i) and clause (ii)
below exceed $400,000, and the Sellers shall discharge any
liabilities to the extent necessary to reduce all such liabilities
to $400,000 or less;
(ii) All accounts payable and accrued
liabilities of the Sellers incurred in the ordinary course of
business of the Sellers from the Balance Sheet Date to the Closing
Date, other than (x) any liabilities of the Sellers to any
Affiliate of any Seller, (y) accounts payable which are by their
terms past due as of the Closing Date and (z) any accounts payable
which, as of the Closing Date, have been outstanding for greater
than 60 days (regardless of whether past due), provided that, in
no event shall the aggregate amount of the liabilities assumed
pursuant to this clause (ii) and clause (i) above exceed $400,000,
and the Sellers shall discharge any liabilities to the extent
necessary to reduce all such liabilities to $400,000 or less;
(iii) All obligations of the Sellers continuing
after the Closing under the leases and contracts (which shall not
and may not include liabilities under employee benefit plans) of
the Business and set forth on SCHEDULE 1.4 attached hereto which
become due and payable after the Closing Date; and
(iv) All other liabilities and obligations of
the Sellers specifically set forth in SCHEDULE 1.4 attached
hereto.
(b) The Buyer shall not at the Closing assume or
agree to perform, pay or discharge, and the Sellers shall remain
unconditionally liable for, all obligations, liabilities and
commitments, fixed or contingent, of the Sellers other than the
Assumed Liabilities. Without limiting the foregoing, the Buyer
shall not assume any liabilities or obligations of the Sellers for
wages, severance pay, vacation pay or under any employee benefit
plan.
-6-
<PAGE> 12
1.5 ALLOCATION OF BASE PURCHASE PRICE AND ASSUMED
LIABILITIES. The aggregate amount of the Base Purchase Price and
the Assumed Liabilities shall be allocated among the Assets in the
manner specified on SCHEDULE 1.5 attached hereto. As provided in
Section 1.3(b) above, the Base Purchase Price shall be allocated
among each Seller in the manner provided on SCHEDULE C attached
hereto.
1.6 THE CLOSING. The Closing shall take place on or
before September 30, 1996 (time being of the essence), at the
offices of Hale and Dorr, 60 State Street, Boston, Massachusetts,
at such time or date as may be selected by Buyer, on not less than
two days prior notice to any Principal (which notice may be given
orally), or at such other time and date as may be mutually agreed
upon in writing by the Buyer and the Principals. The transfer of
the Assets by the Sellers to the Buyer shall be deemed to occur at
9:00 a.m., Boston time, on the date of the Closing (the "Closing
Date").
In the event that the Closing does not occur on or before
September 30, 1996, the Buyer and the Sellers shall be released
from all of their obligations under this Agreement, and any other
agreements between the Buyer and the Sellers (except that the
Deposit, as defined below, shall be disposed of in accordance with
the Escrow Agreement described in Section 1.8 below).
1.7 NO APPORTIONMENT. Except as specifically provided
in this Section 1.7 below, the purchase price of the assets shall
not be subject to any adjustment for any prepaid expenses of the
Sellers, including without limitation: (i) prepaid premiums on
insurance, (ii) water and sewer use charges, (iii) transfer taxes
and recording fees, if any, incurred in connection with the
transfer of the Assets contemplated hereby, or (iv) real property
taxes or other taxes for the then current tax period, and such
amounts, if any, shall not be added to or deducted from the Base
Purchase Price. The Sellers shall be entitled to additional
consideration in respect of prepaid rent as of the Closing Date,
which amount shall be added to the cash portion of the purchase
price deliverable at closing.
1.8 DEPOSIT. The Buyer has previously deposited with
Lentz & Gengaro, as escrow agent (the "Escrow Agent") cash in the
amount of $200,000 as an earnest money deposit hereunder (the
"Deposit") in accordance with the terms of an Escrow Agreement
(the "Escrow Agreement"). The Deposit shall be delivered to the
Sellers or the Buyer, as applicable, in accordance with the terms
of the Escrow Agreement.
THE SELLERS AND THE PRINCIPALS, ON THE ONE HAND, AND THE
BUYER, ON THE OTHER HAND, HAVE BEEN REPRESENTED BY SEPARATE
-7-
<PAGE> 13
COUNSEL IN CONNECTION WITH THIS AGREEMENT. ONE OF SUCH COUNSEL
MAY SERVE AS THE ESCROW AGENT. TO THE EXTENT THAT SERVICE AS SUCH
ESCROW AGENT CONSTITUTES A CONFLICT OF INTEREST, EACH OF THE
SELLERS, PRINCIPALS AND THE BUYER HEREBY EXPRESSLY WAIVE ANY SUCH
CONFLICT OF INTEREST WITH RESPECT TO ANY REPRESENTATION OF THE
BUYER OR THE SELLERS OR THE PRINCIPALS IN THE FUTURE, INCLUDING
REPRESENTATION IN CONNECTION WITH RESOLUTION OF DISPUTES ARISING
UNDER THE ESCROW AGREEMENT.
1.9 NEW STORES. Neither the Sellers nor the Principals
(nor any of their respective Affiliates) shall be permitted or
entitled to open additional retail stores prior to the Closing,
unless the Buyer shall have previously consented thereto, which
consent may be granted or withheld by the Buyer in its sole and
absolute discretion.
2. Representations of the Sellers and the Principals
-------------------------------------------------
The Sellers and the Principals, jointly and severally,
represent and warrant to the Buyer as follows (it being understood
that all references in this Section 2 to the Sellers shall be
deemed to include all of the Sellers, unless the context otherwise
requires):
2.1 ORGANIZATION. Each Seller is a corporation or
limited liability company duly organized, validly existing and in
good standing under the laws of the state of its organization, as
specified on SCHEDULE D attached hereto, and has all requisite
power and authority (corporate and other) to own its properties,
to carry on its business as now being conducted, to execute and
deliver this Agreement and the agreements contemplated herein, and
to consummate the transactions contemplated hereby. No Seller
directly or indirectly owns or holds any legal or beneficial
equity interest, in any corporation, partnership, joint venture,
limited liability company or other entity. Each Seller is duly
qualified to do business and in good standing in each of the
jurisdictions listed on SCHEDULE 2.1(i) attached hereto, which
constitute all jurisdictions in which their ownership of property
or the character of their business requires such qualification.
Certified copies of the charter, bylaws and other governing
instruments of each of the Sellers, each as amended to date, have
been previously delivered to the Buyer, are complete and correct,
and no amendments have been made thereto or have been authorized
since the date thereof. SCHEDULE B sets forth a list of each
retail video rental store (including the location of each such
store and the name and address of all owners of each such store)
owned, operated or licensed directly or indirectly by each Seller.
2.2 CAPITALIZATION OF THE SELLERS. Each Seller's
authorized and issued capital stock or membership interests are as
-8-
<PAGE> 14
specified on SCHEDULE D. The Principals own (beneficially and of
record) all issued and outstanding shares of stock or constitute
all of the members and managers of each Seller, all as more fully
specified on SCHEDULE D. All of such shares or membership
interests have been duly and validly issued and are fully paid
and nonassessable.
2.3 AUTHORIZATION. The execution and delivery of this
Agreement by each Seller, and the agreements provided for herein,
and the consummation by each Seller of all transactions
contemplated hereby, have been duly authorized by all requisite
corporate and shareholder (or limited liability company member
and/or manager) action (as the case may be). This Agreement and
all such other agreements and obligations entered into and
undertaken in connection with the transactions contemplated hereby
to which any Seller is a party constitute the valid and legally
binding obligations of such Seller, enforceable against such
Seller in accordance with their respective terms. The execution,
delivery and performance by each Seller of this Agreement and the
agreements provided for herein, and the consummation by each
Seller of the transactions contemplated hereby and thereby, will
not, with or without the giving of notice or the passage of time
or both: (a) violate the provisions of any law, rule or regulation
applicable to such Seller; (b) violate the provisions of the
charter or Bylaws or limited liability company agreement or
certificate of formation or organization of such Seller; (c)
violate any judgment, decree, order or award of any court,
governmental body or arbitrator; or (d) conflict with or result in
the breach or termination of any term or provision of, or
constitute a default under, or cause any acceleration under, or
cause the creation of any lien, charge or encumbrance upon the
properties or assets of such Seller pursuant to, any indenture,
mortgage, deed of trust or other instrument or agreement to which
such Seller is a party or by which such Seller or any of its
properties is or may be bound. SCHEDULE 2.3 attached hereto sets
forth a true, correct and complete list of all consents and
approvals of third parties that are required in connection with
the consummation by each Seller of the transactions contemplated
by this Agreement.
2.4 OWNERSHIP OF THE ASSETS. SCHEDULE 2.4(i) attached
hereto sets forth a true, correct and complete list of all claims,
liabilities, liens, pledges, charges, encumbrances and equities of
any kind affecting the Assets (collectively, the "Encumbrances").
The Sellers are, and at the Closing will be, the true and lawful
owners of the Assets, and will have the right to sell and transfer
to the Buyer good, clear, record and marketable title to the
Assets, free and clear of all Encumbrances of any kind, except as
set forth on SCHEDULE 2.4(ii) attached hereto (the "Permitted
Encumbrances"). The delivery to the Buyer of the instruments of
-9-
<PAGE> 15
transfer of ownership contemplated by this Agreement will vest
good and marketable title to the Assets in the Buyer, free and
clear of all liens, mortgages, pledges, security interests,
restrictions, prior assignments, encumbrances and claims of any
kind or nature whatsoever, except for the Permitted Encumbrances.
2.5 Financial Statements.
--------------------
(a) The Sellers have previously delivered to the
Buyer their combined audited balance sheets as of December 31,
1993, 1994 and 1995 (the "Audited Balance Sheets") and the related
statements of income, shareholders' equity, retained earnings and
statements of cash flow of the Sellers for the fiscal years ending
December 31, 1993, 1994 and 1995 (collectively, including the
Audited Balance Sheet, the "Audited Financial Statements").
The Sellers have also delivered their combined unaudited
balance sheets as of December 31, 1991 and 1992 (the "Unaudited
Balance Sheets") and the related statements of income,
shareholders' equity, retained earnings and statements of cash
flow of the Sellers for the fiscal years then ended (collectively,
including the Unaudited Balance Sheets, the "Unaudited Financial
Statements").
The Sellers have delivered to the Buyer their internal
statements for each whole monthly period commencing after June 30,
1996 and ending prior to the date hereof (the "Internal
Statements"), which were prepared by Sellers in accordance with
their internal accounting policies, consistently applied.
The Sellers have also delivered a report prepared by Sellers'
management (which is attached as SCHEDULE 2.5 hereto, and entitled
"ADJUSTED CASH FLOW"), which Sellers hereby certify as a true and
correct statement of Sellers' aggregate net operating cash flow
for the year ended December 31, 1995.
The Sellers shall deliver to the Buyer, prior to the Closing,
their combined unaudited balance sheets as of June 30, 1996 and
the combined statements of operations and retained earnings and
statements of cash flows for the six months ended June 30, 1996
prepared in accordance with generally accepted accounting
principles ("GAAP") applied consistently with Sellers' past
practices, which shall be reviewed by Sellers' independent outside
accounting firm and accompanied by an unqualified report from such
accounting firm (the "June Statements"). In addition, the Sellers
have agreed to provide to the Buyer access to Sellers' books and
records, and the Sellers have directed Sellers' independent
outside accounting firm to assist Buyer, in connection with the
preparation of the Sellers' combined unaudited balance sheet as of
June 30, 1995, and the combined comparative statements of
-10-
<PAGE> 16
operations and retained earnings and statements of cash flow for
the six months ended June 30, 1996 and June 30, 1995, prepared in
accordance with GAAP applied consistently with Sellers' past
practices, which shall be reviewed by Sellers' independent outside
accounting firm. The expenses payable to Sellers' independent
outside accounting firm in connection with their review of the
June Statements shall be borne equally by the Buyer and the Seller
(regardless of whether the transactions contemplated by this
Agreement are consummated); provided that in no event shall the
Buyer be required to pay more than $12,500 of such expenses. The
expenses payable to Sellers' independent outside accounting firm
in connection with the preparation and review of the June 30, 1995
statements shall be borne by the Buyer (regardless of whether the
transactions contemplated by this Agreement are consummated).
The Audited Financial Statements have been prepared in
accordance with generally accepted accounting principles applied
consistently with past practice and are certified without
qualification by the Sellers' respective independent public
accountants. The Unaudited Financial Statements and the Internal
Statements (and the interim financial statements to be delivered
by Sellers pursuant to Section 5.4) have been or will be certified
by each Sellers' chief financial officer to have been prepared in
accordance with Seller's internal accounting policies, consistent
with past practice, provided that, the Sellers make no
representation or warranty herein as to the interim statements
delivered pursuant to Section 5.4 which are prepared in accordance
with GAAP. The Audited Financial Statements and the Unaudited
Financial Statements are hereinafter referred to collectively as
the "Financial Statements."
(b) Each Seller's Financial Statements and the Internal
Statements fairly present, and the June Statements will fairly
present, as of their respective dates, the financial condition,
retained earnings, assets and liabilities of each Seller and the
results of operations of such Seller's business for the periods
indicated; with respect to the contracts and commitments for the
sale of goods or the provision of services by such Seller, the
Financial Statements and the Internal Statements contain and
reflect and the June Statements will contain and reflect adequate
reserves, which are consistent with previous reserves taken, for
all reasonably anticipated material losses and costs and expenses
(except that the Internal Statements do not contain accruals for
current and deferred income taxes, tape amortization or
depreciation); and the amounts shown as accrued for current and
deferred income and other taxes in the Financial Statements, the
Internal Statements and the June Statements are (or will be)
sufficient for the payment of all unpaid federal, state and local
income taxes, interest, penalties, assessments or deficiencies
applicable to such Seller, whether disputed or not, for the
-11-
<PAGE> 17
applicable period then ended and periods prior thereto (except
that the Internal Statements do not contain accruals for current
and deferred income taxes, tape amortization or depreciation).
2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and
to the extent (a) reflected and reserved against in its most
recent Audited Balance Sheet, (b) set forth on SCHEDULE 2.6
attached hereto or (c) incurred in the ordinary course of business
after the date of its most recent Audited Balance Sheet and not
material in amount, either individually or in the aggregate, no
Seller (individually) has, nor do the Sellers (in the aggregate)
have, any liability or obligation, secured or unsecured, whether
accrued, absolute, contingent, unasserted or otherwise, affecting
the Assets. For purposes of this Subsection 2.6 only, "material"
means any amount in excess of $10,000.
2.7 LITIGATION. Except as set forth on SCHEDULE 2.7
attached hereto, no Seller is a party to, or to the Sellers' best
knowledge threatened with, and none of the Assets are subject to,
any litigation, suit, action, investigation, proceeding or
controversy before any court, administrative agency or other
governmental authority relating to or affecting the Assets or the
business or condition (financial or otherwise) of any Seller. No
Seller is in violation of or in default with respect to any
judgment, order, writ, injunction, decree or rule of any court,
administrative agency or governmental authority or any regulation
of any administrative agency or governmental authority.
2.8 INSURANCE. SCHEDULE 2.8 attached hereto sets forth
a true, correct and complete list of all fire, theft, casualty,
general liability, workers compensation, business interruption,
environmental impairment, product liability, automobile and other
insurance policies insuring the Assets or business of each Seller
and of all life insurance policies maintained for any of its
employees, specifying the type of coverage, the amount of
coverage, the premium, the insurer and the expiration date of each
such policy (collectively, the "Insurance Policies") and all
claims made under such Insurance Policies since January 1, 1991.
True, correct and complete copies of all of the Insurance Policies
have been previously delivered by the Sellers to the Buyer. The
Insurance Policies are in full force and effect and are in amounts
and of a nature which are adequate and customary for the Sellers'
business. All premiums due on the Insurance Policies or renewals
thereof have been paid and there is no default under any of the
Insurance Policies.
2.9 INVENTORY. SCHEDULE 2.9 attached hereto sets forth
a true, correct and complete list of the Sellers' inventory of
rental videotapes, rental video games and other products held for
rent by the Sellers, all as of a date not more than two days prior
-12-
<PAGE> 18
to the date hereof which inventory shall be prepared on a Seller-
by-Seller basis, including quantities and titles. SCHEDULE 2.9
also sets forth a true, correct and complete list of the inventory
of the Sellers' merchandise held for sale, all as of a date not
more than two days prior to the date hereof, which inventory shall
be prepared on a Seller-by-Seller basis, including a description,
quantity and cost of all such merchandise. SCHEDULE 2.9, as
updated pursuant to Subsection 7.9 hereof, shall set forth a true,
correct and complete list of such inventories as of a date not
more than two days prior to the Closing Date. Such inventories
consist of items of a quality and quantity which are usable or
saleable without discount in the ordinary course of the business
conducted by the Sellers.
2.10 FIXED ASSETS. SCHEDULE 2.10 attached hereto sets
forth a true, correct and complete list of all Fixed Assets (on a
Seller-by-Seller basis) as of the date hereof, including a
description and the book value thereof. SCHEDULE 2.10, as updated
pursuant to Subsection 7.9 hereof, shall set forth a true, correct
and complete list of all Fixed Assets as of the Closing Date,
including a description and valuation thereof. All of the Fixed
Assets are in good operating condition and repair, normal wear and
tear excepted, are currently used by the Seller in the ordinary
course of business and in the production of products of the
Sellers and normal maintenance has been consistently performed
with respect to such Fixed Assets.
2.11 LEASES. SCHEDULE 2.11 attached hereto sets forth a
true, correct and complete list as of the date hereof of all
leases of real property, identifying separately each lease, to
which each Seller is a party (the "Leases"). True, correct and
complete copies of the Leases, and all amendments, modifications
and supplemental agreements thereto, have previously been
delivered by the Sellers to the Buyer. The Leases are in full
force and effect, are binding and enforceable against each of the
parties thereto in accordance with their respective terms and,
except as set forth on SCHEDULE 2.11, have not been modified or
amended since the date of delivery to the Buyer. No party to any
Lease has sent written notice to the other claiming that such
party is in default thereunder, which remains uncured. Except as
set forth on SCHEDULE 2.11 attached hereto, there has not occurred
any event which would constitute a breach of or default in the
performance of any material covenant, agreement or condition
contained in any Lease, nor has there occurred any event which
with the passage of time or the giving of notice or both would
constitute such a breach or material default. No Seller is
obligated to pay any leasing or brokerage commission relating to
any Lease and, except as set forth on SCHEDULE 2.11 attached
hereto, no Seller will have any obligation to pay any leasing or
brokerage commission upon the renewal of any Lease. No material
-13-
<PAGE> 19
construction, alteration or other leasehold improvement work with
respect to any of the Leases remains to be paid for or to be
performed by any Seller. The Financial Statements and the
Internal Statements contain (and the June Statements will contain)
adequate reserves to provide for the restoration of the properties
subject to the Leases at the end of the respective Lease terms, to
the extent required by the Leases.
2.12 CHANGE IN FINANCIAL CONDITION AND ASSETS. Except
as set forth on SCHEDULE 2.12 attached hereto, since June 30,
1996, there has been no change which materially and adversely
affects the business, properties, assets, store operating cash
flow, condition (financial or otherwise) or prospects of any
Seller, other than general economic conditions, and economic and
other conditions in and affecting the retail video rental industry
generally. No Seller has any knowledge of any existing or
threatened occurrence, event or development which, as far as can
be reasonably foreseen, could have a material and adverse effect
on such Seller or its business, properties, assets, store
operating cash flow, condition (financial or otherwise) or
prospects, other than general economic conditions, and economic
and other conditions in and affecting the retail video rental
industry generally.
2.13 Tax Matters.
-----------
(a) Except as set forth on SCHEDULE 2.13 to this
Agreement, the Sellers and the Principals represent and warrant,
as to each Seller:
(i) Within the times and in the manner
prescribed by law, such Seller has filed all Returns which are
required to be filed;
(ii) With respect to all amounts in respect of
Taxes imposed upon such Seller for which it could be liable,
whether to Taxing Authorities (as, for example, under law) or to
other persons or entities (as, for example, under Tax allocation
agreements), with respect to all taxable periods or portions of
taxable periods ending on or before the Closing Date, all
applicable tax laws and agreements have been fully complied with,
and all such amounts required to be paid by such Seller to Taxing
Authorities or others on or before the date hereof have been paid.
(iii) All Returns filed by such Seller
constitute materially complete and accurate representations of the
respective Tax liabilities of, or attributable to, such Seller for
such years;
-14-
<PAGE> 20
(iv) No examination of the Returns of such
Seller is currently in progress nor, to the best knowledge of the
Seller, threatened and no unresolved deficiencies have been
asserted or assessed against such Seller as a result of any audit
by any Taxing Authority and no such deficiency has been proposed
or threatened;
(v) There are no liens for Taxes (other than
for current Taxes not yet due and payable) upon the assets of such
Seller;
(vi) Such Seller is not a person other than a
United States person within the meaning of the Internal Revenue
Code of 1986, as amended (the "Code").
(b) For purposes of this Section 2.13: "Return"
means any return, declaration, report, statement or other document
required to be filed in respect of any Tax. "Tax" or "Taxes"
means any federal, state, local, foreign and other net income,
gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall profits, customs duty or
other tax, fee, assessment or charge of any kind whatever,
together with interest and any penalty, addition to tax or ad-
ditional amount with respect thereto. "Taxing Authority" means
any governmental authority responsible for the imposition of
Taxes.
2.14 ACCOUNTS RECEIVABLE. SCHEDULE 2.14 attached hereto
sets forth a true, correct and complete list of the Sellers'
collection accounts, including an aging thereof as of the Balance
Sheet Date. SCHEDULE 2.14, as updated pursuant to Subsection 7.9
hereof, shall set forth a true, correct and complete list of the
Sellers collection accounts as of the Closing Date, including an
aging thereof. Except for such collection accounts, the Sellers
have no Accounts Receivable. The collection accounts arose out of
the sales or rentals of inventory or services in the ordinary
course of business, and the Sellers' have established a reserve
therefor in an amount equal to 100% of such collection accounts.
2.15 BOOKS AND RECORDS. The general ledgers and books
of account of each Seller, all federal, state and local income,
franchise, property and other tax returns filed by each Seller,
with respect to the Assets, and all other books and records of
each Seller are in all material respects complete and correct and
have been maintained in accordance with good business practice and
in accordance with all applicable procedures required by laws and
regulations.
-15-
<PAGE> 21
2.16 Contracts and Commitments.
-------------------------
(a) SCHEDULE 2.16 attached hereto contains a true,
complete and correct list and description of the following
contracts and agreements, whether written or oral (collectively,
the "Contracts"):
(i) all loan agreements, indentures,
mortgages and guaranties to which any Seller is a party or by
which any Seller or any of its property is bound;
(ii) all pledges, conditional sale or title
retention agreements, security agreements, equipment obligations,
personal property leases and lease purchase agreements relating to
any of the Assets to which any Seller is a party or by which any
Seller or any of its property is bound;
(iii) all contracts, agreements, commitments,
purchase orders or other understandings or arrangements to which
any Seller is a party or by which any Seller or any of its
property is bound which (A) involve payments or receipts by any
Seller of more than $2,000 in the case of any single contract,
agreement, commitment, understanding or arrangement under which
full performance (including payment) has not been rendered by all
parties thereto or (B) which may materially adversely affect the
condition (financial or otherwise) or the properties, assets,
business or prospects of any Seller;
(iv) all collective bargaining agreements,
employment and consulting agreements, executive compensation
plans, bonus plans, deferred compensation agreements, pension
plans, retirement plans, employee stock option or stock purchase
plans and group life, health and accident insurance and other
employee benefit plans, agreements, arrangements or commitments to
which any Seller is a party or by which any Seller or any of its
property is bound;
(v) all agency, distributor, sales
representative and similar agreements to which any Seller is a
party;
(vi) all contracts, agreements or other
understandings or arrangements between any Seller and any
stockholder, member or Affiliate of such Seller;
(vii) all leases, whether operating, capital or
otherwise, under which any Seller is lessor or lessee; and
(viii) any other material agreement or contract
entered into by any Seller.
-16-
<PAGE> 22
(b) Except as set forth on SCHEDULE 2.16 attached
hereto:
(i) each Contract is a valid and binding
agreement of the applicable Seller, enforceable against such
Seller in accordance with its terms, and such Seller does not have
any knowledge that any Contract is not a valid and binding
agreement of the other parties thereto;
(ii) each Seller has fulfilled all material
obligations required pursuant to the Contracts to have been
performed by such Seller on its part prior to the date hereof, and
each Seller has no reason to believe that it will not be able to
fulfill, when due, all of its obligations under the Contracts
which remain to be performed after the date hereof;
(iii) no Seller is in material breach of or
default under any Contract, and no event has occurred which with
the passage of time or giving of notice or both would constitute
such a default, result in a loss of rights or result in the
creation of any lien, charge or encumbrance, thereunder or
pursuant thereto;
(iv) to the best knowledge of the Sellers and
the Principals, there is no existing breach or default by any
other party to any Contract, and no event has occurred which with
the passage of time or giving of notice or both would constitute a
default by such other party, result in a loss of rights or result
in the creation of any lien, charge or encumbrance thereunder or
pursuant thereto;
(v) no Seller is restricted by any Contract
from carrying on its business anywhere in the world; and
(vi) no Seller has any written or oral
Contracts to sell products or perform services which are expected
to be performed at, or to result in, a material loss.
(c) Except as set forth on SCHEDULE 2.3 or
SCHEDULE 2.16, the continuation, validity and effectiveness of
each Contract will not be affected by the transfer thereof to
Buyer under this Agreement and all such Contracts are assignable
to Buyer without a consent.
(d) True, correct and complete copies of all
Contracts have previously been delivered by the Sellers to the
Buyer.
2.17 COMPLIANCE WITH AGREEMENTS AND LAWS. Each Seller
has all requisite licenses, permits and certificates, including
-17-
<PAGE> 23
environmental, health and safety permits, from federal, state and
local authorities necessary to conduct the Business and own and
operate the Assets, other than those the failure of which to
obtain could not have a material adverse effect on any Seller or
its properties (collectively, the "Permits"). SCHEDULE 2.17
attached hereto sets forth a true, correct and complete list of
all such Permits, copies of which have previously been delivered
by the Sellers to the Buyer. No Seller is in violation of any
law, regulation or ordinance (including, without limitation, laws,
regulations or ordinances relating to building, zoning,
environmental, disposal of hazardous substances, land use or
similar matters) relating to its properties, the violation of
which could have a material adverse effect on any Seller or its
properties. Except as set forth on SCHEDULE 2.7, the business of
each Seller does not violate, in any material respect, any
federal, state, local or foreign laws, regulations or orders
(including, but not limited to, any of the foregoing relating to
employment discrimination, occupational safety, environmental
protection, hazardous waste (as defined in the Resource
Conservation and Recovery Act, as amended, and the regulations
adopted pursuant thereto), conservation, or corrupt practices, the
enforcement of which would have a material and adverse effect on
the results of operations, condition (financial or otherwise),
assets, properties, business or prospects of such Seller. Except
as set forth on SCHEDULE 2.17 attached hereto, no Seller has since
January 1, 1993 received any notice or communication from any
federal, state or local governmental or regulatory authority or
otherwise of any such violation or noncompliance.
2.18 Employee Relations.
------------------
(a) Each Seller is in material compliance with all
federal, state and municipal laws respecting employment and
employment practices, terms and conditions of employment, and
wages and hours, and no Seller is engaged in any unfair labor
practice, and there are no arrears in the payment of wages or
social security taxes.
(b) Except as set forth on SCHEDULE 2.18 attached
hereto:
(i) none of the employees of any Seller is
represented by any labor union;
(ii) there is no unfair labor practice
complaint against any Seller pending before the National Labor
Relations Board or any state or local agency;
-18-
<PAGE> 24
(iii) there is no pending labor strike or other
material labor trouble affecting any Seller (including, without
limitation, any organizational drive);
(iv) there is no labor grievance pending
against any Seller;
(v) there is no pending representation
question respecting the employees of any Seller; and
(vi) there are no pending arbitration
proceedings arising out of or under any collective bargaining
agreement to which any Seller is a party, or to the best knowledge
of the Sellers, any basis for which a claim may be made under any
collective bargaining agreement to which any Seller is a party.
(c) SCHEDULE 2.18 attached hereto sets forth a
true, correct and complete list of (a) the employee benefits
provided by each Seller to its employees and all contracts or
agreements between each Seller and its employees, and (b) each
Seller's current payroll, including the job descriptions and
salary or wage rates of each of its employees, showing separately
for each such person who received an annual salary in excess of
$20,000 the amounts paid or payable as salary and bonus payments
for the years ending December 31, 1995 and December 31, 1994.
(d) For purposes of this Subsection 2.18, the term
"employee" shall be construed to include sales agents and other
independent contractors who spend a majority of their working time
on a Seller's business.
2.19 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
set forth on SCHEDULE 2.19 attached hereto, since December 31,
1995, the Sellers have not entered into any transaction which is
not in the usual and ordinary course of business, and, without
limiting the generality of the foregoing, the Sellers have not:
(a) Incurred any material obligation or liability
for borrowed money;
(b) Discharged or satisfied any lien or
encumbrance or paid any obligation or liability other than current
liabilities reflected in the Internal Statements;
(c) Mortgaged, pledged or subjected to lien,
charge or other encumbrance any of the Assets;
(d) Sold or purchased, assigned or transferred any
of its tangible assets or cancelled any debts or claims, except
-19-
<PAGE> 25
for inventory sold and raw materials purchased in the ordinary
course of business;
(e) Made any material amendment to or termination
of any Contract or done any act or omitted to do any act which
would cause the breach of any Contract;
(f) Suffered any losses, whether insured or
uninsured, and whether or not in the control of any Seller, in
excess of $5,000 in the aggregate, or waived any rights of any
value;
(g) Made any changes in compensation of its
officers, directors or employees except in the ordinary course of
their business and consistent with past practice;
(h) Except as set forth on SCHEDULE 2.7, received
notice of any litigation, warranty claim or products liability
claims; or
(i) Made any material change in the terms, status
or funding condition of any Employee Plan, as defined in
Subsection 2.23 hereof.
2.20 SUPPLIERS. SCHEDULE 2.20 attached hereto sets
forth a true, correct and complete list of the names and addresses
of the ten suppliers of the Sellers which accounted for the
largest dollar volume of purchases by the Sellers for the fiscal
years ending December 31, 1994 and December 31, 1995. None of
such suppliers has notified any Seller that it intends to
discontinue its relationship with the Sellers.
2.21 PREPAYMENTS AND DEPOSITS. Except for deposits from
customers to reserve videotapes which, in the aggregate, are less
than $1,500 (which deposits, as they exist on the Closing Date,
shall be transferred to the Buyer pursuant to this Agreement), the
Sellers have not received prepayments or deposits from customers
for products to be shipped, or services to be performed, at a
later date.
2.22 Trade Names and Other Intangible Property.
-----------------------------------------
(a) SCHEDULE 2.22 attached hereto sets forth a
true, correct and complete list and, where appropriate, a
description of, all Intangible Property. True, correct and
complete copies of all licenses and other agreements relating to
the Intangible Property have been previously delivered by the
Sellers to the Buyer.
-20-
<PAGE> 26
(b) Except as otherwise disclosed in SCHEDULE 2.22
attached hereto, the Sellers are the sole and exclusive owners of
all Intangible Property and all designs, permits, labels and
packages used on or in connection therewith. The Intangible
Property owned by the Sellers is sufficient to conduct the
Sellers' business as currently conducted and, when transferred to
the Buyer pursuant to this Agreement, will be sufficient to permit
the Buyer to conduct the business of the Sellers as currently
conducted by the Sellers. The Sellers have received no notice of,
and have no knowledge of any basis for, a claim against any of
them that any of their operations, activities, products or
publications infringes on any patent, trademark, trade name,
copyright or other property right of a third party, or that any of
them is illegally or otherwise using the trade secrets, formulae
or any property rights of others. No Seller has any disputes with
or claims against any third party for infringement by such third
party of any trade name or other Intangible Property of any
Seller. Each Seller has taken all steps reasonably necessary to
protect its right, title and interest in and to the Intangible
Property.
2.23 Employee Benefit Plans.
----------------------
(a) Except as listed on SCHEDULE 2.23, none of the
Sellers now has or contributes to or participates in, and none of
the Sellers has in the past had or otherwise contributed to, any
employee benefit plan subject to the Employee Retirement Income
Security Act of 1974.
(b) The Buyer assumes no liabilities with respect
to any employee benefit plan which liability relates to any period
prior to or after the Closing Date, including, without limitation,
any taxes, accrued vacation or sick pay (whether or not vested),
accrued vacation, sick and personal leaves, employee policies,
employee benefit claims or liability to the Pension Benefit
Guaranty Corporation.
(c) EMPLOYEE PLANS. SCHEDULE 2.23 attached hereto
contains a true, correct and complete list of all pension,
benefit, profit sharing, retirement, deferred compensation,
welfare, insurance, disability, bonus, vacation pay, severance pay
and other similar plans, programs and agreements, whether reduced
to writing or not, relating to any Seller's employees, or
maintained at any time since January 1, 1991 by any Seller or by
any other member of any controlled group of corporations, group of
trades or businesses under common control, or affiliated service
group (as defined for purposes of Section 414(b), (c) and (m),
respectively, of the Internal Revenue Code of 1986, as amended
(the "Code")) (the "Employee Plans") and, except as set forth on
SCHEDULE 2.23 attached hereto, no Seller has any obligations,
-21-
<PAGE> 27
contingent or otherwise, past or present, under applicable law or
the terms of any Employee Plan.
2.24 REGULATORY APPROVALS. Except to the extent waived
by the Buyer in this Section 2.24, all consents, approvals,
authorizations and other requirements prescribed by any law, rule
or regulation which must be obtained or satisfied by the Sellers
and which are necessary for the execution and delivery by the
Sellers of this Agreement and the documents to be executed and
delivered by the Sellers in connection herewith are set forth on
SCHEDULE 2.24 attached hereto and have been, or will be prior to
the Closing Date, obtained and satisfied. The Sellers shall pay
all costs and expenses required to obtain such consents,
approvals, authorizations and other requirements.
The Buyer hereby waives compliance by the Sellers with the
bulk sales notice provisions under the Uniform Commercial Code as
enacted in New Jersey, and other comparable applicable laws and
regulations. Such waiver does not extend to the bulk sales notice
requirements to the State of New Jersey Department of the
Treasury.
2.25 INDEBTEDNESS TO AND FROM OFFICERS, DIRECTORS AND
SHAREHOLDERS. Except as set forth on SCHEDULE 2.25 attached
hereto, no Seller is indebted, directly or indirectly, to any
person who is an officer, director or shareholder of any Seller or
any affiliate of any such person in any amount whatsoever other
than for salaries for services rendered or reimbursable business
expenses, all of which have been reflected on the Internal
Statements, and no such officer, director, shareholder or
affiliate is indebted to any Seller, except for advances made to
employees of the Sellers in the ordinary course of business to
meet reimbursable business expenses anticipated to be incurred by
such obligor.
2.26 POWERS OF ATTORNEY AND SURETYSHIPS. Except as set
forth on SCHEDULE 2.26 attached hereto, no Seller has any general
or special powers of attorney outstanding (whether as grantor or
grantee thereof) and has no obligation or liability (whether
actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signor, endorser, co-maker, indemnitor or otherwise in
respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity, except
as endorser or maker of checks or letters of credit, respectively,
endorsed or made in the ordinary course of business.
2.27 DISCLOSURE. To the best of the Sellers' and the
Principals' knowledge, no representation or warranty by any of the
Sellers or the Principals in this Agreement or in any Exhibit
hereto, or in any list, statement, document or information set
-22-
<PAGE> 28
forth in or attached to any Schedule delivered or to be delivered
pursuant to this Agreement, contains or will contain any untrue
statement of a material fact or omits or will omit any material
fact necessary in order to make the statements contained therein
not misleading. The Sellers and the Principals have disclosed to
the Buyer the material facts arising from and after June 30, 1996
pertaining to the transactions contemplated by this Agreement.
3. Representations of the Buyer
----------------------------
The Buyer represents and warrants to the Sellers as follows:
3.1 ORGANIZATION AND AUTHORITY. The Buyer is a
corporation duly organized, validly existing and in good standing
under the laws of the state of Delaware, and has requisite power
and authority (corporate and other) to own its properties and to
carry on its business as now being conducted. The Buyer has full
power to execute and deliver this Agreement and the Instrument of
Assumption of Liabilities and to consummate the transactions
contemplated hereby and thereby. Certified copies of the
Certificate of Incorporation and the Bylaws of the Buyer, as
amended to date, have been previously delivered to the Sellers,
are complete and correct, and no amendments have been made thereto
or have been authorized since the date thereof.
3.2 CAPITALIZATION OF THE BUYER. On the date hereof,
the Buyer's authorized capital stock consists of 25,000,000 shares
of Common Stock, $.01 par value ("Common Stock"), of which
12,070,239 shares are issued and outstanding as of the date
hereof, and 2,000,000 shares of Preferred Stock, $.01 par value
per share, none of which are issued or outstanding as of the date
hereof. As of the date hereof, all of the outstanding shares of
capital stock of the Buyer have been and on the Closing Date will
be duly and validly issued and are, or will be, fully paid and
nonassessable.
3.3 AUTHORIZATION. The execution and delivery of this
Agreement by the Buyer, and the agreements provided for herein,
and the consummation by the Buyer of all transactions contemplated
hereby, have been duly authorized by all requisite corporate
action. This Agreement and all such other agreements and written
obligations entered into and undertaken in connection with the
transactions contemplated hereby constitute the valid and legally
binding obligations of the Buyer, enforceable against the Buyer in
accordance with their respective terms. The execution, delivery
and performance of this Agreement and the agreements provided for
herein, and the consummation by the Buyer of the transactions
contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the
provisions of any law, rule or regulation applicable to the Buyer;
-23-
<PAGE> 29
(b) violate the provisions of the Buyer's Certificate of
Incorporation or Bylaws; (c) violate any judgment, decree, order
or award of any court, governmental body or arbitrator; or (d)
conflict with or result in the breach or termination of any term
or provision of, or constitute a default under, or cause any
acceleration under, or cause the creation of any lien, charge or
encumbrance upon the properties or assets of the Buyer pursuant
to, any indenture, mortgage, deed of trust or other agreement or
instrument to which it or its properties is a party or by which
the Buyer is or may be bound. SCHEDULE 3.3 attached hereto sets
forth a true, correct and complete list of all consents and
approvals of third parties that are required in connection with
the consummation by the Buyer of the transactions contemplated by
this Agreement. On the date hereof, the Buyer has access to funds
in an amount sufficient to pay the cash portion of the purchase
price to the Sellers, as provided in this Agreement.
3.4 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule
or regulation which must be obtained or satisfied by the Buyer and
which are necessary for the consummation of the transactions
contemplated by this Agreement have been, or will be prior to the
Closing Date, obtained and satisfied. The Buyer shall pay all
costs and expenses required to obtain such consents, approvals,
authorizations and other requirements.
3.5 DISCLOSURE. To the best of the Buyer's knowledge,
no representation or warranty by the Buyer in this Agreement or in
any Exhibit hereto, or in any list, statement, document or
information set forth in or attached to any Schedule delivered or
to be delivered pursuant hereto, contains or will contain any
untrue statement of a material fact or omits or will omit any
material fact necessary in order to make the statements contained
therein not misleading.
3.6 ISSUANCE OF SHARES. The issuance and delivery of
the shares of Common Stock in accordance with this Agreement have
been, or prior to the Closing, will be, duly authorized by all
necessary corporate action on the part of the Buyer, and all such
shares of Common Stock have been duly reserved for issuance. The
shares of Common Stock, when issued and delivered in accordance
with the provisions of this Agreement will be duly and validly
issued, fully paid and non-assessable.
4. Access to Information; Public Announcements
-------------------------------------------
4.1 Access to Management, Properties and Records.
--------------------------------------------
(a) From the date of this Agreement until the
Closing Date, the Sellers shall afford the officers, attorneys,
-24-
<PAGE> 30
accountants and other authorized representatives of the Buyer free
and full access upon reasonable notice and during normal business
hours to all management personnel, offices, properties, books and
records of the Sellers, so that the Buyer may have full
opportunity to make such investigation as it shall desire to make
of the management, business, properties and affairs of the
Sellers, and the Buyer shall be permitted to make abstracts from,
or copies of, all such books and records. The Sellers shall
furnish to the Buyer such financial and operating data and other
information as to the Assets and the business of the Sellers as
the Buyer shall reasonably request.
(b) If the Buyer, at its option and expense, prior
to the Closing Date, elects to have a report or reports prepared
by an engineer or other professional selected by the Buyer,
certifying that the real property associated with the Assets
(i) complies with all applicable federal, state and local
environmental and wetlands laws, rules and regulations and that
there is not now, and never has been, manufacture, storage, or
disposal of hazardous wastes at the real estate in violation of
said laws, rules and regulations, (ii) complies with all
applicable building, health and fire codes, and subdivision
control laws, rules and regulations, the Sellers shall cooperate
with such engineer or professional to the extent necessary to
prepare such reports, including, without limitation, providing
such engineer or professional access to such real property and
necessary records, and arranging interviews with employees of the
Sellers.
(c) If reasonably requested by the Buyer, the
Sellers shall authorize the release to the Buyer of all files
pertaining to the Sellers, the Assets or the business or
operations of the Sellers held by any federal, state, county or
local authorities, agencies or instrumentalities. If any such
files relate to tax matters of the Sellers and such files may be
obtained from the Sellers, the Buyer shall deliver notice to the
Sellers of their intention to obtain such files at least 15 days
prior to doing so. During such 15-day period the Sellers may
elect to provide all such information to the Buyer directly.
4.2 CONFIDENTIALITY. All information not previously
disclosed to the public or generally known to persons engaged in
the respective businesses of the Sellers or the Buyer which shall
have been furnished by the Buyer or the Sellers to the other party
in connection with the transactions contemplated hereby or as
provided pursuant to this Section 4 shall not be disclosed to any
person other than their respective employees, directors,
attorneys, accountants or financial advisors or other than as
contemplated herein. In the event that the transactions
contemplated by this Agreement shall not be consummated, all such
-25-
<PAGE> 31
information which shall be in writing shall be returned to the
party furnishing the same, including, to the extent reasonably
practicable, all copies or reproductions thereof which may have
been prepared, and neither party shall at any time thereafter
disclose to third parties, or use, directly or indirectly, for its
own benefit, any such information, written or oral, about the
business of the other party hereto. Notwithstanding the above,
(a) the Buyer may include in any Registration Statement or
periodic report filed by it with the Securities and Exchange
Commission or any state securities commission or any stock market
and (b) otherwise disclose, to the extent reasonably advised to do
so by counsel, any information regarding the Seller, the business
of the Seller, the financial condition of the Seller and/or the
terms of this Agreement.
In the event that the transactions contemplated by this
Agreement shall not be consummated, for a period of 12 months
after the date of the termination of this Agreement, the Buyer
shall not solicit any person who was an employee of any Seller on
the date of such termination to terminate his employment with the
Sellers or to become an employee of the Buyer, or hire any person
who was such an employee on the date of such termination. In the
event that the transactions contemplated by this Agreement shall
not be consummated, the Buyer agrees that the remedy at law for
any breach of this Section 4.2 by the Buyer would be inadequate
and that the Sellers shall be entitled to injunctive relief in
addition to any other remedy they may have upon breach of the
Buyer's obligations in such sentence.
4.3 PUBLIC ANNOUNCEMENTS. The parties agree that prior
to the Closing Date, except as otherwise required by law, any and
all public announcements or other public communications concerning
this Agreement and the purchase of the Assets by the Buyer shall
be subject to the approval of the Buyer.
4.4 REGISTRATION STATEMENT. The Buyer filed, on July
24, 1996, a registration statement with the Securities and
Exchange Commission and applicable state securities regulators,
with respect to the shares of Buyer Common Stock to be issued to
the Sellers pursuant to this Agreement and the Instrument. The
Buyer shall provide a copy of such registration statement to the
Principals. The Buyer shall pay to the Buyer's transfer agent any
fees or expenses in connection with the issuance of shares of
Buyer Common Stock to the Sellers as contemplated by this
Agreement.
5. Pre-Closing Covenants of the Seller
-----------------------------------
From and after the date hereof and until the Closing
Date:
-26-
<PAGE> 32
5.1 CONDUCT OF BUSINESS. Each Seller shall carry on
its business diligently and substantially in the same manner as
heretofore and shall not make or institute any unusual or new
methods of purchase, sale, shipment or delivery, lease,
management, accounting or operation, except as agreed to in
writing by the Buyer. All of the property of each Seller shall be
used, operated, repaired and maintained in a normal business
manner consistent with past practice.
5.2 ABSENCE OF MATERIAL CHANGES. Without the prior
written consent of the Buyer, no Seller shall:
(a) Take any action to amend its charter,
operating agreement, certificate of formation or Bylaws;
(b) Issue any stock, bonds or other corporate
securities or grant any option or issue any warrant to purchase or
subscribe to any of such securities or issue any securities
convertible into such securities;
(c) Incur any obligation or liability (absolute or
contingent), except current liabilities incurred and obligations
under contracts entered into in the ordinary course of business;
(d) Except for customary (in amount and frequency
consistent with past practice) dividend and distribution payments
to the stockholders and members of the Sellers, declare or make
any payment or distribution to its shareholders with respect to
their stock or purchase or redeem any shares of its capital stock;
(e) Mortgage, pledge, or subject to any lien,
charge or any other encumbrance any of the Assets;
(f) Sell, assign, or transfer any of the Assets,
except for inventory sold in the ordinary course of business, at a
normal profit margin, and for not less than replacement cost;
(g) Cancel any debts or claims, except in the
ordinary course of business;
(h) Merge or consolidate with or into any
corporation or other entity;
(i) Make, accrue or become liable for any bonus,
profit sharing or incentive payment, except for accruals under
existing plans, if any, or increase the rate of compensation
payable or to become payable by it to any of its officers,
directors or employees, outside of the ordinary course of business
or inconsistent with past practice;
-27-
<PAGE> 33
(j) Make any election or give any consent under
the Code or the tax statutes of any state or other jurisdiction or
make any termination, revocation or cancellation of any such
election or any consent or compromise or settle any claim for past
or present Taxes, to the extent materially different from those
made in accordance with customary past practice;
(k) Modify, amend, alter or terminate any of its
executory contracts of a material value or which are material in
amount;
(l) Take or permit any act or omission
constituting a material breach or default under any contract,
indenture or agreement by which it or its properties are bound;
(m) Fail to (i) preserve the possession and
control of its assets and business, (ii) use its best efforts to
keep in faithful service its present officers and key employees,
(iii) use its best efforts to preserve the goodwill of its
customers, suppliers, agents, brokers and others having business
relations with it, and (iv) use its best efforts to keep and
preserve its business existing on the date hereof until after the
Closing Date;
(n) Fail to operate its business and maintain its
books, accounts and records in the customary manner and in the
ordinary or regular course of business and maintain in good repair
its business premises, fixtures, furniture and equipment;
(o) Enter into any leases, contracts, agreements
or understandings other than those entered into in the ordinary
course of business calling for payments which in the aggregate do
not exceed $5,000 for each such lease, contract, agreement or
understanding;
(p) Engage any employee for a salary in excess of
$20,000 per annum;
(q) Materially alter the terms, status or funding
condition of any Employee Plan;
(r) Make any loans to any person or entity; or
(s) Commit or agree to do any of the foregoing in
the future.
5.3 TAXES. Each Seller will, on a timely basis, file
all tax returns for and pay any and all taxes which shall become
due or shall have accrued (a) on account of the operation of the
business of such Seller or the ownership of the Assets on or prior
-28-
<PAGE> 34
to the Closing Date or (b) on account of the sale of the Assets
(including a pro-rata portion of all personal property and excise
taxes payable with respect to the Assets by such Seller).
5.4 DELIVERY OF INTERIM FINANCIAL STATEMENTS. As
promptly as possible following the last day of each month after
the date hereof, and in any event within 30 days after the end of
each such month, the Sellers shall deliver to the Buyer their
combined comparative balance sheets and related statements of
income, shareholders' equity, retained earnings and statements of
cash flow for the one-month period then ended, and for the
comparable one-month period of the prior fiscal year, all prepared
in accordance with Sellers' internal accounting policies
consistent with past practice, and certified by the chief
financial officer (collectively, the "Interim Financial
Statements"). In addition, on each of such dates, the Sellers
shall deliver to the Buyer such combined comparative balance
sheets and related statements of income, shareholders' equity,
retained earnings and statements of cash flow for such periods,
prepared in accordance with Sellers internal accounting periods,
consistent with past practice.
5.5 COMPLIANCE WITH LAWS. Each Seller will comply with
all laws and regulations which are applicable to it, its ownership
of the Assets or to the conduct of its business and will perform
and comply with all contracts, commitments and obligations by
which it is bound.
5.6 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE SELLERS. No Seller will take any actions which would
result in any of the representations or warranties set forth in
Section 2 hereof being materially untrue, except for
representations which are qualified as to materiality, in which
case no Seller will take any actions which would result in any of
such representations or warranties being untrue in any respect.
5.7 CONTINUING OBLIGATION TO INFORM. From time to time
prior to the Closing, each Seller will deliver or cause to be
delivered to the Buyer supplemental information concerning
material events subsequent to the date hereof which would render
any statement, representation or warranty in this Agreement or any
information contained in any Schedule inaccurate or incomplete in
any material respect at any time after the date hereof until the
Closing Date. No such supplemental information shall modify the
obligations of the parties hereunder or constitute a waiver by the
Buyer of any claims or rights it may have for breach by any Seller
or Principal of this Agreement.
5.8 EXCLUSIVE DEALING. No Seller or Principal shall,
directly or indirectly, through any officer, director, agent or
-29-
<PAGE> 35
otherwise, (a) solicit, initiate or encourage submission of
proposals or offers from any person relating to any acquisition or
purchase of all or a material portion of the Assets, or any equity
interest in, any Seller or any equity investment, merger,
consolidation or business combination with any Seller, or (b)
participate in any discussions or negotiations regarding, or
furnish to any other person, any non-public information with
respect to, or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by
any other person to do or seek any of the foregoing. The Sellers
shall promptly notify the Buyer if any such proposal or offer, or
any inquiry or contact with any person with respect thereto, is
made.
5.9 NO PUBLICITY. No Seller or Principal shall make
any public announcement with respect to this Agreement or the
transactions contemplated hereby without the express prior written
consent of the Buyer. Each Seller and Principal shall hold in
confidence, and use its best efforts to have all of its officers,
directors and personnel hold in confidence, the terms of this
Agreement and the transactions contemplated hereby.
6. Satisfaction of Conditions; Liquidated Damages.
----------------------------------------------
6.1 SATISFACTION OF CONDITIONS. The Sellers, the
Principals and the Buyer covenant and agree to use their
commercially reasonable efforts to obtain the satisfaction of the
conditions specified in this Agreement.
6.2 Liquidated Damages.
------------------
(a) The parties hereto agree that the harm
suffered by the Buyer as a result of a Willful Breach (as defined
below) of this Agreement by any Seller or any Principal and the
failure by the Sellers or the Principals to consummate the
transactions contemplated hereby is difficult to accurately
estimate. The parties agree, based on all present circumstances,
that $1,000,000 represents a reasonable estimate of the damages,
including lost opportunity costs, which would be suffered by the
Buyer upon a failure to close due to a Willful Breach of the
Sellers or the Principals.
(b) If any Seller or Principal (i) willfully or
intentionally breaches any representation, warranty or covenant
under this Agreement, willfully or intentionally fails to perform
any condition or obligation required to be performed hereunder, or
fails to disclose a material fact pertaining to the Assets or the
transactions contemplated by this Agreement to the Buyer; or (ii)
either elects not to sell the Assets to the Buyer pursuant to the
terms of this Agreement, sells or otherwise transfers the Assets
-30-
<PAGE> 36
or enters into an agreement (in principle or otherwise) with any
other person or entity to sell any shares of the capital stock or
membership interests of any Seller, to merge with or into, or
consolidate any Seller with any person or entity other than the
Buyer, to sell more than 10% of the Assets to any other person or
entity or to effect any other transaction with any other person or
entity that would preclude or otherwise frustrate the transfer of
the Assets to the Buyer (a "Willful Breach"), the Sellers will pay
to the Buyer the sum of $500,000, as liquidated damages, and
Sellers will pay the Buyer the additional sum of $500,000, which
the parties agree would be a reasonable estimate of Buyer's lost
opportunity cost.
7. Conditions to Obligations of the Buyer
--------------------------------------
The obligations of the Buyer under this Agreement are
subject to the fulfillment, at the Closing Date, of the following
conditions precedent, each of which may be waived in writing in
the sole discretion of the Buyer:
7.1 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE SELLER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The
representations and warranties of the Sellers and the Principals
shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date,
except for any changes permitted by the terms hereof or consented
to in writing by the Buyer. The Sellers and the Principals shall
have performed and complied in all material respects with all
terms, conditions, covenants, obligations, agreements and
restrictions required by this Agreement to be performed or
complied with by them prior to or at the Closing Date.
7.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Sellers to
authorize or carry out this Agreement and to convey, assign,
transfer and deliver the Assets shall have been taken. Without
limiting the foregoing, promptly following delivery to the
Principals of a Prospectus relating to the sale of Buyer's Common
Stock (which is included in a Registration Statement which has
been declared effective by the SEC), the Sellers will hold a
meeting of their respective stockholders for purposes of approving
the consummation of the transactions contemplated by this
Agreement.
7.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any
applicable law, rule, order or regulation for the consummation by
the Sellers of the transactions contemplated by this Agreement and
-31-
<PAGE> 37
the operation of the Sellers' business by the Buyer shall have
consented to, authorized, permitted or approved such transactions.
7.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD
PARTIES. The Sellers shall have received all requisite consents
and approvals of all lenders, if any, lessors and other third
parties whose consent or approval is required in order for the
Sellers to consummate the transactions contemplated by this
Agreement, including, without limitation, those set forth on
SCHEDULE 2.3 attached hereto.
7.5 ADVERSE PROCEEDINGS. No action or proceeding by or
before any court or other governmental body shall have been
instituted or threatened by any governmental body or person
whatsoever which shall seek to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which might
affect the right of the Buyer to own or use the Assets after the
Closing.
7.6 OPINION OF COUNSEL. The Buyer shall have received
an opinion of Lentz & Gengaro, counsel to the Sellers, dated as of
the Closing Date, in substantially the form attached hereto as
EXHIBIT 2, and as to such other matters as may be reasonably
requested by the Buyer or its counsel.
7.7 BOARD OF DIRECTORS AND SHAREHOLDER AND MEMBER AND
MANAGER APPROVAL. The Board of Directors and shareholders or
members and managers, as applicable, of each Seller shall have
duly authorized the transactions contemplated by this Agreement.
7.8 THE ASSETS. Except for the Permitted Encumbrances,
at the Closing the Buyer shall receive good, clear, record and
marketable title to the Assets, free and clear of all liens,
liabilities, security interests and encumbrances of any nature
whatsoever.
7.9 UPDATE. The Sellers shall have provided the Buyer
with a true, correct and complete list and amount, as of the
Closing Date, of:
(a) the inventories (reflecting the items described in
Section 2.9 hereof), which, from a physical unit count, shall be
not greater than or less than, by 5%, of the amounts which would
be derived from a physical inventory, and which shall be as of a
date not more than two days prior to the Closing Date;
(b) the Fixed Assets;
(c) the Sellers' collection accounts, including an aging
thereof; and
-32-
<PAGE> 38
(d) the trade accounts payable and accrued liabilities
assumed pursuant to Subsection 1.4(a)(i) and (ii) hereof.
7.10 CASH AVAILABLE. On the Closing Date, the Sellers
will have an aggregate of $14,000 of cash on hand in the Stores
(which shall be allocated among the Stores as specified on
SCHEDULE E hereto), which shall be in secured cashboxes, and all
which cash will be transferred to the Buyer pursuant to the terms
of this Agreement. In addition, the Sellers will leave at each
store any amounts left by customers as deposits or prepayments, as
described in Section 2.21 of this Agreement.
7.11 PAYABLES. On the Closing Date, the Seller will
have no obligations to suppliers and vendors of goods and services
to the Business and other trade creditors of the Business which
are past due in accordance with their terms, and the aggregate
amount of all outstanding obligations to suppliers, vendors and
trade creditors shall in no event exceed $400,000, and all of
which obligations shall be current (i.e., outstanding for less
than 60 days, and not, by their terms, past due).
7.12 TAX HOLDBACK AGREEMENT. The Sellers and the Buyer
shall have entered into a tax holdback agreement pursuant to which
the Buyer shall hold back from the cash consideration payable to
each Seller the amount requested by the New Jersey Department of
Treasury (Bulk Sales Compliance Division) (or comparable
regulatory authorities in any other jurisdiction in which the
Assets are located) in connection with the sale of the Assets,
which amount shall be released after the Closing upon receipt for
all Sellers of tax clearance certificates for the Sellers dated
after the Closing Date. Such agreement shall be substantially in
the form and on the terms of EXHIBIT 3 hereto. The Buyer shall be
responsible for preparing, with the cooperation of the Sellers and
the Principals, the requisite notices to the New Jersey Department
of the Treasury.
7.13 CLOSING DELIVERIES. The Buyer shall have received
at or prior to the Closing each of the following documents:
(a) a bill of sale substantially in the form
attached hereto as EXHIBIT 4;
(b) such instruments of conveyance, assignment and
transfer, in form and substance satisfactory to the Buyer, as
shall be appropriate to convey, transfer and assign to, and to
vest in, the Buyer, good, clear, record and marketable title to
the Assets;
-33-
<PAGE> 39
(c) such contracts, files and other data and
documents pertaining to the Assets or the Sellers' business as the
Buyer may reasonably request;
(d) copies of the general ledgers and books of
account of each Seller, and all federal, state and local income,
franchise, property and other tax returns filed by each Seller
with respect to the Assets since January 1, 1991;
(e) such certificates of each Seller's officers
and such other documents evidencing satisfaction of the conditions
specified in Section 7 as the Buyer shall reasonably request;
(f) a certificate of the Secretary of State of the
state of organization of each Seller as to the legal existence and
good standing of each Seller in such jurisdiction, and a
certificate of the Secretary of State of each jurisdiction in
which each Seller is qualified to transact business, as to the
good standing and foreign qualification of each Seller in each
such jurisdiction;
(g) certificates of the Secretary or other
appropriate offices of each Seller attesting to the incumbency of
such Seller's officers, respectively, the authenticity of the
resolutions authorizing the transactions contemplated by the
Agreement, and the authenticity and continuing validity of the
charter documents delivered pursuant to Subsection 2.1;
(h) estoppel certificates (in the form previously
approved by the Buyer) from each lessor from whom each Seller
leases real or personal property and instruments reflecting such
lessor's consent to the assumption of such lease by the Buyer and
representing that there are no outstanding claims against such
Seller under any such lease;
(i) the schedules listed in Subsection 7.9;
(j) such other documents, instruments or
certificates as the Buyer may reasonably request.
8. Conditions to Obligations of the Sellers
----------------------------------------
The obligations of the Sellers under this Agreement are
subject to the fulfillment, at the Closing Date, of the following
conditions precedent, each of which may be waived in writing at
the sole discretion of the Sellers:
8.1 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE BUYER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The
representations and warranties of the Buyer in this Agreement
-34-
<PAGE> 40
shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date,
except for any changes consented to in writing by the Principals.
The Buyer shall have performed and complied in all material
respects with all terms, conditions, obligations, agreements and
restrictions required by this Agreement to be performed or
complied with by it prior to or at the Closing Date.
8.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Buyer to
authorize or carry out this Agreement shall have been taken.
8.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any
applicable law, rule, order or regulation for the consummation by
the Buyer of the transactions contemplated by this Agreement shall
have consented to, authorized, permitted or approved such
transactions.
8.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD
PARTIES. The Buyer shall have received all requisite consents and
approvals of all lenders, lessors and other third parties whose
consent or approval is required in order for the Buyer to
consummate the transactions contemplated by this Agreement,
including, without limitation, those set forth on Schedule 3.3
attached hereto.
8.5 ADVERSE PROCEEDINGS. No action or proceeding by or
before any court or other governmental body shall have been
instituted or threatened by any governmental body or person
whatsoever which shall seek to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which might
affect the right of the Sellers to transfer the Assets.
8.6 OPINION OF COUNSEL. The Sellers shall have
received an opinion of Hale and Dorr, counsel to the Buyer, dated
as of the Closing Date, in substantially the form attached hereto
as EXHIBIT 5, and as to such other matters as may be reasonably
requested by the Sellers or their counsel.
8.7 CLOSING DELIVERIES. The Sellers shall have
received at or prior to the Closing each of the following
documents:
(a) such certificates of the Buyer's officers and
such other documents evidencing satisfaction of the conditions
specified in this Section 8 as the Sellers shall reasonably
request;
-35-
<PAGE> 41
(b) a certificate of the Secretary of State of the
State of Delaware as to the legal existence and good standing
(including tax) of the Buyer in Delaware;
(c) a certificate of the Secretary of the Buyer
attesting to the incumbency of the Buyer's officers, the
authenticity of the resolutions authorizing the transactions
contemplated by this Agreement, and the authenticity and
continuing validity of the charter documents delivered pursuant to
Subsection 3.1;
(d) The Instrument, and an Instrument of
Assumption of Liabilities executed by the Buyer and accepted by
the Sellers;
(e) payment of the Base Purchase Price;
(f) such other documents, instruments or
certificates as the Sellers may reasonably request.
9. Indemnification
---------------
9.1 BY THE BUYER AND THE SELLERS AND THE PRINCIPALS.
The Buyer on the one hand and the Sellers and the Principals,
jointly and severally, on the other hand, each hereby agree to
indemnify and hold harmless the other against all claims, damages,
losses, liabilities, costs and expenses (including, without
limitation, settlement costs and any legal, accounting or other
expenses for investigating or defending any actions or threatened
actions) reasonably incurred by the Buyer or the Sellers in
connection with each and all of the following:
(a) Any breach by the indemnifying party of any
representation or warranty made by it in this Agreement;
(b) Any breach of any covenant, agreement or
obligation of the indemnifying party contained in this Agreement
or any other agreement, instrument or document contemplated by
this Agreement; and
(c) Any misrepresentation contained in any
statement, certificate or schedule furnished by the indemnifying
party pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement.
9.2A BY THE SELLERS AND THE PRINCIPALS. The Sellers and
the Principals, on a joint and several basis, further agree to
indemnify and hold harmless the Buyer from any and all claims,
damages, losses, liabilities, costs and expenses (including,
without limitation, settlement costs and any legal, accounting or
-36-
<PAGE> 42
other expenses for investigating or defending any actions or
threatened actions) reasonably incurred by the Buyer, in
connection with each and all of the following:
(a) Any claims against, or liabilities or
obligations of, the Sellers or against the Assets not specifically
assumed by the Buyer pursuant this Agreement;
(b) The failure of the Buyer to obtain the
protections afforded by compliance with the notification and other
requirements of the bulk sales laws in force in the jurisdictions
in which such laws may be applicable to either the Sellers or the
transactions contemplated by this Agreement, unless such claim
arises as a result of the failure by the Buyer to pay an Assumed
Liability;
(c) Any violation by any Seller of, or any failure
by the Sellers to comply with, any law, ruling, order, decree,
regulation or zoning, environmental or permit requirement
applicable to any Seller, the Assets or the business of the
Sellers, whether or not any such violation or failure to comply
has been disclosed to the Buyer, including any costs incurred by
the Buyer (i) in order to bring the Assets into compliance with
environmental laws as a consequence of noncompliance with such
laws on the Closing Date or (ii) in connection with the transfer
of the Assets;
(d) Any warranty claim or product liability claim
relating to any Seller's business or operation prior to the
Closing Date;
(e) Any Taxes of any Seller or any Principal;
(f) Any claims against, or liabilities or
obligations of, any Seller with respect to obligations under
Employee Plans, or for accrued vacation or severance pay, or for
accrued and unpaid wages or similar amounts; and
(g) Except for the Assumed Liabilities, any
claims, damages, or liabilities arising out of the conduct of the
business and operations of the Sellers, the Business or the
Stores, to the extent such claims accrue or arise out of facts or
circumstances occurring on or before to the Closing Date.
9.2B BY THE BUYER. The Buyer further agrees to
indemnify and hold harmless the Sellers and the Principals from
any and all claims, damages, losses, liabilities, costs and
expenses (including, without limitation, settlement costs and any
legal, accounting or other expenses for investigating or defending
any actions or threatened actions) reasonably incurred by the
-37-
<PAGE> 43
Sellers and the Principals, in connection with each and all of the
following:
(a) Any claims against, or liabilities or
obligations of, the Sellers specifically assumed by the Buyer
pursuant this Agreement;
(b) Any violation by the Buyer of, or any failure
by the Buyer to comply with, any law, ruling, order, decree,
regulation or zoning, environmental or permit requirement
applicable to the Buyer or its business, whether or not any such
violation or failure to comply has been disclosed to the Sellers;
(c) Any warranty claim or product liability claim
relating to the conduct of the Business after the Closing Date;
(d) Any Taxes of the Buyer (other than amounts
described in Section 9.2A(e) above);
(e) Any claim by a third party or government
regulatory agency contesting the adequacy, nature, timing or
manner of disclosure (or nondisclosure) of any information to the
public concerning the transactions contemplated by this Agreement,
except to the extent that such claim is based upon information
provided by the Sellers or Principals hereunder (or upon the
failure of the Sellers or Principals to disclose information
required to be disclosed hereunder); and
(f) Any claims, damages, or liabilities arising
out of the conduct of the business and operations of the Stores or
the Business, to the extent such claims accrue or arise out of
facts or circumstances occurring after the Closing Date.
9.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim
shall arise for indemnification hereunder the party seeking
indemnification (the "Indemnified Party"), shall promptly notify
the party from whom indemnification is sought (the "Indemnifying
Party") of the claim and, when known, the facts constituting the
basis for such claim. In the event of any such claim for
indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third-party, the notice to the
Indemnifying Party shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a
third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, which
shall not be unreasonably withheld, unless suit shall have been
instituted against it and the Indemnifying Party shall not have
taken control of such suit after notification thereof as provided
in Subsection 9.4 of this Agreement.
-38-
<PAGE> 44
9.4 DEFENSE BY INDEMNIFYING PARTY. In connection with
any claim giving rise to indemnity hereunder resulting from or
arising out of any claim or legal proceeding by a person who is
not a party to this Agreement, the Indemnifying Party at its sole
cost and expense may, upon written notice to the Indemnified
Party, assume the defense of any such claim or legal proceeding if
it acknowledges to the Indemnified Party in writing its
obligations to indemnify the Indemnified Party with respect to all
elements of such claim. The Indemnified Party shall be entitled
to participate in (but not control) the defense of any such
action, with its counsel and at its own expense. If the
Indemnifying Party does not assume the defense of any such claim
or litigation resulting therefrom within 30 days after the date
such claim is made, (a) the Indemnified Party may defend against
such claim or litigation, in such manner as it may deem
appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the Indemnifying
Party, on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with
its counsel and at its own expense. If the Indemnifying Party
thereafter seeks to question the manner in which the Indemnified
Party defended such third party claim or the amount or nature of
any such settlement, the Indemnifying Party shall have the burden
to prove by a preponderance of the evidence that the Indemnified
Party did not defend or settle such third party claim in a
reasonably prudent manner.
9.5 PAYMENT OF INDEMNIFICATION OBLIGATION. All
indemnification by the Buyer, the Sellers or the Principals
hereunder shall be effected by payment of cash or delivery of a
cashier's or certified check in the amount of the indemnification
liability; provided that the Buyer shall have the right to offset
against amounts due from Buyer under the Instrument any amounts
due to Buyer hereunder.
9.6 SURVIVAL OF REPRESENTATIONS; CLAIMS FOR
INDEMNIFICATION. All representations and warranties made by the
parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any
investigation at any time made by or on behalf of the parties
hereto. All such representations and warranties shall expire on
the third anniversary of the Closing Date, except for claims, if
any, asserted in writing prior to such third anniversary, which
shall survive until finally resolved and satisfied in full. All
claims and actions for indemnity pursuant to this Section 9 for
breach of any representation or warranty shall be asserted or
maintained in writing by a party hereto on or prior to the
expiration of such three-year period. Notwithstanding the above
claims resulting from the failure by any Seller or Principal to
-39-
<PAGE> 45
pay any Tax when due shall expire one year after any applicable
statute of limitations.
9.7 INDEMNIFICATION LIMITATIONS. Notwithstanding the
provisions of this Article 9 to the contrary, (i) the Sellers and
the Principals shall be liable for only that portion of the
aggregate damages payable by them hereunder which exceeds $25,000,
and (ii) the Buyer shall be liable for only that portion of the
aggregate damages payable by it hereunder which exceeds $25,000.
10. Post-Closing Agreements
------------------------
The Sellers and the Principals agree that from and after the
Closing Date:
10.1 Proprietary Information.
-----------------------
(a) Each of the Sellers and the Principals shall
hold in confidence, and use its best efforts to have all of its
officers, directors, managers, members and personnel hold in
confidence, all knowledge and information of a secret or
confidential nature with respect to the business of the Sellers
and shall not disclose, publish or make use of the same without
the consent of the Buyer, except to the extent that such
information shall have become public knowledge other than by
breach of this Agreement by the Sellers or the Principals.
(b) The Sellers agree that the remedy at law for
any breach of this Subsection 10.1 would be inadequate and that
the Buyer shall be entitled to injunctive relief in addition to
any other remedy it may have upon breach of any provision of this
Subsection 10.1.
10.2 NO SOLICITATION OR HIRING OF FORMER EMPLOYEES.
Except as provided by law, for a period of five years after the
Closing Date, no Seller, Principal or any Affiliate of any of them
shall solicit any person who was an employee of any Seller on the
Closing Date to terminate his employment with the Buyer or to
become an employee of any Seller or hire any person who was such
an employee on the date hereof or on the Closing Date; provided,
that, subject to the provisions of Section 10.3 below, if Brian
Miller voluntarily terminates his employment with the Buyer, any
other Principal shall thereafter be permitted to employ him.
10.3 Non-Competition Agreement.
-------------------------
(a) Without the prior approval of the Buyer, for
a period of five years after the Closing Date, neither the
Sellers, Steven Matsakis or Hal Greene, nor any Affiliate thereof,
shall engage directly or indirectly in the retail videotape rental
-40-
<PAGE> 46
business, retail videotape rental industry, or retail videotape
rental market or the retail video game rental business, retail
video game rental industry or retail video game rental market in
the United States or any other country in which the Buyer or
Sellers conducted their business during the two years prior to the
Closing Date; provided that, nothing herein shall prevent the
Sellers, the Principals or their Affiliates from engaging in the
development, marketing or sale of software for use in video games.
Without the prior approval of the Buyer, for a period of
three years after the Closing Date, Brian Miller shall not,
directly or indirectly, as an individual proprietor, partner,
stockholder, officer, employee, director, joint venturer,
investor, lender, or in any other capacity whatsoever (other than
as the holder of not more than one percent (1%) of the total
outstanding stock of any entity), establish, operate, build,
develop, acquire or purchase any retail video store that is within
five miles of any retail establishment owned or operated by the
Seller immediately prior to the Closing Date; provided that,
nothing shall prohibit Brian Miller from being employed by an
entity which establishes, operates, builds, develops, acquires or
purchases a retail video in any such location if Mr. Miller does
not provide services to such entity at a location within the
radius proscribed above.
(b) The parties hereto agree that the duration
and geographic scope of the non-competition provision set forth in
this Subsection 10.3 are reasonable. In the event that any court
determines that the duration or the geographic scope, or both, are
unreasonable and that such provision is to that extent
unenforceable, the parties hereto agree that the provision shall
remain in full force and effect for the greatest time period and
in the greatest area that would not render it unenforceable. The
parties intend that this non-competition provision shall be deemed
to be a series of separate covenants, one for each and every
county of each and every state of the United States of America and
each and every political subdivision of each and every country
outside the United States of America where this provision is
intended to be effective. The Sellers and the Applicable
Principals agree that damages are an inadequate remedy for any
breach of this provision and that the Buyer shall, whether or not
it is pursuing any potential remedies at law, be entitled to
equitable relief in the form of preliminary and permanent
injunctions without bond or other security upon any actual or
threatened breach of this non-competition provision.
10.4 Sharing of Data.
----------------
(a) The Sellers shall have the right for a period
of three years following the Closing Date (and for such longer
-41-
<PAGE> 47
period as may be reasonably necessary to enable the Sellers to
deal with applicable governmental agencies and regulators) to have
reasonable access to such books, records and accounts, including
financial and tax information, correspondence, production records,
and other similar information as are transferred to the Buyer
pursuant to the terms of this Agreement for the limited purposes
of concluding its involvement in the Business prior to the Closing
Date and for complying with its obligations under applicable
securities, tax, environmental, employment or other laws and
regulations.
The Buyer shall have the right for a period of three years
following the Closing Date to have reasonable access to those
books, records and accounts, including financial and tax
information, correspondence, employment records and other records
which are retained by the Sellers pursuant to the terms of this
Agreement to the extent that any of the foregoing relates to the
Business transferred to the Buyer hereunder or is otherwise needed
by the Buyer in order to comply with its obligations under
applicable securities, tax, environmental, employment or other
laws and regulations. All of such books, records and accounts
(including tax and financial information, correspondence,
employment records and other records) shall be delivered by
Sellers to the Buyer on or before the Closing in a sealed box (the
"Box"). If the Buyer intends to gain access to the contents of
the Box for a legitimate business purpose, it shall provide not
less than 14 days' prior notice of such intention to the Sellers,
which notice shall indicate the Buyer's business reason. Sellers
shall, during the 14-day period following delivery of the notice,
seek to provide to the Buyer the information Buyer requires in
connection with such business reason, or to otherwise resolve any
request for information from a third party. If the Seller fails
to provide such information or otherwise resolve such third party
request, the Buyer shall be permitted to open the Box, review the
contents thereof and satisfy any such third party request. At the
end of such three-year period, the Buyer shall return to the
Sellers the Box and its contents.
(b) The Sellers, the Principals and the Buyer
agree that from and after the Closing Date they shall cooperate
fully with each other to facilitate the transfer of the Assets
from the Sellers to the Buyer and the operation thereof by the
Buyer.
10.5 USE OF NAME. The Sellers and the Principals agree
not to use the name "Super Video Store" or the service mark "More
Movies, More Copies, More Fun!" or any variation or derivation
thereof after the Closing Date in connection with any business
related to, competitive with, or an outgrowth of, the business
conducted by the Sellers on the date hereof.
-42-
<PAGE> 48
10.6 COOPERATION IN LITIGATION. Each party hereto will
fully cooperate with the others in the defense or prosecution of
any litigation or proceeding already instituted or which may be
instituted hereafter against or by such party relating to or
arising out of the conduct of the business of the Sellers prior to
or after the Closing Date (other than litigation or proceedings
arising out the transactions contemplated by this Agreement). The
party requesting such cooperation shall pay the reasonable out-of-
pocket expenses (including legal fees and disbursements), as
incurred, of the party providing such cooperation and of its
officers, directors, managers, members, employees and agents
reasonably incurred in connection with providing such cooperation,
but shall not be responsible to reimburse the party providing such
cooperation for such party's time spent in such cooperation or the
salaries or costs of fringe benefits or similar expenses paid by
the party providing such cooperation to its officers, directors,
managers, members, employees and agents while assisting in the
defense or prosecution of any such litigation or proceeding.
11. Termination of Agreement
------------------------
11.1 TERMINATION BY LAPSE OF TIME. This Agreement
shall terminate at 5:00 p.m., Boston time, on September 30, 1996,
if the transactions contemplated hereby have not been consummated,
unless such date is extended by the written consent of all of the
parties hereto.
11.2 TERMINATION BY AGREEMENT OF THE PARTIES. This
Agreement may be terminated by the mutual written agreement of the
parties hereto. In the event of such termination by agreement,
the Buyer shall have no further obligation or liability to the
Sellers or the Principals under this Agreement, and the Sellers
and the Principals shall have no further obligation or liability
to the Buyer under this Agreement.
11.3 TERMINATION BY REASON OF BREACH. This Agreement
may be terminated by the Sellers, if at any time prior to the
Closing there shall occur a breach of any of the representations,
warranties or covenants of the Buyer or the failure by the Buyer
to perform any condition or obligation hereunder, and may be
terminated by the Buyer, if at any time prior to the Closing there
shall occur a breach of any of the representations, warranties or
covenants of any Seller or Principal or the failure of any Seller
or Principal to perform any condition or obligation hereunder.
12. Transfer and Sales Tax
----------------------
Notwithstanding any provisions of law imposing the
burden of such taxes on the Sellers or the Buyer, as the case may
be, the Sellers shall be responsible for and shall pay (a) all
-43-
<PAGE> 49
sales, use and transfer taxes, if any, upon the sale or transfer
of any of the Assets hereunder, and (b) all governmental charges,
if any, upon the sale or transfer of any of the Assets hereunder.
If the Sellers shall fail to pay such amounts on a timely basis,
the Buyer shall notify and give the Sellers an opportunity to
contest such charges at the Sellers' expense. If, following any
such contest (or if the Sellers determine not to so contest such
charges), the Sellers fail to pay such charges, the Buyer may pay
such amounts to the appropriate governmental authority or
authorities, and the Sellers shall promptly reimburse the Buyer
for any amounts so paid by the Buyer.
13. Brokers
-------
13.1 FOR THE SELLERS. The Sellers and the Principals
represent and warrant that none of them has engaged any broker or
finder or incurred any liability for brokerage fees, commissions
or finder's fees in connection with the transactions contemplated
by this Agreement. The Sellers and the Principals, jointly and
severally, agree to indemnify and hold harmless the Buyer against
any claims or liabilities asserted against it by any person acting
or claiming to act as a broker or finder on behalf of any Seller
or any Principal.
13.2 FOR THE BUYER. The Buyer agrees to pay all fees,
expenses and compensation owed to any person, firm or corporation
who has acted in the capacity of broker or finder on its behalf in
connection with the transactions contemplated by this Agreement.
The Buyer agrees to indemnify and hold harmless the Sellers
against any claims or liabilities asserted against them by any
person acting or claiming to act as a broker or finder on behalf
of the Buyer.
14. Notices
-------
Any notices or other communications required or permitted
hereunder shall be sufficiently given if delivered personally or
sent by federal express or other reputable nationwide overnight
courier service, registered or certified mail, postage prepaid,
addressed as follows or to such other address of which the parties
may have given notice:
To any Seller: To all of the Principals, at
their respective addresses
If to any
Principal
(as applicable): Mr. Steven Matsakis
366 High Meadow Court
Wycoff, NJ 07481
-44-
<PAGE> 50
Mr. Hal Greene
293 Whitford Avenue
Nutley, NJ 07110
Mr. Brian Miller
P.O. Box 64
Wood-Ridge, NJ 07075
With a copy to: David Lentz, Esq.
Lentz & Gengaro
443 Northfield Avenue
West Orange, NJ 07052
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other
communications shall be deemed received (a) on the date delivered,
if delivered personally; (b) on the business day following
delivery to an overnight courier; (c) three business days after
being sent, if sent by registered or certified mail; or (d) on the
date of actual delivery, if sent by any other method.
15. Arbitration
-----------
(a) Except as provided in this Section 15(a), any
dispute, controversy or claim between the parties arising out of
or relating to this Agreement, a breach hereof or the transactions
contemplated hereby, shall be settled by arbitration in accordance
with the provisions of this Section 15. Any arbitration pursuant
to this Section 15 shall be conducted by a single arbitrator
appointed by the Philadelphia, Pennsylvania office of the American
Arbitration Association upon the request of any party. The
arbitrator shall have a minimum of five years of experience in the
area of business relevant to the particular dispute. Each of the
two parties to the dispute (all Sellers and all Principals being
treated as one party for this purpose) shall be permitted to
submit only one proposal to the arbitrator, and the arbitrator
shall be required to choose one of such two proposals as the
resolution of the dispute. The arbitrator may proceed to a
resolution notwithstanding the failure of a party to participate
in the proceedings. Each of the parties shall pay its own costs
and expenses in connection with any such arbitration, and the
-45-
<PAGE> 51
parties shall share equally in the fees and expenses of the
arbitrator.
Notwithstanding the foregoing, any dispute as to the failure
of Buyer to deliver cash or stock at the times and in the amounts
specified under the Instrument shall be presented in a court of
law or equity, and shall not be submitted to arbitration
hereunder.
(b) The parties agree that any such arbitration will
occur in Philadelphia, Pennsylvania, any such arbitration award
shall be final and binding upon the parties, may be entered in any
court having jurisdiction and shall not be appealable by either
party in any court.
16. Successors and Assigns
----------------------
This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns, except that the Buyer and the Sellers may not assign
their respective obligations hereunder without the prior written
consent of the other party; provided, however, that the Buyer may
assign this Agreement, and its rights and obligations hereunder,
to a subsidiary or Affiliate. Any assignment in contravention of
this provision shall be void. No assignment shall release the
Buyer or any Seller or Principal from any obligation or liability
under this Agreement.
17. Entire Agreement; Amendments; Attachments
-----------------------------------------
(a) This Agreement, all Schedules and Exhibits hereto,
and all agreements and instruments to be delivered by the parties
pursuant hereto represent the entire understanding and agreement
between the parties hereto with respect to the subject matter
hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer, the Sellers and the Principals
may amend or modify this Agreement, in such manner as may be
agreed upon, by a written instrument executed by the Buyer and the
Principals.
(b) If the provisions of any Schedule or Exhibit to
this Agreement are inconsistent with the provisions of this
Agreement, the provision of the Agreement shall prevail. The
Exhibits and Schedules attached hereto or to be attached hereafter
are hereby incorporated as integral parts of this Agreement.
-46-
<PAGE> 52
18. Expenses
--------
Except as otherwise expressly provided herein, the Buyer
(on the one hand) and the Sellers and the Principals (on the other
hand) shall each pay their own expenses in connection with this
Agreement and the transactions contemplated hereby. The Buyer
shall pay the costs and expenses of any audit conducted by, or at
the request of, the Buyer, and Sellers shall pay the costs and
expenses of any accounting services provided to the Sellers in
connection with the transactions contemplated hereby.
19. Legal Fees
----------
In the event that legal proceedings are commenced by the
Buyer against any Principal or any Seller, or by any Principal or
any Seller against the Buyer, in connection with this Agreement or
the transactions contemplated hereby, the party or parties which
do not prevail in such proceedings shall pay the reasonable
attorneys' fees and other costs and expenses, including
investigation costs, incurred by the prevailing party in such
proceedings.
20. Governing Law
-------------
This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
21. Section Headings
----------------
The section headings are for the convenience of the
parties and in no way alter, modify, amend, limit, or restrict the
contractual obligations of the parties.
22. Severability
------------
The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
23. Counterparts
------------
This Agreement and any amendment hereto may be executed
in one or more counterparts, each of which shall be deemed to be
an original, but all of which shall be one and the same document.
(end of page)
-47-
<PAGE> 53
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto as of and on the date first above written.
(Corporate Seal) WEST COAST ENTERTAINMENT CORPORATION
ATTEST:
/s/ Sarah Rothermel By: /s/ T. Kyle Standley
------------------------- --------------------------------
Title: President
-----------------------------
PRINCIPALS:
/s/ Steven Matsakis
-----------------------------------
Steven Matsakis
/s/ Hal Greene
-----------------------------------
Hal Greene
/s/ Brian Miller
-----------------------------------
Brian Miller
SELLERS:
(Corporate Seal) LARGE CORPORATION
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) LYNDHURST VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
-48-
<PAGE> 54
(Corporate Seal) KEARNY VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) NEW MILFORD VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) HILLSDALE VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) HACK VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) BELL VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) BERGEN VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
-49-
<PAGE> 55
(Corporate Seal) HARRIS VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) RAHWAY VIDEO INC.
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) WALL VIDEO INC.
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) MONT VIDEO INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
(Corporate Seal) SUPER VIDEO OF PARK RIDGE, INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
EMERSON VIDEO LLC
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
-50-
<PAGE> 56
(Corporate Seal) SUPER VIDEO MANAGEMENT CO., INC.
ATTEST:
/s/ Brian Miller By: /s/ Steven Matsakis
------------------------- --------------------------------
Title: CEO
-----------------------------
-51-
<PAGE> 1
INSTRUMENT OF EVIDENCE OF INDEBTEDNESS
THIS INSTRUMENT OF EVIDENCE OF INDEBTEDNESS dated as of the
30th day of September, 1996, is by and among West Coast
Entertainment Corporation, a Delaware corporation (the "Buyer"),
and the Sellers identified on SCHEDULE A attached hereto
(individually, a "Seller" and collectively, the "Sellers"), in
connection with the consummation of the transactions contemplated
by that certain Asset Purchase Agreement dated as of September 30,
1996, by and among the Buyer, the Sellers and the other parties
thereto (the "Purchase Agreement"). Capitalized terms used
herein, and not otherwise defined herein, shall have the
respective meanings ascribed to them in the Purchase Agreement.
WHEREAS, the Buyer has acquired substantially all of the
assets and business of each of the Sellers pursuant to the
Purchase Agreement; and
WHEREAS, in partial consideration for such assets and
business, the Buyer has agreed to issue this Instrument, pursuant
to which it will deliver to the Sellers shares of its Common
Stock, at the times and on the terms described herein.
NOW, THEREFORE, in consideration of the foregoing, and for
other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the Buyer and the Sellers hereby
agree as follows:
1. ISSUANCE OF SHARES. (a) The Buyer shall issue to the
Sellers, at the times and on the terms provided herein, the number
of shares of the Buyer's Common Stock, $.01 par value per share
("Common Stock"), as is determined by dividing $3,919,000 by the
Market Value (as defined in Section 1(d) below). Except to the
extent provided in Section 2 hereof, the shares shall be issued on
the following dates:
(1) One-third of the total number of shares issuable
pursuant to this Section 1(a) shall be issued on March 30,
1997 (the "First Issue Date");
(2) One-third of the total number of shares issuable
pursuant to this Section 1(a) shall be issued on September
30, 1997 (the "Second Issue Date"); and
(3) The balance of the shares issuable pursuant to this
Section 1(a) shall be issued on March 30, 1998 (the "Third
Issue Date");
<PAGE> 2
each of such dates being sometimes hereinafter referred to as an
"Issue Date." The excess of (i) the total number of shares to be
issued by the Buyer hereunder over (ii) the amount of shares
actually issued pursuant to this Section 1(a) at any point in time
is hereinafter referred to as the "Unissued Shares."
(b) The Buyer shall issue additional shares of its
registered Common Stock (the "Additional Shares") or pay
additional cash consideration to the Sellers pursuant to this
Instrument on the terms described in this Section 1(b). If, on
the First Issue Date, the closing price of a share of Buyer Common
Stock as reported on The Nasdaq Stock Exchange (the "First Issue
Date Price"), is less than the Market Value, the Buyer shall
deliver, within three business days following the First Issue
Date, (1) cash or (2) Additional Shares, valued at the First Issue
Date Price, which stock shall not be subject to any restrictions
whatsoever, or (3) some combination of items (1) and (2), in any
event, with an aggregate value equal to (A) the number of shares
of Buyer Common Stock issued on the First Issue Date multiplied by
(B) the excess of the Market Value over the First Issue Date
Price.
If, on the Second Issue Date, the closing price of a
share of Buyer Common Stock as reported on the Nasdaq Stock
Exchange (the "Second Issue Date Price"), is less than the Market
Value, the Buyer shall deliver, within three business days
following the Second Issue Date, (1) cash or (2) Additional
Shares, valued at the Second Issue Date Price, which stock shall
not be subject to any restrictions whatsoever, or (3) some
combination of items (1) and (2), in any event, with an aggregate
value equal to 50% of (A) the number of shares of Buyer Common
Stock issued on the Second Issue Date multiplied by (B) the excess
of the Market Value over the Second Issue Date Price.
(c) All shares of Buyer Common Stock to be issued
pursuant to this Instrument shall be registered under the
Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission (the
"SEC").
(d) The Market Value shall be equal to the average of
the bid and asked prices per share of Buyer's Common Stock as
reported on the Nasdaq Stock Exchange for each of the fifteen
trading days ending on the business day preceding the Closing
Date.
-2-
<PAGE> 3
2. Acceleration.
------------
(a) In the event that the Buyer fails to deliver the
shares on any Issue Date as provided in Section 1 above (or any
Additional Shares issuable or cash consideration payable pursuant
to Section 1(b) above on the date specified therein), or fails to
register any of the shares to be delivered pursuant hereto, and,
within 30 days following written notice of such failure from the
Sellers to the Buyer, the Buyer has not delivered all such
registered shares or cash, the Buyer shall immediately and without
further action on the part of the Sellers, be obligated to issue
all Unissued Shares and Additional Shares (or cash in lieu of such
Additional Shares). For purposes of determining the number of
Additional Shares with respect to any Issue Date which has not yet
occurred (e.g., the Buyer fails to deliver shares on the First
Issue Date, and the Second Issue Date has not yet occurred for
purposes of calculating the number of Additional Shares which are
deliverable pursuant to this Section 2(a) in respect of the Second
Issue Date), the applicable Issue Date Price shall be the closing
price of a share of Buyer Common Stock as reported on the Nasdaq
Stock Exchange on the date on which the Buyer shall have failed to
deliver the shares or Additional Shares or cash (as applicable)
(and not the last day of the 30-day notice period described
above).
(b) At the option of the Sellers, the Buyer shall
immediately be obligated to issue all Unissued Shares and
Additional Shares (or cash) pursuant to Section 1(b) above (to the
extent not previously issued or paid) upon the occurrence of any
of the following events (a "Bankruptcy Event"):
(i) If the Buyer (i) makes a composition or an
assignment for the benefit of creditors or trust mortgage,
(ii) applies for, consents to, acquiesces in, files a
petition seeking or admits (by answer, default or otherwise)
the material allegations of a petition filed against it
seeking the appointment of a trustee, receiver or liquidator,
in bankruptcy or otherwise, of itself or of all or
substantially all of its assets, or a reorganization,
arrangement with creditors or other remedy, relief or
adjudication available to or against a bankrupt, insolvent or
debtor under any bankruptcy or insolvency law or any law
affecting the rights of creditors generally, or (iii) admits
in writing its inability to pay its debts generally as they
become due; or
(ii) If an order for relief shall have been entered
by a bankruptcy court or if a decree, order or judgment shall
have been entered adjudging the Buyer insolvent, or
appointing a receiver, liquidator, custodian or trustee, in
-3-
<PAGE> 4
bankruptcy or otherwise, for it or for all or a substantial
portion of its assets, or approving the winding-up or
liquidation of its affairs on the grounds of insolvency or
nonpayment of debts, and such order for relief, decree, order
or judgment shall remain undischarged or unstayed for a
period of ninety (90) days; or if any substantial part of the
property of the Buyer is sequestered or attached and shall
not be returned to the possession of the Buyer or such subsi-
diary or released from such attachment within ninety (90)
days.
The option to accelerate the delivery of Unissued Shares and
Additional Shares or cash (to the extent not previously delivered)
pursuant to Section 1(b) upon the occurrence of a Bankruptcy Event
shall be exercisable only by delivery of written notice to the
Buyer within 30 days following notice to Sellers of the occurrence
of any of such events. For purposes of determining the number of
Additional Shares issuable or cash payable pursuant to this
Section 2(b) in respect of any Issue Date which has not yet
occurred, the applicable Issue Date Price shall be the closing
price of a share of Buyer Common Stock as reported on the Nasdaq
Stock Exchange on the date on which the Bankruptcy Event shall
have occurred.
(c) If the Buyer's obligation to deliver Unissued
Shares and Additional Shares (or cash) is accelerated pursuant to
Section 2(a) or (b) above, the Sellers shall also have the option
to elect to have the Buyer pay to the Sellers cash in lieu of
delivery of the Unissued Shares or any Additional Shares, such
cash to be in an amount equal to (x) the number of Unissued Shares
multiplied by (y) the Market Value, together with the amounts
payable pursuant to Section 1(b) above (to the extent not
previously paid). Any such option must be exercised, if at all,
(i) in writing in the same notice pursuant to which the Sellers
elect to accelerate the delivery of the Unissued Shares and
Additional Shares (or cash) pursuant to this Section 2(b), if
applicable, or (ii) in writing in a notice to the Buyer delivered
PRIOR to the date on which the Buyer delivers the Unissued Shares
and Additional Shares (or cash) pursuant to Section 2(a), and in
any event within 30 days following the last day of the 30-day
period specified in Section 2(a).
3. RIGHT OF SET-OFF. The Buyer shall be permitted to set
off, against the number of shares (or other amounts) deliverable
to the Sellers hereunder, amounts or obligations owed by the
Principals or the Sellers to the Buyer pursuant to the Purchase
Agreement. In order to calculate the reduction in the number of
shares issuable by the Buyer hereunder for this purpose, each
share shall have a value equal to the Market Value.
-4-
<PAGE> 5
4. EARLIER ISSUANCE. If, prior to the date of issuance of
all of the shares to be issued pursuant to Section 1, the Buyer
intends to register shares of Buyer Common Stock owned by Ralph T.
Standley, III or T. Kyle Standley for the account of Ralph T.
Standley, III or T. Kyle Standley (the "Standleys") pursuant to a
Registration Statement to be filed with the SEC, the Buyer shall
so notify the Sellers in writing. The Sellers shall have the
option, exercisable in writing within 15 days following receipt of
any such notice, to make an irrevocable election to cause the
Buyer to issue all Unissued Shares together with any Additional
Shares (or cash) pursuant to Section 1(b) as soon as practicable
following the first date on which the Standleys' shares are sold
pursuant to such Registration Statement. If the Sellers make such
an election and shares of the Standleys' Buyer Common Stock are so
registered and sold, and the effectiveness of such Registration
Statement, or the closing of the sale of shares for the account of
the Standleys thereunder is delayed past the date on which the
Unissued Shares or Additional Shares, if any, would have been
issued pursuant to this Instrument, the Sellers shall have no
claim for damages or equitable relief associated with any such
delay.
If the Sellers make such an election, and the Standleys
thereafter determine not to register or sell shares of their Buyer
Common Stock, the Sellers and the Buyer shall cause the Unissued
Shares and Additional Shares (or cash), if any, to be issued
hereunder on such dates as shall be as close as reasonably
practicable to the Issue Dates originally provided for in Section
1.
For purposes of determining the number of Additional Shares
issuable or cash payable pursuant to this Section 4 in respect of
any Issue Date which has not yet occurred, the applicable Issue
Date Price shall be the closing price of a share of Buyer Common
Stock as reported on the Nasdaq Stock Exchange on the date on
which the Standleys notify the Sellers in writing that they intend
to file a Registration Statement with the SEC.
5. ALLOCATION OF SHARES DELIVERABLE TO THE ASSETS. The
Buyer and the Seller hereby agree and acknowledge that the value
of the consideration issuable pursuant to this Instrument shall be
allocated for tax purposes solely to goodwill of the Sellers being
acquired by the Buyer pursuant to the Purchase Agreement, and not
to any of the Sellers other Assets.
6. General.
-------
(a) SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, except that the Buyer and
-5-
<PAGE> 6
the Sellers may not assign their respective rights and obligations
hereunder without the prior written consent of the other party;
provided that, any Seller may, without the consent of the Buyer,
assign its rights hereunder to its respective shareholders
pursuant to and in connection with a plan of liquidation adopted
by such Seller. Any assignment in contravention of this provision
shall be void. Except as provided in this Section 6(a), the
Sellers may not transfer to any other person the right to receive
shares of Buyer Common Stock hereunder without the prior consent
of the Buyer.
(b) NOTICES. Any notices or other communications
required or permitted hereunder shall be sufficiently given if
delivered personally or sent by federal express or other reputable
nationwide overnight courier service, registered or certified
mail, postage prepaid, addressed as follows or to such other
address of which the parties may have given notice:
To any Seller: To Each of:
Mr. Steven Matsakis
366 High Meadow Court
Wycoff, NJ 07481
Mr. Hal Greene
293 Whitford Avenue
Nutley, NJ 07110
Mr. Brian Miller
P.O. Box 64
Wood-Ridge, NJ 07075
With a copy to: David Lentz, Esq.
Lentz & Gengaro
443 Northfield Avenue
West Orange, NJ 07052
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other
communications shall be deemed received (1) on the date delivered,
if delivered personally; (2) on the business day following
-6-
<PAGE> 7
delivery to an overnight courier; (3) three business days after
being sent, if sent by registered or certified mail; or (4) on the
date of actual delivery, if sent by any other method.
(c) Arbitration.
-----------
(i) Except as provided in this Section 6(c), any
dispute, controversy or claim between the parties arising out of
or relating to this Instrument, a breach hereof or the
transactions contemplated hereby, shall be settled by arbitration
in accordance with the provisions of this Section 6(c). Any
arbitration pursuant to this Section 6(c) shall be conducted by a
single arbitrator appointed by the Philadelphia, Pennsylvania
office of the American Arbitration Association upon the request of
any party. The arbitrator shall have a minimum of five years of
experience in the area of business relevant to the particular
dispute. Each of the two parties to the dispute (all Sellers
being treated as one party for this purpose) shall be permitted to
submit only one proposal to the arbitrator, and the arbitrator
shall be required to choose one of such two proposals as the
resolution of the dispute. The arbitrator may proceed to a
resolution notwithstanding the failure of a party to participate
in the proceedings. Each of the parties shall pay its own costs
and expenses in connection with any such arbitration, and the
parties shall share equally in the fees and expenses of the
arbitrator.
Notwithstanding the foregoing, any dispute as to the failure
of Buyer to deliver cash or stock at the times and in the amounts
specified in this Instrument shall be presented in a court of law
or equity, and shall not be submitted to arbitration hereunder.
(ii) The parties agree that any such arbitration
will occur in Philadelphia, Pennsylvania, any such arbitration
award shall be final and binding upon the parties, may be entered
in any court having jurisdiction and shall not be appealable by
either party in any court.
(d) ENTIRE AGREEMENT; AMENDMENTS; ATTACHMENTS. The
Buyer and the Sellers may amend or modify this Agreement, in such
manner as may be agreed upon, only by a written instrument
executed by the Buyer and the Sellers.
(e) SECTION HEADINGS. The section headings contained
in this Instrument are for the convenience of the parties and in
no way alter, modify, amend, limit, or restrict the contractual
obligations of the parties.
-7-
<PAGE> 8
(f) SEVERABILITY. The invalidity or unenforceability
of any provision of this Agreement shall not affect the validity
or enforceability of any other provision of this Agreement.
(g) COUNTERPARTS. This Instrument and any amendment
hereto may be executed in one or more counterparts, each of which
shall be deemed to be an original, but all of which shall be one
and the same document.
(h) SATURDAYS, SUNDAYS, HOLIDAYS. If any date that may
at any time be specified in this Instrument as an Issue Date shall
fall on Saturday, Sunday or on a day which in the Philadelphia,
Pennsylvania shall be a legal holiday, then the date for the
making of that payment shall be the next subsequent day which is
not a Saturday, Sunday or legal holiday.
(i) GOVERNING LAW. This Instrument shall be construed
and enforced in accordance with, and the rights of the parties
shall be governed by, the laws of the State of Delaware.
[Remainder of page left intentionally blank.]
-8-
<PAGE> 9
IN WITNESS WHEREOF, this Instrument has been executed and
delivered as a sealed instrument on the date first above written
by the duly authorized representative of the Buyer.
WEST COAST ENTERTAINMENT
CORPORATION
By /s/ T. Kyle Standley
----------------------------
President
AGREED TO AND ACCEPTED AS OF
THE DATE FIRST SET FORTH ABOVE:
Large Corporation
Lyndhurst Video Inc.
Kearny Video Inc.
New Milford Video Inc.
Hillsdale Video Inc.
Hack Video Inc.
Bell Video Inc.
Bergen Video Inc.
Harris Video Inc.
Rahway Video Inc.
Wall Video Inc.
Mont Video Inc.
Super Video of Park Ridge, Inc.
Emerson Video LLC
Super Video Management Co., Inc.
By /s/ Steven Matsakis
---------------------------
The duly authorized and
acting representative
of each Seller
-9-
<PAGE> 10
Schedule A
----------
Sellers
-------
Large Corporation
Lyndhurst Video Inc.
Kearny Video Inc.
New Milford Video Inc.
Hillsdale Video Inc.
Hack Video Inc.
Bell Video Inc.
Bergen Video Inc.
Harris Video Inc.
Rahway Video Inc.
Wall Video Inc.
Mont Video Inc.
Super Video of Park Ridge, Inc.
Emerson Video LLC
Super Video Management Co., Inc.
-10-
<PAGE> 1
ASSET PURCHASE AGREEMENT
By and Among
West Coast Entertainment Corporation
and the Seller Identified
on Schedule I hereto
----------
<PAGE> 2
TABLE OF CONTENTS
-----------------
Section Page
------- ----
1. Sale and Delivery of the Assets....................... 1
1.1 Delivery of the Assets.......................... 1
1.2 Further Assurances ............................. 3
1.3 Purchase Price.................................. 3
1.4 Assumption of Liabilities; Etc.................. 5
1.5 Allocation of Purchase Price and Assumed
Liabilities..................................... 6
1.6 The Closings.................................... 6
1.7 Restrictions on Transfer of Common Stock........ 6
2. Representations of the Seller......................... 6
2.1 Organization.................................... 6
2.2 Capitalization of the Seller and the
Subsidiaries.................................... 7
2.3 Authorization................................... 7
2.4 Ownership of the Assets......................... 8
2.5 Financial Statements............................ 8
2.6 Absence of Undisclosed Liabilities.............. 9
2.7 Litigation...................................... 9
2.8 Insurance....................................... 10
2.9 Inventory....................................... 10
2.10 Fixed Assets.................................... 10
2.11 Leases.......................................... 11
2.12 Change in Financial Condition and Assets........ 11
2.13 Tax Matters..................................... 12
2.14 Accounts Receivable............................. 13
2.15 Books and Records............................... 13
2.16 Contracts and Commitments....................... 13
2.17 Compliance with Agreements and Laws............. 15
2.18 Employee Relations.............................. 16
2.19 Absence of Certain Changes or Events............ 17
2.20 Suppliers....................................... 17
2.21 Prepayments and Deposits........................ 18
2.22 Trade Names and Other Intangible Property....... 18
2.23 Employee Benefit Plans.......................... 18
2.24 Regulatory Approvals............................ 19
2.25 Indebtedness to and from Officers, Directors
and Shareholders................................ 19
2.26 Powers of Attorney and Suretyships.............. 19
2.27 Disclosure...................................... 20
-i-
<PAGE> 3
Section Page
------- ----
3. Representations of the Buyer.......................... 20
3.1 Organization and Authority...................... 20
3.2 Capitalization of the Buyer..................... 20
3.3 Authorization................................... 20
3.4 Regulatory Approvals............................ 21
3.5 Disclosure...................................... 21
3.6 Buyer Financial Statements...................... 21
3.7 Issuance of Shares.............................. 21
4. Access to Information; Public Announcements........... 22
4.1 Access to Management, Properties and Records.... 22
4.2 Confidentiality................................. 22
5. Pre-Closing Covenants of the Seller................... 23
5.1 Conduct of Business............................. 23
5.2 Absence of Material Changes..................... 23
5.3 Taxes........................................... 25
5.4 Delivery of Interim Financial Statements ....... 25
5.5 Compliance with Laws............................ 25
5.6 Continued Truth of Representations
and Warranties of the Seller.................... 25
5.7 Continuing Obligation to Inform................. 25
5.8 Exclusive Dealing............................... 26
5.9 No Publicity.................................... 26
6. Satisfaction of Conditions............................ 26
7. Conditions to Obligations of the Buyer................ 26
7.1 Continued Truth of Representations
and Warranties of the Seller; Compliance with
Covenants and Obligations ...................... 26
7.2 Corporate Proceedings........................... 27
7.3 Governmental Approvals.......................... 27
7.4 Consents of Lenders, Lessors and Other
Third Parties................................... 27
7.5 Adverse Proceedings............................. 27
7.6 Opinion of Counsel.............................. 27
7.7 Board of Directors and Shareholder Approval..... 27
7.8 The Assets...................................... 27
7.9 Update.......................................... 27
7.10 Cash Available for Working Capital Purposes..... 28
7.11 Payables........................................ 28
-ii-
<PAGE> 4
Section Page
------- ----
7.12 Engineer's Report............................... 28
7.13 Tax Lien Waivers................................ 28
7.14 Closing Deliveries.............................. 28
7.15 Retail Store Option Agreement................... 29
8. Conditions to Obligations of the Seller............... 29
8.1 Continued Truth of Representations and
Warranties of the Buyer; Compliance
with Covenants and Obligations.................. 30
8.2 Corporate Proceedings........................... 30
8.3 Governmental Approvals.......................... 30
8.4 Consents of Lenders, Lessors and Other
Third Parties................................... 30
8.5 Adverse Proceedings............................. 30
8.6 Opinion of Counsel.............................. 30
8.7 Closing Deliveries.............................. 31
8.8 Retail Store Option Agreement................... 31
9. Indemnification....................................... 31
9.1 By the Buyer and the Seller..................... 31
9.2 By the Seller................................... 32
9.3 Claims for Indemnification...................... 33
9.4 Defense by Indemnifying Party.................. 33
9.5 Payment of Indemnification Obligation........... 34
9.6 Survival of Representations; Claims for
Indemnification................................. 34
10. Post-Closing Agreements............................... 34
10.1 Proprietary Information......................... 34
10.2 No Solicitation or Hiring of Former Employees... 35
10.3 Non-Competition Agreement....................... 35
10.4 Sharing of Data................................. 36
10.5 Use of Name.................................... 36
10.6 Cooperation in Litigation....................... 37
10.7 License to Reel Video........................... 37
10.8 Conduct of Business............................. 37
10.9 Non-Compete Agreement with Gabriel Ackal........ 37
10.10 Confidentiality Agreements...................... 37
11. Termination of Agreement.............................. 37
11.1 Termination by Agreement of the Parties........ 37
11.2 Termination by Reason of Breach................ 38
12. Transfer and Sales Tax................................ 38
-iii-
<PAGE> 5
Section Page
------- ----
13. Brokers............................................... 38
13.1 For the Seller.................................. 38
13.2 For the Buyer................................... 38
14. Notices............................................... 38
15. Arbitration........................................... 39
16. Successors and Assigns................................ 40
17. Entire Agreement; Amendments; Attachments............. 40
18. Expenses.............................................. 40
19. Legal Fees............................................ 40
20. Governing Law......................................... 41
21. Section Headings...................................... 41
22. Severability.......................................... 41
23. Counterparts......................................... 41
Exhibits
--------
A - Instrument of Assumption of Liabilities
B - Opinion of Counsel to Seller
C - Bill of Sale
D - Opinion of Hale and Dorr
-iv-
<PAGE> 6
ASSET PURCHASE AGREEMENT
------------------------
Agreement made as of October __, 1996 by and among West Coast
Entertainment Corporation, a Delaware corporation with its
principal office at 9990 Global Road, Philadelphia, Pennsylvania
19115 (the "Buyer"), the Seller identified on SCHEDULE I attached
hereto, which has as its principal office the location identified
on SCHEDULE I attached hereto (the "Seller"), and those persons
identified as "Principals" on SCHEDULE I attached hereto
(individually, a "Principal" and collectively, the "Principals").
Preliminary Statement
---------------------
The Buyer desires to purchase, and the Seller desires to
sell, substantially all of the assets and business of the Seller
related to the four stores identified on SCHEDULE I attached
hereto (each, a "Store"), for the consideration set forth below
and the assumption of certain of the Seller's liabilities set
forth below, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises
hereinafter set forth and other good and valuable consideration,
the receipt of which is hereby acknowledged, the parties hereby
agree as follows:
1. Sale and Delivery of the Assets
-------------------------------
1.1 Delivery of the Assets.
----------------------
(a) Subject to and upon the terms and conditions
of this Agreement, at each of the four closings of the
transactions contemplated by this Agreement (each, a "Closing"),
the Seller shall sell, transfer, convey, assign and deliver to the
Buyer, and the Buyer shall purchase from the Seller, the following
properties, assets and other claims, rights and interests related
to the Store acquired by the Buyer at each such Closing:
(i) all inventories, videotapes, finished
goods, office supplies, maintenance supplies, packaging materials
and similar items of the Seller (collectively, the "Inventory")
which exist on the Closing Date (as defined below);
(ii) all accounts, accounts receivable, notes
and notes receivable existing on the Closing Date which are
payable to the Seller, including any security held by the Seller
for the payment thereof (the "Accounts Receivable");
<PAGE> 7
(iii) all prepaid expenses, deposits and other
similar assets of the Seller existing on the Closing Date;
(iv) all rights of the Seller under the
contracts, agreements, leases, licenses and other instruments set
forth on SCHEDULE 2.16 attached hereto, but not including such
rights under contracts, agreements, leases, licenses and other
instruments set forth on SCHEDULE 1.1 (collectively, the "Contract
Rights");
(v) copies of all books, records and
accounts, correspondence, manuals, customer lists, employment
records, studies, reports or summaries relating to or arising out
of the business of the Seller;
(vi) all rights of the Seller under express or
implied warranties from the suppliers of the Seller;
(vii) all of the machinery, equipment,
furniture, leasehold improvements and construction in progress
owned by the Seller on the Closing Date whether or not reflected
as capital assets in the accounting records of the Seller
(collectively, the "Fixed Assets");
(viii) all of the Seller's right, title and
interest in and to all intangible property rights, including but
not limited to inventions, discoveries, trade secrets, processes,
formulas, know-how, United States and foreign patents, patent
applications, trade names, including the trade names (if any)
identified on SCHEDULE I attached hereto or any derivation
thereof, trademarks, trademark registrations, applications for
trademark registrations, copyrights, copyright registrations,
owned or, where not owned, used by the Seller in its business and
all licenses and other agreements to which the Seller is a party
(as licensor or licensee) or by which the Seller is bound relating
to any of the foregoing kinds of property or rights to any "know-
how" or disclosure or use of ideas (collectively, the "Intangible
Property"); and
(ix) except as specifically provided in
Subsection 1.1(b) hereof, all other assets, properties, claims,
rights and interests of the Seller which exist on the Closing
Date, of every kind and nature and description, whether tangible
or intangible, real, personal or mixed.
(b) Notwithstanding the provisions of
paragraph (a) above, the assets to be transferred to the Buyer
under this Agreement shall not include those assets listed on
SCHEDULE 1.1 attached hereto (the "Excluded Assets").
-2-
<PAGE> 8
(c) The Inventory, Accounts Receivable, Contract
Rights, Fixed Assets, Intangible Property and other properties,
assets and business of the Seller with respect to each Store
described in paragraph (a) above, other than the Excluded Assets,
shall be referred to collectively as the "Assets."
1.2 FURTHER ASSURANCES. At any time and from time to
time after a Closing, at the Buyer's request and without further
consideration, the Seller promptly shall execute and deliver such
instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as the Buyer may
reasonably request to more effectively transfer, convey and assign
to the Buyer, and to confirm the Buyer's title to, all of the
Assets, to put the Buyer in actual possession and operating
control thereof, to assist the Buyer in exercising all rights with
respect thereto and to carry out the purpose and intent of this
Agreement.
1.3 Purchase Price.
--------------
(a) The "Purchase Price" for the assets to be
acquired at each Closing shall be $425,000. The parties
acknowledge and agree that the sum of the Purchase Price payable
for the four Stores was determined as a multiple of the projected
Net Operating Cash Flow (as defined below). The Purchase Price
shall be subject to a post-Closing adjustment as provided in
Subsection 1.3(d) below. The Total Purchase Price for all four
Stores shall be $1,700,000.
(b) The Purchase Price at each Closing shall be
payable by (i) the payment to the Seller of a minimum $300,000 in
cash or by certified check or by wire transfer to an account
designated by the Seller and (ii) the issuance in the name of the
Seller of that number of shares of Common Stock, $.01 par value
per share, of the Buyer ("Common Stock") determined by dividing
the balance of the Purchase Price by the Market Value of a share
of Common Stock. The Buyer at its option may elect to pay up to
the total amount of the Purchase Price in cash or by certified
check or wire transfer. The "Market Value" of a share of Common
Stock shall equal the average of the closing price of a share of
Common Stock on the Nasdaq National Market for the 15 trading days
ending on the third business day prior to the Closing. The shares
of Common Stock issuable hereunder shall be registered under the
Securities Act of 1933, as amended, pursuant to a Registration
Statement filed with the Securities and Exchange Commission.
(c) For purposes hereof "Net Operating Cash Flow"
shall be equal to the pre-tax income from the Stores for the 12-
month period ending on September 30, 1997, plus all debt-related
-3-
<PAGE> 9
interest expense proportionately allocable to the Stores and
depreciation and amortization expenses proportionately allocable
to the Stores for such 12-month period, less all rental product
purchases proportionately allocable to the Stores during such 12-
month period (including revenue sharing expenses if not previously
expensed), less all earned income interest proportionately
allocable to the Stores for such 12-month period, plus all royalty
expenses attributable to such stores during such 12-month period
(if expensed), with such components of Net Operating Cash Flow
determined in accordance with generally accepted accounting
principles applied consistently with Seller's past practices.
(d) Promptly following September 30, 1997, the
Buyer shall cause independent certified public accountants for the
Buyer (the "Accountants") to review the books and records of the
acquired Stores for the 12 month period ending September 30, 1997.
On or before December 31, 1997, the Buyer shall cause the
Accountants to deliver a statement setting forth the Net Operating
Cash Flow for the Stores to each of the Buyer and the Seller (the
"Accountants' Report).
In the event that the Buyer or the Seller dispute the
calculation of the Net Operating Cash Flow, the disputing party
shall notify the other parties hereto in writing (the "Dispute
Notice") of the amount, nature and basis of such dispute, within
10 calendar days after delivery of the Accountants' Report. In
the event of such a dispute, the parties hereto shall first use
their best efforts to resolve such dispute among themselves. If
the parties are unable to resolve the dispute within 10 business
days after delivery of the Accountants' Report, the dispute shall
be submitted to the Accountants and ___________, independent
accountants for the Seller ("Seller's Accountants"), for
resolution. The Accountants and Seller's Accountants shall use
their best efforts to resolve the dispute within 10 business days
after submission to the Accountants and the Seller's Accountants.
If the Accountants and the Seller's Accountants are unable to
agree upon a resolution of the dispute within such 10-business day
period, the dispute shall be submitted to independent accountants
selected jointly by the Accountants and the Seller's Accountants
(the "Independent Accountants"). The Independent Accountants
shall resolve the dispute within 15 business days after submission
and such resolution shall be final and binding upon the parties,
may be entered in any court having jurisdiction and shall not be
appealable by either party in any court.
The fees and expenses of the Accountants in connection with
the preparation of the Accountants' Report and the resolution of
disputes pursuant to the preceding paragraph shall be borne by the
Buyer and the fees and expenses of Seller's Accountants in
-4-
<PAGE> 10
connection with the resolution of disputes pursuant to the
preceding paragraph shall be borne by the Seller. The fees and
expenses of the Independent Accountants shall be shared equally by
the Buyer and Seller.
Immediately upon the expiration of the 10-business day period
for giving the Dispute Notice, if no Dispute Notice is given, or
immediately upon the resolution of disputes, if any, as provided
above, the Cash Flow Adjustment shall be determined, as provided
below.
A Cash Flow Adjustment for Buyer shall occur only if the Net
Operating Cash Flow for the 12-month period ending September 30,
1997, as determined by the Accountants (the "1997 Cash Flow") is
less than $377,778. A Cash Flow Adjustment for Buyer shall result
in a reduction in the purchase price for the first Tranche of
Stores (as defined in the Retail Store Option Agreement described
below) to be acquired by Buyer from Seller pursuant to the Retail
Store Option Agreement between the Buyer and the Seller of even
date herewith by an amount determined as follows:
Total Purchase Price - Total Purchase Price x 1997 Cash Flow
-------------------------------------
$377,778
A Cash Flow Adjustment for Seller shall occur only if the
1997 Cash Flow is more than $377,778. A Cash Flow Adjustment for
Seller shall result in an increase in the purchase price for the
first Tranche of Stores acquired by Buyer from Seller pursuant to
the Retail Store Option Agreement by an amount determined as
follows:
Total Purchase Price x 1997 Cash Flow - Total Purchase Price
-------------------------------------
$377,778
1.4 Assumption of Liabilities; Etc.
------------------------------
(a) At each Closing, the Buyer shall execute and
deliver an Instrument of Assumption of Liabilities (the
"Instrument of Assumption") substantially in the form attached
hereto as EXHIBIT A, pursuant to which it shall assume and agree
to perform, pay and discharge the liabilities, obligations and
commitments of the Seller related to the Store being acquired at
each such Closing (the "Assumed Liabilities") set forth on
SCHEDULE I.
-5-
<PAGE> 11
(b) The Buyer shall not at the Closing assume or
agree to perform, pay or discharge, and the Seller shall remain
unconditionally liable for, all obligations, liabilities and
commitments, fixed or contingent, of the Seller other than the
Assumed Liabilities.
1.5 ALLOCATION OF PURCHASE PRICE AND ASSUMED
LIABILITIES. The aggregate amount of the Purchase Price and the
Assumed Liabilities shall be allocated among the Assets using the
book value of the Assets, with the balance allocated to goodwill.
1.6 THE CLOSINGS. Each Closing shall take place at the
offices of Hale and Dorr, 60 State Street, Boston, Massachusetts
02109, on the dates set forth on SCHEDULE I or on such other dates
mutually agreeable to the Buyer and Seller (each, a "Closing
Date"). The transfer by the Seller to the Buyer of the Assets
related to the Store being acquired at each such Closing (as set
forth on SCHEDULE I) shall be deemed to occur at 9:00 a.m., Boston
time, on the applicable Closing Date.
1.7 RESTRICTIONS ON TRANSFER OF COMMON STOCK. Each of
the Seller and the Principals hereby confirm, covenant and agree
that, without the prior written consent of the Buyer, it, she or
he will not, directly or indirectly, sell, offer to sell, contract
to sell, pledge, grant any option for the sale of, or otherwise
dispose of, any shares of Common Stock issued or issuable to
Seller or the Principals hereunder during the following periods:
(i) the six-month period following the first Closing with respect
to the shares of Common Stock issued at such Closing; (ii) the
three-month period following the second Closing with respect to
the shares of Common Stock issued at such Closing; (iii) the six-
month period following the third Closing with respect to the
shares of Common Stock issued at such Closing; and (iv) the
three-month period following the fourth Closing with respect to
the shares of Common Stock issued at such Closing.
2. Representations of the Seller
-----------------------------
The Seller represents and warrants to the Buyer as follows:
2.1 ORGANIZATION. The Seller is a corporation duly
organized, validly existing and in good standing under the laws of
the state of its incorporation, and has all requisite power and
authority (corporate and other) to own its properties, to carry on
its business as now being conducted, to execute and deliver this
Agreement and the agreements contemplated herein, and to
consummate the transactions contemplated hereby. SCHEDULE 2.2
attached hereto constitute a true, correct and complete list of
all corporate, partnership, joint venture and other entities in
-6-
<PAGE> 12
which the Seller holds, directly or indirectly, a 50% or greater
interest. Each of the Subsidiaries is a corporation or other
entity duly organized, validly existing and in good standing under
the laws of the state of its incorporation or organization and has
all requisite power and authority to own its properties and to
carry on its business as now being conducted. The Seller and the
Subsidiaries are each duly qualified to do business and in good
standing in all jurisdictions in which their ownership of property
or the character of their business requires such qualification.
Certified copies of the charter, bylaws and other governing
instruments of each of the Seller and the Subsidiaries, each as
amended to date, have been previously delivered to the Buyer, are
complete and correct, and no amendments have been made thereto or
have been authorized since the date thereof. The Seller does not
own any capital stock of or other equity interest in any
corporation, partnership or other entity, other than the
Subsidiaries. SCHEDULE 2.1 sets forth a list of each retail video
rental store (including the location of each such store and the
name and address of all owners (if not Seller) of each such store)
owned, operated or licensed directly or indirectly by the Seller.
2.2 CAPITALIZATION OF THE SELLER AND THE SUBSIDIARIES.
The Seller's authorized capital stock is as specified on
SCHEDULE I attached hereto. There are issued and outstanding the
number of shares of capital stock of the Seller as are specified
on SCHEDULE 2.2 attached hereto, which shares are held of record
and beneficially by the stockholders listed on SCHEDULE 2.2
attached hereto. All of such shares have been duly and validly
issued and are fully paid and nonassessable. The authorized
capital stock of the Subsidiaries is as set forth on SCHEDULE 2.2
attached hereto, and all of the issued and outstanding shares of
capital stock of each of the Subsidiaries is specified on SCHEDULE
2.2, and all of such issued and outstanding shares are owned
beneficially and of record by the Seller. All of such shares have
been duly and validly issued, and are fully paid and
nonassessable.
2.3 AUTHORIZATION. The execution and delivery of this
Agreement by the Seller, and the agreements provided for herein,
and the consummation by the Seller of all transactions
contemplated hereby, have been duly authorized by all requisite
corporate and shareholder action. This Agreement and all such
other agreements and obligations entered into and undertaken in
connection with the transactions contemplated hereby to which the
Seller is a party constitute the valid and legally binding
obligations of the Seller, enforceable against the Seller in
accordance with their respective terms. The execution, delivery
and performance by the Seller of this Agreement and the agreements
provided for herein, and the consummation by the Seller of the
-7-
<PAGE> 13
transactions contemplated hereby and thereby, will not, with or
without the giving of notice or the passage of time or both, (a)
violate the provisions of any law, rule or regulation applicable
to the Seller; (b) violate the provisions of the charter or Bylaws
of the Seller; (c) violate any judgment, decree, order or award of
any court, governmental body or arbitrator; or (d) conflict with
or result in the breach or termination of any term or provision
of, or constitute a default under, or cause any acceleration
under, or cause the creation of any lien, charge or encumbrance
upon the properties or assets of the Seller pursuant to, any
indenture, mortgage, deed of trust or other instrument or
agreement to which the Seller is a party or by which the Seller or
any of its properties is or may be bound. SCHEDULE 2.3 attached
hereto sets forth a true, correct and complete list of all
consents and approvals of third parties that are required in
connection with the consummation by the Seller of the transactions
contemplated by this Agreement.
2.4 OWNERSHIP OF THE ASSETS. SCHEDULE 2.4(i) attached
hereto sets forth a true, correct and complete list of all claims,
liabilities, liens, pledges, charges, encumbrances and equities of
any kind affecting the Assets (collectively, the "Encumbrances").
The Seller is, and at each Closing will be, the true and lawful
owner of the Assets, and will have the right to sell and transfer
to the Buyer good, clear, record and marketable title to the
Assets with respect to the Store being acquired by the Buyer at
such Closing, free and clear of all Encumbrances of any kind,
except as set forth on SCHEDULE 2.4(ii) attached hereto (the
"Permitted Encumbrances"). The delivery to the Buyer of the
instruments of transfer of ownership contemplated by this
Agreement will vest good and marketable title to such Assets in
the Buyer, free and clear of all liens, mortgages, pledges,
security interests, restrictions, prior assignments, encumbrances
and claims of any kind or nature whatsoever, except for the
Permitted Encumbrances.
2.5 Financial Statements.
--------------------
[(a) Except as otherwise set forth on SCHEDULE 2.5,
the Seller has previously delivered to the Buyer its combined
unaudited balance sheet as of August 31, 1996 (the "Unaudited
Balance Sheet") and the related statements of income,
shareholders' equity, retained earnings and changes in financial
condition of the Seller for the period from incorporation of the
Seller until August 31, 1996 (collectively, including the
Unaudited Balance Sheets, the "Unaudited Financial Statements").
The Unaudited Financial Statements and the interim financial
statements (the "Interim Financial Statements") to be delivered
pursuant to Subsection 5.4 hereof (collectively, the "Financial
-8-
<PAGE> 14
Statements") have been, or will be, prepared in accordance with
generally accepted accounting principles applied consistently with
past practice and have been, or will be, certified by the Seller's
independent public accountants.
(b) The Financial Statements fairly present, as of
their respective dates, the financial condition, retained
earnings, assets and liabilities of the Seller and the results of
operations of the Seller's business for the periods indicated;
with respect to the contracts and commitments for the sale of
goods or the provision of services by the Seller, the Financial
Statements contain and reflect adequate reserves, which are
consistent with previous reserves taken, for all reasonably
anticipated material losses and costs and expenses; and the
amounts shown as accrued for current and deferred income and other
taxes in the Financial Statements are sufficient for the payment
of all accrued and unpaid federal, state and local income taxes,
interest, penalties, assessments or deficiencies applicable to the
Seller, whether disputed or not, for the applicable period then
ended and periods prior thereto.
2.6 ABSENCE OF UNDISCLOSED LIABILITIES. Except as and
to the extent set forth on SCHEDULE 2.6 attached hereto, either
individually or in the aggregate, the Seller does not have any
material liability or obligation, secured or unsecured, affecting
the Assets, whether accrued, absolute, contingent, or, to Seller's
best knowledge, unasserted or otherwise. Notwithstanding the
above, to the best of the Seller's knowledge, the Seller does not
have any liability or obligation arising out of the violation of
any environmental laws, rules or regulations or the storage or
disposal of hazardous waste. For purposes of this Subsection 2.6,
"material" means any amount in excess of $10,000.
2.7 LITIGATION. Except as set forth on SCHEDULE 2.7
attached hereto, the Seller is not a party to, or to the Seller's
best knowledge threatened with, and none of the Assets are subject
to, any litigation, suit, action, investigation, proceeding or
controversy before any court, administrative agency or other
governmental authority relating to or affecting the Assets or the
business or condition (financial or otherwise) of the Seller. The
Seller is not in violation of or in default with respect to any
judgment, order, writ or injunction of any court, administrative
agency or governmental authority or any regulation of any
administrative agency or governmental authority.
-9-
<PAGE> 15
2.8 INSURANCE. SCHEDULE 2.8 attached hereto sets forth
a true, correct and complete list of all fire, theft, casualty,
general liability, workers compensation, business interruption,
environmental impairment, product liability, automobile and other
insurance policies insuring the Assets or business of the Seller
and of all life insurance policies maintained for any of its
employees, specifying the type of coverage, the amount of
coverage, the premium, the insurer and the expiration date of each
such policy (collectively, the "Insurance Policies") and all
claims made under such Insurance Policies. True, correct and
complete copies of all of the Insurance Policies have been
previously delivered by the Seller to the Buyer. The Insurance
Policies are in full force and effect and are in amounts and of a
nature which are adequate and customary for the Seller's business.
All premiums due on the Insurance Policies or renewals thereof
have been paid and there is no default under any of the Insurance
Policies.
2.9 INVENTORY. SCHEDULE 2.9 attached hereto sets forth
a true, correct and complete list of the Inventory as of the date
hereof, including a description and the book value thereof.
SCHEDULE 2.9, as updated pursuant to Subsection 7.9 hereof, shall
set forth a true, correct and complete list of the Inventory as of
the Closing Date, including a description and valuation thereof.
Such Inventory consists of items of a quality and quantity which
are usable or saleable without discount in the ordinary course of
the business conducted by the Seller. The value of all items of
obsolete materials and of materials of below standard quality has
been written down to realizable market value, and the values at
which such Inventory is carried reflect the normal inventory
valuation policy of the Seller of stating the Inventory at the
lower of cost or market value in accordance with generally
accepted accounting principles.
2.10 FIXED ASSETS. SCHEDULE 2.10 attached hereto sets
forth a true, correct and complete list of all Fixed Assets as of
the date hereof, including a description and the book value
thereof. SCHEDULE 2.10, as updated pursuant to Subsection 7.9
hereof, shall set forth a true, correct and complete list of all
Fixed Assets as of the Closing Date, including a description and
valuation thereof. All of the Fixed Assets are in good operating
condition and repair, normal wear and tear excepted, are currently
used by the Seller in the ordinary course of business and in the
production of products of the Seller and normal maintenance has
been consistently performed with respect to such Fixed Assets.
-10-
<PAGE> 16
2.11 LEASES. SCHEDULE 2.11 attached hereto sets forth a
true, correct and complete list as of the date hereof of all
leases of real property, identifying separately each ground lease
for a Store, to which the Seller is a party (the "Leases"). True,
correct and complete copies of the Leases, and all amendments,
modifications and supplemental agreements thereto, have previously
been delivered by the Seller to the Buyer. The Leases for the
Stores are in full force and effect, are binding and enforceable
against each of the parties thereto in accordance with their
respective terms and, except as set forth on SCHEDULE 2.11, have
not been modified or amended since the date of delivery to the
Buyer. No party to any Lease for a Store has sent written notice
to the other claiming that such party is in default thereunder,
which remains uncured. Except as set forth on SCHEDULE 2.11
attached hereto, there has not occurred any event which would
constitute a breach of or default in the performance of any
material covenant, agreement or condition contained in any Lease
for a Store, nor has there occurred any event which with the
passage of time or the giving of notice or both would constitute
such a breach or material default. The Seller is not obligated to
pay any leasing or brokerage commission relating to any Lease for
a Store and, except as set forth on SCHEDULE 2.11 attached hereto,
will not have any enforceable obligation to pay any leasing or
brokerage commission upon the renewal of any Lease for a Store.
No material construction, alteration or other leasehold
improvement work with respect to any of the Leases for the Stores
remains to be paid for or to be performed by the Seller. The
Financial Statements contain adequate reserves to provide for the
restoration of the properties subject to the Leases for the Stores
at the end of the respective Lease terms, to the extent required
by such Leases.
2.12 CHANGE IN FINANCIAL CONDITION AND ASSETS. Except
as set forth on SCHEDULE 2.12 attached hereto, since August 31,
1996 (the "Balance Sheet Date"), there has been no change which
materially and adversely affects the business, properties, assets,
condition (financial or otherwise) or prospects of the Seller.
The Seller has no knowledge of any existing or threatened
occurrence, event or development which, as far as can be
reasonably foreseen, could have a material adverse effect on the
Seller or its business, properties, assets, condition (financial
or otherwise) or prospects.
-11-
<PAGE> 17
2.13 Tax Matters.
-----------
(a) Except as set forth on SCHEDULE 2.13 to this
Agreement:
(i) Within the times and in the manner
prescribed by law, the Seller has filed all Returns which are
required to be filed;
(ii) With respect to all amounts in respect of
Taxes imposed upon the Seller for which it could be liable,
whether to Taxing Authorities (as, for example, under law) or to
other persons or entities (as, for example, under Tax allocation
agreements), with respect to all taxable periods or portions of
taxable periods ending on or before the Closing Date, all
applicable tax laws and agreements have been fully complied with,
and all such amounts required to be paid by the Seller to Taxing
Authorities or others on or before the date hereof have been paid.
(iii) All Returns filed by the Seller
constitute complete and accurate representations of the respective
Tax liabilities of, or attributable to, the Seller for such years;
(iv) No examination of the Returns of the
Seller is currently in progress nor, to the best knowledge of the
Seller, threatened and no unresolved deficiencies have been
asserted or assessed against the Seller as a result of any audit
by any Taxing Authority and no such deficiency has been proposed
or threatened;
(v) There are no liens for Taxes (other than
for current Taxes not yet due and payable) upon the assets of the
Seller;
(vi) The Seller is not a person other than a
United States person within the meaning of the Code;
(b) For purposes of this Section 2.13: "Return"
means any return, declaration, report, statement or other document
required to be filed in respect of any Tax; "Tax" or "Taxes" means
any federal, state, local, foreign and other net income, gross
income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall profits, customs duty or
other tax, fee, assessment or charge of any kind whatever,
together with interest and any penalty, addition to tax or ad-
ditional amount with respect thereto; "Taxing Authority" means any
-12-
<PAGE> 18
governmental authority responsible for the imposition of Taxes;
and "Code" means the Internal Revenue Code of 1986, as amended.
2.14 ACCOUNTS RECEIVABLE. SCHEDULE 2.14 attached hereto
sets forth the list of all Accounts Receivable, including an aging
thereof, as reasonably reflected in the records of the Seller as
of the Balance Sheet Date. SCHEDULE 2.14, as updated pursuant to
Subsection 7.9 hereof, shall set forth a list of the Accounts
Receivable as, or within five days, of the Closing Date, including
an aging thereof, as reflected in the records of the Seller. All
Accounts Receivable arose out of the sales or rentals of inventory
or services in the ordinary course of business.
2.15 BOOKS AND RECORDS. The general ledgers and books
of account of the Seller, all federal, state and local income,
franchise, property and other tax returns filed by the Seller,
with respect to the Assets, and all other books and records of the
Seller are in all material respects complete and correct and have
been maintained in accordance with good business practice and in
accordance with all applicable procedures required by laws and
regulations.
2.16 Contracts and Commitments.
-------------------------
(a) SCHEDULE 2.16 attached hereto contains a true,
complete and correct list and description of the following
contracts and agreements, whether written or oral (collectively,
the "Contracts"):
(i) all loan agreements, indentures,
mortgages and guaranties to which the Seller is a party or by
which the Seller or any of its property is bound;
(ii) all pledges, conditional sale or title
retention agreements, security agreements, equipment obligations,
personal property leases and lease purchase agreements relating to
any of the Assets to which the Seller is a party or by which the
Seller or any of its property is bound;
(iii) all contracts, agreements, commitments,
purchase orders or other understandings or arrangements to which
the Seller is a party or by which the Seller or any of its
property is bound which (A) involve payments or receipts by the
Seller of more than $2,000 in the case of any single contract,
agreement, commitment, understanding or arrangement under which
full performance (including payment) has not been rendered by all
parties thereto or (B) which may materially adversely affect the
condition (financial or otherwise) or the properties, assets,
business or prospects of the Seller;
-13-
<PAGE> 19
(iv) all collective bargaining agreements,
employment and consulting agreements, executive compensation
plans, bonus plans, deferred compensation agreements, pension
plans, retirement plans, employee stock option or stock purchase
plans and group life, health and accident insurance and other
employee benefit plans, agreements, arrangements or commitments to
which the Seller is a party or by which the Seller or any of its
property is bound;
(v) all agency, distributor, sales
representative and similar agreements to which the Seller is a
party;
(vi) all contracts, agreements or other
understandings or arrangements between the Seller any stockholder
or Affiliate of the Seller;
(vii) all leases, whether operating, capital or
otherwise, under which the Seller is lessor or lessee; and
(viii) any other material agreement or contract
entered into by the Seller.
(b) Except as set forth on SCHEDULE 2.16 attached
hereto:
(i) each Contract is a valid and binding
agreement of the Seller, enforceable against the Seller in
accordance with its terms, and the Seller does not have any
knowledge that any Contract is not a valid and binding agreement
of the other parties thereto;
(ii) the Seller has fulfilled all material
obligations required pursuant to the Contracts to have been
performed by the Seller on its part prior to the date hereof, and
the Seller has no reason to believe that it will not be able to
fulfill, when due, all of its obligations under the Contracts
which remain to be performed after the date hereof;
(iii) the Seller is not in breach of or default
under any Contract, and no event has occurred which with the
passage of time or giving of notice or both would constitute such
a default, result in a loss of rights or result in the creation of
any lien, charge or encumbrance, thereunder or pursuant thereto;
(iv) to the best knowledge of the Seller,
there is no existing breach or default by any other party to any
Contract, and no event has occurred which with the passage of time
or giving of notice or both would constitute a default by such
-14-
<PAGE> 20
other party, result in a loss of rights or result in the creation
of any lien, charge or encumbrance thereunder or pursuant thereto;
(v) the Seller is not restricted by any
Contract from carrying on its business anywhere in the world; and
(vi) the Seller has no written or oral
Contracts to sell products or perform services which are expected
to be performed at, or to result in, a loss.
(c) Except as set forth on SCHEDULE 2.3 or
SCHEDULE 2.16, the continuation, validity and effectiveness of
each Contract will not be affected by the transfer thereof to
Buyer under this Agreement and all such Contracts are assignable
to Buyer without a consent.
(d) True, correct and complete copies of all
Contracts have previously been delivered by the Seller to the
Buyer.
2.17 COMPLIANCE WITH AGREEMENTS AND LAWS. The Seller
has all requisite licenses, permits and certificates, including
environmental, health and safety permits, from federal, state and
local authorities necessary to conduct its business and own and
operate its assets (collectively, the "Permits"). SCHEDULE 2.17
attached hereto sets forth a true, correct and complete list of
all such Permits, copies of which have previously been delivered
by the Seller to the Buyer. The Seller is not in violation of any
law, regulation or ordinance (including, without limitation, laws,
regulations or ordinances relating to building, zoning,
environmental, disposal of hazardous substances, land use or
similar matters) relating to its properties, the violation of
which could have a material adverse effect on the Seller or its
properties. The business of the Seller does not violate, in any
material respect, any federal, state, local or foreign laws,
regulations or orders (including, but not limited to, any of the
foregoing relating to employment discrimination, occupational
safety, environmental protection, hazardous waste (as defined in
the Resource Conservation and Recovery Act, as amended, and the
regulations adopted pursuant thereto), conservation, or corrupt
practices, the enforcement of which would have a material and
adverse effect on the results of operations, condition (financial
or otherwise), assets, properties, business or prospects of the
Seller. Except as set forth on SCHEDULE 2.17 attached hereto, the
Seller has not since January 1, 1993 received any notice or
communication from any federal, state or local governmental or
regulatory authority or otherwise of any such violation or
noncompliance.
-15-
<PAGE> 21
2.18 Employee Relations.
------------------
(a) The Seller is in compliance with all federal,
state and municipal laws respecting employment and employment
practices, terms and conditions of employment, and wages and
hours, and is not engaged in any unfair labor practice, and there
are no arrears in the payment of wages or social security taxes.
(b) Except as set forth on SCHEDULE 2.18 attached
hereto:
(i) none of the employees of the Seller is
represented by any labor union;
(ii) there is no unfair labor practice
complaint against the Seller pending before the National Labor
Relations Board or any state or local agency;
(iii) there is no pending labor strike or other
material labor trouble affecting the Seller (including, without
limitation, any organizational drive);
(iv) there is no material labor grievance
pending against the Seller;
(v) there is no pending representation
question respecting the employees of the Seller; and
(vi) there are no pending arbitration
proceedings arising out of or under any collective bargaining
agreement to which the Seller is a party, or to the best knowledge
of the Seller, any basis for which a claim may be made under any
collective bargaining agreement to which the Seller is a party.
(c) SCHEDULE 2.18 attached hereto sets forth a
true, correct and complete list of (a) the employee benefits
provided by the Seller to its employees and all contracts or
agreements between the Seller and its employees, and (b) the
Seller's current payroll, including the job descriptions and
salary or wage rates of each of its employees, showing separately
for each such person who received an annual salary in excess of
$20,000 the amounts paid or payable as salary and bonus payments
for Seller's most recently completed full fiscal year.
(d) For purposes of this Subsection 2.18, the term
"employee" shall be construed to include sales agents and other
independent contractors who spend a majority of their working time
on the Seller's business.
-16-
<PAGE> 22
2.19 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
set forth on SCHEDULE 2.19 attached hereto, since the Balance
Sheet Date, the Seller has not entered into any transaction
affecting the Stores which is not in the usual and ordinary course
of business, and, without limiting the generality of the
foregoing, the Seller has not:
(a) Incurred any material obligation or liability
for borrowed money;
(b) Discharged or satisfied any lien or
encumbrance or paid any obligation or liability other than current
liabilities reflected in the Unaudited Balance Sheet;
(c) Mortgaged, pledged or subjected to lien,
charge or other encumbrance any of the Assets;
(d) Sold or purchased, assigned or transferred any
of its tangible assets or cancelled any debts or claims, except
for inventory sold and raw materials purchased in the ordinary
course of business;
(e) Made any material amendment to or termination
of any Contract or done any act or omitted to do any act which
would cause the breach of any Contract;
(f) Suffered any losses, whether insured or
uninsured, and whether or not in the control of the Seller, in
excess of $5,000 in the aggregate, or waived any rights of any
value;
(g) Made any changes in compensation of its
officers, directors or employees other than hourly wage increases
made prior to the closing in the ordinary course of business;
(h) Received notice of any litigation, warranty
claim or products liability claims; or
(i) Made any material change in the terms, status
or funding condition of any Employee Plan, as defined in
Subsection 2.23 hereof.
2.20 SUPPLIERS. SCHEDULE 2.20 attached hereto sets
forth a true, correct and complete list of the names and addresses
of the six suppliers of the Seller which accounted for the largest
dollar volume of purchases by the Seller for its most recently
completed fiscal year. None of such suppliers has notified the
Seller that it intends to discontinue its relationship with the
Seller.
-17-
<PAGE> 23
2.21 PREPAYMENTS AND DEPOSITS. SCHEDULE 2.21 attached
hereto sets forth all prepayments or deposits from customers for
products to be shipped, or services to be performed, after the
Closing Date which have been received by the Seller as of the date
hereof.
2.22 Trade Names and Other Intangible Property.
-----------------------------------------
(a) SCHEDULE 2.22 attached hereto sets forth a
true, correct and complete list and, where appropriate, a
description of, all Intangible Property. True, correct and
complete copies of all licenses and other agreements relating to
the Intangible Property have been previously delivered by the
Seller to the Buyer.
(b) Except as otherwise disclosed in SCHEDULE 2.22
attached hereto, the Seller is the sole and exclusive owner of all
Intangible Property and all designs, permits, labels and packages
used on or in connection therewith. The Intangible Property owned
by the Seller is sufficient to conduct the Seller's business as
presently conducted and, when transferred to the Buyer pursuant to
this Agreement, will be sufficient to permit the Buyer to conduct
the business of the Seller as presently conducted by the Seller.
The Seller has received no notice of, and has no knowledge of any
basis for, a claim against it that any of its operations,
activities, products or publications infringes on any patent,
trademark, trade name, copyright or other property right of a
third party, or that it is illegally or otherwise using the trade
secrets, formulae or any property rights of others. The Seller
has no disputes with or claims against any third party for
infringement by such third party of any trade name or other
Intangible Property of the Seller. The Seller has taken all steps
reasonably necessary to protect its right, title and interest in
and to the Intangible Property.
2.23 Employee Benefit Plans.
----------------------
(a) Except as set forth on SCHEDULE 2.23, the
Seller does not now have or otherwise contribute to or participate
in, and has not in the past had or otherwise contributed to, any
employee benefit plan subject to the Employee Retirement Income
Security Act of 1974.
(b) The Buyer assumes no liabilities with respect
to any employee benefit plan which liability relates to any period
prior to the Closing Date, including, without limitation, any
taxes, accrued vacation or sick pay (whether or not vested),
accrued vacation, sick and personal leaves, employee policies,
-18-
<PAGE> 24
employee benefit claims or liability to the Pension Benefit
Guaranty Corporation.
(c) EMPLOYEE PLANS. SCHEDULE 2.23 attached hereto
contains a true, correct and complete list of all pension,
benefit, profit sharing, retirement, deferred compensation,
welfare, insurance, disability, bonus, vacation pay, severance pay
and other similar plans, programs and agreements, whether reduced
to writing or not, relating to the Seller's employees, or
maintained at any time since January 1, 1992 by the Seller or by
any other member of any controlled group of corporations, group of
trades or businesses under common control, or affiliated service
group (as defined for purposes of Section 414(b), (c) and (m),
respectively, of the Code) (the "Employee Plans") and, except as
set forth on SCHEDULE 2.23 attached hereto, the Seller has no
obligations, contingent or otherwise, past or present, under
applicable law or the terms of any Employee Plan.
2.24 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule
or regulation which must be obtained or satisfied by the Seller
and which are necessary for the execution and delivery by the
Seller of this Agreement and the documents to be executed and
delivered by the Seller in connection herewith are set forth on
SCHEDULE 2.24 attached hereto and have been, or will be prior to
the Closing Date, obtained and satisfied.
2.25 INDEBTEDNESS TO AND FROM OFFICERS, DIRECTORS AND
SHAREHOLDERS. Except as set forth on SCHEDULE 2.25 attached
hereto, the Seller is not indebted, directly or indirectly, to any
person who is an officer, director or shareholder of the Seller or
any affiliate of any such person in any amount whatsoever other
than for salaries for services rendered or reimbursable business
expenses, all of which have been reflected on the Current
Financial Statements, and no such officer, director, shareholder
or affiliate is indebted to the Seller, except for advances made
to employees of the Seller in the ordinary course of business to
meet reimbursable business expenses anticipated to be incurred by
such obligor.
2.26 POWERS OF ATTORNEY AND SURETYSHIPS. Except as set
forth on SCHEDULE 2.26 attached hereto, the Seller has no general
or special powers of attorney outstanding (whether as grantor or
grantee thereof) and has no obligation or liability (whether
actual, accrued, accruing, contingent or otherwise) as guarantor,
surety, co-signor, endorser, co-maker, indemnitor or otherwise in
respect of the obligation of any person, corporation, partnership,
joint venture, association, organization or other entity, except
-19-
<PAGE> 25
as endorser or maker of checks or letters of credit, respectively,
endorsed or made in the ordinary course of business.
2.27 DISCLOSURE. No representation or warranty by the
Seller in this Agreement or in any Exhibit hereto, or in any list,
statement, document or information set forth in or attached to any
Schedule delivered or to be delivered pursuant to this Agreement,
contains or will contain any untrue statement of a material fact
or omits or will omit any material fact necessary in order to make
the statements contained therein not misleading. The Seller has
disclosed to the Buyer all material facts pertaining to the
transactions contemplated by this Agreement.
3. Representations of the Buyer
----------------------------
The Buyer represents and warrants to the Seller as follows:
3.1 ORGANIZATION AND AUTHORITY. The Buyer is a
corporation duly organized, validly existing and in good standing
under the laws of the state of Delaware, and has requisite power
and authority (corporate and other) to own its properties and to
carry on its business as now being conducted. The Buyer has full
power to execute and deliver this Agreement and the Instrument of
Assumption of Liabilities and to consummate the transactions
contemplated hereby and thereby. Certified copies of the
Certificate of Incorporation and the Bylaws of the Buyer, as
amended to date, have been previously delivered to the Seller, are
complete and correct, and no amendments have been made thereto or
have been authorized since the date thereof.
3.2 CAPITALIZATION OF THE BUYER. On the date hereof,
the Buyer's authorized capital stock consists of 35,000,000 shares
of Common Stock, $.01 par value ("Common Stock"), and 2,000,000
shares of Preferred Stock, $.01 par value per share, none of which
shares of Preferred Stock are issued or outstanding. As of
September 9, 1996, there were issued and outstanding 12,070,239
shares of Common Stock of the Buyer. All of the outstanding
shares of capital stock of the Buyer have been and on the Closing
Date will be duly and validly issued and are, or will be, fully
paid and nonassessable.
3.3 AUTHORIZATION. The execution and delivery of this
Agreement by the Buyer, and the agreements provided for herein,
and the consummation by the Buyer of all transactions contemplated
hereby, have been duly authorized by all requisite corporate
action. This Agreement and all such other agreements and written
obligations entered into and undertaken in connection with the
transactions contemplated hereby constitute the valid and legally
binding obligations of the Buyer, enforceable against the Buyer in
-20-
<PAGE> 26
accordance with their respective terms. The execution, delivery
and performance of this Agreement and the agreements provided for
herein, and the consummation by the Buyer of the transactions
contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the
provisions of any law, rule or regulation applicable to the Buyer;
(b) violate the provisions of the Buyer's Certificate of
Incorporation or Bylaws; (c) violate any judgment, decree, order
or award of any court, governmental body or arbitrator; or (d)
conflict with or result in the breach or termination of any term
or provision of, or constitute a default under, or cause any
acceleration under, or cause the creation of any lien, charge or
encumbrance upon the properties or assets of the Buyer pursuant
to, any indenture, mortgage, deed of trust or other agreement or
instrument to which it or its properties is a party or by which
the Buyer is or may be bound. SCHEDULE 3.3 attached hereto sets
forth a true, correct and complete list of all consents and
approvals of third parties that are required in connection with
the consummation by the Buyer of the transactions contemplated by
this Agreement.
3.4 REGULATORY APPROVALS. All consents, approvals,
authorizations and other requirements prescribed by any law, rule
or regulation which must be obtained or satisfied by the Buyer and
which are necessary for the consummation of the transactions
contemplated by this Agreement have been, or will be prior to the
Closing Date, obtained and satisfied.
3.5 DISCLOSURE. No representation or warranty by the
Buyer in this Agreement or in any Exhibit hereto, or in any list,
statement, document or information set forth in or attached to any
Schedule delivered or to be delivered pursuant hereto, contains or
will contain any untrue statement of a material fact or omits or
will omit any material fact necessary in order to make the
statements contained therein not misleading.
3.6 BUYER FINANCIAL STATEMENTS. The audited financial
statements included in registration statements and reports filed
by the Buyer with the Securities and Exchange Commission or
delivered to the Seller were prepared in accordance with generally
accepted accounting principles applied on a consistent basis and
fairly present the financial position of the Buyer as at the dates
thereof and the results of operations and cash flow for the
periods then ended.
3.7 ISSUANCE OF SHARES. The shares of Common Stock of
Buyer issuable hereunder shall be registered under the Securities
Act of 1933, as amended, pursuant to a Registration Statement
filed with the Securities and Exchange Commission.
-21-
<PAGE> 27
4. Access to Information; Public Announcements
-------------------------------------------
4.1 Access to Management, Properties and Records.
--------------------------------------------
(a) From the date of this Agreement until the
final Closing Date, the Seller shall afford the officers,
attorneys, accountants and other authorized representatives of the
Buyer free and full access upon reasonable notice and during
normal business hours to all management personnel, offices,
properties, books and records of the Seller related to the Stores,
so that the Buyer may have full opportunity to make such
investigation as it shall desire to make of the management,
business, properties and affairs of the Seller with respect to the
Stores, and the Buyer shall be permitted to make abstracts from,
or copies of, all such books and records. The Seller shall
furnish to the Buyer such financial and operating data and other
information as to the Assets of the Seller as the Buyer shall
reasonably request.
(b) If the Buyer, at its option and expense, prior
to the final Closing Date, elects to have a report or reports
prepared by an engineer or other professional selected by the
Buyer, certifying that the real property associated with the
Assets (i) complies with all applicable federal, state and local
environmental and wetlands laws, rules and regulations and that
there is not now, and never has been, manufacture, storage, or
disposal of hazardous wastes at the real estate in violation of
said laws, rules and regulations, (ii) complies with all
applicable building, health and fire codes, and subdivision
control laws, rules and regulations, the Seller shall cooperate
with such engineer or professional to the extent necessary to
prepare such reports, including, without limitation, providing
such engineer or professional access to such real property and
necessary records, and arranging interviews with employees of the
Seller.
(c) The Seller shall authorize the release to the
Buyer of all files pertaining to the Seller with respect to the
Stores, the Assets or the business or operations of the Seller
held by any federal, state, county or local authorities, agencies
or instrumentalities.
4.2 CONFIDENTIALITY. All information not previously
disclosed to the public or generally known to persons engaged in
the respective businesses of the Seller or the Buyer which shall
have been furnished by the Buyer or the Seller to the other party
in connection with the transactions contemplated hereby or as
provided pursuant to this Section 4 shall not be disclosed to any
person other than their respective employees, directors,
-22-
<PAGE> 28
attorneys, accountants or financial advisors or other than as
contemplated herein. In the event that the transactions
contemplated by this Agreement shall not be consummated, all such
information which shall be in writing shall be returned to the
party furnishing the same, including, to the extent reasonably
practicable, all copies or reproductions thereof which may have
been prepared, and neither party shall at any time thereafter
disclose to third parties, or use, directly or indirectly, for its
own benefit, any such information, written or oral, about the
business of the other party hereto. Notwithstanding the above,
the parties acknowledge that it is likely that the terms hereof
shall be publicly available as an exhibit to the Buyer's
Registration Statement on Form S-1 or other periodic filing made
with the Securities and Exchange Commission and the Buyer shall
include in its Registration Statement on Form S-1 and in the
prospectus included therewith information regarding the Seller,
the business of the Seller and the financial condition of the
Seller.
5. Pre-Closing Covenants of the Seller
-----------------------------------
From and after the date hereof and until the final
Closing Date:
5.1 CONDUCT OF BUSINESS. The Seller shall carry on the
business of the Stores not yet acquired by the Buyer diligently
and substantially in the same manner as heretofore and shall not
make or institute any unusual or new methods of purchase, sale,
shipment or delivery, lease, management, accounting or operation,
except as agreed to in writing by the Buyer. All of the property
of the Seller relating to the Stores shall be used, operated,
renewed, repaired and maintained in a normal business manner
consistent with past practice.
5.2 ABSENCE OF MATERIAL CHANGES. Without the prior
written consent of the Buyer (which consent shall not be
unreasonably withheld and which consent shall not be required with
respect to any action set forth below in this Section 5.2 if such
action could not adversely impact the Seller's ability to
consummate the transactions contemplated hereby or increase the
post-Closing liability or obligations of the Buyer), the Seller
shall not:
(a) Take any action to amend its charter or
Bylaws;
(b) Incur any obligation or liability (absolute or
contingent), except current liabilities incurred and obligations
under contracts entered into in the ordinary course of business;
-23-
<PAGE> 29
(c) Mortgage, pledge, or subject to any lien,
charge or any other encumbrance any of the Assets;
(d) Sell, assign, or transfer any of the Assets,
except for inventory sold in the ordinary course of business, at a
normal profit margin, and for not less than replacement cost;
(e) Cancel any debts or claims, except in the
ordinary course of business;
(f) Merge or consolidate with or into any
corporation or other entity;
(g) Make, accrue or become liable for any bonus,
profit sharing or incentive payment, except for accruals under
existing plans, if any, or increase the rate of compensation
payable or to become payable by it to any of its officers,
directors or employees, other than increases in the ordinary
course of business consistent with past practice;
(h) Make any election or give any consent under
the Code or the tax statutes of any state or other jurisdiction or
make any termination, revocation or cancellation of any such
election or any consent or compromise or settle any claim for past
or present tax due;
(i) Modify, amend, alter or terminate any of its
executory contracts of a material value or which are material in
amount;
(j) Take or permit any act or omission
constituting a breach or default under any contract, indenture or
agreement by which it or its properties are bound;
(k) Fail to (i) preserve the possession and
control of its assets and business, (ii) keep in faithful service
its present officers and key employees, (iii) preserve the
goodwill of its customers, suppliers, agents, brokers and others
having business relations with it, and (iv) keep and preserve its
business existing on the date hereof until after the Closing Date;
(l) Fail to operate its business and maintain its
books, accounts and records in the customary manner and in the
ordinary or regular course of business and maintain in good repair
its business premises, fixtures, furniture and equipment;
(m) Engage any employee to work in a Store for a
salary in excess of $25,000 per annum;
-24-
<PAGE> 30
(n) Materially alter the terms, status or funding
condition of any Employee Plan, except for any such alterations
that would create no current or future obligations on the part of
the Buyer; or
(o) Commit or agree to do any of the foregoing in
the future.
5.3 TAXES. The Seller will, on a timely basis, file
all tax returns for and pay any and all taxes which shall become
due or shall have accrued (a) on account of the operation of the
business of the Seller or the ownership of the Assets on or prior
to the Closing Date or (b) on account of the sale of the Assets
(including a pro-rata portion of all personal property, excise and
other taxes payable with respect to the Assets on an annual basis
by the Seller).
5.4 DELIVERY OF INTERIM FINANCIAL STATEMENTS. As
promptly as possible following the last day of each month after
the date hereof, and in any event within 15 days after the end of
each such month, the Seller shall deliver to the Buyer its balance
sheet and related statements of income, shareholders' equity,
retained earnings and changes in financial condition (all with
respect to the Stores not yet acquired by Buyer) for the one-month
period then ended, all certified by the Seller's independent
public accountants or Seller's chief financial officer
(collectively, the "Interim Financial Statements").
5.5 COMPLIANCE WITH LAWS. The Seller will comply with
all laws and regulations which are applicable to it, its ownership
of the Assets or to the conduct of its business and will perform
and comply with all contracts, commitments and obligations by
which it is bound.
5.6 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE SELLER. The Seller will not take any actions which would
result in any of the representations or warranties set forth in
Section 2 hereof being untrue.
5.7 CONTINUING OBLIGATION TO INFORM. From time to time
prior to the final Closing, the Seller will deliver or cause to be
delivered to the Buyer supplemental information concerning events
subsequent to the date hereof which would render any statement,
representation or warranty in this Agreement or any information
contained in any Schedule inaccurate or incomplete in any material
respect at any time after the date hereof until the Closing Date.
-25-
<PAGE> 31
5.8 EXCLUSIVE DEALING. The Seller will not, directly
or indirectly, through any officer, director, agent or otherwise,
(a) solicit, initiate or encourage submission of proposals or
offers from any person relating to any acquisition or purchase of
all or a material portion of the Assets, or any equity interest
in, the Seller or any equity investment, merger, consolidation or
business combination with the Seller, or (b) participate in any
discussions or negotiations regarding, or furnish to any other
person, any non-public information with respect to, or otherwise
cooperate in any way with, or assist or participate in, facilitate
or encourage, any effort or attempt by any other person to do or
seek any of the foregoing. The Seller shall promptly notify the
Buyer if any such proposal or offer, or any inquiry or contact
with any person with respect thereto, is made.
5.9 NO PUBLICITY. The Seller shall make no public
announcement with respect to this Agreement or the transactions
contemplated hereby without the express prior written consent of
the Buyer. The Seller shall hold in confidence, and use its best
efforts to have all of its officers, directors and personnel hold
in confidence, the terms of this Agreement and the transactions
contemplated hereby.
6. SATISFACTION OF CONDITIONS. The Seller and the Buyer
covenant and agree to use their commercially reasonable efforts to
obtain the satisfaction of the conditions specified in this
Agreement.
7. Conditions to Obligations of the Buyer
--------------------------------------
The obligations of the Buyer under this Agreement are
subject to the fulfillment, at each Closing Date, of the following
conditions precedent, each of which may be waived in writing in
the sole discretion of the Buyer:
7.1 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE SELLER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The
representations and warranties of the Seller (as updated on each
Closing Date) shall be true on and as of each Closing Date as
though such representations and warranties were made on and as of
such date, except for any changes permitted by the terms hereof or
consented to in writing by the Buyer. The Seller shall have
performed and complied with all terms, conditions, covenants,
obligations, agreements and restrictions required by this
Agreement to be performed or complied with by it prior to or at
each Closing Date.
-26-
<PAGE> 32
7.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Seller to
authorize or carry out this Agreement and to convey, assign,
transfer and deliver the Assets shall have been taken.
7.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any
applicable law, rule, order or regulation for the consummation by
the Seller of the transactions contemplated by this Agreement and
the operation of the Seller's business by the Buyer shall have
consented to, authorized, permitted or approved such transactions.
7.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD
PARTIES. The Seller shall have received all requisite consents
and approvals of all lenders, lessors and other third parties
whose consent or approval is required in order for the Seller to
consummate the transactions contemplated by this Agreement,
including, without limitation, those set forth on SCHEDULE 2.3
attached hereto.
7.5 ADVERSE PROCEEDINGS. No action or proceeding by or
before any court or other governmental body shall have been
instituted or threatened by any governmental body or person
whatsoever which shall seek to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which might
affect the right of the Buyer to own or use the Assets after each
Closing.
7.6 OPINION OF COUNSEL. The Buyer shall have received
an opinion of counsel to the Seller, dated as of the first Closing
Date, in substantially the form attached hereto as EXHIBIT B.
7.7 BOARD OF DIRECTORS AND SHAREHOLDER APPROVAL. The
shareholders of the Seller shall have duly authorized the
transactions contemplated by this Agreement.
7.8 THE ASSETS. Except for the Permitted Encumbrances,
at each Closing the Buyer shall receive good, clear, record and
marketable title to the Assets related to the Store being acquired
at such Closing, free and clear of all liens, liabilities,
security interests and encumbrances of any nature whatsoever.
7.9 UPDATE. The Seller shall have provided the Buyer
with a true, correct and complete list and amount, as of each
Closing Date, of (a) the Inventory; (b) the Fixed Assets; and (c)
the trade accounts payable and accrued liabilities of the Seller
with respect to the Stores not yet acquired by the Buyer. The
Seller shall have provided the Buyer with a list of the Accounts
-27-
<PAGE> 33
Receivable, as of, or within five days prior to, the Closing Date,
including an aging thereof, as reflected in the records of the
Seller.
7.10 CASH AVAILABLE FOR WORKING CAPITAL PURPOSES. On
each Closing Date, the Seller will have available cash for working
capital purposes of not less than $700 for the Store being
acquired on such Closing Date, which cash will be transferred to
the Buyer pursuant to the terms of this Agreement.
7.11 Payables.
--------
(a) On each Closing Date, with respect to the
Stores not yet acquired by the Buyer, the Seller will have no
obligations to suppliers and vendors of goods and services and
other trade creditors which are past due in accordance with their
terms and in no event shall the Seller have any of such
obligations outstanding for more than 60 days as of the Closing.
(b) On each Closing Date, the Seller will have no
liabilities to employees working in the Store being acquired by
the Buyer of such Closing for accrued vacation or sick pay,
employee benefit claims or liabilities to the Pension Benefit
Guaranty Corporation.
7.12 ENGINEER'S REPORT. On or prior to each Closing
Date, the Buyer shall have received the engineer's report, if any,
referred to in Subsection 4.1(b) hereof.
7.13 TAX LIEN WAIVERS. On or prior to each Closing
Date, the Seller shall have obtained and delivered to the Buyer
tax lien waivers from all jurisdictions in which Assets of the
Store being acquired by the Buyer at such Closing are located and
which provide such tax lien waivers.
7.14 CLOSING DELIVERIES. The Buyer shall have received
at or prior to each Closing each of the following documents:
(a) a bill of sale substantially in the form
attached hereto as EXHIBIT C;
(b) such instruments of conveyance, assignment and
transfer, in form and substance satisfactory to the Buyer, as
shall be appropriate to convey, transfer and assign to, and to
vest in, the Buyer, good, clear, record and marketable title to
the Assets being acquired;
-28-
<PAGE> 34
(c) such contracts, files and other data and
documents pertaining to the Assets or the Seller's business as the
Buyer may reasonably request;
(d) such certificates of the Seller's officers and
such other documents evidencing satisfaction of the conditions
specified in Section 7 (including without limitation, this
Section 7.14) as the Buyer shall reasonably request;
(e) a certificate of the Secretary of State (or
comparable issuing authority) of the state in which the Seller is
incorporated as to the legal existence and good standing
(including tax) of the Seller in such state, and a certificate of
the Secretary of State (or comparable issuing authority) of each
state or jurisdiction in which the Seller is qualified to transact
business, as to Seller's qualification to do business in such
state or jurisdiction;
(f) certificates of the Clerk or Secretary of the
Seller attesting to the incumbency of the Seller's officers,
respectively, the authenticity of the resolutions authorizing the
transactions contemplated by the Agreement, and the authenticity
and continuing validity of the charter documents delivered
pursuant to Subsection 2.1;
(g) estoppel certificates from the lessor of the
Store being acquired by the Buyer consenting to the assumption of
such lease by the Buyer and representing that there are no
outstanding claims against the Seller under any such lease;
(h) the schedules listed in Subsection 7.9;
(i) cross receipt executed by the Buyer and the
Seller;
(j) such other documents, instruments or
certificates as the Buyer may reasonably request.
7.15 RETAIL STORE OPTION AGREEMENT. On or prior to the
first Closing Date the Seller shall have executed and delivered
the Retail Store Option Agreement substantially in the form
attached hereto as SCHEDULE 7.15.
8. Conditions to Obligations of the Seller
---------------------------------------
The obligations of the Seller under this Agreement are
subject to the fulfillment, at the Closing Date, of the following
conditions precedent, each of which may be waived in writing at
the sole discretion of the Seller:
-29-
<PAGE> 35
8.1 CONTINUED TRUTH OF REPRESENTATIONS AND WARRANTIES
OF THE BUYER; COMPLIANCE WITH COVENANTS AND OBLIGATIONS. The
representations and warranties of the Buyer (as updated prior to
each Closing) in this Agreement shall be true on and as of each
Closing Date as though such representations and warranties were
made on and as of such date, except for any changes consented to
in writing by the Seller. The Buyer shall have performed and
complied with all terms, conditions, obligations, agreements and
restrictions required by this Agreement to be performed or
complied with by it prior to or at the Closing Date.
8.2 CORPORATE PROCEEDINGS. All corporate and other
proceedings required to be taken on the part of the Buyer to
authorize or carry out this Agreement shall have been taken.
8.3 GOVERNMENTAL APPROVALS. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent,
authorization or approval of which is necessary under any
applicable law, rule, order or regulation for the consummation by
the Buyer of the transactions contemplated by this Agreement shall
have consented to, authorized, permitted or approved such
transactions.
8.4 CONSENTS OF LENDERS, LESSORS AND OTHER THIRD
PARTIES. The Buyer shall have received all requisite consents and
approvals of all lenders, lessors and other third parties whose
consent or approval is required in order for the Buyer to
consummate the transactions contemplated by this Agreement at each
such Closing, including, without limitation, those set forth on
SCHEDULE 3.3 attached hereto, or in the event the lessor has not
consented to an assignment to the Buyer of the lease of the Store
being acquired by the Buyer, the Buyer has agreed to include under
such Lease obligations arising after the Closing Date as Assumed
Liabilities on SCHEDULE 1.4.
8.5 ADVERSE PROCEEDINGS. No action or proceeding by or
before any court or other governmental body shall have been
instituted or threatened by any governmental body or person
whatsoever which shall seek to restrain, prohibit or invalidate
the transactions contemplated by this Agreement or which might
affect the right of the Seller to transfer the Assets.
8.6 OPINION OF COUNSEL. The Seller shall have received
an opinion of Hale and Dorr, counsel to the Buyer, dated as of the
first Closing Date, in substantially the form attached hereto as
EXHIBIT D.
-30-
<PAGE> 36
8.7 CLOSING DELIVERIES. The Seller shall have received
at or prior to the Closing each of the following documents:
(a) such certificates of the Buyer's officers and
such other documents evidencing satisfaction of the conditions
specified in this Section 8 as the Seller shall reasonably
request;
(b) a certificate of the Secretary of State of the
State of Delaware as to the legal existence and good standing
(including tax) of the Buyer in Delaware;
(c) a certificate of the Secretary of the Buyer
attesting to the incumbency of the Buyer's officers, the
authenticity of the resolutions authorizing the transactions
contemplated by this Agreement, and the authenticity and
continuing validity of the charter documents delivered pursuant to
Subsection 3.1;
(d) Instrument of Assumption of Liabilities
executed by the Buyer and accepted by the Seller; and
(e) such other documents, instruments or
certificates as the Seller may reasonably request.
8.8 RETAIL STORE OPTION AGREEMENT. On or prior to the
first Closing Date the Buyer shall have executed and delivered the
Retail Store Option Agreement substantially in the form attached
hereto as SCHEDULE 8.8.
9. Indemnification
---------------
9.1 BY THE BUYER AND THE SELLER. The Buyer and the
Seller each hereby agrees to indemnify and hold harmless the other
against all claims, damages, losses, liabilities, costs and
expenses (including, without limitation, settlement costs and any
legal, accounting or other expenses for investigating or defending
any actions or threatened actions) reasonably incurred by the
Buyer or the Seller in connection with each and all of the
following:
(a) Any breach by the indemnifying party of any
representation or warranty in this Agreement;
(b) Any breach of any covenant, agreement or
obligation of the indemnifying party contained in this Agreement
or any other agreement, instrument or document contemplated by
this Agreement; and
-31-
<PAGE> 37
(c) Any misrepresentation contained in any
statement, certificate or schedule furnished by the indemnifying
party pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement.
9.2 BY THE SELLER. The Seller further agrees to
indemnify and hold harmless the Buyer from any and all claims,
damages, losses, liabilities, costs and expenses (including,
without limitation, settlement costs and any legal, accounting or
other expenses for investigating or defending any actions or
threatened actions) reasonably incurred by the Buyer, in
connection with each and all of the following:
(a) Any claims against, or liabilities or
obligations of, the Seller or against the Assets not specifically
assumed by the Buyer pursuant this Agreement, including without
limitation, any liabilities or obligations of the Seller for
accrued vacation or sick pay and employee benefit claims under any
Employee Benefit Plan;
(b) The failure of the Buyer to obtain the
protections afforded by compliance with the notification and other
requirements of the bulk sales laws in force in the jurisdictions
in which such laws may be applicable to either the Seller or the
transactions contemplated by this Agreement;
(c) Any violation by the Seller of, or any failure
by the Seller to comply with, any law, ruling, order, decree,
regulation or zoning, environmental or permit requirement
applicable to the Seller, the Assets or its business, whether or
not any such violation or failure to comply has been disclosed to
the Buyer, including any costs incurred by the Buyer (i) in order
to bring the Assets into compliance with environmental laws as a
consequence of noncompliance with such laws on the Closing Date or
(ii) in connection with the transfer of the Assets;
(d) Any warranty claim or product liability claim
relating to the operation of each Store prior to the acquisition
by the Buyer;
(e) Any tax liabilities or obligations of the
Seller; and
(f) Any claims against, or liabilities or
obligations of, the Seller with respect to obligations under
Employee Plans not specifically assumed by the Buyer pursuant to
this Agreement.
-32-
<PAGE> 38
9.3 CLAIMS FOR INDEMNIFICATION. Whenever any claim
shall arise for indemnification hereunder the party seeking
indemnification (the "Indemnified Party"), shall promptly notify
the party from whom indemnification is sought (the "Indemnifying
Party") of the claim and, when known, the facts constituting the
basis for such claim. In the event of any such claim for
indemnification hereunder resulting from or in connection with any
claim or legal proceedings by a third-party, the notice to the
Indemnifying Party shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The
Indemnified Party shall not settle or compromise any claim by a
third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, which
shall not be unreasonably withheld, unless suit shall have been
instituted against it and the Indemnifying Party shall not have
taken control of such suit after notification thereof as provided
in Subsection 9.4 of this Agreement.
9.4 DEFENSE BY INDEMNIFYING PARTY. In connection with
any claim giving rise to indemnity hereunder resulting from or
arising out of any claim or legal proceeding by a person who is
not a party to this Agreement, the Indemnifying Party at its sole
cost and expense may, upon written notice to the Indemnified
Party, assume the defense of any such claim or legal proceeding if
it acknowledges to the Indemnified Party in writing its
obligations to indemnify the Indemnified Party with respect to all
elements of such claim. The Indemnified Party shall be entitled
to participate in (but not control) the defense of any such
action, with its counsel and at its own expense. If the
Indemnifying Party does not assume the defense of any such claim
or litigation resulting therefrom within 30 days after the date
such claim is made, (a) the Indemnified Party may defend against
such claim or litigation, in such manner as it may deem
appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the Indemnifying
Party, on such terms as the Indemnified Party may deem
appropriate, and (b) the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with
its counsel and at its own expense. If the Indemnifying Party
thereafter seeks to question the manner in which the Indemnified
Party defended such third party claim or the amount or nature of
any such settlement, the Indemnifying Party shall have the burden
to prove by a preponderance of the evidence that the Indemnified
Party did not defend or settle such third party claim in a
reasonably prudent manner.
-33-
<PAGE> 39
9.5 PAYMENT OF INDEMNIFICATION OBLIGATION. All
indemnification by the Buyer and the Seller hereunder shall be
effected by payment of cash or delivery of a cashier's or
certified check in the amount of the indemnification liability.
Notwithstanding anything herein to the contrary, the maximum
aggregate liability of the Seller under Section 9 hereof shall not
exceed an amount equal to the Purchase Price. Notwithstanding
anything to the contrary in this Section 9, Buyer shall not be
entitled to receive, and the Seller shall not be obligated to pay,
the first $10,000 in the aggregate of indemnity obligations
otherwise payable by Seller to Buyer pursuant to this Section 9
and Seller shall not be entitled to receive, and the Buyer shall
not be obligated to pay, the first $10,000 in the aggregate of
indemnity obligations otherwise payable by Buyer to Seller
pursuant to this Section 9. All indemnification liability payable
hereunder shall be reduced by the net present value (using a
discount rate equal to the then prime rate as set forth in THE
WALL STREET JOURNAL) of any noncontingent tax benefits to the
indemnified party resulting therefrom.
9.6 SURVIVAL OF REPRESENTATIONS; CLAIMS FOR
INDEMNIFICATION. All representations and warranties made by the
parties herein or in any instrument or document furnished in
connection herewith shall survive the Closing and any
investigation at any time made by or on behalf of the parties
hereto. All such representations and warranties shall expire on
the second anniversary of the final Closing Date, except for
claims, if any, asserted in writing prior to such second
anniversary, which shall survive until finally resolved and
satisfied in full. All claims and actions for indemnity pursuant
to this Section 9 for breach of any representation or warranty
shall be asserted or maintained in writing by a party hereto on or
prior to the expiration of such two-year period. Notwithstanding
the above claims resulting from the failure by the Seller to pay
when due any tax or claims relating to Seller's employee benefit
plans shall expire one year after any applicable statute of
limitations.
10. Post-Closing Agreements
-----------------------
The Seller agrees that from and after the Closing Date:
10.1 Proprietary Information.
-----------------------
(a) The Seller shall hold in confidence, and use
its best efforts to have all of its officers, directors and
personnel hold in confidence, all knowledge and information of a
secret or confidential nature with respect to the business of the
Seller and shall not disclose, publish or make use of the same
-34-
<PAGE> 40
without the consent of the Buyer, except to the extent that such
information shall have become public knowledge other than by
breach of this Agreement by the Seller.
(b) The Seller agrees that the remedy at law for
any breach of this Subsection 10.1 would be inadequate and that
the Buyer shall be entitled to injunctive relief in addition to
any other remedy it may have upon breach of any provision of this
Subsection 10.1.
10.2 NO SOLICITATION OR HIRING OF FORMER EMPLOYEES.
Except as provided by law, for a period of three years after the
final Closing Date, neither the Seller nor any Affiliate thereof
(including the Principals) shall solicit any person who was an
employee of the Seller on the Closing Date to terminate his
employment with the Buyer or to become an employee of the Seller
or hire any person who was such an employee on the date hereof or
on the Closing Date.
10.3 Non-Competition Agreement.
-------------------------
(a) Except as otherwise set forth on
SCHEDULE 10.3, for a period of five years after the final Closing
Date, neither the Seller nor any Affiliate (including the
Principals) thereof shall (i) market, rent or sell at the retail
level any product which has the same or substantially the same
form, function and primary application as any existing or proposed
videotape, game or movie product marketed, rented or sold by the
Seller on or prior to the Closing Date or (ii) engage in any
business involving directly or indirectly the marketing, sale or
rental at the retail level of any videotape, game or movie product
competitive with the business of the Seller as conducted on the
date hereof or on the Closing Date, in the United States or any
other country in which the Seller conducted its business during
the two years prior to the Closing Date. Notwithstanding any
provision to the contrary herein, in the State of Louisiana the
noncompete period referred to above shall terminate two years
after the date of termination of the restrictions on transfer of
Common Stock included in Section 1.7 above.
(b) The parties hereto agree that the duration
and geographic scope of the non-competition provision set forth in
this Subsection 10.3 are reasonable. In the event that any court
determines that the duration or the geographic scope, or both, are
unreasonable and that such provision is to that extent
unenforceable, the parties hereto agree that the provision shall
remain in full force and effect for the greatest time period and
in the greatest area that would not render it unenforceable. The
parties intend that this non-competition provision shall be deemed
-35-
<PAGE> 41
to be a series of separate covenants, one for each and every
county of each and every state of the United States of America and
each and every political subdivision of each and every country
outside the United States of America where this provision is
intended to be effective. The Seller agrees that damages are an
inadequate remedy for any breach of this provision and that the
Buyer shall, whether or not it is pursuing any potential remedies
at law, be entitled to equitable relief in the form of preliminary
and permanent injunctions without bond or other security upon any
actual or threatened breach of this non-competition provision.
10.4 Sharing of Data.
---------------
(a) The Seller shall have the right for a period
of three years following the final Closing Date to have reasonable
access to such books, records and accounts, including financial
and tax information, correspondence, production records,
employment records and other similar information as are
transferred to the Buyer pursuant to the terms of this Agreement
for the limited purposes of concluding its involvement in the
business of the Seller prior to the Closing Date and for complying
with its obligations under applicable securities, tax,
environmental, employment or other laws and regulations. The
Buyer shall have the right for a period of three years following
the Closing Date to have reasonable access to those books, records
and accounts, including financial and tax information,
correspondence, employment records and other records which are
retained by the Seller pursuant to the terms of this Agreement to
the extent that any of the foregoing relates to the business of
the Seller transferred to the Buyer hereunder or is otherwise
needed by the Buyer in order to comply with its obligations under
applicable securities, tax, environmental, employment or other
laws and regulations.
(b) The Seller and the Buyer agree that from and
after the Closing Date they shall cooperate fully with each other
to facilitate the transfer of the Assets from the Seller to the
Buyer and the operation thereof by the Buyer.
10.5 USE OF NAME. Except as set forth in Section 10.7
below, without Buyer's prior written consent, the Seller and each
of the Principals each agrees not to use the trade names
identified on SCHEDULE I or any derivation thereof after the final
Closing Date in connection with any business.
-36-
<PAGE> 42
10.6 COOPERATION IN LITIGATION. Each party hereto will
fully cooperate with the other in the defense or prosecution of
any litigation or proceeding already instituted or which may be
instituted hereafter against or by such party relating to or
arising out of the conduct of the business of the Seller prior to
or after the Closing Date (other than litigation arising out the
transactions contemplated by this Agreement). The party
requesting such cooperation shall pay the out-of-pocket expenses
(including legal fees and disbursements) of the party providing
such cooperation and of its officers, directors, employees and
agents reasonably incurred in connection with providing such
cooperation, but shall not be responsible to reimburse the party
providing such cooperation for such party's time spent in such
cooperation or the salaries or costs of fringe benefits or similar
expenses paid by the party providing such cooperation to its
officers, directors, employees and agents while assisting in the
defense or prosecution of any such litigation or proceeding.
10.7 LICENSE TO REEL VIDEO. Effective from and after
the first Closing, Buyer hereby grants to Seller a non-exclusive,
royalty-free right and license to use the tradename "Reel Video"
solely in connection with the operation of the Stores not yet
acquired by the Buyer.
10.8 CONDUCT OF BUSINESS. Until September 30, 1997,
the Buyer shall carry on the Business of the Stores acquired by it
hereunder in a reasonably diligent and prudent manner and
consistent with the manner in which the Buyer carries on the
Business of the other stores owned and operated by it.
10.9 NON-COMPETE AGREEMENT WITH GABRIEL ACKAL. From
and after the first Closing Date, the Seller will take all
commercially reasonable measures to enforce its rights under the
Non-Compete Agreement between the Seller (then known as "Box
Office Entertainment, Inc.") and Gabriel Ackal, dated April 4,
1996.
10.10 CONFIDENTIALITY AGREEMENTS. Within one week of
the first Closing Date, the Seller will use its best efforts to
cause Gabriel Ackal and William Seymour to execute and deliver
Confidentiality Agreements to the Buyer which are in form and
substance reasonably satisfactory to the Buyer.
11. Termination of Agreement
------------------------
11.1 TERMINATION BY AGREEMENT OF THE PARTIES. This
Agreement may be terminated by the mutual written agreement of the
parties hereto.
-37-
<PAGE> 43
11.2 TERMINATION BY REASON OF BREACH. The obligations
hereunder to purchase and sell any Stores not yet acquired by the
Buyer may be terminated by the Seller, if at any time prior to a
Closing there shall occur a material breach of any of the
representations, warranties or covenants of the Buyer or the
failure by the Buyer to perform any material condition or
obligation hereunder, and may be terminated by the Buyer, if at
any time prior to the Closing there shall occur a material breach
of any of the representations, warranties or covenants of the
Seller or the failure of the Seller to perform any material
condition or obligation hereunder.
12. Transfer and Sales Tax
----------------------
Notwithstanding any provisions of law imposing the
burden of such taxes on the Seller or the Buyer, as the case may
be, the Seller shall be responsible for and shall pay (a) all
sales, use and transfer taxes, and (b) all governmental charges,
if any, upon the sale or transfer of any of the Assets hereunder.
If the Seller shall fail to pay such amounts on a timely basis,
the Buyer may pay such amounts to the appropriate governmental
authority or authorities, and the Seller shall promptly reimburse
the Buyer for any amounts so paid by the Buyer.
13. Brokers
-------
13.1 FOR THE SELLER. The Seller represents and
warrants that it has not engaged any broker or finder or incurred
any liability for brokerage fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
The Seller agrees to indemnify and hold harmless the Buyer against
any claims or liabilities asserted against it by any person acting
or claiming to act as a broker or finder on behalf of the Seller.
13.2 FOR THE BUYER. The Buyer agrees to pay all fees,
expenses and compensation owed to any person, firm or corporation
who has acted in the capacity of broker or finder on its behalf in
connection with the transactions contemplated by this Agreement.
The Buyer agrees to indemnify and hold harmless the Seller against
any claims or liabilities asserted against it by any person acting
or claiming to act as a broker or finder on behalf of the Buyer.
14. Notices
-------
Except to the extent otherwise provided herein, any
notices or other communications required or permitted hereunder
shall be sufficiently given if delivered personally or sent by
telex, federal express, registered or certified mail, postage
-38-
<PAGE> 44
prepaid, addressed as follows or to such other address of which
the parties may have given notice:
To the Seller
or any Principal: At the address specified for
this purpose on SCHEDULE I
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, PA 19115
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other
communications shall be deemed received (a) on the date delivered,
if delivered personally; (b) three business days after being sent,
if sent by registered or certified mail; or (c) on the date of
actual receipt, if delivered by any other method.
15. Arbitration
-----------
(a) Any dispute, controversy or claim between the
parties arising out of or relating to this Agreement, a breach
hereof or the transactions contemplated hereby, shall be settled
by arbitration in accordance with the provisions of this
Section 15. Any arbitration pursuant to this Section 15 shall be
conducted by a single arbitrator appointed by the Philadelphia,
Pennsylvania office of the American Arbitration Association upon
the request of either party. The arbitrator shall have a minimum
of five years of experience in the area of business relevant to
the particular dispute. Each party shall be permitted to submit
only one proposal to the arbitrator, and the arbitrator shall be
required to choose one of such two proposals as the resolution of
the dispute. The arbitrator may proceed to a resolution notwith-
standing the failure of a party to participate in the proceedings.
Each of the parties shall pay its own costs and expenses in
connection with any such arbitration, and the parties shall share
equally in the fees and expenses of the arbitrator.
(b) The parties agree that any such arbitration will
occur in Philadelphia, Pennsylvania, any such arbitration award
shall be final and binding upon the parties, may be entered in any
court having jurisdiction and shall not be appealable by either
party in any court.
-39-
<PAGE> 45
16. Successors and Assigns
----------------------
This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and
assigns, except that the Buyer, the Seller and the Principals may
not assign their respective obligations hereunder without the
prior written consent of the Seller in the case of an assignment
by the Buyer or the Buyer in the case of an assignment by the
Seller or a Principal; provided, however, that the Buyer may
assign this Agreement, and its rights and obligations hereunder,
to a subsidiary or affiliate. Any assignment in contravention of
this provision shall be void.
17. Entire Agreement; Amendments; Attachments
-----------------------------------------
(a) This Agreement, all Schedules and Exhibits hereto,
and all agreements and instruments to be delivered by the parties
pursuant hereto represent the entire understanding and agreement
between the parties hereto with respect to the subject matter
hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer, the Seller and the Principals
may amend or modify this Agreement, in such manner as may be
agreed upon, by a written instrument executed by the Buyer and the
Seller.
(b) If the provisions of any Schedule or Exhibit to
this Agreement are inconsistent with the provisions of this
Agreement, the provision of the Agreement shall prevail. The
Exhibits and Schedules attached hereto or to be attached hereafter
are hereby incorporated as integral parts of this Agreement.
18. Expenses
--------
Except as otherwise expressly provided herein, the Buyer
and the Seller shall each pay their own expenses in connection
with this Agreement and the transactions contemplated hereby.
19. Legal Fees
----------
In the event that legal proceedings are commenced by the
Buyer against the Seller, or by the Seller against the Buyer, in
connection with this Agreement or the transactions contemplated
hereby, the party or parties which do not prevail in such
proceedings shall pay the reasonable attorneys' fees and other
costs and expenses, including investigation costs, incurred by the
prevailing party in such proceedings.
-40-
<PAGE> 46
20. Governing Law
-------------
This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
21. Section Headings
----------------
The section headings are for the convenience of the
parties and in no way alter, modify, amend, limit, or restrict the
contractual obligations of the parties.
22. Severability
------------
The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
23. Counterparts
------------
This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but
all of which shall be one and the same document.
-41-
<PAGE> 47
IN WITNESS WHEREOF, this Agreement has been duly executed by
the parties hereto as of and on the date first above written.
(Corporate Seal) WEST COAST ENTERTAINMENT CORPORATION
ATTEST:
By: /s/ T. Kyle Standley
--------------------------------
Title: CEO/President
------------------------- -----------------------------
SELLER:
REEL ENTERTAINMENT, INC.
By: /s/ T. George Solomon, Jr.
--------------------------------
Title: President
-----------------------------
PRINCIPALS:
/s/ T. George Solomon, Jr.
-----------------------------------
T. George Solomon, Jr.
BANK ONE EQUITY INVESTORS, INC.
By: /s/ Thomas Adamek
--------------------------------
Title: President
-----------------------------
-42-
<PAGE> 48
Schedule I
----------
to Asset Purchase Agreement
between West Coast Entertainment Corporation and
Seller
Section of Agreement
in Which Term, Item or
Information is Referenced Term or Item
------------------------- ------------
Recital Seller: Reel Entertainment, Inc., a Louisiana
corporation.
Recital Address of Principal Office: 510 O'Keefe Avenue,
New Orleans, Louisiana 70113
Recital Principals: T. George Solomon, Jr.
Bank One Equity Investors, Inc.
Preliminary
Statement: Stores by Location:
6632 Jones Creek Road
Baton Rouge, LA 70817 (the "Woodlawn Store")
8685 Siegen Lane
Baton Rouge, LA 70810 (the "Siegen Store")
5421-B Johnson Street
Lafayette, LA 70503 (the "Time Plaza Store")
4050 Ryan Street
Lake Charles, LA 70605 (the "Lake Charles Store")
1.1(a)(viii) Trade Names: Reel Entertainment, Inc.
1.4 Assumed Liabilities:
All obligations of the Seller continuing after
each Closing under the Lease specified on SCHEDULE
2.11 for the Store acquired at such Closing.
Accounts Payable for new release rental and sell-
through videotapes and interactive electronic
games relating to the Stores that have been
-43-
<PAGE> 49
outstanding for 60 days or less at the Closing and
that have been incurred in the ordinary course of
business.
1.6 Closing Dates:
First Closing: October 1, 1996 - Woodlawn Store
Second Closing: December 2, 1996 - Store to be
determined
Third Closing: March 3, 1997 - Store to be
determined
Fourth Closing: May 1, 1997 - Store to be
determined
2.2 The Seller's authorized capital stock consists of
100,000 shares of Common Stock, no par value per
share, of which 50,000 shares are issued and
outstanding, 23,333 shares of Series A Preferred
Stock, $100 par value per share, of which 10,000
shares are issued and outstanding, and 11,667
shares of Series B Preferred Stock, $100 par value
per share, of which 5,000 shares are issued and
outstanding.
14 Address for notices for purposes of Section 14:
If to the Seller or
to any Principal: Reel Entertainment, Inc.
510 O'Keefe Avenue
New Orleans, LA 70113
With a copy to: B. Troy Villa, Esq.
Adams and Reese, L.L.P.
451 Florida Street
19th Floor, North Tower
Baton Rouge, LA 70801
-44-
<PAGE> 1
DEVELOPMENT AGREEMENT
---------------------
[EXHIBIT "C" TO OFFERING CIRCULAR]
<PAGE> 2
DEVELOPMENT AGREEMENT
---------------------
THIS AGREEMENT (herein "Agreement"), made and entered into this
1st day of October, 1996, by and between WEST COAST FRANCHISING COMPANY, a
Delaware corporation, with its principal offices at 9990 Global Road,
Philadelphia, Pennsylvania 19115 (herein "FRANCHISOR") and REEL ENTERTAINMENT,
INC., a Louisiana corporation, with a principal business office at 510 O'Keefe
Avenue, New Orleans, LA 70113 (herein "DEVELOPER").
BACKGROUND
----------
FRANCHISOR, its predecessors and its affiliates have expended
considerable time, skill, effort and money to originate and develop a unique and
proprietary plan, design, method and system (herein the "WEST COAST SYSTEM") for
offering to the public from distinctive retail facilities the rental and sale of
a wide range of video products, including from time to time, by way of
illustration and not limitation, prerecorded and blank videocassette tapes,
video software products, video, electronic and computer games, laser discs and
related technologically advanced products (herein collectively "Video
Products"). These Video Products are offered to the public in conjunction with
related or complementary accessories, products, supplies and services (herein
collectively "Accessories") and promotional materials, products and supplies
bearing FRANCHISOR's proprietary marks (herein collectively "Proprietary
Supplies"). The distinguishing characteristics of the WEST COAST SYSTEM include,
by way of illustration and not limitation, standards and specifications for
Video Products, Accessories and Proprietary Supplies, inventory and equipment
layout, distinctive design and decor, proprietary software, distinctive formats
and operating procedures, record keeping and reporting, promotion and
advertising, management training, proprietary marks and proprietary information,
all of which may be changed, improved and further developed by FRANCHISOR from
time to time.
FRANCHISOR identifies the WEST COAST SYSTEM by means of certain
proprietary trademarks, service marks, trade names, logos, photographs and other
indicia of origin including, but not limited to, the service mark "WEST COAST
VIDEO[Registered Trademark]", and such other indicia of origin as FRANCHISOR
may from time to time designate (herein collectively "Proprietary Marks").
These Proprietary Marks are designed to identify to the public the source of
goods and services offered by the WEST COAST SYSTEM and to represent to the
public high and uniform standards of quality, service and appearance.
FRANCHISOR grants to certain qualified persons or entities who
meet FRANCHISOR's qualifications, the right to establish and operate a specified
number of retail facilities
<PAGE> 3
using the WEST COAST SYSTEM and the Proprietary Marks (herein "FRANCHISED
STORES") with a defined geographic area, subject to and in accordance with the
terms and provisions of this Agreement.
NOW, THEREFORE, the parties hereto, in consideration of the
mutual covenants and promises herein contained and for other good and valuable
consideration, acknowledged by each of them to be satisfactory and adequate, and
each of said parties intending to be legally bound hereby, agree as follows:
1. DEVELOPMENT RIGHTS.
------------------
1.1 GRANT OF DEVELOPMENT RIGHTS. FRANCHISOR hereby
grants to DEVELOPER and DEVELOPER hereby accepts, the right to establish and
operate thirty-one (31) FRANCHISED STORES using the WEST COAST SYSTEM, as it may
be changed, improved, modified or further developed from time to time, upon the
terms and subject to the provisions of this Agreement. The location of each
FRANCHISED STORE (herein "Location") shall be approved in advance by FRANCHISOR
as provided in Section 4.1 of this Agreement. Each Franchised Store shall be
established and operated pursuant to FRANCHISOR's Franchise Agreement (herein
the "Franchise Agreement") attached hereto as Exhibit A and incorporated herein
by reference and the addendum with respect to each FRANCHISED STORE (herein the
"Addendum"), as provided in Section 4.2 hereof. This Agreement does not grant to
DEVELOPER any right to use in any manner FRANCHISOR's Proprietary Marks or
System. DEVELOPER shall have no right under this Agreement to license others to
use in any manner the Proprietary Marks or WEST COAST SYSTEM.
1.2 DEVELOPMENT AREA. DEVELOPER shall establish and
operate its FRANCHISED STORES solely in the geographic area set forth on Exhibit
B attached hereto and incorporated herein by reference (the "Development Area").
DEVELOPER acknowledges and agrees that DEVELOPER is not granted any rights to
develop or operate FRANCHISED STORES outside of the Development Area.
1.3 DEVELOPMENT SCHEDULE. Recognizing that TIME IS OF
THE ESSENCE, DEVELOPER hereby acknowledges and agrees that DEVELOPER's rights in
and to the Development Area and the grant of development rights set forth in
this Agreement are expressly conditioned upon the establishment and continuous
operation of a minimum number of FRANCHISED STORES within the Development Area
as set forth on Exhibit C attached hereto and incorporated herein by reference
(the "Development Schedule").
In the event that DEVELOPER fails to meet the specified goals
set forth on Exhibit C attached hereto, in any stated period, all of DEVELOPER's
rights in and to territorial protection in the Development Area permanently
cease and FRANCHISOR may, in its sole discretion, grant other DEVELOPER rights
within the Development Area, otherwise franchise within the Development Area;
-2-
<PAGE> 4
or establish and generate (by itself or through affiliates) company-owned video
retail facilities within the Development Area; provided however, in the event
this Agreement is terminated for breach of Section 1.3 hereof, DEVELOPER shall
continue to operate the then-established FRANCHISED STORES in accordance with
the Franchise Agreement and all Addenda thereto, as provided in Section 4.2
hereof, then existing between FRANCHISOR and DEVELOPER.
1.4 TERRITORIAL RIGHTS. Except as otherwise provided
in this Section 1, and provided that DEVELOPER is in full compliance with this
Agreement and the Franchise Agreement including all Addenda thereto, FRANCHISOR
shall not, during the "Term" of this Agreement (as defined in Section 2 hereof),
operate itself or grant others the right to operate FRANCHISED STORES within the
Development Area.
1.5 BEST EFFORTS. DEVELOPER agrees that during the
term of this Agreement, it will continuously exert its best efforts to develop
and establish FRANCHISED STORES within the Development Area.
1.6 RETAIL SALE AND RENTAL RESTRICTIONS. DEVELOPER is
restricted solely to the retail sale or rental of all WEST COAST SYSTEM Video
Products, Accessories and Proprietary Supplies at the FRANCHISED STORES. Without
FRANCHISOR's prior written consent, to be exercised in FRANCHISOR's sole
discretion, DEVELOPER is expressly prohibited from engaging in the wholesale
business or distribution of any such product sold or rented at the FRANCHISED
STORES including Video Products, Accessories and Proprietary Supplies. Further,
the rights herein granted to DEVELOPER are specifically limited to the
FRANCHISED STORES within the Development Area and DEVELOPER agrees that it will
not use any aspect of the WEST COAST SYSTEM, including the Proprietary Marks, at
any other facility or location, either within or outside of the Development
Area. DEVELOPER shall not solicit, promote or advertise for business outside of
its Development Area through the use of any toll free number, the internet or
any site thereon, direct mail or other advertising method.
1.7 RIGHTS RESERVED BY FRANCHISOR. Except as set forth
in Section 1.4 hereof, DEVELOPER understands and expressly acknowledges and
agrees that, both within and outside of the Development Area, FRANCHISOR (and
its affiliates) reserve at its or their sole option the rights to offer, sell,
rent and distribute all Video Products, Accessories and Proprietary Supplies
which comprise, or may in the future comprise, a part of the WEST COAST SYSTEM
and all other products and services regardless of whether such products or
services are authorized for sale as part of the WEST COAST SYSTEM, under the
Proprietary Marks licensed hereunder, or otherwise. The rights expressly
retained by FRANCHISOR include, without limitation, (i) the right to
-3-
<PAGE> 5
operate itself or grant others the right to operate retail facilities offering
Video Products, Accessories and Proprietary Supplies to the public anywhere
outside the Development Area regardless of its proximity to the FRANCHISED
STORES and on such terms and conditions as FRANCHISOR, in its sole discretion,
deems appropriate; (ii) the right, and the right to grant others the right, to
develop, manufacture, market, distribute and/or sell Video Products,
Accessories, and Proprietary Supplies, through any channel of distribution
including mail order catalogs, computerized (such as the internet), telephone or
other electronic ordering systems capable of accepting orders placed from within
or outside the Development Area; and (iii) the right, subject to Section 1.8
hereof, to acquire and operate a business owning and/or operating a retail
facility within the Development Area offering for sale or rental Video Products
and Accessories (herein the "Acquired Video Store").
1.8 ACQUIRED VIDEO STORES. During the term hereof, in
the event that FRANCHISOR purchases an Acquired Video Store in the Development
Area, FRANCHISOR shall, except as otherwise prohibited by law or contract, offer
to sell the Acquired Video Store to DEVELOPER for the price paid (or as
reasonably allocated in the case of a multi-store purchase) by FRANCHISOR for
such Acquired Video Store. DEVELOPER must own and operate the Acquired Video
Store as a FRANCHISED STORE in accordance with FRANCHISOR's then-current
Franchise Agreement. DEVELOPER shall have a period of thirty (30) days from the
date of receipt of written notice from the FRANCHISOR to accept or reject this
offer. In the event DEVELOPER rejects or fails to timely accept such offer,
FRANCHISOR (or its affiliates) shall have the right to own and operate the
Acquired Video Store in the Development Area and DEVELOPER shall have no rights
or claims whatsoever to the Acquired Video Store; provided, however, that for a
period of one (1) year following acquisition of the Acquired Video Store,
FRANCHISOR shall not utilize the WEST COAST VIDEO_ service mark as the trade
name of the Acquired Video Store.
1.9 PRINCIPAL OWNERS GUARANTY. An "Owner" for purposes
of this Agreement is defined as each person or entity holding direct or
indirect, legal or beneficial Ownership Interests in DEVELOPER, and each person
who has other direct or indirect property rights in DEVELOPER or this Agreement.
"Ownership Interests" for purposes of this Agreement is defined to mean in
relation to (i) a corporation, the legal or beneficial ownership of shares in
the corporation; (ii) a partnership, the legal or beneficial ownership of a
general or limited partnership interest; (iii) a limited liability company, the
legal or beneficial ownership of units or membership interests in the limited
liability company; or (iv) a trust, the ownership of a beneficial interest of
such trust. A "Principal Owner" for purposes of this Agreement is an owner which
-4-
<PAGE> 6
1.9.1 is a general partner in
DEVELOPER; or
1.9.2 has a direct or indirect equity
interest in DEVELOPER of five percent (5%) or more (regardless of whether such
owner is entitled to vote therein); or
1.9.3 is designated as a Principal
Owner in Exhibit D of this Agreement.
All Principal Owners of DEVELOPER shall be disclosed on Exhibit D to this
Agreement. DEVELOPER shall cause all Principal Owners and their spouses as of
the date of this Agreement to execute and deliver to FRANCHISOR concurrently
with the execution of this Agreement the form of Guaranty and Assumption of
DEVELOPER's Obligations attached hereto as Exhibit E and incorporated herein by
reference (the "Guaranty"). All persons or entities that become Principal Owners
following the date of this Agreement and their spouses shall promptly execute
and deliver to FRANCHISOR, the Guaranty.
2. TERM.
-----
Unless sooner terminated in accordance with the terms
and provisions of this Agreement, the term of this Agreement and all rights
granted hereunder shall expire on the earlier of: (1) the last date specified in
the Development Schedule; or (2) the date when DEVELOPER has open and in
operation all of the FRANCHISED STORES required by the Development Schedule set
forth at Exhibit C. Thereafter, FRANCHISOR shall be entitled to establish and
operate, and license others to establish and operate FRANCHISED STORES or
FRANCHISOR (or its affiliates) owned retail video facilities whether or not
using the WEST COAST SYSTEM in the Development Area, except as may otherwise be
provided under the Franchise Agreement and all Addenda thereto, which have been
executed between the FRANCHISOR and DEVELOPER.
3. DEVELOPMENT FEE.
----------------
In consideration of the development rights granted
herein, DEVELOPER shall pay to FRANCHISOR, upon execution of this Agreement, a
development fee of One Hundred Ninety-Four Thousand Dollars ($194,000.00)
(herein the "Development Fee"), receipt of which is hereby acknowledged by
FRANCHISOR. The Development Fee is hereby deemed fully earned and non-refundable
upon execution of this Agreement in consideration of the administrative and
other expenses incurred by the FRANCHISOR and for the development opportunities
lost or deferred as a result of the rights granted DEVELOPER herein. Payment of
the Development Fee shall be as follows: One Hundred Thousand Dollars
($100,000.00) on or before October 1, 1996, Sixty-nine Thousand Dollars
($69,000.00) to be
-5-
<PAGE> 7
paid on or before October 1, 1997 and Twenty-Five Thousand Dollars ($25,000.00)
to be paid on or before October 1, 1998.
4. DUTIES OF DEVELOPER.
--------------------
4.1 Site Selection and Leases.
--------------------------
4.1.1 SITE SELECTION. DEVELOPER shall comply
with FRANCHISOR's then-current specifications regarding site selection for each
of the Locations of the FRANCHISED STORES. DEVELOPER hereby acknowledges and
agrees that FRANCHISOR's approval of each of the Locations does not constitute
an assurance, representation or warranty of any kind, expressed or implied, as
to the suitability of the Locations for FRANCHISED STORES or for any other
purpose. FRANCHISOR's approval of Locations indicates only that FRANCHISOR
believes a Location complies with acceptable minimum criteria established by
FRANCHISOR solely for its purposes as of the time of evaluation. DEVELOPER and
FRANCHISOR acknowledge that application of criteria that have been effective
with respect to other locations may not be predictive of potential for the
FRANCHISED STORES; and that, subsequent to FRANCHISOR's approval of a Location,
demographic and/or economic factors, such as competition from other similar
businesses, included in or excluded from FRANCHISOR's criteria could change,
thereby altering the potential of a Location. Such factors are unpredictable and
are beyond FRANCHISOR's control. FRANCHISOR shall not be responsible for the
failure of a Location to meet DEVELOPER's expectations as to revenue or
operational performance. DEVELOPER further acknowledges and agrees that its
acceptance of a particular site for the operation of a FRANCHISED STORE at a
Location is based on its own independent investigation of the suitability of the
Location. FRANCHISOR will approve or disapprove sites by delivery of written
notice to DEVELOPER. FRANCHISOR agrees to exert its reasonable best efforts to
deliver such notification to DEVELOPER within thirty (30) days following receipt
by FRANCHISOR of complete information with respect to a particular site, as
required by FRANCHISOR.
4.1.2 LEASES. Any and all leases, subleases or
other agreements entered into by DEVELOPER to secure the Locations of FRANCHISED
STORES must, at a minimum, meet with FRANCHISOR's prior written approval and any
such lease or purchase document must be conditional upon such approval, which
approval shall not be unreasonably withheld by FRANCHISOR. The following
provisions shall be in DEVELOPER's lease or purchase agreement with respect to
each FRANCHISED STORE:
4.1.2.1 A minimum lease term of
five (5) years, with a minimum renewal term, at lessee's option of an additional
five (5) years.
-6-
<PAGE> 8
4.1.2.2 In the event of the
unauthorized transfer, expiration or termination of the Franchise Agreement and
Addendum thereto with respect to a FRANCHISED STORE, for any reason, FRANCHISOR
shall have the option for thirty (30) days to assume the obligations under said
lease, and at any time thereafter to reassign the lease to another franchisee
(which lessor, sublessor or renter shall reasonably approve);
4.1.2.3 The lessor, sublessor
or renter will furnish to FRANCHISOR written notice specifying any default and
the method of curing any such default (except that if default is in the nature
of nonpayment of rent, FRANCHISOR shall have but thirty (30) days from receipt
of such notice to cure said default) and succeed to DEVELOPER's interest in such
lease;
4.1.2.4 The lessor, sublessor
or renter will accept FRANCHISOR or its designee (which lessor, sublessor or
renter shall reasonably approve) as a substitute tenant under the terms and
provisions of the lease upon notice from FRANCHISOR that it is exercising its
right to succeed to the interest of DEVELOPER in such lease;
4.1.2.5 Any lease entered into
by DEVELOPER shall provide that it may not be modified or amended without
FRANCHISOR's prior written consent which shall not be unreasonably withheld, and
that FRANCHISOR shall be promptly provided with copies of all such proposed
modifications or amendments and, when executed, true and correct copies of such
executed modifications or amendments; and
4.1.2.6 All of the foregoing
constitute rights but not obligations on the part of FRANCHISOR to assume the
rights and responsibilities of DEVELOPER under any lease, sublease or other
rental arrangement.
4.2 EXECUTION OF ADDENDUM TO FRANCHISE AGREEMENT. Upon
approval of a site by FRANCHISOR for the Location of a FRANCHISED STORE,
FRANCHISOR shall send to DEVELOPER the Addendum to Franchise Agreement in the
form of Exhibit F, attached hereto and incorporated herein by reference, any
supporting agreements in form for execution by DEVELOPER and a copy of the
FRANCHISOR's then-current Offering Circular. The Addendum to Franchise Agreement
shall provide that all of the terms and provisions of the Franchise Agreement
attached as Exhibit A to this Agreement govern the relationship of FRANCHISOR
and DEVELOPER with respect to the FRANCHISED STORE. DEVELOPER shall execute and
return to FRANCHISOR, within twenty (20) days following FRANCHISOR's delivery
thereof, a fully executed Addendum to Franchise Agreement, any supporting
agreements, together with a fully executed receipt for the Offering Circular and
the fees required to be paid upon execution of the Addendum to Franchise
Agreement. In no event may a FRANCHISED STORE be opened for business prior to
-7-
<PAGE> 9
FRANCHISOR's receipt of the fully executed Addendum to Franchise Agreement, all
supporting agreements, the Offering Circular receipt and all required payments.
4.3 STORE DESIGN SPECIFICATIONS. FRANCHISOR shall
furnish to DEVELOPER specifications of FRANCHISOR's then-current requirements
for construction, design, decoration and layout for FRANCHISED STORES (herein
the "Store Design Specifications"). DEVELOPER acknowledges and agrees that the
Store Design Specifications are an integral part of the WEST COAST SYSTEM and
form a part of the trade dress of the WEST COAST SYSTEM and that, therefore, the
FRANCHISED STORES will be developed, constructed and designed in accordance with
the then-current Store Design Specifications. With respect to each of the
FRANCHISED STORES, DEVELOPER shall (i) submit to FRANCHISOR detailed
construction plans and specifications and space plans for each of the FRANCHISED
STORES that comply with the Store Design Specifications and all applicable
ordinances, building codes, permit requirements, and lease requirements and
restrictions; (ii) obtain all required zoning changes, planning consents,
building, utility, sign, health, sanitation and business permits, licenses and
approvals and any other required permits and licenses; (iii) construct all
required improvements in compliance with construction plans and specifications
approved by FRANCHISOR; and (iv) decorate and layout the FRANCHISED STORES in
compliance with Store Design Specifications and plans and specifications
approved by FRANCHISOR. DEVELOPER shall at its own expense obtain and be
responsible for qualified architectural and engineering services as may be
required to adapt FRANCHISOR's Store Design Specifications to the FRANCHISED
STORES and to applicable local or state laws, regulations or ordinances.
DEVELOPER shall also bear the cost of preparing, for FRANCHISOR's approval, any
plans containing material deviations or modifications from the Store Design
Specifications. In that event, DEVELOPER shall be charged an hourly
architectural fee for FRANCHISOR's designated architect to review such plans.
4.4 OPENING INVENTORY. In connection with the opening
of each of the FRANCHISED STORES, DEVELOPER shall purchase an opening inventory
of Video Products, Accessories and Proprietary Supplies only from approved
suppliers and in accordance with FRANCHISOR's inventory specifications (herein
the "Opening Inventory") for the FRANCHISED STORES.
4.5 Training.
---------
4.5.1 Prior to opening of the first FRANCHISED
STORE, DEVELOPER and DEVELOPER's manager shall attend and complete to
FRANCHISOR's satisfaction an initial training program conducted by FRANCHISOR.
In the event that DEVELOPER designates itself as a manager, then DEVELOPER shall
also designate one other employee as an assistant manager who shall
-8-
<PAGE> 10
also attend and complete to FRANCHISOR's satisfaction the initial training
program. Thereafter, with respect to each FRANCHISED STORE, DEVELOPER must
designate a manager who shall attend and complete to FRANCHISOR's satisfaction
an initial training program conducted by FRANCHISOR;
4.5.2 DEVELOPER shall be solely responsible for
all costs and expenses incurred on its own behalf and by its employees in
connection with the training programs;
4.5.3 At FRANCHISOR's request, any person
employed by DEVELOPER as a manager or assistant manager subsequent to the
opening of each of the FRANCHISED STORES shall be required to attend
FRANCHISOR's initial training program. DEVELOPER shall pay to FRANCHISOR a
training fee at the then-current rate imposed by FRANCHISOR for the initial
training of such managers or assistant manager subsequently employed by
DEVELOPER. Such training fee shall be in addition to any other training costs to
be borne by DEVELOPER as provided herein;
4.5.4 DEVELOPER shall employ sufficient
qualified personnel to operate the FRANCHISED STORES. All employees shall wear
the then-current WEST COAST uniform, as designated by FRANCHISOR. DEVELOPER
agrees to maintain, and assure that all of its employees maintain, the highest
quality standards of professionalism and integrity in the operation of the
FRANCHISED STORES. DEVELOPER agrees to screen carefully all of its employees
prior to employment and to employ only those who have sufficient work experience
or training and who meet such other requirements as may be reasonably prescribed
by FRANCHISOR; and
4.5.5 DEVELOPER and other employees reasonably
designated by FRANCHISOR shall attend such courses, seminars and other training
and re-training or refresher programs as FRANCHISOR may from time to time
reasonably require and DEVELOPER and its other employees shall meet all
reasonable performance standards in connection with such programs as established
from time to time by FRANCHISOR.
4.6 OPERATIONS MANUAL. At the commencement of the
initial training program as set forth in Section 4.5 hereof, FRANCHISOR shall
provide on loan to DEVELOPER one copy of its proprietary operations manual
(herein the "Operations Manual") for each of the FRANCHISED STORES. DEVELOPER
shall operate the FRANCHISED STORE in conformity with the standards,
specifications, techniques and procedures as FRANCHISOR may from time to time
reasonably prescribe in the Operations Manual, or as otherwise directed in
writing by FRANCHISOR to DEVELOPER. The Operations Manual shall at all times
remain FRANCHISOR's property. FRANCHISOR may, from time to time, revise the
content of said
-9-
<PAGE> 11
Operations Manual and DEVELOPER expressly agrees to comply with each changed
requirement after notice thereof from FRANCHISOR.
4.7 Operations of the FRANCHISED STORES.
------------------------------------
4.7.1 COMPLIANCE WITH APPLICABLE LAWS.
DEVELOPER shall obtain all required government licenses and permits for the
establishment and operation of the FRANCHISED STORES and maintain such licenses
and permits in full force and effect throughout the term of this Agreement.
DEVELOPER shall operate the FRANCHISED STORES in compliance with all applicable
local, state and federal statutes, rules, ordinances and regulations and shall
take prompt and immediate action to correct any violation set forth in any
notice issued by any governmental or municipal authority, with respect to the
establishment and/or operation of the FRANCHISED STORES.
4.7.2 VIDEO PRODUCTS, ACCESSORIES AND
PROPRIETARY SUPPLIES. DEVELOPER shall offer for retail sale or rental at all
times only such Video Products, Accessories and Proprietary Supplies as conform
with FRANCHISOR's standards and specifications, and not deviate by offering
non-conforming products of any kind at the FRANCHISED STORES without
FRANCHISOR's prior written consent.
4.8 APPROVED SUPPLIERS. DEVELOPER shall purchase or
lease all products, supplies, services and equipment required for the operation
of the FRANCHISED STORES (including Video Products, Accessories and Proprietary
Supplies) solely from suppliers who demonstrate to the continuing reasonable
satisfaction of FRANCHISOR, the ability to meet FRANCHISOR's reasonable
standards and specifications; who possess adequate quality controls and capacity
to supply DEVELOPER's needs promptly and reliably; and who have been approved in
writing by FRANCHISOR and not thereafter disapproved. FRANCHISOR shall furnish
to DEVELOPER a list of approved suppliers. If DEVELOPER desires to purchase or
lease any unapproved product, supplies, service or equipment or purchase or
lease any approved product, supplies, service or equipment from an unapproved
supplier, DEVELOPER shall notify FRANCHISOR in writing and request approval.
FRANCHISOR shall have the right to require that its representatives be permitted
to inspect the proposed supplier's facilities and test or evaluate the proposed
supplier's product, supplies, service or equipment. FRANCHISOR shall have the
right to request that samples be delivered to it or to an independent testing
facility chosen by FRANCHISOR. A charge not to exceed the reasonable cost of the
inspection and the actual cost of the test shall be paid by DEVELOPER or the
supplier. FRANCHISOR will, within thirty (30) days of its receipt of a completed
request and completion of the evaluation and testing, notify DEVELOPER in
writing of its approval or disapproval of the supplier and/or the proposed
product, supplies, service or equipment. FRANCHISOR reserves the
-10-
<PAGE> 12
right, at its option, to reinspect the facilities of any such approved supplier
and to re-test or re-evaluate any previously approved products, supplies,
service or equipment and to revoke its approval upon the supplier's failure to
continue to meet any of FRANCHISOR's then-existing supplier, product, equipment
or service criteria, or as otherwise reasonably determined by FRANCHISOR.
4.9 Insurance.
----------
DEVELOPER agrees to secure, prior to the opening
of each of the FRANCHISED STORE and to maintain in full force and effect during
the term of this Agreement, at DEVELOPER's expense, insurance policies
protecting DEVELOPER, FRANCHISOR as an additional insured, and their respective
officers, directors, shareholders and employees, against any loss, liability,
personal injury, death, property damage or expense whatsoever arising or
occurring in connection with this Agreement and the operations of each of the
FRANCHISED STORES, as well as such other insurance as FRANCHISOR may reasonably
require.
5. FEES.
-----
5.1 INITIAL FRANCHISE FEES. DEVELOPER shall pay to
FRANCHISOR an Initial Franchise Fee of One Thousand ($1,000.00) Dollars, for
each of the FRANCHISED STORES granted pursuant to this Agreement, payable upon
execution of each Addendum to Franchise Agreement, as set forth in Section 4.2
hereof.
5.2 CONTINUING ROYALTY FEES. DEVELOPER shall pay to
FRANCHISOR continuing monthly royalty fees, continuing monthly national
marketing fund payments and such other payments for each of the FRANCHISED
STORES in accordance with FRANCHISOR's payment requirements as set forth in the
Franchise Agreement.
6. PROPRIETARY MARKS.
------------------
6.1 DEVELOPER shall use only the Proprietary Marks
designated by FRANCHISOR and shall use them only in the manner authorized and
permitted pursuant to the Franchise Agreement and by FRANCHISOR.
6.2 DEVELOPER shall use the Proprietary Marks only in
conjunction with the operation of the FRANCHISED STORES and in accordance with
the Operations Manual.
6.3 DEVELOPER's right to use the Proprietary Marks is
limited to such uses as are authorized under the Franchise Agreement, and any
unauthorized use thereof shall constitute an infringement of FRANCHISOR's
rights.
-11-
<PAGE> 13
6.4 DEVELOPER shall not make use of the Proprietary
Marks, including the mark, WEST COAST or any part thereof, in its corporate name
or in any other business or legal entity.
6.5 In the event that litigation by a third party
involving the Proprietary Marks is instituted or threatened against DEVELOPER,
DEVELOPER shall promptly notify FRANCHISOR and shall cooperate fully in
defending or settling such litigation. In the event FRANCHISOR undertakes the
defense or prosecution of any litigation pertaining to the Proprietary Marks,
DEVELOPER agrees to execute any and all documents and do such acts and things as
may, in the opinion of FRANCHISOR's counsel, be necessary or appropriate in the
litigation. FRANCHISOR shall have the sole right and discretion to take such
action as it deems appropriate. Provided DEVELOPER is in compliance with this
Agreement, FRANCHISOR will defend DEVELOPER, at FRANCHISOR's expense, against
any third party claim, suit or demand involving the Proprietary Marks and
arising out of DEVELOPER's authorized use thereof.
6.6 DEVELOPER expressly acknowledges and agrees that:
6.6.1 FRANCHISOR has the sole and exclusive
rights and interest in and to the Proprietary Marks and the goodwill associated
thereto.
6.6.2 DEVELOPER will not, directly or
indirectly, contest the validity or the ownership of the Proprietary Marks.
6.6.3 DEVELOPER acquires no right, title or
interest in the Proprietary Marks, except for the non-exclusive license to use
the Proprietary Marks pursuant to the Franchise Agreement and all Addenda
thereto.
6.6.4 Any and all goodwill arising from
DEVELOPER's use of the Proprietary Marks pursuant to the Franchise Agreement and
all Addenda thereto shall inure solely and exclusively to the benefit of
FRANCHISOR. Upon expiration or termination of this Agreement, no monetary amount
shall be assigned, for any reason and for any purpose whatsoever, to any
goodwill in connection with DEVELOPER's use of the Proprietary Marks pursuant to
the Franchise Agreement.
7. CONFIDENTIAL OPERATIONS MANUAL, CONFIDENTIAL INFORMATION AND
------------------------------------------------------------
NON-DISCLOSURE.
---------------
7.1 Confidential Manuals.
---------------------
-12-
<PAGE> 14
7.1.1 DEVELOPER shall at all times treat the
Operations Manual and other manuals created for or approved for use in the
establishment and operation of the FRANCHISED STORES, and the information
contained therein as confidential, and shall use all reasonable efforts to
maintain such information as secret and confidential (herein collectively the
"Confidential Manuals"). DEVELOPER shall not, at any time, without FRANCHISOR's
prior written consent, copy, duplicate, record or otherwise reproduce the
Confidential Manuals, in whole or in part, nor otherwise make the same available
to any unauthorized person.
7.1.2 DEVELOPER shall conduct the operation of
the FRANCHISED STORE in accordance with FRANCHISOR's methods and procedures as
prescribed from time to time in the Confidential Manuals and in all supplemental
bulletins and notices, which shall be deemed a part thereof.
7.1.3 The Confidential Manuals may be modified
from time to time to reflect changes in the image, decor, design, format,
appearance, methods, standards and specifications and operating procedures
approved or required for FRANCHISED STORES, and all such modifications shall be
binding upon DEVELOPER upon being mailed or otherwise delivered to it, as if
originally set forth therein; provided, however, that such modifications shall
not impose any obligations that are materially more onerous or costly than those
imposed by the Franchise Agreement.
7.1.4 DEVELOPER will maintain the Confidential
Manuals strictly confidential and will not at any time copy any part of the
Confidential Manuals, disclose any information contained in the Confidential
Manuals to others (except to the extent such information is otherwise lawfully
publicly known or available) or permit others access to the Confidential
Manuals, except as may be required to DEVELOPER's employees, provided that such
employees have signed FRANCHISOR's form of non-disclosure and non-competition
agreement, as set forth in an exhibit to the Franchise Agreement.
7.1.5 The Confidential Manuals shall at all
times remain FRANCHISOR's exclusive property and shall be returned to FRANCHISOR
promptly upon termination or expiration of this Agreement for any reason
whatsoever. DEVELOPER understands and agrees that it is of substantial value and
importance to FRANCHISOR and other franchisees, as well as to the DEVELOPER,
that the WEST COAST SYSTEM developed by FRANCHISOR establish and maintain a
common identity. DEVELOPER agrees and acknowledges that compliance with the WEST
COAST SYSTEM and the Confidential Manuals are essential to preserve, maintain
and enhance the reputation, trade demand and goodwill built up by the WEST COAST
SYSTEM, and the Proprietary Marks used in connection therewith; and that failure
of DEVELOPER to operate the FRANCHISED STORES in accordance with the WEST COAST
SYSTEM and the Confidential Manuals
-13-
<PAGE> 15
will cause irreparable damage to FRANCHISOR and its other franchisees, as well
as to DEVELOPER.
7.2 Confidential Information.
-------------------------
DEVELOPER, for itself and all of its agents and
employees, shall not, during the term of this Agreement or at any time
thereafter, communicate, divulge or use for the benefit of any other person,
persons, partnership, association or corporation, any confidential information,
knowledge, or know-how concerning the methods of operation of the WEST COAST
SYSTEM which may be communicated to DEVELOPER, or of which DEVELOPER may be
apprised, pursuant to the terms of this Agreement or the Franchise Agreement.
DEVELOPER shall divulge such confidential information only to such of its
employees as must have access to it in order to operate the FRANCHISED STORES.
7.3. Nondisclosure.
--------------
DEVELOPER shall not, at any time, either during
or after the term of this Agreement, copy or duplicate, or permit the copying or
duplication, nor publish, disclose or in any manner reveal, or permit the
publication, disclosure or revelation in any manner, to any person or entity,
except employees of DEVELOPER any portion of the Confidential Manuals,
supplements, addenda or amendments thereto, or any other information or material
supplied by FRANCHISOR to DEVELOPER and designated as confidential information.
DEVELOPER hereby recognizes and agrees that these materials and information are
proprietary trade secrets of FRANCHISOR and will be disclosed to DEVELOPER in
strict confidence solely for use in the development and operation of the
FRANCHISED STORES during the term of this Agreement and on the condition that
DEVELOPER will not use these trade secrets in any other business or capacity.
DEVELOPER acknowledges and agrees that it will not acquire any interest in the
trade secrets, other than the right to utilize them in the operation of the
FRANCHISED STORES during the term hereof and that DEVELOPER will maintain the
confidentiality of these trade secrets during and after the term of this
Agreement.
7.4 Confidentiality Agreements.
---------------------------
All persons affiliated with DEVELOPER, including
Owners, Principal Owners, directors, officers, partners, shareholders and
managers, and other key employees who have access to the Confidential Manuals,
shall execute the Confidentiality and Restrictive Covenant Agreement set forth
as Exhibit "G" hereto and incorporated herein by reference.
8. RECORD KEEPING, MODEM REPORTING AND REPORTING.
----------------------------------------------
-14-
<PAGE> 16
8.1 RECORD KEEPING. During the term of this Agreement,
DEVELOPER shall maintain and preserve, for at least six (6) years from the date
of their preparation, full, complete and accurate books, records and accounts
with respect to DEVELOPER. DEVELOPER shall establish and maintain in accordance
with good business practices, complete books of account and records from which
Gross Revenues of the FRANCHISED STORES may be determined as of the close of
business of each month during the term of this Agreement. DEVELOPER shall send
FRANCHISOR monthly, along with its payment of the Royalty Fees, a written report
showing the Gross Revenues of the FRANCHISED STORES during the preceding month
and such other information as requested by FRANCHISOR on a report form
prescribed by FRANCHISOR. Such report shall include such forms, reports,
records, software information and other data as FRANCHISOR may reasonably
require.
8.2 FRANCHISOR ACCESS BY MODEM. FRANCHISOR shall have
the right, at all times, to access its proprietary software through a modem, or
otherwise for purposes of ensuring DEVELOPER's compliance with this Agreement
and for reporting of information required to be submitted to FRANCHISOR with
respect to each of the FRANCHISED STORES.
8.3 ANNUAL REPORTS. DEVELOPER shall submit to
FRANCHISOR annually, within ninety (90) days after the end of each fiscal year
of DEVELOPER, financial statements covering the previous twelve (12) month's
operation of DEVELOPER and each of the FRANCHISED STORES certified as true and
correct by an executive officer of DEVELOPER, prepared on a review basis by a
certified public accountant reasonably acceptable to FRANCHISOR in accordance
with generally accepted accounting principles, applied on a consistent basis and
in accordance with customary industry practices and in sufficient detail to
provide accurate and complete information covering each of the FRANCHISED
STORES, during such fiscal year. In addition, such information shall be on both
a combined basis and on a per FRANCHISED STORE basis in a format determined by
FRANCHISOR.
8.4 INSPECTION OF RECORDS. FRANCHISOR or its
designated agents shall have the right at all reasonable times and on reasonable
notice to examine, at its expense, the books, records, and tax returns of
DEVELOPER with respect to each of the FRANCHISED STORES including all documents
in the care, custody, possession or control of DEVELOPER in connection with the
operations of each of the FRANCHISED STORES. FRANCHISOR shall also have the
right, at any time, and at its own expense, to have an audit made of the books
of DEVELOPER. If FRANCHISOR's accountants indicate that there has been an
understatement of Gross Revenues in any given period with respect to any of the
FRANCHISED STORES, then DEVELOPER shall immediately pay to FRANCHISOR the amount
understated in addition to interest from the date such amount was due until paid
at a rate equal to eighteen
-15-
<PAGE> 17
(18%) percent per annum, or, if less, at the maximum rate permitted by law. If
any understatement of Gross Revenues is in the amount of three (3%) percent or
more, or if FRANCHISOR's audit reveals any material or willful violation of this
Agreement, the Franchise Agreement, or any Addenda thereto, DEVELOPER shall, in
addition, reimburse FRANCHISOR for any and all costs and expenses connected with
the inspection (including, without limitation, travel expenses, compensation to
FRANCHISOR's representatives and reasonable accounting fees). The foregoing
remedies shall be in addition to any other remedies FRANCHISOR may have,
including the right to terminate this Agreement, of the Franchise Agreement and
Addenda thereto.
9. CONDITIONS OF TRANSFER OF INTEREST.
-----------------------------------
9.1 Transfer by Developer.
----------------------
Developer understands and acknowledges that the
rights and duties set forth in this Agreement are unique to DEVELOPER, and are
granted in reliance upon the business skill, financial capacity and personal
character of DEVELOPER and each of its Principal Owners. Therefore, neither
DEVELOPER nor any immediate or remote successor to any part of DEVELOPER'S
interest in this Agreement, nor any individual, partnership, corporation or
other legal entity which directly or indirectly controls DEVELOPER, shall sell,
assign, transfer, convey, sublease, pledge, mortgage or otherwise encumber the
following without the prior written consent of FRANCHISOR:
9.1.1 any right or interest created by this
Agreement, the Franchise Agreement or any Addenda thereto;
9.1.2 any of the FRANCHISED STORES, including
any portion of the assets therein;
9.1.3 any of the ownership interests in
DEVELOPER; or
9.1.4 this Agreement.
9.2 REQUIREMENTS OF TRANSFER. FRANCHISOR shall not
unreasonably withhold its consent to a transfer of any ownership interests in
DEVELOPER provided that DEVELOPER shall have been in full compliance with this
Agreement, the Franchise Agreement and Addenda thereto, and that all of the
following conditions are met prior to the time of the proposed transfer:
9.2.1 All of DEVELOPER's accrued monetary
obligations to FRANCHISOR, shall have been satisfied including all such
obligations arising under the Franchise Agreement and Addenda thereto;
-16-
<PAGE> 18
9.2.2 The transferor shall have first offered
to sell such interest to FRANCHISOR pursuant to Section 9.4 hereof.
9.2.3 The transferor's right to receive
compensation will be subordinated and secondary to obligations owed to
FRANCHISOR or other outstanding obligations due to FRANCHISOR from the
transferor, or DEVELOPER;
9.2.4 The transferor shall have executed a
general release, in a form satisfactory to FRANCHISOR, of any and all claims
against FRANCHISOR, and its officers, directors, shareholders, affiliates,
representatives, agents and employees, in their corporate and individual
capacities;
9.2.5 The transferee shall enter into a written
assignment, in a form satisfactory to FRANCHISOR, assuming and agreeing to
discharge all of DEVELOPER's obligations under this Agreement;
9.2.6 The transferee shall demonstrate to
FRANCHISOR's satisfaction that it meets FRANCHISOR's educational, managerial and
business standards, possesses a good aptitude, moral character, business
reputation and ability as may be evidenced by prior related business experience
or otherwise; has adequate financial resources and capital to fulfill the
obligations of DEVELOPER. DEVELOPER shall provide FRANCHISOR with such
information as FRANCHISOR may require in its then-current franchise application
form, in order to make such determination concerning each such proposed
transferee, including by way of illustration and not limitation, a ten (10) year
employment history, financial statements and tax returns for the most recent
three (3) year period and three (3) references, one of which must be a bank
reference. FRANCHISOR may reasonably object to a proposed transferee if the
proposed transfer would harm the WEST COAST SYSTEM or place FRANCHISOR at a
competitive disadvantage with respect to its proprietary information and the
WEST COAST SYSTEM;
9.2.7 DEVELOPER shall pay FRANCHISOR a transfer
fee which shall be Twenty-Five Thousand ($25,000.00) Dollars to cover
administrative and other expenses, in connection with the transfer.
9.3 SECURITIES OFFERINGS. All materials required
for any offer or sale of securities of DEVELOPER by federal or state law shall
be submitted to FRANCHISOR for review, approval, and consent prior to their
being filed with any government agency; and any materials to be used in any
exempt offering shall be submitted to the FRANCHISOR for review, approval and
consent prior to their use. No DEVELOPER offering shall imply (by use of the
Proprietary Marks or otherwise) that FRANCHISOR is participating
-17-
<PAGE> 19
as an underwriter, issuer, or offeror of DEVELOPER's or FRANCHISOR's securities;
and the FRANCHISOR's review of any offering shall be limited solely to the
subject of the relationship between DEVELOPER and FRANCHISOR. DEVELOPER and the
other participants in the offering must fully indemnify FRANCHISOR in connection
with the offering (subject to such limitations which are customary in offerings
of this nature). For each proposed offering, DEVELOPER shall pay to FRANCHISOR a
non-refundable fee of Five Thousand Dollars ($5,000.00), or such greater amount
necessary to reimburse FRANCHISOR for its reasonable costs and expenses
associated with reviewing the propose offering, including, without limitation,
legal and accounting fees. If the documentation with respect to any such offer
or sale is significantly less than what would normally be required in the case
of such an offering, then the fee DEVELOPER shall pay to FRANCHISOR for its
costs and expenses shall be adjusted downward in order to reflect the amount of
time actually expended in connection with such review. DEVELOPER shall give
FRANCHISOR written notice at least ninety (90) days prior to the date of
commencement of any such offering. Any such offering shall be subject to
FRANCHISOR's right of first refusal, as set forth in Section 9.4 hereof.
9.4 RIGHT OF FIRST REFUSAL. If any party holding
any interest in DEVELOPER, in this Agreement, in the DEVELOPER's business, or in
substantially of the DEVELOPER's assets (the transfer of which interest would
have the effect of transferring this Agreement, a controlling interest in
DEVELOPER, DEVELOPER's business, or in substantially all of DEVELOPER's assets),
or if DEVELOPER desires to accept any bona fide offer from a third party to
purchase such interest, the seller shall notify FRANCHISOR in writing of the
terms of such offer, and shall provide such information and documentation
relating to the offer as FRANCHISOR may require; and FRANCHISOR shall have the
right and option, exercisable within thirty (30) days after receipt of such
written notification, to send written notice to the seller that FRANCHISOR
intends to purchase the seller's interest on the same terms and conditions
offered by the third party. In the event that FRANCHISOR elects to purchase the
seller's interest, no material change in any offer and no other offers by a
third party for such interest shall be considered with respect to FRANCHISOR's
right of first refusal. In the event that FRANCHISOR elects to purchase the
seller's interest, closing on such purchase must occur within ninety (90) days
from the date of notice to the seller of the election to purchase by FRANCHISOR.
In the event that FRANCHISOR has elected not to purchase the seller's interest,
any material change in the terms of any offer prior to closing by any third
party shall constitute a new offer subject to the same rights of first refusal
by FRANCHISOR to exercise the option afforded by this Section 9.4 shall not
constitute a waiver of any other provision of this Agreement, including all of
the requirements of this Section 9.4 with respect to a proposed transfer. In the
event
-18-
<PAGE> 20
the consideration, terms, and/or conditions offered by a third party are such
that FRANCHISOR may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then FRANCHISOR may purchase the
interest in the DEVELOPER's business proposed to be sold for the reasonable
equivalent in cash. If the parties cannot agree within a reasonable time on the
reasonable equivalent in cash of the consideration, terms, and/or conditions
offered by the third party, an independent appraiser shall be designated by
mutual agreement of FRANCHISOR and DEVELOPER, and his determination shall be
binding. If FRANCHISOR and DEVELOPER cannot agree upon the selection of a single
appraiser, then each party shall designate one (1) such appraiser and the two
(2) designated appraisers, in turn, shall designate a third party appraiser and
the determination of the three (3) appraisers shall be binding.
9.5 Death, Disability or Incompetency.
---------------------------------
Upon the death, disability or mental
incompetency of any person with a controlling interest in this Agreement or in
DEVELOPER, the transfer of which requires the consent of the FRANCHISOR as
provided in Section 9.2 hereof, the executor, administrator, personal
representative, guardian, or conservator of such person shall transfer such
interest within six (6) months after such death, disability or mental
incompetency to a third party approved by FRANCHISOR. Such transfers, including,
without limitation, transfers by devise or inheritance, shall be subject to the
same conditions as any inter vivos transfer. However, in the case of transfer by
devise or inheritance, if the heirs or beneficiaries of any such person are
unable to meet the conditions of this Section 9, the personal representative of
the deceased person shall have a reasonable time to dispose of the deceased's
interest, which disposition shall be subject to all the terms and conditions for
transfers contained in this Agreement. If the interest is not disposed of within
a reasonable time not to exceed nine (9) months, FRANCHISOR may terminate this
Agreement.
9.6 WRITTEN CONSENT OF FRANCHISOR. Any purported
assignment, transfer, conveyance or encumbrance of any right or interest created
herein, any ownership interests in DEVELOPER, or this Agreement, without the
prior written consent of FRANCHISOR, shall be null and void, and shall result in
termination of this Agreement, as set forth below in Section 10.2.9 hereof.
9.7 NON-WAIVER BY FRANCHISOR. FRANCHISOR's consent
to a transfer of any interest granted herein shall not constitute a waiver of
any claims FRANCHISOR may have against the transferring party, nor shall it be
deemed a waiver of FRANCHISOR's rights to demand exact compliance with any of
the terms of this Agreement by the transferee.
-19-
<PAGE> 21
9.8 INTRA-CORPORATE NON-CONTROLLING TRANSFER. The
principals of DEVELOPER including the Principal Owners of DEVELOPER may agree
among themselves as to the purchase of a principal's interest in DEVELOPER. A
transfer of a minority interest in DEVELOPER (whether voting stock, securities
convertible thereto, partnership or proprietary interests) pursuant to such an
agreement will not be subject to the terms and conditions applicable to an
inter-vivos transfer set forth in this Section 9; provided, however, that the
interest of the transferring principal of DEVELOPER is not to be transferred to
a party not owning an interest in DEVELOPER immediately prior to the transfer.
9.9 Transfer by FRANCHISOR.
----------------------
FRANCHISOR shall have the right to transfer or
assign this Agreement, including all or any part of its rights and obligations
herein to any person or legal entity.
10. DEFAULT AND TERMINATION.
-----------------------
10.1 NO CURE PERIOD. Except as otherwise provided
by applicable law, DEVELOPER shall be deemed to be in default under this
Agreement, and this Agreement and all rights granted herein shall automatically
terminate without opportunity to cure and without notice by FRANCHISOR to
DEVELOPER, in the event that DEVELOPER files any petition in bankruptcy,
voluntary or involuntary.
10.2 OPTIONAL CURE PERIOD. Except as otherwise
provided by applicable law, DEVELOPER shall be deemed in default under this
Agreement and FRANCHISOR may, at its option, terminate this Agreement and all
rights granted herein without affording DEVELOPER any opportunity to cure the
default, with such termination to be effective immediately upon the sending of
the notice of termination to DEVELOPER as set forth in the notice provisions of
Section 14 hereof, or, FRANCHISOR may, at its option, suspend all FRANCHISOR
support of DEVELOPER pursuant to this Agreement, or otherwise, upon the
occurrence of any of the following events:
10.2.1 DEVELOPER becomes insolvent;
10.2.2 DEVELOPER makes an assignment for the
benefit of its creditors;
10.2.3 DEVELOPER admits in writing its
inability to pay its debts generally as they become due;
10.2.4 DEVELOPER suffers temporary or
permanently appointed receivership;
-20-
<PAGE> 22
10.2.5 DEVELOPER has against it a final
judgment which remains unsatisfied for thirty days or longer;
10.2.6 A suit is brought against DEVELOPER to
foreclose any lien or mortgage against any of the FRANCHISED STORES or against
any products in connection with the FRANCHISED STORES, and such suit is not
dismissed within thirty days;
10.2.7 DEVELOPER ceases to operate any of the
FRANCHISED STORES or otherwise abandons said business for five (5) or more
consecutive days;
10.2.8 DEVELOPER is convicted of a felony or
any other crime or offense that is reasonably likely, in the sole opinion of
FRANCHISOR, to adversely effect FRANCHISOR, the Proprietary Marks, or the
goodwill associated with the Proprietary Marks;
10.2.9 DEVELOPER attempts to, or purports to,
transfer any rights or obligations under this Agreement, or otherwise, to any
third party, contrary to the terms and provisions of Section 10 hereof;
10.2.10 DEVELOPER fails to comply with the
covenants set forth in Section 12 hereof;
10.2.11 DEVELOPER fails to comply with the
Development Schedule set forth at Exhibit C hereof.
10.3 CURE PERIOD AND TERMINATION. Except as set
forth in Sections 10.1 and 10.2 hereof, and except as otherwise provided by
applicable law, DEVELOPER shall have thirty (30) days after its receipt in any
manner set forth in Section 14 hereof from FRANCHISOR of a written notice of
default within which to remedy a default of any of the terms of this Agreement,
as set forth in such written notice of default, and provide written evidence
thereof to the satisfaction of FRANCHISOR.
If any such default is not cured within said thirty (30)
day period (or such longer period as applicable law may otherwise require),
FRANCHISOR may, at its option, terminate this Agreement and all rights granted
herein without affording DEVELOPER any further opportunity to cure the default,
with such termination to be effective immediately upon the sending of the notice
of termination to DEVELOPER in any manner set forth in Section 14 hereof, or,
FRANCHISOR may, at its option, suspend all FRANCHISOR support of DEVELOPER
pursuant to this Agreement, or otherwise.
10.4 CROSS-DEFAULT. Any default by DEVELOPER under
the terms and conditions of this Agreement or any other agreement between
FRANCHISOR and DEVELOPER, including the
-21-
<PAGE> 23
Franchise Agreement, and any Addenda thereto, shall be deemed to be a default of
each and every agreement between FRANCHISOR and DEVELOPER. Furthermore, in the
event of termination, for any cause, of this Agreement or any other such
agreement between the parties hereto, FRANCHISOR may, at its option, terminate
any or all other agreements.
11. OBLIGATIONS UPON TERMINATION.
----------------------------
11.1 DEVELOPER OBLIGATIONS. Upon the termination of
this Agreement by either DEVELOPER or FRANCHISOR, by operation of law, or upon
expiration of this Agreement because of lapse of time, this Agreement and all
rights granted herein to DEVELOPER shall automatically terminate; provided,
however, that the obligations of DEVELOPER as set forth in this Section 11 and
in Sections 12 and 13 hereof shall survive the termination of this Agreement.
11.2 DEVELOPER shall promptly pay all sums owing to
FRANCHISOR. FRANCHISOR shall have the right to set off any or all amounts due to
DEVELOPER under this Agreement. DEVELOPER shall also pay all damages, costs and
expenses, incurred by FRANCHISOR as a result of a default by DEVELOPER which
resulted in termination of this Agreement, including all fees and costs and
reasonable attorney's fees in obtaining injunctive or other relief for the
enforcement of DEVELOPER's obligations in this Section 11 and in Section 12
hereof. DEVELOPER does hereby irrevocably authorize and empower FRANCHISOR or
any officer of FRANCHISOR to execute, as DEVELOPER's attorney-in-fact, coupled
with an interest, all documents or orders as may be necessary for completion of
the post-termination obligations set forth in this Section 11.
11.3 DEVELOPER must continue to comply with the
continuing obligations set forth in this Agreement, including the
post-termination obligations set forth in Sections 11 and 12 hereof.
11.4 The covenants contained in this Section 11 shall
be construed as independent of any other provision of this Agreement and the
existence of any claim or cause of action of DEVELOPER against FRANCHISOR,
whether predicated upon this Agreement or otherwise, shall not constitute a
defense to the enforcement by FRANCHISOR of the covenants set forth in this
Section 11 or in Section 12 hereof.
12. NON-COMPETITION.
---------------
12.1 Covenants not to Compete.
-------------------------
12.1.1 In consideration of FRANCHISOR's
execution of this Agreement and the confidential disclosure by
-22-
<PAGE> 24
FRANCHISOR of unique valuable information to DEVELOPER, DEVELOPER and each of
its Principal Owners shall not (other than as provided in this Agreement),
during the term of this Agreement and for two years after its termination,
expiration, transfer, assignment, sale or nonrenewal:
12.1.2.1 Divert or attempt to
divert any business or customer from any of the FRANCHISED STORES to any
competitor, by direct or indirect inducement or otherwise, or do or perform,
directly or indirectly, any other act injurious or prejudicial to the WEST COAST
SYSTEM or the goodwill associated with the Proprietary Marks; or
12.1.2.2 Have any interest,
directly or indirectly, in any business competitive with the business of the
FRANCHISED STORES; or
12.1.2.3 Own, maintain, engage
in, or have any interest in, either directly or indirectly (including through a
member of the immediate family of any of the Principal Owners of DEVELOPER), as
a proprietor, partner, investor, lender, guarantor, shareholder, director,
officer, employee, principal, agent, advisor, independent contractor, or
consultant to, any business which specializes in whole or in part in the
development, establishment or operation of any retail facilities which sell or
rent video movies and related products, in the Development Area or within five
(5) miles of any retail video store operating under the WEST COAST SYSTEM
(whether company-owned, franchised or otherwise established); or
12.1.2.4 Employ or seek to
employ any person who is at that time currently employed by FRANCHISOR (or its
affiliates), or directly or indirectly induce such person to leave his or her
employment without the prior written consent of FRANCHISOR.
12.2 EFFECT OF UNENFORCEABILITY OF COVENANTS. The
parties hereto agree that the foregoing covenants shall be construed as
independent of any other covenants or provisions of this Agreement and the
existence of any claim or cause of action of DEVELOPER against FRANCHISOR, shall
not constitute a defense to the enforcement by FRANCHISOR of such covenants. In
the event that all or any portion of any provisions set forth in this Section 12
are held unreasonable or unenforceable by a court or agency having valid
jurisdiction in an unappealed final decision to which FRANCHISOR is a party,
DEVELOPER expressly agrees to be bound by any lessor covenants subsumed within
the terms of such covenant that imposes the maximum duty permitted by law, as if
the resulting covenant were separately stated in and made a part of this Section
12, or as otherwise amended by the court or agency.
-23-
<PAGE> 25
12.3 INJUNCTIVE RELIEF. DEVELOPER acknowledges that
FRANCHISOR would be irreparably injured and without an adequate remedy at law in
the event DEVELOPER violates any provision of this Section 12 and that in such
event FRANCHISOR will therefore be entitled to a temporary restraining order,
preliminary injunction and/or permanent injunction without need to show monetary
damages or to post a bond or other security, as well as actual costs and
attorneys' fees incurred in enforcing the restrictive covenants set forth in
Section 12 hereof.
13. INDEPENDENT CONTRACTOR AND INDEMNIFICATION.
------------------------------------------
13.1 INDEPENDENT CONTRACTOR. It is understood and
agreed by the parties hereto that this Agreement does not create a fiduciary
relationship between or among them, that DEVELOPER shall be an independent
contractor, and that nothing in this Agreement is intended to constitute or
construe DEVELOPER as an agent, legal representative, subsidiary, joint
venturer, partner, affiliate, employee or servant of FRANCHISOR for any purpose
whatsoever. It is understood and agreed that nothing in this Agreement
authorizes DEVELOPER to make any contract, agreement, warranty or representation
on FRANCHISOR's behalf, or to incur any debt or other obligation in FRANCHISOR's
name, and that FRANCHISOR shall in no event assume liability for, or be deemed
liable hereunder, as a result of, any such action, or by reason of any act or
omission of DEVELOPER, its employees or agents, in its conduct pursuant to this
Agreement or of the FRANCHISED STORES.
13.2 DEVELOPER INDEMNIFICATION. DEVELOPER agrees to
indemnify FRANCHISOR, including its officers, directors, employees and
stockholders and save and hold FRANCHISOR harmless from, against, for and in
respect of any and all damages, losses, obligations, liabilities, claims,
deficiencies, costs and expenses, including, without limitation, reasonable
attorney's fees and other costs and expenses incident to any suit, action,
investigation, claim or proceeding (herein referred to as "FRANCHISOR's Losses")
suffered, sustained, incurred or required to be paid by FRANCHISOR, by reason of
any representation, act, commission or omission of DEVELOPER, its agents,
servants, employees, with respect to, or in connection with, DEVELOPER's
obligations and the establishment and operation of each of the FRANCHISED
STORES, including any injury to, or loss of property of, any customer or
employee of any of the FRANCHISED STORES, or any failure by DEVELOPER to observe
or perform its covenants and obligations as set forth in this Agreement;
provided, however, that this indemnification obligation shall not arise to the
extent FRANCHISOR's losses result from FRANCHISOR's (including its agents' or
employees') negligent or wrongful act or failure to act. All of FRANCHISOR's
Losses shall be satisfied by cash payments from DEVELOPER to FRANCHISOR.
DEVELOPER shall, in writing, notify FRANCHISOR immediately as to any suit,
action, investigation, claim or proceeding for which indemnification might
-24-
<PAGE> 26
be claimed by FRANCHISOR. Upon receipt of any notice of suit, action,
investigation, claim or proceeding for which indemnification might be claimed by
FRANCHISOR, FRANCHISOR shall be entitled promptly to defend, prosecute, settle,
contest or otherwise protect itself, by counsel of its own choosing, at
DEVELOPER's sole cost and expense. DEVELOPER shall have the right to select its
own counsel, provided, that attorneys' fees and costs for such counsel are paid
by DEVELOPER. FRANCHISOR shall be entitled to control the defense or prosecution
thereof, unless FRANCHISOR has consented in writing to allow DEVELOPER to
control the litigation.
14. NOTICES.
-------
Any and all notices required or permitted under this
Agreement shall be in writing and shall be (a) personally delivered (and deemed
received when delivered and acknowledgment of receipt is given), or (b) mailed
by certified or registered mail, return receipt requested (and deemed received
three (3) days after delivery to the U.S. Postal Service, whether or not
accepted by addressee), or (c) by telecopy (and deemed received when sent and
confirmation of receipt is made), or (d) by Federal Express or other recognized
overnight courier service guaranteeing delivery within twenty four (24) hours
(and deemed received on the scheduled date of delivery), and addressed to the
respective parties at the following addresses unless and until a different
address has been designated by written notice to the other party:
Notices to FRANCHISOR:
West Coast Franchising Company
9990 Global Road
Philadelphia, Pennsylvania 19115
Attention: Office of the President
Notices to DEVELOPER:
Reel Entertainment, Inc.
510 O'Keefe Avenue
New Orleans, LA 70113
Attention: Office of the President
15. ENTIRE AGREEMENT.
----------------
This Agreement, the documents referred to herein, and
the Exhibits hereto, constitute the entire, full and complete Agreement between
FRANCHISOR and DEVELOPER concerning the subject matter hereof, and supersede all
prior agreements. There are no representations, inducements, promises,
agreements, arrangements or undertakings, oral or written, between the parties
other than those set forth in this Agreement. No amendment, change or variance
from this Agreement shall be binding on either party
-25-
<PAGE> 27
unless mutually agreed to in writing by the parties and executed by their
authorized officers or agents in writing.
16. SEVERABILITY AND CONSTRUCTION; WAIVER; MISCELLANEOUS.
----------------------------------------------------
16.1 SEVERABILITY. Except as expressly provided to the
contrary herein, each section, part, term and/or provision of this Agreement
shall be considered severable; and if, for any reason, any section, part, term
and/or provision herein is determined to be invalid and contrary to, or in
conflict with, any existing or future law or regulation by a court or agency
having valid jurisdiction, such shall not impair the operation of, or have any
other effect upon, such other portions, sections, parts, terms and/or provisions
of this Agreement as may remain otherwise intelligible, and the latter shall
continue to be given full force and effect and bind the parties hereto; and said
invalid sections, parts, terms and/or provisions shall be deemed not to be a
part of this Agreement.
16.2 NO THIRD PARTY BENEFITS. Except as otherwise set
forth in this Agreement, nothing in this Agreement is intended, nor shall be
deemed, to confer upon any person or legal entity other than the parties hereto,
and such of their respective successors and assigns as permitted herein, any
rights or remedies under or by reason of this Agreement.
16.3 CAPTIONS. All captions in this Agreement are
intended solely for the convenience of the parties, and none shall be deemed to
affect the meaning or construction of any provisions hereof.
16.4 GENDER REFERENCES. All references herein to the
masculine, neuter or singular shall be construed to include the masculine,
feminine, neuter or plural, where applicable.
16.5 EXECUTION OF AGREEMENT. This Agreement may be
executed in duplicate, and each copy so executed shall be deemed an original.
16.6 ABSENCE OF WARRANTIES. Except as otherwise
provided herein, FRANCHISOR does not make any warranties or guarantees upon
which DEVELOPER may rely, and assumes no liability or obligation to DEVELOPER,
by providing any waiver, approval, consent or suggestion to DEVELOPER in
connection with this Agreement, or by reason of any neglect, delay or denial or
any request therefor.
16.7 ANTI-WAIVER. No delay, waiver, omission or
forbearance on the part of FRANCHISOR, to exercise any right, option, duty or
power arising out of any breach or default by DEVELOPER or by any other WEST
COAST developer, of any of the
-26-
<PAGE> 28
terms, provisions or covenants hereof, shall constitute a waiver by such party
to enforce any such right, option or power as against DEVELOPER or as to
subsequent breach or default by DEVELOPER. Subsequent acceptance by FRANCHISOR
of any payments due to it hereunder shall not be deemed to be a waiver of any
preceding breach by DEVELOPER of any terms, covenants or conditions of this
Agreement.
16.8 FORCE MAJURE. Except for the obligations of
DEVELOPER to pay any fees or other payments hereunder, neither party will be
liable to the other party for failure to perform under this Agreement, in whole
or in part, when such failure is due to governmental restrictions, failure of
utilities, strikes, labor troubles, riots, storms, fires, explosions, floods,
wars, embargoes, blockades, legal restrictions, insurrections, acts of God or
any other cause similar thereto which is beyond the reasonable control of the
parties. In the event of such delay, the time for performance will be extended
by a period of time equal to such delay if such extension is reasonably needed.
17. APPLICABLE LAW; JURISDICTION AND VENUE; LIMITATION OF
-----------------------------------------------------
CLAIMS; INJUNCTIVE RELIEF; WAIVERS.
----------------------------------
17.1 EFFECT. This Agreement takes effect upon
acceptance and signing by FRANCHISOR in Philadelphia, Pennsylvania.
17.2 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED
BY, INTERPRETED AND CONSTRUED UNDER THE LAWS OF THE COMMONWEALTH OF
PENNSYLVANIA. THE PARTIES HERETO AGREE THAT ANY ACTION BROUGHT BY ANY ONE OF
THEM, WHETHER FEDERAL OR STATE, OR ANY ARBITRATION PROCEEDING, SHALL BE BROUGHT
WITHIN THE COMMONWEALTH OF PENNSYLVANIA. DEVELOPER WAIVES ANY OBJECTIONS TO
PERSONAL JURISDICTION, FORUM NON CONVENIENS, AND VENUE WITH RESPECT TO ANY
ACTION OR ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT.
17.3 LIMITATIONS OF CLAIMS. EXCEPT WITH REGARD TO
DEVELOPER'S OBLIGATIONS TO MAKE PAYMENTS TO FRANCHISOR PURSUANT TO THIS
AGREEMENT, ANY AND ALL CLAIMS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR
THE RELATIONSHIP OF DEVELOPER AND FRANCHISOR IN CONNECTION WITH DEVELOPER'S
OPERATION OF ANY OF THE FRANCHISED STORES SHALL BE BARRED UNLESS AN ACTION OR
PROCEEDING IS COMMENCED WITHIN ONE (1) YEAR FROM THE DATE ON WHICH DEVELOPER OR
FRANCHISOR KNEW OR SHOULD HAVE KNOWN, IN THE EXERCISE OF REASONABLE DILIGENCE,
OF THE FACTS GIVING RISE TO SUCH CLAIMS.
17.4 WAIVER OF PUNITIVE DAMAGES AND JURY TRIAL.
FRANCHISOR AND DEVELOPER HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY RIGHT TO OR CLAIM FOR ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER
AND AGREE THAT IN THE EVENT OF A DISPUTE BETWEEN THEM, EXCEPT AS OTHERWISE
PROVIDED HEREIN, EACH
-27-
<PAGE> 29
SHALL BE LIMITED TO THE RECOVERY OF ACTUAL DAMAGES SUSTAINED BY IT. FRANCHISOR
AND DEVELOPER HEREBY IRREVOCABLY WAIVE TRIAL BY JURY ON ANY ACTION, PROCEEDING
OR COUNTERCLAIM, WHETHER AT LAW OR EQUITY, BROUGHT BY EITHER OF THEM.
17.5 INJUNCTIVE RELIEF. Nothing in this Agreement
shall bar FRANCHISOR's right to seek specific performance of the provisions of
this Agreement and injunctive relief against threatened conduct that will cause
it loss or damages under customary equity rules, including applicable rules for
obtaining restraining orders and preliminary injunctions. DEVELOPER agrees that
FRANCHISOR may obtain such injunctive relief in addition to such further or
other relief as may be available at equity or law for (i) any dispute involving
the Proprietary Marks; (ii) termination of this Agreement; (iii) any dispute
involving enforcement of the confidentiality provisions set forth in this
Agreement; and (iv) any dispute involving enforcement of the covenants not to
compete set forth in Section 12 of this Agreement. DEVELOPER agrees that
FRANCHISOR will not be required to post a bond to obtain any injunctive relief
and that DEVELOPER's only remedy if an injunction is entered against DEVELOPER
will be the dissolution of that injunction, if warranted, upon due hearing (all
claims for damages by reason of the wrongful issuance of such injunction being
expressly waived hereby).
18. ACKNOWLEDGEMENTS.
----------------
18.1 DEVELOPER ACKNOWLEDGES THAT IT HAS CONDUCTED AN
INDEPENDENT INVESTIGATION OF FRANCHISOR, AND THE STATUS AND REPUTATION OF WEST
COAST VIDEO FRANCHISES, GENERALLY, AND RECOGNIZES THAT THE BUSINESS VENTURE
CONTEMPLATED BY THIS AGREEMENT INVOLVES BUSINESS RISKS AND THAT ITS SUCCESS IS
PRIMARILY DEPENDENT UPON THE ABILITY OF DEVELOPER AS AN INDEPENDENT
BUSINESSPERSON AND NOT UPON FRANCHISOR. FRANCHISOR EXPRESSLY DISCLAIMS THE
MAKING OF, AND DEVELOPER ACKNOWLEDGES THAT IT HAS NOT RECEIVED, ANY WARRANTY OR
GUARANTEE, EXPRESS OR IMPLIED, AS TO THE POTENTIAL VOLUME, PROFITS OR SUCCESS OF
THE BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT. FURTHER, DEVELOPER
ACKNOWLEDGES, WARRANTS AND REPRESENTS TO FRANCHISOR THAT NO REPRESENTATION HAS
BEEN MADE BY FRANCHISOR, OR ANY EMPLOYEE, AGENT OR SALES PERSON OF FRANCHISOR,
AND RELIED UPON BY DEVELOPER AS TO THE FUTURE OR PAST INCOME, EXPENSES, SALES
VOLUME OR POTENTIAL PROFITABILITY, EARNINGS OR INCOME OF THE FRANCHISED STORES .
18.2 DEVELOPER ACKNOWLEDGES THAT IT RECEIVED A COPY OF
THIS AGREEMENT AND ALL EXHIBITS THERETO AT LEAST FIVE (5) BUSINESS DAYS PRIOR TO
THE DATE ON WHICH THIS AGREEMENT WAS EXECUTED, OR AS OTHERWISE PROVIDED BY
APPLICABLE STATE LAW. DEVELOPER FURTHER ACKNOWLEDGES THAT IT HAS RECEIVED THE
DISCLOSURE DOCUMENT REQUIRED BY THE TRADE REGULATION RULE OF THE FEDERAL
-28-
<PAGE> 30
TRADE COMMISSION ENTITLED "DISCLOSURE REQUIREMENTS AND PROHIBITIONS CONCERNING
FRANCHISING AND BUSINESS OPPORTUNITY VENTURES," OR AS OTHER APPLICABLE LAW MAY
REQUIRE, AT LEAST TEN (10) BUSINESS DAYS PRIOR TO THE DATE ON WHICH THIS
AGREEMENT WAS EXECUTED.
18.3 DEVELOPER ACKNOWLEDGES THAT IT HAS READ AND
UNDERSTOOD THIS AGREEMENT, THE ATTACHMENTS HERETO, IF ANY, AND AGREEMENTS
RELATING THERETO, IF ANY, AND THAT FRANCHISOR HAS ACCORDED DEVELOPER AMPLE TIME
AND OPPORTUNITY TO CONSULT WITH ADVISORS OF ITS OWN CHOOSING ABOUT THE POTENTIAL
BENEFITS AND RISKS OF ENTERING INTO THIS AGREEMENT.
19. MEDIATION. Except as set forth in Section 17.5 of this
Agreement, the parties agree that if any dispute between them, or any claim by
one or more of them, concerning this Agreement, any related agreement, including
the Franchise Agreement and any Addendum thereto, or any of the FRANCHISED
STORES, cannot be settled through negotiation, after diligent effort, they will
first attempt in good faith to settle the dispute or claim by submitting the
matter to private and confidential mediation pursuant to the CPR Procedure for
Resolution of Franchise Disputes, a copy of which is attached hereto as Exhibit
H and incorporated herein by reference.
20. ARBITRATION.
-----------
20.1 Except as set forth in Sections 17.5 and 19 of
this Agreement, any controversy, claim, cause of action or dispute arising out
of, or relating to any of the FRANCHISED STORES or this Agreement including, but
not limited to (i) any claim by DEVELOPER, or any person in privity with or
claiming through, on behalf of or in the right of DEVELOPER, concerning the
entry into, performance under, or termination of, this Agreement or any other
agreement entered into by FRANCHISOR, or its subsidiaries or affiliates, and
DEVELOPER, (ii) any claim against a past or present employee, officer, director
or agent of FRANCHISOR, (iii) any claim of breach of this Agreement, and (iv)
any claims arising under state or federal laws, shall be submitted to final and
binding arbitration as the sole and exclusive remedy for any such controversy or
dispute. Unless prohibited by applicable law, any claim shall be made by filing
a written demand for arbitration within one (1) year following the conduct, act
or other event or occurrence first giving rise to the claim; otherwise, the
right to any remedy shall be deemed forever waived and lost. Persons in privity
with or claiming through, on behalf of or in the right of DEVELOPER include, but
are not limited to, spouses and other family members, heirs, executors,
representatives, successors and assigns.
20.2 The right and duty of the parties to this
Agreement to resolve any disputes by arbitration shall be governed
-29-
<PAGE> 31
exclusively by the Federal Arbitration Act, as amended, and arbitration shall be
conducted pursuant to the then-prevailing Commercial Arbitration Rules of the
American Arbitration Association (herein "AAA"). The arbitration shall be held
at the office of the AAA closest to FRANCHISOR's principal place of business.
Any dispute as to the arbitration of any controversy, claim, cause of action or
dispute shall also be determined by arbitration.
20.3 Three arbitrator(s) shall be selected from a panel
of neutral arbitrators provided by the AAA and shall be chosen by the striking
method. The parties each shall bear all of their own costs (including attorney's
fees) of arbitration; however, the fees of the arbitrators shall be divided
equally between the parties. The arbitrators shall have no authority to amend or
modify the terms of this Agreement.
20.4 Each party further agrees that, unless such a
limitation is prohibited by applicable law, the other party shall not be liable
for punitive or exemplary damages and the arbitrators shall have no authority to
award the same. The award or decision by a majority of the arbitrators shall be
final and binding on the parties without right of appeal and may be enforced by
judgment or order of a court having subject matter jurisdiction in the state
where the arbitration took place. The arbitration panel shall have absolutely no
authority to award punitive or exemplary damages to any party.
20.5 No arbitration under this Agreement shall include,
by consolidation, joinder or in any other manner, any person other than the
DEVELOPER and FRANCHISOR and any person in privity with or claiming through, in
the right of or on behalf of DEVELOPER or FRANCHISOR, unless both parties
consent in writing. To the extent permitted by applicable law, no issue of fact
or law shall be given preclusive or collateral estoppel effect in any
arbitration hereunder, except to the extent such issue may have been determined
in another proceeding between FRANCHISOR and DEVELOPER or any person in privity
with or claiming through, in the right of or on behalf of DEVELOPER or
FRANCHISOR.
20.6 Except as and to the extent expressly provided to
the contrary by law, FRANCHISOR and DEVELOPER shall maintain all aspects of the
arbitration proceeding in confidence, and shall not disclose any information
about the proceeding to any third party other than legal counsel who shall be
required to maintain the confidentiality hereof.
-30-
<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed and delivered this Agreement in duplicate on the day and year first above
written.
WEST COAST FRANCHISING COMPANY
By: /s/ Kenneth R. Graffeo
-----------------------------------
Title: Executive Vice President-
Marketing
--------------------------------
REEL ENTERTAINMENT, INC.
By: /s/ T. George Solomon, Jr.
-----------------------------------
Title: President
--------------------------------
-31-
<PAGE> 1
RETAIL STORE OPTION AGREEMENT
AGREEMENT made this first day of October, 1996, by and among
Reel Entertainment, Inc., a Louisiana corporation ("Developer")
and West Coast Entertainment Corporation, a Delaware corporation
with its principal office at 9990 Global Road, Philadelphia,
Pennsylvania 19115 ("Buyer").
WHEREAS, the Developer is party to a Development Agreement
(the "Development Agreement") of even date herewith with West
Coast Franchising Company, a Delaware corporation and wholly-owned
subsidiary of the Buyer ("WCFC"), pursuant to which the Developer
has certain rights to establish, acquire and operate West Coast
Video Franchise Stores (each, a "Retail Store" and collectively,
"Retail Stores") pursuant to the terms of a Franchise Agreement
between the Developer and WCFC; and
WHEREAS, the execution and delivery of this Agreement was a
condition to the execution of the Development Agreement by the
parties thereto.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the
Developer and the Buyer hereby agree as follows:
1. DEFINITIONS. As used herein, each of the following
terms shall have the respective meaning set forth below:
(a) "Asset Purchase Agreement" shall mean the form of
asset purchase agreement attached hereto as EXHIBIT A and executed
by the Buyer and Developer after the exercise of a Buy Option or
Sell Option.
(b) "Buy Option" shall mean the right of the Buyer,
exercised by written notice to the Developer, to cause the
Developer to transfer and sell to the Buyer, and the Buyer to
purchase from the Developer, pursuant to the Asset Purchase
Agreement all of the assets of a Tranche of Stores identified by
the Developer no later than 14 days after the exercise of the Buy
Option.
(c) "Net Operating Cash Flow" shall mean with respect
to a Retail Store included in a Tranche of Stores an amount equal
to the pre-tax income from the Retail Store during the 12-month
period (or, if a Retail Store included in a Tranche of Stores has
been open for less than 12 months, then for the period since such
store has been open and not prior thereto) ending on the last day
of the calendar month preceding the delivery of the Buy Option or
Sell Option, as applicable, plus all debt-related interest expense
<PAGE> 2
and depreciation and amortization expenses attributable to the
Retail Store for such 12-month period, less all rental product
purchases reasonably attributable to the Retail Store during such
12-month period (including revenue sharing expenses if not
previously expensed), less all earned income interest reasonably
attributable to the Retail Store for such 12-month period, plus
all royalty expenses attributable to the Retail Store during such
12-month period (if expensed). The Net Operating Cash Flow shall
be determined in accordance with generally accepted accounting
principles applied consistently with the Developer's past
practice.
(d) "Prospectus" shall mean the prospectus included in
an effective Registration Statement filed by the Buyer with the
Securities and Exchange Commission relating to the registration of
WCEC Shares under the Securities Act of 1933, as amended.
(e) "Purchase Price" shall mean with respect to all of
the assets of a Tranche of Stores an amount equal to the product
of (x) 4.5 multiplied by (y) the aggregate amount of the Net
Operating Cash Flow for each Retail Store included in the Tranche
of Stores.
(f) "Sell Option" shall mean the right of the
Developer, exercised by written notice to the Buyer, to cause the
Buyer to purchase from the Developer, and the Developer to
transfer and sell to the Buyer, pursuant to the Asset Purchase
Agreement all of the assets of a Tranche of Stores identified by
the Developer.
(g) "Tranche of Stores" shall mean a group of Retail
Stores identified in writing by the Developer at the time of
exercise by the Developer of a Sell Option, or, in the case of the
exercise by the Buyer of a Buy Option a group of Retail Stores
identified in writing by the Developer no later than 14 days after
the exercise of a Buy Option; PROVIDED HOWEVER, that the first,
second and third Tranche of Stores shall be comprised of at least
eight, ten and thirteen Retail Stores, respectively, that have
been newly-developed by the Developer pursuant to the terms of the
Development Agreement (as opposed to Acquired Video Stores, as
that term is defined in the Development Agreement).
(h) "Tranche Financial Statements" shall mean (i) the
balance sheet as of the most recent calendar year end and the
related statements of income, retained earnings and changes in
financial condition for the year then ended for the Tranche of
Stores on a combined basis (collectively, the "Annual Financials")
and (ii) the balance sheet as of the most recent month end and the
- 2 -
<PAGE> 3
related statements of income, retained earnings and changes in
financial condition for the period beginning on the previous
January 1 and ended on such most recent month end (collectively,
the "Stub Financials"). The Annual Financials shall be prepared
in accordance with generally accepted accounting principles
applied consistently with past practice and certified without
qualification by the Developer's independent public accountants
(which shall be licensed to practice before the Securities and
Exchange Commission), and the Stub Financials shall be reviewed by
such accountants and certified by the Developer's chief financial
officer; provided, however, that, at the election of the
Developer, the Annual Financials delivered to Buyer in connection
with the exercise of a Buy Option may be reviewed by such
accountants and certified by the Developer's chief financial
officer.
(i) "WCEC Shares" shall mean shares of Common Stock,
$.01 per value per share, of Buyer.
2. OPTION TO SELL. The Buyer hereby grants the
Developer the right to exercise up to four Sell Options during the
period beginning April 1, 1998 and ending June 30, 2001, except
that no Sell Option may be exercised within six months after the
closing of the sale to the Buyer of a Tranche of Stores. If any
Tranche of Stores identified by the Developer in connection with
the exercise of any Sell Option includes less than 10 Retail
Stores, then thereafter the Developer shall no longer have any
right to exercise a Sell Option. Notwithstanding the above, prior
to exercising a Sell Option, the Developer shall provide to the
Buyer not less than 75 days', nor more than 105 days', prior
notice of its preliminary (and non-binding) intention to do so.
During such 75-day period, the Buyer shall deliver to the
Developer a then-current Prospectus (or such other information as
Buyer reasonably determines is required in order to comply with
applicable state and federal securities laws). Following receipt
of such Prospectus, the Developer may then exercise the Sell
Option; provided, however, that the Developer shall have no
obligation to exercise a Sell Option (and its failure to do so
shall not preclude the Developer from providing any further notice
of its preliminary intention to exercise a Sell Option).
3. OPTION TO BUY. The Developer hereby grants the Buyer the
right to exercise up to four Buy Options during the period
beginning October 1, 1998 and ending December 31, 2001, provided,
that the Buyer may not exercise more than (1) one Buy Option prior
to October 1, 1999, (ii) two Buy Options prior to July 1, 2000 and
(iii) three Buy Options prior to April 1, 2001.
- 3 -
<PAGE> 4
4. FINANCIAL STATEMENTS. The Developer shall provide
Tranche Financial Statements for each Tranche of Stores within 45
days of the exercise of a Sell Option or a Buy Option.
5. ASSET PURCHASE AGREEMENT. Upon exercise of a Buy Option
or Sell Option, both Buyer and Developer shall diligently complete
the blank provisions of and execute and deliver the form of asset
purchase agreement attached hereto as EXHIBIT A.
6. DETERMINATION OF PURCHASE PRICE. Promptly following the
delivery of the Buy Option or Sell Option, as applicable, the
Buyer shall cause independent certified public accountants for the
Buyer (the "Accountants"), to review the books and records of the
Developer and the Retail Stores. Not later than 20 days after the
delivery of the Tranche Financial Statements, the Buyer shall
cause the Accountants to deliver a statement to the Buyer and the
Developer setting forth the Purchase Price (the "Accountants'
Report"). The Purchase Price shall be included in the Asset
Purchase Agreement.
In the event that the Buyer or the Developer dispute the
calculation of the Purchase Price, the disputing party shall
notify the other party hereto in writing (the "Dispute Notice") of
the amount, nature and basis of such dispute, within 5 business
days after delivery of the Accountants' Report. In the event of
such a dispute, the parties hereto shall first use their best
efforts to resolve such dispute among themselves. If the parties
are unable to resolve the dispute within 10 business days after
delivery of the Accountants' Report, the dispute shall be
submitted to the Accountants and, independent accountants for the
Developer ("Developer's Accountants"), for resolution. The
Accountants and Developer's Accountants shall use their best
efforts to resolve the dispute within 5 business days after
submission. If they are unable to agree upon a resolution of the
dispute within such 5-business day period, the dispute shall be
submitted to arbitration in accordance with Section 13.
The fees and expenses of the Accountants in connection with
the preparation of the Accountants' Report and the resolution of
disputes pursuant to the preceding paragraph shall be borne by the
Buyer and the fees and expenses of Developer's Accountants in
connection with the resolution of disputes pursuant to the
preceding paragraph shall be borne by the Developer.
Promptly upon the expiration of the 5-business day period for
giving the Dispute Notice, if no Dispute Notice is given, or
promptly upon the resolution of disputes, if any, as provided
above, the Closing shall occur.
- 4 -
<PAGE> 5
The Purchase Price for the first Tranche of Stores shall be
increased or decreased to reflect any adjustment required pursuant
to Section 1.3(d) of that certain Asset Purchase Agreement of even
date herewith among the Buyer, Developer and the Principals
identified therein.
7. THE CLOSING. Following each exercise of a Buy Option or
Sell Option, the closing of the acquisition by the Buyer of the
assets of the related Tranche of Stores (the "Closing") shall take
place within 60 days following the date of delivery of the Tranche
Financial Statements (or if later within 5 business days after
resolution of any dispute in accordance with Section 6 above) at
the offices of Hale and Dorr, 60 State Street, Boston,
Massachusetts, at such time or date as may be selected by Buyer,
on not less than five days prior notice to Developer (which notice
may be given orally), or at such other time and date as may be
mutually agreed upon in writing by the parties hereto.
8. PAYMENT OF PURCHASE PRICE. At each Closing, the
Purchase Price shall be paid in accordance with the Asset Purchase
Agreement. The value of each WCEC Share delivered to Developer as
part of the payment of the Purchase Price shall be equal to the
average of the bid and asked prices per share of common stock of
WCEC as reported on the Nasdaq Stock Exchange for each of the
fifteen trading days ending on the third business day immediately
preceding the Closing.
9. ASSUMPTION OF LIABILITIES. The Buyer shall assume no
liabilities of the Developer other than accounts payable for new
release rental and sell-through videotapes and interactive
electronic games relating to the Tranche of Stores that have been
outstanding for 60 days or less at the Closing and that have been
incurred in the ordinary course of business. Such amount of
payables shall not reduce the Purchase Price. All other
liabilities of the Developer relating to such Tranche of Stores
shall be paid in full by Developer at or prior to the Closing.
10. RESTRICTIONS ON TRANSFER OF RETAIL STORES. Developer
hereby agrees that it shall not, without Buyer's prior written
consent (which may be granted or denied in Buyer's sole and
absolute discretion), sell, transfer or dispose of, directly or
indirectly, by sale of stock, assets, merger, consolidation or
otherwise, all or any portion of, or any interest in, any Retail
Store until such time as the Buy Options have expired unexercised.
11. REPRESENTATION OF THE DEVELOPER. The Developer hereby
represents and warrants to the Buyer that the execution and
delivery of this Agreement by the Developer, and the agreements
provided for herein, and the consummation by the Developer of all
transactions contemplated hereby, have been duly authorized by all
- 5 -
<PAGE> 6
requisite corporate and shareholder action; that this Agreement
and all such other agreements and obligations entered into and
undertaken in connection with the transactions contemplated hereby
to which the Developer is a party constitute the valid and legally
binding obligations of the Developer, enforceable against the
Developer in accordance with their respective terms.
12. NOTICES. Any notices or other communications required
or permitted hereunder shall be sufficiently given if delivered
personally or sent by telex, federal express, registered or
certified mail, postage prepaid, addressed as follows or to such
other address of which the parties may have given notice:
To the Developer: Reel Entertainment Inc.
-----------------------
-----------------------
-----------------------
With a copy to:
-----------------------
-----------------------
-----------------------
To the Buyer: West Coast Entertainment Corporation
9990 Global Road
Philadelphia, Pennsylvania 19115
Attn: President
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: John H. Chory, Esq.
Unless otherwise specified herein, such notices or other
communications shall be deemed received (a) on the date delivered,
if delivered personally; (b) one business day after delivery to an
overnight courier, if sent by overnight courier; or (c) three
business days after being sent, if sent by registered or certified
mail.
13. Arbitration.
-----------
(a) Any dispute, controversy or claim between the
parties arising out of or relating to this Agreement, a breach
hereof or the transactions contemplated hereby, shall be settled
by arbitration in accordance with the provisions of this Section.
Any arbitration pursuant to this Section shall be conducted by a
single arbitrator appointed by the Boston, Massachusetts office of
the American Arbitration Association upon the request of either
party. The arbitrator shall have a minimum of five years of
experience in the area of business relevant to the particular
dispute. Each party shall be permitted to submit only one
- 6 -
<PAGE> 7
proposal to the arbitrator, and the arbitrator shall be required
to choose one of such two proposals as the resolution of the
dispute. The arbitrator may proceed to a resolution notwith-
standing the failure of a party to participate in the proceedings.
Each of the parties shall pay its own costs and expenses in
connection with any such arbitration, and the parties shall share
equally in the fees and expenses of the arbitrator.
(b) The parties agree that any such arbitration will
occur in Boston, Massachusetts, any such arbitration award shall
be final and binding upon the parties, may be entered in any court
having jurisdiction and shall not be appealable by either party in
any court.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Buyer and the
Developer may not assign their respective obligations hereunder
without the prior written consent of the other party; provided,
however, that the Buyer may assign this Agreement, and its rights
and obligations hereunder, to a subsidiary or affiliate. Any
assignment in contravention of this provision shall be void. No
assignment shall release the Buyer from any obligation or
liability under this Agreement.
15. Entire Agreement; Amendments; Attachments.
-----------------------------------------
(a) This Agreement, all Schedules and Exhibits hereto,
and all agreements and instruments to be delivered by the parties
pursuant hereto represent the entire understanding and agreement
between the parties hereto with respect to the subject matter
hereof and supersede all prior oral and written and all
contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer and the Developer may amend or
modify this Agreement, in such manner as may be agreed upon, by a
written instrument executed by the Buyer and the Developer.
(b) If the provisions of any Schedule or Exhibit to
this Agreement are inconsistent with the provisions of this
Agreement, the provision of the Agreement shall prevail. The
Exhibits and Schedules attached hereto or to be attached hereafter
are hereby incorporated as integral parts of this Agreement.
16. EXPENSES. Except as otherwise expressly provided herein,
the Buyer and the Developer shall each pay their own expenses in
connection with this Agreement and the transactions contemplated
hereby.
17. LEGAL FEES. In the event that legal or arbitration
proceedings are commenced by the Buyer against the Developer, or by the
Developer against the Buyer, in connection with this Agreement or the
transactions contemplated hereby, the party or parties which do not
prevail in such proceedings shall pay the reasonable attorneys' fees
and other costs and expenses, including investigation costs, incurred
by the prevailing party in such proceedings.
18. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
19. SECTION HEADINGS. The section headings are for the
convenience of the parties and in no way alter, modify, amend, limit,
or restrict the contractual obligations of the parties.
20. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not effect the validity or
enforceability of any other provision of this Agreement.
21. COUNTERPARTS. This Agreement may be excuted in one or more
counterparts, each which shall be deemed to be an original, but all of
which shall be one and the same document.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of and on the date first above written.
DEVELOPER:
REEL ENTERTAINMENT, INC.
By: /s/ T. George Soloman
---------------------------------
Title: President
------------------------------
BUYER:
WEST COAST ENTERTAINMENT CORPORATION
By: /s/ T. Kyle Standley
---------------------------------
Title: President and CEO
------------------------------
- 7 -
