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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): APRIL 16, 1997
GUITAR CENTER, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-22207 95-4600862
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
5515 CLARETON DRIVE
AGOURA HILLS, CALIFORNIA 91301
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (818) 735-8800
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 16, 1997, Guitar Center, Inc. (the "Company") acquired all of
the outstanding capital stock of Rhythm City, Inc. ("Rhythm City"), the operator
of two musical instrument stores in the Atlanta, Georgia market, for $10.3
million in cash, subject to adjustment based on the actual level of working
capital on such date and other matters. The capital stock was acquired by the
Company from George A. Luther, Sr. and Nadine H. Luther (collectively, the
"Sellers"). Prior to this transaction, the Company had no pre-existing
relationship with Rhythm City or the Sellers.
The purchase price was determined pursuant to arms-length negotiations
among the Company and the Sellers and was paid from the Company's general
corporate funds. All of the debt and other liabilities of Rhythm City were
either paid or assumed by the Sellers prior to closing.
Through the purchase of the outstanding capital stock of Rhythm City,
the Company acquired control of physical assets consisting principally of
inventory and the real property and improvements of the Atlanta store operated
by Rhythm City. The Company's present intention is to continue to use
substantially all of the acquired assets in the conduct of its business as a
retailer of musical instruments.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits. See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereto duly authorized.
GUITAR CENTER, INC.
Dated: April 25, 1997 By /s/ BRUCE ROSS
-------------------------------------
Bruce Ross
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
*2.1 Stock Purchase Agreement made as of April 14, 1997, as amended, by and
among the Company, Rhythm City, Inc., George A. Luther, Sr. and Nadine
H. Luther
-------------------------
* In accordance with Item 601 of Regulation S-K, schedules, exhibits
and other attachments to such agreement have not been filed since such
items do not contain information which is material to an investment
decision and is not otherwise disclosed in such agreement. The
Company agrees to furnish supplementally a copy of any omitted items
to the Securities and Exchange Commission upon request.
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EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("AGREEMENT") is made as of April 14,
1997, by Guitar Center, Inc., a Delaware corporation ("BUYER"), Rhythm City,
Inc., a Georgia corporation (the "COMPANY"), and George A. Luther, Sr. and
Nadine H. Luther, individual residents in the State of Georgia (each a "SELLER"
and, collectively, the "SELLERS").
RECITALS
Sellers desire to sell, and Buyer desires to purchase, all of the
issued and outstanding shares (the "SHARES") of capital stock of the Company for
the consideration and on the terms set forth in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"APPLICABLE CONTRACT"--any Contract (a) under which the Company has or
may acquire any rights, (b) under which the Company has or may become subject to
any obligation or liability, or (c) by which the Company or any of the assets
owned or used by it is or may become bound.
"BALANCE SHEET"--as defined in Section 3.4.
"BEST EFFORTS"--the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible; PROVIDED, HOWEVER, that an obligation
to use Best Efforts under this Agreement does not require the Person subject to
that obligation to take actions that would result in a materially adverse change
in the benefits to such Person of this Agreement and the Contemplated
Transactions.
"BREACH"--a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or comply
with, such representation, warranty, covenant, obligation, or other provision,
or (b) any claim (by any Person) or other occurrence or circumstance that is or
was inconsistent with such representation, warranty, covenant, obligation, or
other provision, and the term "Breach" means any such inaccuracy, breach,
failure, claim, occurrence, or circumstance.
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"BUYER"--as defined in the first paragraph of this Agreement.
"CAPITALIZED LEASE OBLIGATIONS"--rental obligations of a leasee under
leases that are required to be capitalized for financial reporting purposes in
accordance with GAAP.
"CLOSING"--as defined in Section 2.3.
"CLOSING DATE"--the date and time as of which the Closing actually
takes place.
"COMPANY"--as defined in the Recitals of this Agreement.
"CONSENT"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS"--all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares by Sellers to Buyer;
(b) the execution, delivery, and performance of the Lease, the Other
Real Estate Documents, the SR Employment Agreement, the JR Employment
Agreement, the Noncompetition Agreement and the Releases;
(c) the performance by Buyer and Sellers of their respective
covenants and obligations under this Agreement; and
(d) Buyer's acquisition and ownership of the Shares and exercise of
control over the Company.
"CONTRACT"--any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"CURRENT ASSETS"--all cash, cash equivalents, inventory and accounts
receivable, calculated in accordance with GAAP subject, in the case of inventory
and accounts receivable, to the applicable specific valuation provisions
contained in Article 2 of this Agreement.
"CURRENT LIABILITIES"--all current liabilities calculated in
accordance with GAAP (other than any portion of Funded Debt which would
otherwise be classified as a current liability).
"DAMAGES"--as defined in Section 10.2.
"ENCUMBRANCE"--any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, easement, deed
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of trust, mortgage, right-of-way, encroachment, conditional sales agreement, or
any other right of any third party, whether voluntarily incurred or arising by
operation of law, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership, and including, without limitation, any agreement to give any of the
foregoing in the future.
"ENVIRONMENT"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES"--any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and
health, and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or
response actions ("CLEANUP") required by applicable Environmental Law or
Occupational Safety and Health Law (whether or not such Cleanup has been
required or requested by any Governmental Body or any other Person) and for
any natural resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health
Law.
The terms "REMOVAL," "REMEDIAL," and "RESPONSE ACTION," include the
types of activities covered by the United States Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended ("CERCLA").
"ENVIRONMENTAL LAW"--any Legal Requirement that requires or relates
to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction,
that could have significant impact on the Environment;
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(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing
the hazardous characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of
them, for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for
injuries done to public assets.
"ERISA"--the Employee Retirement Income Security Act of 1974, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"FACILITIES"--any real property, leaseholds, or other interests
currently or formerly owned or operated by the Company and any buildings,
plants, structures, or equipment (including motor vehicles) currently or
formerly owned or operated by the Company.
"FUNDED DEBT"--of the Company means, without duplication, (i) all
obligations of the Company for borrowed money, including, without limitation,
all obligations for accrued and unpaid interest thereon and any pre-payment
premiums or penalties (and associated expenses) with respect thereto, (ii) any
reimbursement obligations of the Company in respect of any letters of credit,
(iii) any Capitalized Lease Obligations of the Company, (iv) all obligations of
the Company for the payment of brokerage and other similar fees and expenses
arising in connection with the transactions contemplated hereby, whether or not
set forth on any of the Schedules, (v) any non-current liability of the Company
not encompassed by clauses (i) through (iv), and (vi) all guarantees issued by
the Company in respect of any obligations of any Person (other than the Company)
of the type described in the foregoing clauses (i) through (v).
"GAAP"--generally accepted United States accounting principles.
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"GOVERNMENTAL AUTHORIZATION"--any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority
or power of any nature.
"HAZARDOUS ACTIVITY"--the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
Release, storage, transfer, transportation, treatment, or use (including any
withdrawal or other use of groundwater) of Hazardous Materials in, on, under,
about or from, the Facilities or any part thereof into the Environment, and any
other act, business, operation, or thing that increases the danger, or risk of
danger, or poses an unreasonable risk of harm to persons or property on or off
the Facilities, or that may affect the value of the Facilities or the Company.
"HAZARDOUS MATERIALS"--any waste or other substance that is listed,
defined, designated or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"INTELLECTUAL PROPERTY ASSETS" --as defined in Section 3.23.
"INTERIM BALANCE SHEET"--as defined in Section 3.4.
"INVENTORY PRICING DETAIL" --inventory pricing schedules prepared
jointly by Sellers and Buyer which set forth agreed upon prices for items of
inventory to be valued pursuant to Section 2.5(d). The Inventory Pricing Detail
consists of, for each of the Atlanta Store and the Smyrna Store, separate
pricing schedules for (i) general usable inventory, (ii) band instruments and
related inventory (the "BAND PRICING SCHEDULE"), (iii) orchestra instruments and
related inventory (the "ORCHESTRA PRICING SCHEDULE", (iv) digital keyboards and
related inventory (the "DIGITAL KEYBOARD PRICING SCHEDULE"), and (v)
miscellaneous
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inventory; except that, because the Smyrna Store does not sell home digital
keyboards, there is no pricing schedule for home digital keyboards with respect
to the Smyrna Store.
"IRC"--the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"IRS"--the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"JR EMPLOYMENT AGREEMENT"--as defined in Section 2.4(a)(iii).
"KNOWLEDGE"--an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter;
or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such
fact or other matter.
A Person (other than an individual) will be deemed to have "Knowledge"
of a particular fact or other matter if any individual who is serving, or who
has at any time served, as a director, officer, partner, executor or trustee of
such Person (or in any similar capacity) has, or at any time had, Knowledge of
such fact or other matter.
"LEASE"--as defined in Section 2.4(a)(v).
"LEGAL REQUIREMENT"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute or treaty.
"NONCOMPETITION AGREEMENT"--as defined in Section 2.4(a)(iv).
"OCCUPATIONAL SAFETY AND HEALTH LAW"--any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any program, whether governmental or private
(including those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"ORDER"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
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"ORDINARY COURSE OF BUSINESS"--an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority); and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or
by any Person or group of Persons exercising similar authority), in the
ordinary course of the normal day-to-day operations of other Persons that
are in the same line of business as such Person.
"ORGANIZATIONAL DOCUMENTS"--(a) the articles or certificate of
incorporation, as the case may be, and the bylaws of a corporation; (b) the
partnership agreement and any statement of partnership of a general partnership;
(c) the limited partnership agreement and the certificate of limited partnership
of a limited partnership; (d) any charter or similar document adopted or filed
in connection with the creation, formation, or organization of a Person; and
(e) any amendment to any of the foregoing.
"OTHER REAL ESTATE DOCUMENTS"--(i) the Termination of Lease, dated as
of the date hereof, between Sellers and the Company with respect to certain real
property adjacent to the Atlanta Store (as defined in Section 2.8), (ii) the
Termination of Lease, dated as of the date hereof, between Sellers and the
Company with respect to a warehouse located on the real property referred to in
clause (i) of this definition, and (iii) the Declaration of Restrictive
Covenants executed by George A. Luther, Sr. with respect to the Smyrna Store to
be filed in the real estate records for Cobb County, Georgia pursuant to Section
5.9.
"PENSION PLAN"--as defined in Section 3.13.
"PERSON"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PROCEEDING"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"RELATED PERSON"--with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
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(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest; and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as
a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "FAMILY" of an individual
includes (i) the individual, (ii) the individual's spouse, (iii) any other
natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "MATERIAL INTEREST" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act) of voting
securities or other voting interests representing at least 10% of the
outstanding voting power of a Person or equity securities or other equity
interests representing at least 10% of the outstanding equity securities or
equity interests in a Person.
"RELEASE"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping or other releasing into the Environment, whether
intentional or unintentional.
"RELEASES"--as defined in Section 2.4(a)(ii).
"REPRESENTATIVE"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor or other representative of such
Person, including legal counsel, accountants and financial advisors.
"SECURITIES ACT"--the Securities Act of 1933, as amended, or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
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"SECURITIES EXCHANGE ACT"--the Securities Exchange Act of 1934, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"SELLERS"--as defined in the first paragraph of this Agreement.
"SHARES"--as defined in the Recitals of this Agreement.
"SR EMPLOYMENT AGREEMENT"--as defined in Section 2.4(a)(iii).
"SUBSIDIARY"--with respect to any Person (the "OWNER"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred) are held by the Owner or one or more of its Subsidiaries.
"TAX"--any tax (including, without limitation, any income tax, capital
gains tax, franchise tax, value-added tax, sales tax, property tax, use tax,
gift tax or estate tax), levy, assessment, tariff, duty (including any customs
duty), deficiency, or other fee, and any related charge or amount (including any
fine, penalty, interest, or addition to tax), imposed, assessed, or collected by
or under the authority of any Governmental Body or payable pursuant too any tax-
sharing agreement or any other Contract related to the sharing or payment of any
such tax, levy, assessment, tariff, duty, deficiency, or fee.
"TAX RETURN"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment
of any Tax or in connection with the administration, implementation, or
enforcement of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE"--a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"THREATENED"--a claim, Proceeding, dispute, action or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing),
or if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
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2. SALE AND TRANSFER OF SHARES; CLOSING.
2.1 SHARES.
Upon the terms and subject to the conditions of this Agreement, at the
Closing, the Sellers will sell and transfer the Shares to Buyer, and Buyer will
purchase the Shares from the Sellers.
2.2 PURCHASE PRICE.
The purchase price (the "PURCHASE PRICE") for the Shares will be
(a) $10,300,000 (the "PRELIMINARY PURCHASE PRICE"), LESS (b) the aggregate
amount of Funded Debt of the Company that remains unpaid as of the Closing, PLUS
(c) the Working Capital Adjustment Amount (it being understood that such
adjustment amount may be either positive or negative).
2.3 CLOSING.
The purchase and sale (the "CLOSING") provided for in this Agreement
will take place at the offices of Buyer's counsel at One Buckhead Plaza, 3060
Peachtree Road, Suite 1100, Atlanta, Georgia, at 10:00 a.m. (local time) on
April 16, 1997 or at such other time and place as the parties may agree.
Subject to the provisions of Section 9, failure to consummate the purchase and
sale provided for in this Agreement on the date and time and at the place
determined pursuant to this Section 2.3 will not result in the termination of
this Agreement and will not relieve any party of any obligation under this
Agreement.
2.4 CLOSING OBLIGATIONS.
(a) SELLER DELIVERIES: Sellers will deliver or cause to be delivered
to Buyer (all such deliveries to be made at and as of the Closing unless
otherwise specified):
(i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers), with signatures guaranteed by a
commercial bank or by a member firm of the New York Stock Exchange, for
transfer to Buyer;
(ii) a release in the form of Exhibit 2.4(a)(ii)(1) executed by
each Seller (the "SELLERS RELEASE") and a release in the form of Exhibit
2.4(a)(ii)(2) executed by George A. Luther, Jr. (the "JR RELEASE" and,
collectively with the Sellers Release, the "RELEASES");
(iii) an employment agreement (the "SR EMPLOYMENT AGREEMENT") in
the form of Exhibit 2.4(a)(iii)(1) executed by the Company and George A.
Luther, Sr., and an employment agreement (the "JR EMPLOYMENT AGREEMENT") in
the form of Exhibit 2.4(a)(iii)(2) executed by the Company and George A.
Luther, Jr.;
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(iv) a noncompetition agreement in the form of Exhibit
2.4(a)(iv), executed by each Seller (the "NONCOMPETITION AGREEMENT");
(v) an amended lease (the "LEASE") in the form of Exhibit
2.4(a)(v) executed by George A. Luther, Sr. and the Company relating to the
Company's store located at 578 Windy Hill Road, S.E., Smyrna, Georgia (the
"SMYRNA STORE");
(vi) the Other Real Estate Documents;
(vii) a certificate executed by each Seller to the effect that
each of Sellers' and the Company's representations and warranties in this
Agreement was accurate in all respects as of the date of this Agreement and
is accurate in all respects as of the Closing Date as if made on the
Closing Date (giving full effect to any supplements to the schedules
attached hereto (the "SCHEDULES") that were delivered by Sellers to Buyer
prior to the Closing Date in accordance with Section 5.5 and any waiver
granted by Buyer pursuant to Section 11.9);
(viii) on or before the third business day prior to the Closing, a
schedule of the estimated Funded Debt and Net Working Capital as of the
Closing, certified by each Seller; and
(ix) an IRS Form W-9 duly executed by each of the Sellers.
(b) BUYER'S DELIVERIES: Buyer will deliver to Sellers at and as of
the Closing:
(i) by bank cashier's or certified check payable to the order of
Sellers, or by wire transfer to accounts specified by Sellers (in either
case allocated between Sellers in accordance with their joint written
instructions), an amount equal to: (A) $10,300,000, LESS (B) the aggregate
amount of Funded Debt of the Company that remains unpaid as of the Closing,
LESS (C) an amount equal to the Working Capital Cash Holdback (as defined
in Section 2.6(a)), LESS (D) an amount equal to the Indemnification Cash
Holdback (as defined in Section 2.7(a)) PLUS (E) the Working Capital
Advance (as defined in subsection (c) of this Section 2.4); and
(ii) a certificate executed by Buyer to the effect that, except
as otherwise stated in such certificate, each of Buyer's representations
and warranties in this Agreement was accurate in all respects as of the
date of this Agreement and is accurate in all respects as of the Closing
Date as if made on the Closing Date.
(c) "WORKING CAPITAL ADVANCE" shall mean an amount equal to (i) the
Company's actual collected cash balance as of the Closing Date (net of
outstanding checks), LESS (ii) an amount equal to the Company's accounts
payable, including, without limitation, accounts payable in respect of
professional fees, as of the Closing Date, LESS (iii) an amount equal to
all accrued salaries and bonuses payable to Sellers and George A. Luther,
Jr., LESS (iv) an amount equal to all accrued
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amounts payable to Sellers in respect of any lease payments, LESS (v)
$500,000. Sellers agree that the amounts identified in clauses (ii), (iii)
and (iv) of the previous sentence shall actually be paid by the Company no
later than the Closing Date and the amount identified in clause (v) shall
be transferred on the Closing Date to a separate account of the Company to
be newly-established by Buyer. The foregoing payments are intended to
cause all accounts payable to vendors, all accrued obligations to Sellers
and all accrued professional fees of the Company to be paid as of the
Closing and to provide a reserve for any other liabilities of the Company
as identified and represented by Sellers.
2.5 WORKING CAPITAL ADJUSTMENT.
(a) CALCULATION OF ADJUSTMENTS. The "WORKING CAPITAL ADJUSTMENT
AMOUNT" (which may be a positive or negative number) will be equal to (i) the
Closing Date Net Working Capital (as defined below), minus (ii) $5,100,000
(which amount represents Sellers' target for Closing Date Net Working Capital,
consisting of inventory valued at $4,900,000 and accounts receivable valued at
$200,000), minus (iii) an amount equal to the Working Capital Advance.
(b) PREPARATION OF CLOSING BALANCE SHEET. Buyer will cause to be
prepared financial statements (the "CLOSING FINANCIAL STATEMENTS") of the
Company as of the Closing Date, including (i) a balance sheet of the Company as
of the Closing Date (the "CLOSING BALANCE SHEET"), and (ii) a calculation of Net
Working Capital (as defined below) of the Company as determined from the Closing
Balance Sheet ("CLOSING DATE NET WORKING CAPITAL"). The Closing Balance Sheet
shall (i) be prepared in accordance with GAAP (subject to the specific valuation
provisions applicable to inventory and accounts receivable as contained in this
Agreement), and (ii) fairly present the financial position of the Company as of
the Closing Date. For the purpose hereof, "NET WORKING CAPITAL" as of any date
shall, subject to the adjustments and conventions set forth in the last sentence
of this Section 2.5(b), be determined in accordance with GAAP and shall mean (i)
the Current Assets of the Company as of such date, minus (ii) the Current
Liabilities of the Company as of such date. Notwithstanding any provision of
this Agreement to the contrary, in calculating Net Working Capital and Closing
Date Net Working Capital pursuant to this Section 2.5, in no event shall Current
Assets include any deferred income tax asset including, without limitation, any
such deferred income tax asset related to unrealized net operating loss
carryforwards of the Company.
(c) DELIVERIES: Buyer will deliver the Closing Financial Statements
to Sellers within sixty (60) days after the Closing Date. If within thirty (30)
days following delivery of the Closing Financial Statements, Sellers have not
given Buyer notice of objection to the Closing Financial Statements (such notice
must contain a statement of the basis of Sellers' objection in reasonable
detail), then the Closing Date Net Working Capital calculation shall be used in
computing the Working Capital Adjustment Amount. If Sellers give such notice of
objection, Buyer, Sellers and their respective accountants shall meet to resolve
the dispute. If the dispute has not been resolved within 15 days after Sellers
give notice of Sellers' objection, then the issues in dispute will be submitted
to KPMG Peat
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Marwick LLP (the "ACCOUNTANTS") for resolution. If issues in dispute are
submitted to the Accountants for resolution: (i) each party will furnish to the
Accountants such workpapers and other documents and information relating to the
disputed issues as the Accountants may request and are available to that party
or its Subsidiaries (or its independent public accountants), and will be
afforded the opportunity to present to the Accountants any material relating to
the determination and to discuss the determination with the Accountants; (ii)
the determination by the Accountants, as set forth in a notice delivered to both
parties by the Accountants, will be binding and conclusive on the parties; and
(iii) Buyer, on one hand, and Sellers, on the other hand, will each bear 50% of
the fees of the Accountants for such determination.
(d) INVENTORY: In calculating the Closing Date Net Working Capital,
the following procedures shall be utilized to value the Company's physical
inventory:
(i) On or as soon as practicable after the Closing, and in any
event within ten (10) business days thereafter (the "INVENTORY DATE"),
Buyer shall take a physical inventory of all of the inventory owned by the
Company located in or about the Facilities (the "AVAILABLE INVENTORY"), and
shall list each item of Available Inventory on inventory sheets. Upon the
completion of such physical inventory, Buyer shall deliver to Sellers a
copy of the inventory sheets described above.
(ii) As soon as practicable but, in any event, not later than
sixty (60) days after the Inventory Date, Buyer, with the assistance of
Sellers, shall price the Available Inventory listed on the inventory sheets
at the price indicated by location on the Inventory Pricing Detail (which
is Exhibit 2.5(d)(ii) hereto); PROVIDED, HOWEVER, that (i) any inventory
designated "a", "e", "i" or "n" will be discounted 11% from the prices
listed in the Inventory Pricing Detail, (ii) band instruments and related
inventory shall be priced at 50% of the price listed on the Band Pricing
Schedule by location, (iii) orchestra instruments and related inventory
shall be priced at 50% of the price listed on the Orchestra Pricing
Schedule by location, (iv) digital keyboards and related inventory shall be
priced at 50% of the price listed Digital Keyboard Pricing Schedule, and
(v) notwithstanding the foregoing provision of this sentence, any inventory
received by the Company after March 11, 1997 shall be priced, on a LAST IN,
FIRST OUT basis, at the Company's cost less all discounts, allowances,
rebates, incentive payments and similar credits routinely received by the
Company. Buyer shall promptly deliver to Sellers a statement (the
"INVENTORY STATEMENT") which shall set forth all such items of the
Available Inventory (the "PURCHASED INVENTORY"), the unit prices of the
Purchased Inventory and the aggregate price of all the Purchased Inventory
listed on the Inventory Statement, as priced pursuant to this Section
2.5(d)(ii). The term "INVENTORY VALUE" shall mean the aggregate price of
all the Purchased Inventory listed on the Inventory Statement, as priced
pursuant to this Section 2.5(d)(ii) and shall be reflected on the Closing
Balance Sheet. Buyer and Sellers each undertake to take all commercially
reasonable steps to cause the inventory settlement date contemplated by
this Section 2.5(d)(ii) to occur within sixty (60) days after the Closing
Date.
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(iii) Within thirty (30) days after its receipt of the Inventory
Statement, Sellers shall give Buyer written notice indicating whether
Sellers accept the Inventory Statement. The failure to give any notice
within that time shall be deemed to constitute acceptance of the Inventory
Statement by Sellers. If the Inventory Statement is disputed, Buyer,
Sellers, and their respective accountants shall meet to resolve the
dispute. If the dispute has not been resolved within fifteen (15) days
after Sellers give notice of Sellers' dispute with the Inventory Statement,
the outstanding issues shall be submitted to the Accountants for final
resolution. The fees of the Accountants shall be paid equally by Buyer, on
the one hand, and Sellers, on the other. The Inventory Statement prepared
as provided herein shall be final, binding, and conclusive in the absence
of manifest error.
(iv) Buyer and Sellers acknowledge and agree that the prices for
inventory established by the Inventory Pricing Detail and the mechanisms
set forth in subsection (ii) of this Section 2.5(d) have been negotiated
and agreed to by Buyer and Sellers and do not necessarily represent the
current or historical cost of goods of either the Company or the Buyer.
(e) ACCOUNTS RECEIVABLE: In calculating the Closing Date Net Working
Capital, the following procedures shall be utilized to value the Company's
accounts receivable:
(i) One day prior to the Closing Date (the "ACCOUNTS RECEIVABLE
DATE"), Sellers shall provide Buyer with a statement (the "PRE-CLOSING
ACCOUNTS RECEIVABLE STATEMENT"), which identifies and itemizes each of the
accounts receivable of the Company (the "ACCOUNTS RECEIVABLE") as of the
Accounts Receivable Date, the face value of each such Account Receivable as
of the Accounts Receivable Date, the aggregate face value of all such
Accounts Receivable as of the Accounts Receivable Date and the amount of
any related reserves for doubtful accounts.
(ii) For a period of sixty (60) days following the Closing Date,
the Company agrees to use reasonable commercial efforts to pursue the
collection of the Accounts Receivable. Sixty (60) days following the
Closing Date, or as soon thereafter as practicable, but in any event not
more than seventy (70) days after the Closing Date (the "RETURN DATE"),
Buyer shall deliver to Sellers a written statement (the "ACCOUNTS
RECEIVABLE STATEMENT") setting forth the Accounts Receivable that have been
collected during the sixty (60) days immediately following the Closing Date
(the "COLLECTED ACCOUNTS RECEIVABLE"), the aggregate amount of payments
that have been received by Buyer in connection with the Collected Accounts
Receivable (the "ACCOUNTS RECEIVABLE VALUE"), the Accounts Receivable that
are uncollected as of sixty (60) days immediately following the Accounts
Receivable Date (the "UNCOLLECTED ACCOUNTS RECEIVABLE"), and the aggregate
face value of the Uncollected Accounts Receivable. The Closing Balance
Sheet shall reflect the Accounts Receivable Value and no value shall be
attributed to Uncollected Accounts Receivable. Buyer will not
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incur any out-of-pocket collection costs with respect to any of the
Accounts Receivable unless Sellers agree to reimburse Buyer for such costs.
(iii) In computing the aggregate payments that have been received
by the Company in connection with the Accounts Receivable for purposes of
the Accounts Receivable Statement and the Accounts Receivable Value,
(a) all payments received through the Return Date shall be accounted for
and (b) any payments received prior to the Return Date by the Company on
credit sales from any customer whose account appears in the Accounts
Receivable Statement (excluding payments by customers whose account
balances are in dispute) shall be deemed to be made first in payment of the
oldest Account Receivable of such customer which appears on the Pre-Closing
Accounts Receivable Statement except where a payment is specifically
identified to the contrary by the customer. Within thirty (30) days after
its receipt of the Accounts Receivable Statement, Sellers shall give Buyer
written notice indicating whether Sellers accept the Accounts Receivable
Statement. The failure to give any notice within that time shall be deemed
to constitute acceptance of the Accounts Receivable Statement by Sellers.
If the Accounts Receivable Statement is disputed, Buyer, Sellers, and their
respective accountants shall meet to resolve the dispute. If the dispute
has not been resolved within fifteen (15) days after Sellers give notice of
their dispute with the Accounts Receivable Statement, the outstanding
issues shall be submitted to the Accountants for final resolution. The
fees of the Accountants shall be paid equally by Buyer, on the one hand,
and Sellers on the other. The Accounts Receivable Statement prepared as
provided herein shall be final, binding and conclusive in the absence of
manifest error. For a period of thirty (30) days immediately following
delivery of the Accounts Receivable Statement, Buyer shall provide to
Sellers in reasonable detail any and all work papers and other documents
used in the preparation of the Accounts Receivable Statement.
2.6 WORKING CAPITAL CASH HOLDBACK AND ADJUSTMENT PROCEDURE.
(a) Buyer is entitled to withhold a cash fund of $450,000 (the
"WORKING CAPITAL CASH HOLDBACK") for a period of at least 90 days after the
Closing Date to be used as described in this Section 2.6 and to otherwise
satisfy claims, if any, for indemnification pursuant to Section 10 on a non-
exclusive basis.
(b) The term "WORKING CAPITAL HOLDBACK DIFFERENTIAL" (which may be a
positive or negative number) shall mean the sum of (i) the Working Capital Cash
Holdback, PLUS (ii) the Working Capital Adjustment Amount.
(c) Upon the later of (i) the 90th day after the Closing Date, (ii)
the date on which Sellers accept the Closing Financial Statements without
objection, and (iii) the date on which Sellers' objections, if any, to the
Closing Financial Statements have been conclusively resolved pursuant to Section
2.5(c) (the "WORKING CAPITAL DETERMINATION DATE"), the Working Capital Holdback
Differential shall be determined and paid as follows:
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(i) if the Working Capital Holdback Differential is a positive
value, then, except to the extent of any claims for Damages (as defined in
Section 10.2) then outstanding and unresolved, Buyer shall pay the Working
Capital Holdback Differential to Sellers (by certified or cashier's checks
payable to the order of Sellers and allocated between Sellers in accordance
with their joint written instructions); and
(ii) if the Working Capital Holdback Differential is a negative
value, then Buyer shall retain the Working Capital Cash Holdback and
Sellers shall pay the Working Capital Holdback Differential to Buyer by
certified bank or cashier's check payable to the order of Buyer.
(d) The Working Capital Cash Holdback shall bear interest from the
day after the Closing Date through the date of payment at the prime rate as
established from time to time by Wells Fargo Bank, N.A. (based on a 365 day year
and the actual number of days elapsed). Upon the Working Capital Determination
Date, to the extent any portion of the Working Capital Cash Holdback is retained
by Buyer, Buyer shall also retain a pro rata share of the interest earned on the
Working Capital Cash Holdback to such date, and to the extent that any portion
of the Working Capital Cash Holdback is paid to Sellers, Sellers shall receive a
pro rata share of the interest earned on the Working Capital Cash Holdback to
such date.
(e) Notwithstanding subsection (c) of the this Section 2.6, the
Working Capital Determination Date shall occur on the 60th date after the
Closing Date if on such date: (i) the Sellers have accepted the Closing
Financial Statements without objection, (ii) Buyer has received releases, in
form and substance satisfactory to Buyer, of all Encumbrances against the assets
of the Company, and (iii) the Buyer has received documentation from the
Company's 20 largest vendors (based on the dollar value of merchandise purchased
from vendors during the fiscal year ended August 31, 1996) that such vendors
have been paid all amounts due and owing as of the Closing Date.
2.7 INDEMNIFICATION CASH HOLDBACK AND ADJUSTMENT PROCEDURE.
(a) Buyer is entitled to withhold a cash fund of $450,000 (the
"INDEMNIFICATION CASH HOLDBACK" for a period of at least 180 days after the
Closing Date to satisfy claims, if any, for indemnification pursuant to Section
10 on a non-exclusive basis.
(b) The term "INDEMNIFICATION HOLDBACK DIFFERENTIAL" (which may be a
positive or negative number) shall mean the sum of (i) the Indemnification Cash
Holdback, LESS (ii) the amount of any claims for Damages (as defined in Section
10.2) then outstanding and unresolved.
(c) Upon the later of (i) the 180th day after the Closing Date and
(ii) the date upon which the Sellers accept the Closing Financial Statements
without objection (the "INDEMNIFICATION HOLDBACK DETERMINATION DATE"), the
Indemnification Holdback Differential shall be determined and paid as follows:
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(i) if the Indemnification Holdback Differential is a positive
value, then Buyer shall pay the Indemnification Holdback Differential to
Sellers (by certified or cashier's checks payable to the order of Sellers
and allocated between Sellers in accordance with their joint written
instructions);
(ii) if the Indemnification Holdback Differential is a negative
value, then Buyer shall retain the Indemnification Cash Holdback and
Sellers shall pay the Indemnification Holdback Differential to Buyer by
certified bank or cashier's check payable to the order of Buyer.
(d) The Indemnification Cash Holdback shall bear interest from the
day after the Closing Date through the date of payment at the prime rate as
established from time to time by Wells Fargo Bank, N.A. (based on a 365 day year
and the actual number of days elapsed). Upon the Indemnification Holdback
Determination Date, to the extent any portion of the Indemnification Cash
Holdback is retained by Buyer, Buyer shall also retain a pro rata share of the
interest earned on the Indemnification Cash Holdback to such date, and to the
extent that any portion of the Indemnification Cash Holdback is paid to Sellers,
Sellers shall receive a pro rata share of the interest earned on the
Indemnification Cash Holdback to such date.
2.8 REAL ESTATE TRANSFERS.
Prior to, or substantially concurrently with, the Closing, Sellers and
the Company will effect the transactions required, if any, to cause (i) the
Company to own good and marketable title to the real property, and all
improvements thereon, located at 1485 Northeast Expressway, Atlanta, Georgia
(the "ATLANTA STORE"), (ii) the Company to own good and marketable title to the
real property, and all improvements thereon, adjoining the Atlanta Store and
used by the Company (the "ATLANTA WAREHOUSE"), (iii) any leases relating to the
Atlanta Store or the Atlanta Warehouse to be terminated (such transactions, if
any, collectively referred to herein as the "ATLANTA WAREHOUSE TRANSFER").
3. REPRESENTATIONS AND WARRANTIES OF SELLERS.
Each Seller and, prior to the Closing Date, the Company, represent and
warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Georgia, with full corporate
power and authority to conduct its business as it is now being conducted, to own
or use the properties and assets that it purports to own or use and to perform
all its obligations under each Applicable Contract. The Company is duly
qualified to do business as a foreign corporation and is in good standing under
the laws of each state or other jurisdiction in which either the ownership or
use of the properties owned or used by it, or the nature of the activities
conducted by it,
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requires such qualification. Schedule 3.1 contains a complete and accurate list
of all states or other jurisdictions in which the Company is qualified to do
business as a foreign corporation.
(b) Sellers have delivered to Buyer complete and correct copies of
the Organizational Documents of the Company, as currently in effect.
(c) The Company does not have, nor has the Company ever had, any
Subsidiaries.
3.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid and binding
obligation of Sellers and the Company, enforceable against each Seller and the
Company in accordance with its terms. Upon the execution and delivery by
George A. Luther, Sr. of the Lease and the SR Employment Agreement, and by
Sellers of the Noncompetition Agreement, the Other Real Estate Documents and the
Sellers Release (collectively, the "CONCURRENT AGREEMENTS"), the Concurrent
Agreements will constitute the legal, valid and binding obligations of such
Persons, enforceable against such Persons in accordance with their respective
terms. Each Seller has the absolute and unrestricted right, power, authority,
and capacity to execute and deliver this Agreement and the Concurrent Agreements
and to perform their respective obligations under this Agreement and the
Concurrent Agreements. The execution, delivery and performance of this
Agreement and the Concurrent Agreements have been duly and validly authorized by
all necessary action (corporate or other) of each Seller and the Company.
(b) Except as set forth on Schedule 3.2, neither the execution and
delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the Company, or
(B) any resolution adopted by the board of directors or the stockholders of
the Company;
(ii) contravene, conflict with, or result in a violation of, or
give any Governmental Body or other Person the right to challenge, any of
the Contemplated Transactions or to exercise any remedy or obtain any
relief under, any Legal Requirement or any Order to which the Company or
Sellers, or any of the assets owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
business of, or any of the assets owned or used by, the Company;
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(iv) cause Buyer or the Company to become subject to, or to
become liable for the payment of, any Tax, including, without limitation,
any sales tax;
(v) cause any of the assets owned by the Company to be
reassessed or revalued by any taxing authority or other Governmental Body;
(vi) as of the Closing Date, contravene, conflict with, or result
in a violation or breach of any provision of, or give any Person the right
to declare a default (or an event which, with the giving of notice or lapse
of time or both, would constitute a default) or exercise any remedy under,
or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Applicable Contract; PROVIDED, HOWEVER, that this clause
(vi) shall not apply with respect to dealer arrangements with trade
vendors, it being understood that Sellers will cooperate and use their Best
Efforts to assist the Company in maintaining the vendor relationships that
Buyer desires to maintain (this proviso referred to herein as the "TRADE
VENDOR EXCEPTION"); or
(vii) result in the imposition or creation of any Encumbrance upon
or with respect to any of the assets owned or used by the Company.
Except for the Trade Vendor Exception and as set forth on
Schedule 3.2, as of the Closing Date, neither Sellers nor the Company is or will
be required to give any notice to or obtain any Consent from any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the Contemplated Transactions.
3.3 CAPITALIZATION.
The authorized equity securities of the Company consist of 100 shares
of common stock, par value $100.00 per share, of which 100 shares are issued and
outstanding and constitute the Shares. Sellers are and will be on the Closing
Date the sole record and beneficial owners and holders of the Shares, free and
clear of all Encumbrances (98 shares owned by George A. Luther, Sr. and 2 shares
owned by Nadine H. Luther). No legend or other reference to any purported
Encumbrance appears upon any certificate representing the Shares, except for
such legends relating solely to the fact that such Shares have not been
registered under the Securities Act. All of the Shares have been duly
authorized and validly issued and are fully paid and nonassessable. There are
no Contracts (including, without limitation, any warrants, options, rights or
similar instruments) relating to the issuance, sale, or transfer of any equity
securities or other securities of the Company. None of the Shares or other
securities of the Company was issued in violation of the Securities Act or any
other Legal Requirement. The Company does not own and has never owned, and does
not have any Contract to acquire, any equity securities or other securities of
any Person or any direct or indirect equity or ownership interest in any other
business.
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3.4 FINANCIAL STATEMENTS.
Sellers have delivered to Buyer: (a) unaudited balance sheets of the
Company as of August 31 for each of the years 1994 through 1996, and the related
unaudited statements of income for each of the fiscal years then ended (the
balance sheet of the Company as of August 31, 1996 referred to herein as the
"BALANCE SHEET"), and (b) an unaudited balance sheet of the Company as of
March 31, 1997 (the "INTERIM BALANCE SHEET") and the related unaudited
statements of income for the seven months then ended. Such financial statements
fairly and accurately present the financial condition and the results of
operations of the Company as of the respective dates of and for the periods
referred to in such financial statements, all in accordance with GAAP; the
financial statements referred to in this Section 3.4 reflect the consistent
application of such accounting principles throughout the periods involved. A
reasonable and normalized level of Net Working Capital for the Company was
approximately $5,100,000 as of the date of this Agreement based on the
operations of the Company at that time. To the Knowledge of the Seller and the
Company, no financial statements of any Person other than the Company are
required by GAAP to be included in the consolidated financial statements of the
Company. The Schedules provided by Sellers to Buyer which identify sales (i) by
product category and (ii) between retail and mail-order are true, correct and
complete.
3.5 BOOKS AND RECORDS.
The books of account, minute books, stock record books and other
records of the Company, all of which have been made available to Buyer, are
complete and correct and have been maintained in accordance with sound business
practices, including the maintenance of an adequate system of internal controls.
The minute books of the Company contain accurate and complete records of all
meetings held of, and corporate action taken by, the stockholder, the board of
directors, and committees of the board of directors of the Company, and no
meeting of any such stockholders, board of directors, or committee has been held
for which minutes have not been prepared and are not contained in such minute
books. At the Closing, all of those books and records will be in the possession
of the Company.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES.
Schedule 3.6 contains a complete and accurate list of all real
property, leaseholds or other interests therein owned by the Company. Sellers
have delivered or made available to Buyer copies of the deeds and other
instruments (as recorded) by which the Company acquired such real property and
interests, and copies of all title insurance policies, opinions, abstracts and
surveys in the possession of Sellers or the Company and relating to such
property or interests. After giving effect to the Atlanta Warehouse Transfer,
and except for the Smyrna Store, the Company will own (with good and marketable
title in the case of real property, subject only to the matters permitted by the
following sentence) all the properties and assets (whether real, personal, or
mixed and whether tangible or intangible) used by the Company in the conduct of
its business, that the Company purports to own located in the facilities owned
or operated by the Company or reflected as owned in the
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books and records of the Company, including all of the properties and assets
reflected in the Balance Sheet and the Interim Balance Sheet (except for assets
held under capitalized leases disclosed or not required to be disclosed on
Schedule 3.6 and personal property sold since the date of the Balance Sheet and
the Interim Balance Sheet, as the case may be, in the Ordinary Course of
Business), and all of the properties and assets purchased or otherwise acquired
by the Company since the date of the Balance Sheet (except for personal property
acquired and sold since the date of the Balance Sheet in the Ordinary Course of
Business and consistent with past practice), which subsequently purchased or
acquired properties and assets (other than inventory and short-term investments)
are listed on Schedule 3.6. All material properties and assets reflected in the
Balance Sheet and the Interim Balance Sheet, and any assets to be contributed to
the Company in connection with the Atlanta Warehouse Transfer, are free and
clear of all Encumbrances and are not, in the case of real property, subject to
any rights of way, building use restrictions, exceptions, variances,
reservations, or limitations of any nature except, with respect to all such
properties and assets, (a) liens for current taxes not yet due, and (b) with
respect to real property, (i) minor imperfections of title, if any, none of
which is substantial in amount, materially detracts from the value or impairs
the use of the property subject thereto, or impairs the operations of the
Company, and (ii) zoning laws and other land use restrictions that do not impair
the present or anticipated use of the property subject thereto. All buildings,
plants, and structures owned (and after giving effect to the Atlanta Warehouse
Transfer, to be owned) by the Company lie wholly within the boundaries of the
real property owned by the Company and do not encroach upon the property of, or
otherwise conflict with the property rights of, any other Person. Except as set
forth on Schedule 3.6, the Company's business is conducted and operated solely
and exclusively by and through the Company and not by or through any other
person or entity or any officer, director, stockholder or Related Person.
3.7 CONDITION AND SUFFICIENCY OF ASSETS.
The buildings, plants, structures and equipment owned, leased or used
by the Company are structurally sound, are in good operating condition and
repair, and are adequate for the uses to which they are being put and for the
operation of the Company's business as currently conducted, and none of such
buildings, plants, structures, or equipment is in need of maintenance or repairs
except for ordinary, routine maintenance and repairs that are not material in
nature or cost. The building, plants, structures, and equipment of the Company
are sufficient for the continued conduct of the Company's businesses after the
Closing in substantially the same manner as conducted prior to the Closing.
3.8 ACCOUNTS RECEIVABLE.
To the Knowledge of Sellers and the Company, all Accounts Receivable
of the Company that are reflected on the Balance Sheet or the Interim Balance
Sheet or on the accounting records of the Company as of the Closing Date
represent or will represent valid obligations arising from sales actually made
or services actually performed in the Ordinary Course of Business. To the
Knowledge of Sellers and the Company, unless paid prior to the Closing Date,
such Accounts Receivable are or will be as of the Closing Date current and
collectible net of an appropriate reserve shown on the Balance Sheet or the
Interim Balance
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Sheet or on the accounting records of the Company as of the Closing Date (which
reserves are adequate and calculated consistent with past practice). Each of
such Accounts Receivable either has been or will be collected in full, without
any set-off, within ninety days after the day on which it first becomes due and
payable. To the Knowledge of Sellers and the Company, there is no contest,
claim, or right of set-off under any Contract with any obligor of an Accounts
Receivable relating to the amount or validity of such Accounts Receivable.
Schedule 3.8 contains a complete and accurate list of all Accounts Receivable as
of the date of the Interim Balance Sheet, which list sets forth the aging of
such Accounts Receivable. Buyer acknowledges that its sole recourse for any
breach of this Section 3.8 shall be to attribute no value to Uncollected
Accounts Receivable for purposes of the Working Capital Adjustment called for by
Section 2.5.
3.9 INVENTORY.
All inventory of the Company, whether or not reflected in the Balance
Sheet or the Interim Balance Sheet, consists of a quality and quantity usable
and salable in the Ordinary Course of Business, except for obsolete items and
items of below-standard quality, all of which have been written off or written
down to net realizable value in the Balance Sheet or the Interim Balance Sheet
or on the accounting records of the Company as of the Closing Date, as the case
may be. The quantities of each item of inventory are not excessive, but are
reasonable in the present circumstances of the Company. Except as disclosed on
Schedule 3.9, the Company has good and marketable title to the inventories free
and clear of all Encumbrances. The inventories do not include any material
amount of inventory that is obsolete, excess, damaged or otherwise not
merchantable or returnable to vendors for full credit. The inventories do not
consist of any items held on consignment.
3.10 NO UNDISCLOSED LIABILITIES.
Except as set forth on Schedule 3.10, the Company has no liabilities
or obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations fully
reflected or reserved against on the face of the Balance Sheet or the Interim
Balance Sheet, as the case may be, and current liabilities incurred in the
Ordinary Course of Business since the respective dates thereof. Any such
liabilities consist solely of either Current Liabilities or Funded Debt.
3.11 TAXES.
(a) The Company has filed or caused to be filed (on a timely basis
since 1991) all Tax Returns that are or were required to be filed by or with
respect to the Company pursuant to applicable Legal Requirements through and
including the Closing Date. Sellers have delivered to Buyer copies of, and
Schedule 3.11 contains a complete and accurate list of, all such Tax Returns
filed since 1991. The Company has paid, or made provision for the payment of,
all Taxes that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by Sellers or the Company,
except such Taxes, if any, as are listed on Schedule 3.11 and are being
contested
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in good faith and as to which adequate reserves (determined in accordance with
GAAP) have been provided in the Balance Sheet and the Interim Balance Sheet.
(b) The United States federal and state income and sales Tax Returns
of the Company subject to such Taxes have been audited by the IRS or relevant
state tax authorities or are closed by the applicable statute of limitations for
all taxable years through August 31, 1992. Schedule 3.11 contains a complete
and accurate list of all audits of all such Tax Returns, including a reasonably
detailed description of the nature and outcome of each audit. All deficiencies
proposed as a result of such audits have been paid, reserved against, settled,
or, as described on Schedule 3.11, are being contested in good faith by
appropriate proceedings. Schedule 3.11 describes all adjustments to the United
States federal income Tax Returns filed by the Company for all taxable years
since 1991, and the resulting deficiencies proposed by the IRS. Except as
described on Schedule 3.11, neither Sellers nor the Company has given or been
requested to give waivers or extensions (or is or would be subject to a waiver
or extension given by any other Person) of any statute of limitations relating
to the payment of Taxes of the Company or for which the Company may be liable.
(c) The charges, accruals and reserves with respect to Taxes on the
respective books of the Company are, and will be as of the Closing, adequate
(determined in accordance with GAAP) and are at least equal to that of Company's
liability for Taxes. There exists no proposed tax assessment against the
Company except as disclosed in the Balance Sheet or on Schedule 3.11. No
consent to the application of Section 341(f)(2) of the IRC has been filed with
respect to any property or assets held, acquired, or to be acquired by the
Company. All Taxes that the Company is or was required by Legal Requirements to
withhold or collect have been duly withheld or collected and, to the extent
required, have been paid to the proper Governmental Body or other Person.
(d) All Tax Returns filed by the Company are true, correct, and
complete. There is no tax sharing agreement that will require any payment by
the Company after the date of this Agreement. The Company is not, nor at any
time has been, (i) an "S" corporation within the meaning of Section 1361 of the
IRC, or (ii) a member of an affiliated group of companies within the meaning of
Section 1504 of the IRC.
3.12 NO MATERIAL ADVERSE CHANGE.
Since the date of the Balance Sheet, there has not been any material
adverse change in the business, operations, properties, prospects, assets, or
condition of the Company, and no event has occurred or circumstance exists that
may result in such a material adverse change.
3.13 EMPLOYEE BENEFITS.
(a) DEFINITIONS. The following terms, when used in this
Section 3.13, shall have the following meanings. Any of these terms may,
unless the context otherwise requires, be used in the singular or the plural
depending on the reference.
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(i) BENEFIT ARRANGEMENT. "Benefit Arrangement" shall mean any
employment, consulting, severance or other similar contract, arrangement or
policy and each plan, arrangement (written or oral), program, agreement or
commitment providing for insurance coverage (including without limitation
any self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
life, health, disability or accident benefits (including without limitation
any "voluntary employees' beneficiary association" as defined in
Section 501(c)(9) of the IRC providing for the same or other benefits) or
for deferred compensation, profit-sharing bonuses, stock options, stock
appreciation rights, stock purchases or other forms of incentive
compensation or post-retirement insurance, compensation or benefits which
(A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is
entered into, maintained, contributed to or required to be contributed to,
as the case may be, by Sellers, the Company or an ERISA Affiliate or under
which Sellers, the Company or any ERISA Affiliate may incur any liability,
and (C) covers any employee or former employee of Sellers, the Company or
any ERISA Affiliate (with respect to their relationship with such
entities).
(ii) EMPLOYEE PLANS. "Employee Plans" shall mean all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.
(iii) ERISA. "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
(iv) ERISA AFFILIATE. "ERISA Affiliate" shall mean any entity
which is (or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, or a member of an
"affiliated service group" with, Sellers or the Company as defined in
Section 414(b), (c), (m) or (o) of the IRC, or under "common control" with
Sellers or the Company, within the meaning of Section 4001(b)(1) of ERISA.
(v) MULTIEMPLOYER PLAN. "Multiemployer Plan" shall mean any
"multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which
Sellers, the Company or any ERISA Affiliate maintains, administers,
contributes to or is required to contribute to, or, after September 25,
1980, maintained, administered, contributed to or was required to
contribute to, or under which Sellers, the Company or any ERISA Affiliate
may incur any liability and (B) which covers any employee or former
employee of Sellers, the Company or any ERISA Affiliate (with respect to
their relationship with such entities).
(vi) PBGC. "PBGC" shall mean the Pension Benefit Guaranty
Corporation.
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(vii) PENSION PLAN. "Pension Plan" shall mean any "employee
pension benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) (A) which Sellers, the Company or any ERISA Affiliate
maintains, administers, contributes to or is required to contribute to, or,
within the five years prior to the Closing Date, maintained, administered,
contributed to or was required to contribute to, or under which Sellers,
the Company or any ERISA Affiliate may incur any liability and (B) which
covers any employee or former employee of Sellers, the Company or any ERISA
Affiliate (with respect to their relationship with such entities).
(viii) WELFARE PLAN. "Welfare Plan" shall mean any "employee
welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which
Sellers, the Company or any ERISA Affiliate maintains, administers,
contributes to or is required to contribute to, or under which Sellers, the
Company or any ERISA Affiliate may incur any liability and (B) which covers
any employee or former employee of Sellers, the Company or any ERISA
Affiliate (with respect to their relationship with such entities).
(b) DISCLOSURE; DELIVERY OF COPIES OF RELEVANT DOCUMENTS AND OTHER
INFORMATION. Schedule 3.13 contains a complete list of Employee Plans which
cover or have covered employees of Sellers or the Company (with respect to their
relationship with such entities). True and complete copies of each of the
following documents have been delivered by Sellers to Buyer: (i) each Welfare
Plan, Pension Plan and Multiemployer Plan (and, if applicable, related trust
agreements) which covers or has covered employees of Sellers or the Company
(with respect to their relationship with such entities) and all amendments
thereto, all written interpretations thereof and written descriptions thereof
which have been distributed to Sellers' or the Company's employees and all
annuity contracts or other funding instruments, (ii) each Benefit Arrangement
which covers or has covered employees of Sellers or the Company (with respect to
their relationship with such entities) including written interpretations thereof
and written descriptions thereof which have been distributed to Sellers' or the
Company's employees (including descriptions of the number and level of employees
covered thereby) and a complete description of any Benefit Arrangement which is
not in writing, (iii) the most recent determination or opinion letter issued by
the IRS with respect to each Pension Plan and each Welfare Plan (other than a
"multiemployer plan", as defined in Section 3(37) of ERISA) which covers or has
covered employees of Sellers or the Company (with respect to its relationship
with such entities), (iv) for the three most recent plan years, Annual Reports
on Form 5500 Series required to be filed with any governmental agency for each
Pension Plan and each Welfare Plan (other than a "multi-employer plan", as
defined in Section 3(37) of ERISA) which covers or has covered employees of
Sellers or the Company (with respect to its relationship with such entities),
(v) all actuarial reports prepared for the last three plan years for each
Pension Plan which covers or has covered employees of Sellers or the Company
(with respect to its relationship with such entities), (vi) a description of
complete age, salary, service and related data as of the last day of the last
plan year for employees and former employees of Sellers and the Company, and
(vii) a description setting forth the amount of any liability of the Company as
of the Closing Date for payments more
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than thirty calendar days past due with respect to each Welfare Plan which
covers or has covered employees or former employees of Sellers or the Company.
(c) REPRESENTATIONS.
(i) PENSION PLANS
(A) The funding method used in connection with each Pension
Plan which is subject to the minimum funding requirements of ERISA is
acceptable and the actuarial assumptions used in connection with
funding each such plan are reasonable. As of the last day of the last
plan year of each Pension Plan and as of the Closing Date, the "amount
of unfunded benefit liabilities" as defined in Section 4001(a)(18) of
ERISA (but excluding from the definition of "current value" of
"assets" of such Pension Plan, accrued but unpaid contributions) did
not and will not exceed zero. No "accumulated funding deficiency"
(for which an excise tax is due or would be due in the absence of a
waiver) as defined in Section 412 of the IRC or as defined in
Section 302(a)(2) of ERISA, whichever may apply, has been incurred
with respect to any Pension Plan with respect to any plan year,
whether or not waived. To the Knowledge of Sellers and the Company,
none of Sellers, the Company or any ERISA Affiliate has failed to pay
when due any "required installment", within the meaning of
Section 412(m) of the IRC and Section 302(e) of ERISA, whichever may
apply, with respect to any Pension Plan. To the Knowledge of Sellers
and the Company, none of Sellers, the Company or any ERISA Affiliate
is subject to any lien imposed under Section 412(n) of the IRC or
Section 302(f) of ERISA, whichever may apply, with respect to any
Pension Plan. None of Sellers, the Company or any ERISA Affiliate
has any liability for unpaid contributions with respect to any
Pension Plan.
(B) To the Knowledge of Sellers and the Company, none of
Sellers, the Company or any ERISA Affiliate is required to provide
security to a Pension Plan under Section 401(a)(29) of the IRC.
(C) Each Pension Plan and each related trust agreement,
annuity contract or other funding instrument which covers or has
covered employees or former employees of Sellers or the Company (with
respect to their relationship with such entities) is qualified and
tax-exempt under the provisions of IRC Sections 401(a) (or 403(a), as
appropriate) and 501(a) and has been so qualified during the period
from its adoption to date.
(D) Each Pension Plan, each related trust agreement,
annuity contract or other funding instrument which covers or has
covered employees or former employees of Sellers or the Company (with
respect to their relationship with such entities) presently complies
and has been maintained in compliance with its terms and, both as to
form and in operation, with the
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requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such plans, including without
limitation ERISA and the IRC.
(E) To the Knowledge of Sellers and the Company, Sellers
and the Company have paid all premiums (and interest charges and
penalties for late payment, if applicable) due the PBGC with respect
to each Pension Plan for each plan year thereof for which such
premiums are required. To the Knowledge of Sellers and the Company,
none of Sellers, the Company or any ERISA Affiliate has engaged in, or
is a successor or parent corporation to an entity that has engaged in,
a transaction described in Section 4069 of ERISA. To the Knowledge of
Sellers and the Company, there has been no "reportable event" (as
defined in Section 4043(c) of ERISA and the PBGC regulations under
such Section) with respect to any Pension Plan and none of Sellers,
the Company or any ERISA Affiliate is subject to Section 4043(b) of
ERISA. No filing has been made by Sellers, the Company or any ERISA
Affiliate with the PBGC, and no proceeding has been commenced by the
PBGC, to terminate any Pension Plan. To the Knowledge of Sellers and
the Company, no condition exists and no event has occurred that could
constitute grounds for the termination of any Pension Plan by the
PBGC. None of Sellers, the Company or any ERISA Affiliate has, at any
time, (1) ceased operations at a facility so as to become subject to
the provisions of Section 4062(e) of ERISA, (2) withdrawn as a
substantial employer so as to become subject to the provisions of
Section 4063 of ERISA, or (3) ceased making contributions on or before
the Closing Date to any Pension Plan subject to Section 4064(a) of
ERISA to which Sellers, the Company or any ERISA Affiliate made
contributions during the six years prior to the Closing Date.
(ii) MULTIEMPLOYER PLANS
(A) None of Sellers, the Company or any ERISA Affiliate
has, at any time, withdrawn from a Multiemployer Plan in a "complete
withdrawal" or a "partial withdrawal" as defined in Sections 4203 and
4205 of ERISA, respectively, so as to result in a liability,
contingent or otherwise (including without limitation the obligations
pursuant to an agreement entered into in accordance with Section 4204
of ERISA), of Sellers, the Company or any ERISA Affiliate. To the
Knowledge of Sellers and the Company, none of Sellers, the Company or
any ERISA Affiliate has engaged in, or is a successor or parent
corporation to an entity that has engaged in, a transaction described
in Section 4212(c) of ERISA.
(B) All contributions required to be made by Sellers, the
Company or any ERISA Affiliate to each Multiemployer Plan have been
made when due.
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(C) If, as of the Closing Date, Sellers, the Company and
all ERISA Affiliates were to withdraw from all Multiemployer Plans to
which it (or any of them) has contributed or been obligated to
contribute, it (and they) would incur no liabilities to such plans
under Title IV of ERISA.
(D) To the best of Sellers' Knowledge, with respect to each
Multiemployer Plan: (1) no such Multiemployer Plan has been
terminated or has been in reorganization under ERISA so as to result,
directly or indirectly, in any liability, contingent or otherwise, of
Sellers, the Company or any ERISA Affiliate under Title IV of ERISA;
(2) no proceeding has been initiated by any person (including the
PBGC) to terminate such Multiemployer Plan; (3) a "mass withdrawal",
as defined in PBGC Reg. Section 2640.7, with respect to such
Multiemployer Plan has not occurred; (4) Sellers, the Company and the
ERISA Affiliates have no reason to believe that such Multiemployer
Plan will be terminated or will be reorganized under ERISA or that a
"mass withdrawal", as defined in PBGC Reg. Section 2640.7, will occur
with respect to such Multiemployer Plan; and (5) Sellers, the Company
and the ERISA Affiliates do not expect to withdraw in a "complete
withdrawal" or "partial withdrawal" from such Multiemployer Plan.
(iii) WELFARE PLANS
(A) Each Welfare Plan which covers or has covered employees
or former employees of Sellers or the Company (with respect to their
relationship with such entities) has been maintained in compliance
with its terms and, both as to form and operation, with the
requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Welfare Plan, including
without limitation ERISA and the IRC.
(B) None of Sellers, the Company, any ERISA Affiliate or
any Welfare Plan has any present or future obligation to make any
payment to, or with respect to any present or former employee of
Sellers, the Company or any ERISA Affiliate pursuant to, any retiree
medical benefit plan, or other retiree Welfare Plan, and no condition
exists which would prevent Sellers or the Company from amending or
terminating any such benefit plan or Welfare Plan.
(C) Each Welfare Plan which covers or has covered employees
or former employees of Sellers, the Company or an ERISA Affiliate and
which is a "group health plan," as defined in Section 607(1) of ERISA,
has been operated in compliance with provisions of Part 6 of Title I,
Subtitle B of ERISA and Section 4980B of the IRC at all times.
(D) None of Sellers, the Company or any ERISA Affiliate has
incurred any liability with respect to any Welfare Plan that is a
"multiemployer plan," as defined in Section 3(37) of ERISA, under the
terms
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of such Welfare Plan, any collective bargaining agreement or otherwise
resulting from any cessation of contributions, cessation of obligation
to make contributions or other form of withdrawal from such Welfare
Plan.
(E) If, as of the Closing Date, Sellers, the Company and
all ERISA Affiliates were to have a cessation of contributions,
cessation of obligations to make contribution or other form of
withdrawal from all Welfare Plans that are "multiemployer plans", as
defined in Section 3(37) of ERISA, it (and they) would incur no
liabilities with respect to any such Welfare Plans under the terms of
such Welfare Plans, any collective bargaining agreement or otherwise.
(iv) BENEFIT ARRANGEMENTS. Each Benefit Arrangement which covers
or has covered employees or former employees of Sellers or the Company
(with respect to their relationship with such entities) has been maintained
in compliance with its terms and with the requirements prescribed by any
and all statutes, orders, rules and regulations which are applicable to
such Benefit Arrangement, including without limitation the IRC. Except as
set forth in Schedule 3.13, and except as provided by law, the employment
of all persons presently employed or retained by Sellers and the Company is
terminable at will without any liability to the Company.
(v) UNRELATED BUSINESS TAXABLE INCOME. No Employee Plan (or
trust or other funding vehicle pursuant thereto) is subject to any tax
under Section 511 of the IRC.
(vi) DEDUCTIBILITY OF PAYMENTS. There is no contract, agreement,
plan or arrangement covering any employee or former employee of Sellers or
the Company (with respect to its relationship with such entities) that,
individually or collectively, provides for the payment by Sellers or the
Company of any amount (i) that is not deductible by Sellers under
Section 162(a)(1) or 404 of the IRC, whichever is applicable, (ii) for
which the deduction by Sellers or the Company would be disallowed under
Section 162(m) of the IRC, or (iii) that is an "excess parachute payment"
pursuant to Section 280G of the IRC.
(viii) FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS. None of
Sellers, the Company or any plan fiduciary of any Welfare Plan or Pension
Plan which covers or has covered employees or former employees of Sellers,
the Company or any ERISA Affiliate, has engaged in any transaction in
violation of Sections 404 or 406 of ERISA or any "prohibited transaction,"
as defined in Section 4975(c)(1) of the IRC, for which no exemption exists
under Section 408 of ERISA or Section 4975(c)(2) or (d) of the IRC, or has
otherwise violated the provisions of Part 4 of Title I, Subtitle B of
ERISA. Sellers and the Company have not knowingly participated in a
violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary
of any Welfare Plan or Pension Plan (or other employee benefit plan subject
to ERISA) and has not been assessed any civil penalty under Section 502(l)
of ERISA.
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(ix) VALIDITY AND ENFORCEABILITY. To the Knowledge of Sellers
and the Company, each Welfare Plan, Pension Plan, related trust agreement,
annuity contract or other funding instrument and Benefit Arrangement which
covers or has covered employees or former employees of Sellers or the
Company (with respect to their relationship with such entities) is legally
valid and binding and in full force and effect.
(x) LITIGATION. To the Knowledge of Sellers and the Company,
there is no action, order, writ, injunction, judgment or decree outstanding
or claim, suit, litigation, proceeding, arbitral action, governmental audit
or investigation relating to or seeking benefits under any Employee Plan
that is pending, threatened or anticipated against Sellers, the Company,
any ERISA Affiliate or any Employee Plan.
(xi) NO AMENDMENTS. To the Knowledge of Sellers and the Company,
none of Sellers, the Company or any ERISA Affiliate has any announced plan
or commitment to create any additional Employee Plans which are intended to
cover employees or former employees of Sellers or the Company (with respect
to their relationship with such entities) or to amend or modify any
existing Employee Plan which covers or has covered employees or former
employees of Sellers or the Company (with respect to their relationship
with such entities).
(xii) NO OTHER MATERIAL LIABILITY. No event has occurred in
connection with which Sellers, the Company or any ERISA Affiliate or any
Employee Plan, directly or indirectly, could be subject to any material
liability (A) under any statute, regulation or governmental order relating
to any Employee Plans or (B) pursuant to any obligation of Sellers or the
Company to indemnify any person against liability incurred under any such
statute, regulation or order as they relate to the Employee Plans.
(xiii) UNPAID CONTRIBUTIONS. None of Sellers, the Company or any
ERISA Affiliate has any liability for unpaid contributions under
Section 515 of ERISA with respect to any Pension Plan, Multiemployer Plan
or Welfare Plan.
(xiv) INSURANCE CONTRACTS. To the Knowledge of Sellers and the
Company, none of Sellers, the Company or any Employee Plan (other than a
"multiemployer plan," as defined in Section 3(37) of ERISA) holds as an
asset of any Employee Plan any interest in any annuity contract, guaranteed
investment contract or any other investment or insurance contract issued by
an insurance company that is the subject of bankruptcy, conservatorship or
rehabilitation proceedings.
(xv) NO ACCELERATION OR CREATION OF RIGHTS. Neither the
execution and delivery of this Agreement or Concurrent Agreements by the
parties thereto, nor the consummation of the Contemplated Transactions will
result in the acceleration or creation of any rights of any person to
benefits under any Employee Plan (including, without limitation, the
acceleration of the vesting or exercisability of any stock options, the
acceleration of the vesting of any restricted stock, the acceleration of
the
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accrual or vesting of any benefits under any Pension Plan or the
acceleration or creation of any rights under any severance, parachute or
change in control agreement).
3.14 TRANSACTIONS WITH RELATED PERSONS. Except as set forth on
Schedule 3.14, none of Sellers, any Related Person of either Seller, or any
Related Person of the Company is, or since January 1, 1992 has been, a party to
any transaction with the Company, or either Seller relating to the business of
the Company, including without limitation, any Contract (a) providing for the
furnishing of services by, (b) providing for the rental of real or personal
property from, or (c) otherwise requiring payments to (other than for services
as officers, directors or employees of the Company) any such Person or other
person or entity in which any such Person has an interest as a shareholder,
officer, director, trustee or partner. Except as set forth on Schedule 3.14,
none of Sellers, any Related Person of either Seller, or any Related Person of
the Company has, or since January 1, 1992 has had, any interest in any property
(whether real, personal, or mixed and whether tangible or intangible), used in
or pertaining to the Company's businesses. None of Sellers, any Related Person
of either Seller, or any Related Person of the Company is, or since January 1,
1992 has owned (of record or as a beneficial owner) an equity interest or any
other financial or profit interest in, a Person that has engaged in competition
with the Company with respect to any line of the products or services of the
Company (a "COMPETING BUSINESS") in any market presently served by the Company.
Except as set forth on Schedule 3.14, none of Sellers, any Related Person of
either Seller, or any Related Person of the Company has any claim or right
against the Company.
3.15 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth on Schedule 3.15:
(i) the Company is, and at all times since January 1, 1992 has
been, in full compliance with each Legal Requirement that is or was
applicable to it or to the conduct or operation of its business or the
ownership or use of any of its assets;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a
violation by the Company of, or a failure on the part of the Company to
comply with, any Legal Requirement, or (B) may give rise to any obligation
on the part of the Company to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature; and
(iii) to the Knowledge of Sellers and the Company, the Company has
not received, at any time since January 1, 1992, any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible, or potential
violation of, or failure to comply with, any Legal Requirement, or (B) any
actual, alleged, possible, or potential obligation on
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the part of the Company to undertake, or to bear all or any portion of the
cost of, any remedial action of any nature.
(b) Schedule 3.15 contains a complete and accurate list of each
Governmental Authorization that is held by the Company or that otherwise relates
to the business of, or to any of the assets owned or used by, the Company. Each
Governmental Authorization listed or required to be listed on Schedule 3.15 is
valid and in full force and effect. Except as set forth on Schedule 3.15:
(i) the Company is, and at all times since January 1, 1992 has
been, in full compliance with all of the terms and requirements of each
Governmental Authorization identified or required to be identified on
Schedule 3.15;
(ii) no event has occurred or circumstance exists that may (with
or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or
requirement of any Governmental Authorization listed or required to be
listed on Schedule 3.15, or (B) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to be
listed on Schedule 3.15;
(iii) to the Knowledge of Sellers and the Company, the Company has
not received, at any time since January 1, 1992, any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible, or potential
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (B) any actual, proposed, possible, or
potential revocation, withdrawal, suspension, cancellation, termination of,
or modification to any Governmental Authorization; and
(iv) all applications required to have been filed for the renewal
of the Governmental Authorizations listed or required to be listed on
Schedule 3.15 have been duly filed on a timely basis with the appropriate
Governmental Bodies, and all other filings required to have been made with
respect to such Governmental Authorizations have been duly made on a timely
basis with the appropriate Governmental Bodies.
The Governmental Authorizations listed on Schedule 3.15 collectively
constitute all of the Governmental Authorizations necessary to permit the
Company to lawfully conduct and operate its businesses in the manner they
currently conduct and operate such businesses and to permit the Company to own
and use their assets in the manner in which they currently own and use such
assets.
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3.16 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth on Schedule 3.16, there is no pending
Proceeding:
(i) that has been commenced by or against the Company or that
otherwise relates to or may affect the business of, or any of the assets
owned or used by, the Company; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
To the Knowledge of Sellers and the Company, (1) no such Proceeding
has been Threatened, and (2) no event has occurred or circumstance exists that
may give rise to or serve as a basis for the commencement of any such
Proceeding. Sellers have delivered to Buyer all pleadings, correspondence, and
other documents relating to each Proceeding listed on Schedule 3.16.
The Proceedings listed on Schedule 3.16 are for the sole account of
the Sellers and, upon the Closing, the Sellers assume the obligation to
defend, settle and pay any amounts owed or owing in connection with such
Proceedings, and the failure thereof by the Sellers shall entitle the
Indemnified Persons (as defined in Section 10.2) to be indemnified by the
Sellers pursuant to Section 10.2.
(b) Except as set forth on Schedule 3.16:
(i) there is no Order to which the Company, or any of the assets
owned or used by the Company, is subject;
(ii) neither Seller is subject to any Order that relates to the
business of, or any of the assets owned or used by, the Company; and
(iii) no officer, director, agent or employee of the Company is
subject to any Order that prohibits such officer, director, agent, or
employee from engaging in or continuing any conduct, activity, or practice
relating to the business of the Company.
(c) Except as set forth on Schedule 3.16:
(i) the Company is, and at all times since January 1, 1992 has
been, in full compliance with all of the terms and requirements of each
Order, if any, to which it, or any of the assets owned or used by it, is or
has been subject;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a
violation of or failure to
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comply with any term or requirement of any Order to which the Company, or
any of the assets owned or used by the Company, is subject; and
(iii) the Company has not received, at any time since January 1,
1992, any notice or other communication (whether oral or written) from any
Governmental Body or any other Person regarding any actual, alleged,
possible, or potential violation of, or failure to comply with, any term or
requirement of any Order to which the Company, or any of the assets owned
or used by the Company, is or has been subject.
3.17 ABSENCE OF CERTAIN CHANGES AND EVENTS.
Except as set forth on Schedule 3.17, since the date of the Balance
Sheet (which is as of August 31, 1996), the Company has conducted its businesses
only in the Ordinary Course of Business and there has not been any:
(a) change in the Company's authorized or issued capital stock; grant
of any stock option, warrant or other right to purchase shares of capital
stock of the Company; issuance of any security convertible into such
capital stock; grant of any registration rights; purchase, redemption,
retirement, or other acquisition by the Company of any shares of any such
capital stock; or declaration or payment of any dividend or other
distribution or payment in respect of shares of capital stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries or
other compensation to any stockholder, director, officer, or (except in the
Ordinary Course of Business) employee or entry into any employment,
severance, or similar Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under,
any profit sharing, bonus, deferred compensation, savings, insurance,
pension, retirement, or other employee benefit plan for or with any
employees of the Company;
(e) damage to or destruction or loss of any asset or property of the
Company, whether or not covered by insurance, materially and adversely
affecting the properties, assets, business, financial condition, or
prospects of the Company, taken as a whole;
(f) entry into, termination of, or receipt of notice of termination
of (i) any license, distributorship, dealer, sales representative, joint
venture, credit, or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to the Company of at least
$5,000;
(g) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of the
Company or mortgage,
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pledge, or imposition of any lien or other encumbrance on any material
asset or property of the Company, including the sale, lease, or other
disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to
the Company in excess of $5,000;
(i) material change in the accounting methods used by the Company;
(j) material change in any tax reporting practice (including, without
limitation, any related election) by the Company; or
(k) agreement, whether oral or written, by the Company to do any of
the foregoing.
3.18 CONTRACTS; NO DEFAULTS.
(a) As of the Closing Date, Schedule 3.18(a) will contain a complete
and accurate list, and Sellers have delivered to Buyer true and complete copies,
of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by the Company of an amount or
value in excess of $5,000;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to the Company of an amount or
value in excess of $5,000;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of
the Company in excess of $5,000;
(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold
or other interest in, any real or personal property (except personal
property leases and installment and conditional sales agreements having a
value per item or aggregate payments of less than $5,000 and with terms of
less than one year);
(v) each licensing agreement or other Applicable Contract with
respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
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(vi) each collective bargaining agreement and other Applicable
Contract to or with any labor union or other employee representative of a
group of employees;
(vii) each joint venture, partnership and other Applicable
Contract (however named) involving a sharing of profits, losses, costs or
liabilities by the Company with any other Person;
(viii) each Applicable Contract containing covenants that in any
way purport to restrict the business activity of the Company or any Related
Person of the Company or limit the freedom of the Company or any Related
Person of the Company to engage in any line of business or to compete with
any Person;
(ix) each Applicable Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments
for goods;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express
undertaking by the Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in excess
of $5,000;
(xiii) each written warranty, guaranty or other similar undertaking
with respect to contractual performance extended by the Company other than
in the Ordinary Course of Business; and
(xiv) each amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing.
Schedule 3.18(a) sets forth reasonably complete details concerning
such Contracts, including the parties to the Contracts, the amount of the
remaining commitment of the Company under the Contracts and the Company's office
where details relating to the Contracts are located.
(b) Except as set forth on Schedule 3.18(b):
(i) Sellers (including any Related Person of either Seller) do
not have and may not acquire any rights under, and Sellers do not have and
may not become subject to any obligation or liability under, any Contract
that relates to the business of, or any of the assets owned or used by, the
Company; and
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(ii) No officer, director, agent, employee, consultant, or
contractor of the Company is bound by any Contract that purports to limit
the ability of such officer, director, agent, employee, consultant, or
contractor to (A) engage in or continue any conduct, activity, or practice
relating to the business of the Company, or (B) assign to the Company or to
any other Person any rights to any invention, improvement, or discovery.
(c) Except as set forth on Schedule 3.18(c), each Contract identified
or required to be identified on Schedule 3.18(a) is in full force and
effect and is valid and enforceable in accordance with its terms.
(d) Except as set forth on Schedule 3.18(d):
(i) the Company is, and at all times since January 1, 1992 has
been, in full compliance with all applicable terms and requirements of each
Contract under which the Company has or had any obligation or liability or
by which the Company or any of the assets owned or used by the Company is
or was bound;
(ii) to the Knowledge of Sellers and the Company, each other
Person that has or had any obligation or liability under any Contract under
which the Company has or had any rights is, and at all times since January
1, 1992 has been, in full compliance with all applicable terms and
requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result
in a violation or breach of, or give the Company or other Person the right
to declare a default or exercise any remedy under, or to accelerate the
maturity or performance of, or to cancel, terminate, or modify, any
Applicable Contract; and
(iv) the Company has not given to or received from any other
Person, at any time since January 1, 1992, any notice or other
communication (whether oral or written) regarding any actual, alleged,
possible, or potential violation or breach of, or default under, any
Contract.
(e) There are no renegotiations of, attempts to renegotiate or
outstanding rights to renegotiate any material amounts paid or payable to
the Company under current or completed Contracts with any Person and no
such Person has made written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture, or
provision of products or services by the Company have been entered into in
the Ordinary Course of Business and have been entered into without the
commission of any act alone or in concert with any other Person, or any
consideration having been paid or promised, that is or would be in
violation of any Legal Requirement.
(g) Schedule 3.18(g) contains a complete and accurate list of every
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arrangement pursuant to which the Company, or either Seller on behalf of
the Company, presently does, or is obligated to, by contract or otherwise,
purchase advertising (including "yellow pages" entries), and the type of
advertising required to be purchased.
3.19 INSURANCE.
(a) Sellers have delivered to Buyer:
(i) true and complete copies of all policies of insurance to
which the Company is a party or under which the Company is or has been
covered at any time within the five years preceding the date of this
Agreement; and
(ii) true and complete copies of all pending applications for
policies of insurance.
(b) Schedule 3.19(b) describes:
(i) any self-insurance arrangement by or affecting the Company,
including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of
insurance, for the transfer or sharing of any risk by the Company; and
(iii) all obligations of the Company to third parties with respect
to insurance (including such obligations under leases and service
agreements) and identifies the policy under which such coverage is
provided.
(c) Schedule 3.19(c) sets forth, by year, for the current policy year
and each of the three preceding policy years:
(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance policy
for an amount in excess of $5,000, which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type of insurance,
and period of coverage; and
(C) the amount and a brief description of the claim; and
(iii) a statement describing the loss experience for all claims
that were self-insured, including the number and aggregate cost of such
claims.
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(d) Except as set forth on Schedule 3.19(d):
(i) All policies to which the Company is a party or that provide
coverage to the Company, or any director or officer (in such capacity) of
the Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that, to the Knowledge of the
Company, is financially sound and reputable;
(C) taken together, provide adequate insurance coverage for the
assets and the operations of the Company for all risks normally
insured against by a Person carrying on the same business or
businesses as the Company;
(D) are sufficient for compliance with all Legal Requirements
and Contracts to which the Company is a party or by which any of them
is bound;
(E) will continue in full force and effect following the
consummation of the Contemplated Transactions; and
(F) do not provide for any retrospective premium adjustment or
other experienced-based liability on the part of the Company.
(ii) Neither Seller nor the Company has received (A) any refusal
of coverage or any notice that a defense will be afforded with reservation
of rights, or (B) any notice of cancellation or any other indication that
any insurance policy is no longer in full force or effect or will not be
renewed or that the issuer of any policy is not willing or able to perform
its obligations thereunder.
(iii) The Company has paid all premiums due, and have otherwise
performed all of their respective obligations, under each policy to which
the Company is a party or that provides coverage to the Company or any
director (in such capacity) thereof.
(iv) The Company has given notice to the insurer of all claims
that may be insured thereby.
3.20 ENVIRONMENTAL MATTERS.
Except as set forth on Schedule 3.20:
(a) The Company is, and at all times has been, in full compliance
with, and has not been and is not in violation of or liable under, any
Environmental Law. Neither Seller nor the Company has any basis to expect,
nor has any of them or any other Person for whose conduct they are or may
be held to be responsible received,
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any actual or Threatened order, notice, or other communication from (i) any
Governmental Body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any Facilities, of any actual or
potential violation or failure to comply with any Environmental Law, or of
any actual or Threatened obligation to undertake or bear the cost of any
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets (whether real, personal, or
mixed) in which Sellers or the Company has had an interest, or with respect
to any property or Facility at or to which Hazardous Materials were
generated, manufactured, refined, transferred, imported, used, or processed
by Sellers, the Company, or any other Person for whose conduct they are or
may be held responsible, or from which Hazardous Materials have been
transported, treated, stored, handled, transferred, disposed, recycled, or
received.
(b) There are no pending or, to the Knowledge of Sellers and the
Company, Threatened claims, Encumbrances, or other restrictions of any
nature, resulting from any Environmental, Health, and Safety Liabilities or
arising under or pursuant to any Environmental Law, with respect to or
affecting any of the Facilities or any other properties and assets (whether
real, personal, or mixed) in which Sellers or the Company has or had an
interest.
(c) Neither Seller nor the Company has Knowledge of any basis to
expect, nor has any of them or any other Person for whose conduct they are
or may be held responsible, received, any citation, directive, inquiry,
notice, Order, summons, warning, or other communication that relates to
Hazardous Activity, Hazardous Materials, or any alleged, actual, or
potential violation or failure to comply with any Environmental Law, or of
any alleged, actual, or potential obligation to undertake or bear the cost
of any Environmental, Health, and Safety Liabilities with respect to any of
the Facilities or any other properties or assets (whether real, personal,
or mixed) in which Sellers or the Company had an interest, or with respect
to any property or facility to which Hazardous Materials generated,
manufactured, refined, transferred, imported, used, or processed by
Sellers, the Company, or any other Person for whose conduct they are or may
be held responsible, have been transported, treated, stored, handled,
transferred, disposed, recycled, or received.
(d) To the Knowledge of Sellers and the Company, neither Seller nor
the Company, nor any other Person for whose conduct they are or may be held
responsible, has any Environmental, Health, and Safety Liabilities with
respect to the Facilities or with respect to any other properties and
assets (whether real, personal, or mixed) in which either Seller or the
Company (or any predecessor), has or had an interest, or at any property
geologically or hydrologically adjoining the Facilities or any such other
property or assets.
(e) There are no Hazardous Materials present on or in the Environment
at the Facilities or at any geologically or hydrologically adjoining
property, including any Hazardous Materials contained in barrels, above or
underground storage tanks, landfills, land deposits, dumps, equipment
(whether moveable or fixed) or other
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containers, either temporary or permanent, and deposited or located in
land, water, sumps, or any other part of the Facilities or such adjoining
property, or incorporated into any structure therein or thereon. None of
Sellers, the Company, and any other Person for whose conduct they are or
may be held responsible, or any other Person, has permitted or conducted,
or is aware of, any Hazardous Activity conducted with respect to the
Facilities or any other properties or assets (whether real, personal, or
mixed) in which Sellers or the Company has or had an interest.
(f) There has been no Release or, to the Knowledge of Sellers and the
Company, Threat of Release, of any Hazardous Materials at or from the
Facilities or at any other locations where any Hazardous Materials were
generated, manufactured, refined, transferred, produced, imported, used, or
processed from or by the Facilities, or from or by any other properties and
assets (whether real, personal, or mixed) in which Sellers or the Company
has or had an interest, or any geologically or hydrologically adjoining
property, whether by Sellers, the Company, or any other Person.
(g) Sellers have delivered to Buyer true and complete copies and
results of any reports, studies, analyses, tests, or monitoring possessed
or initiated by Sellers or the Company pertaining to Hazardous Materials or
Hazardous Activities in, on, or under the Facilities, or concerning
compliance by Sellers, the Company, or any other Person for whose conduct
they are or may be held responsible, with Environmental Laws.
3.21 EMPLOYEES.
(a) As of the Closing Date, Schedule 3.21(a) will contain a complete
and accurate list of the following information for each employee or director of
the Company, including each employee on leave of absence or layoff status:
name; job title; current compensation paid or payable and any change in
compensation since the date of the Balance Sheet; vacation accrued; and service
credited for purposes of vesting and eligibility to participate under the
Company's pension, retirement, profit-sharing, thrift-savings, deferred
compensation, stock bonus, stock option, cash bonus, employee stock ownership
(including investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, other Pension Plan, Welfare Plan,
or any other Benefit Arrangement.
(b) No employee or director of the Company is a party to, or is
otherwise bound by, any agreement or arrangement, including any confidentiality,
noncompetition, or proprietary rights agreement, between such employee or
director and any other Person ("PROPRIETARY RIGHTS AGREEMENT") that in any way
adversely affects or will affect (i) the performance of his duties as an
employee or director of the Company, or (ii) the ability of the Company to
conduct its business, including any Proprietary Rights Agreement with either
Seller or the Company by any such employee or director. To Sellers' Knowledge,
no director, officer or other key employee of the Company intends to terminate
his employment with the Company.
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(c) Schedule 3.21(c) contains a complete and accurate list of the
following information for each retired employee or director of the Company, or
their dependents, receiving benefits or scheduled to receive benefits in the
future: name, pension benefit, pension option election, retiree medical
insurance coverage, retiree life insurance coverage, and other benefits.
3.22 LABOR RELATIONS; COMPLIANCE.
Since January 1, 1992, the Company is not and has not been a party to
any collective bargaining or other labor Contract. Since January 1, 1992, there
has not been, there is not presently pending or existing, and there is not
Threatened, (a) any strike, slowdown, picketing, work stoppage or employee
grievance process, (b) any Proceeding against or affecting the Company relating
to the alleged violation of any Legal Requirement pertaining to labor relations
or employment matters, including any charge or complaint filed by an employee or
union with the National Labor Relations Board, the Equal Employment Opportunity
Commission, or any comparable Governmental Body, organizational activity, or
other labor or employment dispute against or affecting any of the Company or
their premises, or (c) any application for certification of a collective
bargaining agent. To the Knowledge of Sellers and the Company, no event has
occurred or circumstance exists that could provide the basis for any work
stoppage or other labor dispute. There is no lockout of any employees by the
Company, and no such action is contemplated by the Company. The Company has
complied in all respects with all Legal Requirements relating to employment,
equal employment opportunity, nondiscrimination, immigration, wages, hours,
benefits, collective bargaining, the payment of social security and similar
taxes, occupational safety and health, and plant closing. The Company is not
liable for the payment of any compensation, damages, taxes, fines, penalties or
other amounts, however designated, for failure to comply with any of the
foregoing Legal Requirements.
3.23 INTELLECTUAL PROPERTY.
(a) INTELLECTUAL PROPERTY ASSETS--The term "Intellectual Property
Assets" includes:
(i) the name "Rhythm City, Inc.", the name "American Discount
Music", the name "American Music Center", all fictional business names,
trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "MARKS");
(ii) all patents, patent applications and inventions and
discoveries that may be patentable (collectively, "PATENTS");
(iii) all copyrights in both published works and unpublished works
(collectively, "COPYRIGHTS");
(iv) all rights in mask works (collectively, "RIGHTS IN MASK
WORKS"); and
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(v) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "TRADE SECRETS") owned,
used, or licensed by the Company as licensee or licensor.
(b) AGREEMENTS--Schedule 3.23(b) contains a complete and accurate
list and summary description, including any royalties paid or received by the
Company, of all Contracts relating to the Intellectual Property Assets to which
the Company is a party or by which the Company is bound, except for any license
implied by the sale of a product and perpetual, paid-up licenses for commonly
available software programs with a value of less than $5,000 under which the
Company is the licensee. There are no outstanding and, to Sellers' Knowledge,
no Threatened disputes or disagreements with respect to any such agreement.
(c) KNOW-HOW NECESSARY FOR THE BUSINESS.
(i) The Intellectual Property Assets are all those necessary for
the operation of the Company's businesses as they are currently conducted.
The Company is the owner of all right, title and interest in and to each of
the Intellectual Property Assets, free and clear of all liens, security
interests, charges, encumbrances, equities and other adverse claims, and
has the right to use without payment to a third party all of the
Intellectual Property Assets.
(ii) Except as set forth on Schedule 3.23(c), all former and
current employees of the Company have executed written Contracts with the
Company that assign to the Company all rights to any inventions,
improvements, discoveries, or information relating to the business of the
Company. No employee of the Company has entered into any Contract that
restricts or limits in any way the scope or type of work in which the
employee may be engaged or requires the employee to transfer, assign, or
disclose information concerning his work to anyone other than the Company.
(d) PATENTS.
(i) Schedule 3.23(d) contains a complete and accurate list and
summary description of all Patents. The Company is the owner of all right,
title and interest in and to each of the Patents, free and clear of all
liens, security interests, charges, encumbrances, entities and other
adverse claims.
(ii) All of the issued Patents are currently in compliance with
formal legal requirements (including payment of filing, examination, and
maintenance fees and proofs of working or use), are valid and enforceable,
and are not subject to any maintenance fees or taxes or actions falling due
within ninety days after the Closing Date.
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(iii) No Patent has been or is now involved in any interference,
reissue, reexamination, or opposition proceeding. To Sellers' Knowledge,
there is no potentially interfering patent or patent application of any
third party.
(iv) No Patent is infringed or, to Sellers' Knowledge, has been
challenged or threatened in any way. None of the products manufactured and
sold, nor any process or know-how used, by the Company infringes or is
alleged to infringe any patent or other proprietary right of any other
Person.
(e) TRADEMARKS.
(i) Schedule 3.23(e) contains a complete and accurate list and
summary description of all Marks. The Company is the owner of all right,
title and interest in and to each of the Marks, free and clear of all
liens, security interests, charges, encumbrances, equities and other
adverse claims.
(ii) All Marks that have been registered with the United States
Patent and Trademark Office are currently in compliance with all formal
legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid
and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to Sellers' Knowledge, no such action is
Threatened with the respect to any of the Marks.
(iv) To Sellers' Knowledge, there is no potentially interfering
trademark or trademark application of any third party.
(v) No Mark is infringed or, to Sellers' Knowledge, has been
challenged or threatened in any way. None of the Marks used by the Company
infringes or is alleged to infringe any trade name, trademark, or service
mark of any third party.
(f) COPYRIGHTS.
(i) Schedule 3.23(f) contains a complete and accurate list and
summary description of all Copyrights. The Company is the owner of all
right, title and interest in and to each of the Copyrights, free and clear
of all liens, security interests, charges, encumbrances, equities and other
adverse claims.
(ii) All the Copyrights have been registered and are currently
in compliance with formal legal requirements, are valid and enforceable,
and are not subject to any maintenance fees or taxes or actions falling due
within ninety days after the date of Closing.
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(iii) No Copyright is infringed or, to Sellers' Knowledge, has
been challenged or threatened in any way. None of the subject matter of
any of the Copyrights infringes or is alleged to infringe any copyright of
any third party or is a derivative work based on the work of a third party.
(g) TRADE SECRETS.
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in
detail and content to identify and explain it and to allow its full and
proper use without reliance on the knowledge or memory of any individual.
(ii) Sellers and the Company have taken all reasonable
precautions to protect the secrecy, confidentiality and value of their
Trade Secrets.
(iii) The Company has good title and an absolute (but not
necessarily exclusive) right to use the Trade Secrets. The Trade Secrets
are not part of the public knowledge or literature, and, to Sellers'
Knowledge, have not been used, divulged, or appropriated either for the
benefit of any Person (other than the Company) or to the detriment of the
Company. No Trade Secret is subject to any adverse claim or has been
challenged or threatened in any way.
3.24 CERTAIN PAYMENTS.
Since January 1, 1992, none of the Company, nor any director, officer,
agent or employee of the Company, or any other Person associated with or acting
for or on behalf of the Company, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback or other
payment to any Person, private or public, regardless of form, whether in money,
property or services (i) to obtain favorable treatment in securing business,
(ii) to pay for favorable treatment for business secured, (iii) to obtain
special concessions or for special concessions already obtained, for or in
respect of the Company or any Related Person of the Company, or (iv) in
violation of any Legal Requirement, (b) established or maintained any fund or
asset that has not been recorded in the books and records of the Company.
3.25 DISCLOSURE.
(a) No representation or warranty of Sellers in this Agreement
and no statement in the Schedules omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
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(c) There is no fact known to Sellers that has specific
application to Sellers or the Company (other than general economic or industry
conditions) and that materially adversely affects the assets, business,
prospects, financial condition, or results of operations of the Company (on a
consolidated basis) that has not been set forth in this Agreement or the
Schedules.
3.26 BROKERS OR FINDERS.
None of Sellers, the Company or any agent thereof has incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement or the transactions contemplated thereby.
4. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
4.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms.
Buyer has the absolute and unrestricted right, power, and authority to execute
and deliver this Agreement and to perform its obligations hereunder.
(b) Except as set forth on Schedule 4.2, neither the execution and
delivery of this Agreement by Buyer nor the consummation or performance of any
of the Contemplated Transactions by Buyer will give any Person the right to
prevent, delay, or otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any provision of Buyer's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Buyer;
(iii) any Legal Requirement or Order to which Buyer may be
subject; or
(iv) any Contract to which Buyer is a party or by which Buyer
may be bound.
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Except as set forth on Schedule 4.2, Buyer is not and will not be
required to obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or the consummation or performance of any of the
Contemplated Transactions.
4.3 INVESTMENT INTENT.
Buyer is acquiring the Shares for its own account and not with a view
to their distribution within the meaning of Section 2(11) of the Securities Act.
Buyer is an "Accredited Investor" as such term is defined in Rule 501
promulgated under the Securities Act.
4.4 CERTAIN PROCEEDINGS.
There is no pending Proceeding that has been commenced against Buyer
and that challenges, or may reasonably be expected to have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To Buyer's Knowledge, no such Proceeding has been
Threatened.
4.5 BROKERS OR FINDERS.
Buyer and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold each Seller harmless from any such payment alleged to be due
by or through Buyer as a result of the action of Buyer or its officers or
agents.
5. COVENANTS OF SELLERS.
5.1 ACCESS AND INVESTIGATION.
Between the date of this Agreement and the Closing Date, Sellers will,
and will cause the Company and its Representatives to, (a) afford Buyer and its
Representatives and prospective lenders and their Representatives (collectively,
"BUYER'S ADVISORS") full access to the Company's personnel, properties
(including subsurface testing), contracts, books and records and other documents
and data, (b) furnish Buyer and Buyer's Advisors with copies of all such
contracts, books and records, and other existing documents and data as Buyer may
reasonably request, and (c) furnish Buyer and Buyer's Advisors with such
additional financial, operating and other data and information as Buyer may
reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE COMPANY.
Between the date of this Agreement and the Closing Date, Sellers will,
and will cause the Company to:
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(a) conduct the business of the Company only in the Ordinary Course
of Business, except that the Company (i) may distribute to Sellers in
partial redemption of Sellers' equity interest in the Company either or
both of a Harley-Davidson motorcycle and a Ford Thunderbird automobile
owned by the Company, and (ii) shall terminate the lease related to a 1983
Ford automobile owned by George A. Luther, Sr.;
(b) use Best Efforts to preserve intact the current business
organization of the Company, keep available the services of the current
officers, employees, and agents of the Company, and maintain the relations
and good will with suppliers, customers, landlords, creditors, employees,
agents, and others having business relationships with the Company;
(c) confer with Buyer concerning operational matters of a material
nature; and
(d) otherwise report periodically to Buyer concerning the status of
the business, operations, and finances of the Company.
5.3 NEGATIVE COVENANT.
Except as otherwise expressly permitted by this Agreement, between the
date of this Agreement and the Closing Date, Sellers will not, and will cause
the Company not to, without the prior written consent of Buyer, take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in
Section 3.17 occurs or is likely to occur.
5.4 REQUIRED APPROVALS AND PROVISION OF FINANCIAL DATA.
As promptly as practicable after the date of this Agreement, Sellers
will, and will cause the Company to, make all filings required by Legal
Requirements to be made by them in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Sellers
will, and will cause the Company to, (a) cooperate with Buyer with respect to
all filings that Buyer elects to make or is required by Legal Requirements to
make in connection with the Contemplated Transactions, and (b) cooperate with
Buyer in obtaining all consents identified on Schedule 4.2.
5.5 NOTIFICATION.
Between the date of this Agreement and the Closing Date, Sellers will
promptly notify Buyer in writing if Sellers or the Company becomes aware of any
fact or condition that causes or constitutes a Breach of any of Sellers'
representations and warranties as of the date of this Agreement, or if Sellers
or the Company becomes aware of the occurrence after the date of this Agreement
of any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
had such representation or warranty been made as of the time of
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occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Schedules if the Schedules were dated the
date of the occurrence or discovery of any such fact or condition, Sellers will
promptly deliver to Buyer a supplement to the Schedules specifying such change.
During the same period, Sellers will promptly notify Buyer of the occurrence of
any Breach of any covenant of Sellers in this Section 5 or of the occurrence of
any event that may make the satisfaction of the conditions in Section 7
impossible or unlikely.
5.6 NO NEGOTIATION.
Prior to the Closing Date, Sellers shall not, directly or indirectly,
sell, transfer, pledge, hypothecate, encumber or otherwise dispose or surrender
possession of, any of the Shares, or any interest therein. Until such time, if
any, as this Agreement is terminated pursuant to Section 9, Sellers will not,
and will cause the Company and each of Sellers' Representatives not to, directly
or indirectly, solicit, initiate, or encourage any inquiries or proposals from,
discuss or negotiate with, provide any non-public information to, or consider
the merits of any inquiries or proposals from, any Person (other than Buyer)
relating to any transaction involving the sale of the business or assets (other
than in the Ordinary Course of Business) of the Company, or any of the capital
stock of the Company, or any merger, consolidation, business combination, or
similar transaction involving the Company, and Sellers shall promptly notify
Buyer of any such inquiries or proposals.
5.7 BEST EFFORTS.
Between the date of this Agreement and the Closing Date, Sellers will
use their respective Best Efforts to cause the conditions in Sections 7 and 8 to
be satisfied.
5.8 FURTHER ASSURANCES.
Sellers agree that at any time and from time to time after the Closing
Date, Sellers will execute and deliver to any other party such further
instruments or documents and take such further actions as may reasonably be
required to give effect to the Contemplated Transactions.
5.9 SMYRNA STORE.
For a period of five years after the Closing Date, neither Seller
shall lease the Smyrna Store to, permit the Smyrna Store to be sublet to, or
permit the Smyrna Store to be used by, any Person engaged in the retail
distribution or sale of musical instruments other than the Company, the Buyer or
an affiliate thereof. Contemporaneously with the Closing, Sellers shall file,
or cause to be filed, in the real estate records for Cobb County, Georgia, with
respect to the Smyrna Store, a restrictive covenant that is consistent with the
first sentence of this Section 5.9.
5.10 CUSTOMERS.
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After the Closing, neither Seller shall solicit for the purpose of
distributing musical instruments any Person who was a customer of the Company
prior to the Closing, and neither Seller shall maintain possession of, use for
his or her own benefit, or disclose to any third party, any of the Intellectual
Property Assets, including, without limitation, any customer list.
5.11 ACCRUED SALARIES AND LEASE PAYMENTS.
Prior to the Closing, Sellers shall cause the Company to pay to
Sellers and all of Sellers' Related Persons all accrued and unpaid salaries,
accrued and unpaid lease payments, and all other accrued and unpaid amounts due
and owing from the Company to such Persons.
5.12 NAME RESERVATIONS.
Prior to Closing, Sellers shall cause any name reservations or similar
rights obtained by the Company or any Related Person of the Company (including,
without limitation, all reservations in the State of Georgia for the name
"Guitar Center" or any similar formulation) to be owned exclusively by the
Company such that no other Related Person of the Company (including Sellers) has
any interest therein.
5.13 TAX RETURNS.
As soon as practicable after the Closing Date, Sellers shall, at their
expense, cause to be filed all Tax Returns covering periods ending on or before
the Closing Date, including, without limitation, a short period return for the
period September 1, 1996 to the Closing Date.
6. COVENANTS OF BUYER PRIOR TO CLOSING DATE.
6.1 APPROVALS OF GOVERNMENTAL BODIES.
As promptly as practicable after the date of this Agreement, Buyer
will, and will cause each of its Related Persons to, make all filings required
by Legal Requirements to be made by them to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will, and will cause each Related Person to, cooperate with Sellers with respect
to all filings that Sellers are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with Sellers
in obtaining all consents identified on Schedule 3.2; PROVIDED, HOWEVER, that
this Agreement will not require Buyer to dispose of or make any change in any
portion of its business or to incur any other burden to obtain a Governmental
Authorization.
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6.2 BEST EFFORTS.
Except as set forth in the proviso to Section 6.1, between the date of
this Agreement and the Closing Date, Buyer will use its Best Efforts to cause
the conditions in Sections 7 and 8 to be satisfied.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE.
Buyer's obligation to purchase the Shares and to take the other
actions required to be taken by Buyer at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Buyer, in whole or in part, in Buyer's sole
discretion):
7.1 ACCURACY OF REPRESENTATIONS.
(a) All of Sellers' and the Company's representations and warranties
in this Agreement (considered collectively), and each of these representations
and warranties (considered individually), must have been accurate in all
material respects as of the date of this Agreement, and must be accurate in all
material respects as of the Closing Date as if made on the Closing Date, without
giving effect to any supplement to the Schedules.
(b) Each of Sellers' representations and warranties in Sections 3.3,
3.4, 3.12, and 3.25 must have been accurate in all respects as of the date of
this Agreement, and must be accurate in all respects as of the Closing Date as
if made on the Closing Date, without giving effect to any supplement to the
Schedules.
7.2 SELLERS' PERFORMANCE.
(a) All of the covenants and obligations that Sellers are required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.
(b) Each document required to be delivered pursuant to Section 2.4 or
any other applicable provision of this Agreement must have been delivered, and
each of the other covenants and obligations in Sections 5.4 and 5.7 must have
been performed and complied with in all respects.
(c) Buyer must have received from Sellers or the Company all
financial statements, schedules and notes thereto, and all other information
concerning the Company, required (as determined by Buyer in its sole discretion)
by the Securities Act, the Securities Exchange Act and the regulations
promulgated thereunder, including without limitation, Item 3-05 of
Regulation S-X.
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7.3 CONSENTS.
Each of the Consents identified in Schedule 3.2 other than those
covered by the Trade Vendor Exception, and each Consent identified on
Schedule 4.2, must have been obtained and must be in full force and effect.
7.4 ADDITIONAL DOCUMENTS.
Each of the following documents shall have been delivered to Buyer:
(a) an opinion of J. Clifton Barlow, Jr., counsel to Sellers, dated
as of the Closing Date, substantially in the form of Exhibit 7.4(a);
(b) such other documents as Buyer may reasonably request for the
purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of Sellers'
representations and warranties, (iii) evidencing the performance by Sellers
of, or the compliance by Sellers with, any covenant or obligation required
to be performed or complied with by Sellers, (iv) evidencing the
satisfaction of any condition referred to in this Section 7, or
(v) otherwise facilitating the consummation or performance of any of the
Contemplated Transactions.
7.5 NO PROCEEDINGS.
Since the date of this Agreement, there must not have been commenced
or Threatened against Buyer, or against any Person affiliated with Buyer, any
Proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS.
There must not have been made or threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, the Company, or (b) is entitled
to all or any portion of the Purchase Price payable for the Shares.
7.7 NO PROHIBITION.
Neither the consummation nor the performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time), materially contravene, or conflict with, or result in a
material violation of, or cause Buyer or any Person affiliated with Buyer to
suffer any material adverse consequence under, (a) any applicable Legal
Requirement or Order, or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.
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7.8 RESIGNATIONS.
All of the members of the board of directors and all of the officers
of the Company appointed or elected prior to the Closing shall have submitted
their resignations, in form and content reasonably satisfactory to Buyer,
effective on the Closing Date.
7.9 APPROVAL OF DOCUMENTATION.
The form and substance of all certificates, instruments, opinions and
other documents delivered to Buyer under this Agreement shall be reasonably
satisfactory in all respects to Buyer and its counsel and Buyer shall have
received copies of such documents and instruments as Buyer and its counsel may
reasonably request in connection with the Contemplated Transaction.
7.10 FORCE MAJEURE.
All or any material part of the assets of the Company shall not have
been materially and adversely affected in any way by any act of God, fire,
flood, war, legislation (proposed or enacted) or other event or occurrence,
whether or not covered by insurance.
7.11 ADVERSE VENDOR RELATIONS.
Buyer shall be satisfied, in its sole discretion, that (i) no material
adverse change in the Company's or Buyer's respective relationships with trade
vendors to the Company has arisen or will arise after the Closing as a result of
the Contemplated Transactions, and (ii) the Company has received from vendors
all material requisite consents to maintain the Company's existing product lines
after the Contemplated Transactions.
7.12 RELEASE OF LIENS, CLAIMS, ETC.
Prior to the Closing, Buyer shall have received releases, in form and
substance reasonably satisfactory to Buyer, of all Encumbrances against the
assets of the Company and Buyer shall be reasonably satisfied that, as a result,
the Company has good and marketable title to its assets, free and clear of any
Encumbrances; PROVIDED, HOWEVER, that if Buyer elects to waive such condition,
Sellers agree to effect and deliver such releases at Sellers' expense as
promptly as possible, but not in any event more than thirty (30) days after the
Closing.
7.13 FINANCING.
Buyer shall have obtained financing in an amount sufficient to effect
the Contemplated Transactions and to provide sufficient working capital for the
Company to operate its business following the Closing on terms satisfactory to
Buyer.
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7.14 DUE DILIGENCE REVIEW.
Buyer and its Representatives shall have conducted a due diligence
review of the books and records, financial statements, and other records and
accounts of the Company, and in the sole and absolute discretion of Buyer, Buyer
shall be satisfied on the basis of such review that there has been (i) since the
date of the Balance Sheet, no material adverse change in the business,
properties, financial condition, results of operations or prospects of the
Company, and (ii) no breach of the representations and warranties or the pre-
closing covenants of Sellers and the Company made pursuant to this Agreement or
any Concurrent Agreement. Such review shall have no effect on the liability of
any such person or entity under this Agreement or otherwise for breach of any
representations, warranties or covenants thereby.
7.15 PHASE I REPORT.
Buyer and its Representatives shall have caused to be conducted by an
independent environmental consultant a Phase I review of the Atlanta Store and
the Atlanta Warehouse, Buyer shall have received a Phase I report with respect
to such Phase I review, and in the sole discretion of Buyer, Buyer shall be
satisfied with the results of such review.
7.16 INTERIM FINANCIAL STATEMENTS.
Seller shall have prepared and delivered to Buyer the Interim Balance
Sheet and the related unaudited statements of income, changes in stockholders'
equity and cash flow for the seven months ended March 31, 1997, including in
each case the notes thereto.
7.17 ADEQUATE WORKING CAPITAL.
Sellers shall have delivered to Buyer evidence, satisfactory to Buyer
in Buyer's sole discretion, that as of the Closing Date, the Net Working Capital
of the Company is not less than $5,100,000.
8. CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE.
Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers, in whole or in part in Sellers' sole discretion):
8.1 ACCURACY OF REPRESENTATIONS.
All of Buyer's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
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8.2 BUYER'S PERFORMANCE.
(a) All of the covenants and obligations that Buyer is required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
(b) Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to Section 2.4 and must have made the cash payment
required to be made by Buyer pursuant to Sections 2.4(b)(i).
8.3 CONSENTS.
Except for the Trade Vendor Exception, each of the Consents identified
in Schedule 3.2 must have been obtained and must be in full force and effect.
8.4 ADDITIONAL DOCUMENTS.
Buyer must have caused the following documents to be delivered to
Sellers:
(a) an opinion of counsel to Buyer, dated as of the Closing Date, in
form reasonably satisfactory to Sellers and Sellers' counsel, such
opinion(s) to cover the good standing of Buyer in the State of Delaware and
due authorization of this Agreement and the Concurrent Agreements to which
Buyer is a party; and
(b) such other documents as Sellers may reasonably request for the
purpose of (i) enabling their counsel to provide the opinion referred to in
Section 7.4(a), (ii) evidencing the accuracy of any representation or
warranty of Buyer, (iii) evidencing the performance by Buyer of, or the
compliance by Buyer with, any covenant or obligation required to be
performed or complied with by Buyer, (ii) evidencing the satisfaction of
any condition referred to in this Section 8, or (v) otherwise facilitating
the consummation of any of the Contemplated Transactions.
8.5 NO INJUNCTION.
There must not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the sale of the Shares by Sellers to Buyer, and
(b) has been adopted or issued, or has otherwise become effective, since the
date of this Agreement.
9. TERMINATION.
9.1 TERMINATION EVENTS.
This Agreement may, by written notice given prior to or at the
Closing, be terminated:
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(a) by either Buyer or Sellers if a material Breach of any provision
of this Agreement has been committed by the other party and such Breach has
not been waived;
(b) (i) by Buyer if any of the conditions in Section 7 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Buyer to comply
with its obligations under this Agreement) and Buyer has not waived such
condition on or before the Closing Date; or (ii) by Sellers, if any of the
conditions in Section 8 has not been satisfied as of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than
through the failure of Sellers to comply with their obligations under this
Agreement) and Sellers have not waived such condition on or before the
Closing Date;
(c) by mutual consent of Buyer and Sellers; or
(d) by either Buyer or Sellers if the Closing has not occurred (other
than through the failure of any party seeking to terminate this Agreement
to comply fully with its obligations under this Agreement) on or before
May 31, 1997, or such later date as the parties may agree upon.
9.2 EFFECT OF TERMINATION.
Each party's right of termination under Section 9.1 is in addition to
any other rights it may have under this Agreement or otherwise, and the exercise
of a right of termination will not be an election of remedies. If this
Agreement is terminated pursuant to Section 9.1, all further obligations of the
parties under this Agreement will terminate, except that the obligations in
Sections 11.1 and 11.3 will survive; PROVIDED, HOWEVER, that if this Agreement
is terminated by a party because of the Breach of the Agreement by the other
party or because one or more of the conditions to the terminating party's
obligations under this Agreement is not satisfied as a result of the other
party's failure to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired, subject to Section 11.5.
10. INDEMNIFICATION; REMEDIES.
10.1 SURVIVAL.
All representations, warranties, covenants and obligations in this
Agreement, the Schedules, the supplements, if any, to the Schedules, the
certificate delivered pursuant to Section 2.4(a)(vii) and any other certificate
or document delivered pursuant to this Agreement will survive the Closing. The
right to indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants and obligations will not be affected by
any investigation conducted with respect to, or any Knowledge acquired (or
capable of being acquired) at any time, whether before or after the execution
and delivery of this Agreement or the Closing Date, with respect to the accuracy
or inaccuracy of or
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compliance with, any such representation, warranty, covenant, or obligation.
The waiver of any condition based on the accuracy of any representation or
warranty, or on the performance of or compliance with any covenant or
obligation, will not affect the right to indemnification, payment of Damages or
other remedy based on such representations, warranties, covenants and
obligations, unless the related written waiver expressly so provides.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS.
Sellers, jointly and severally, will indemnify and hold harmless
Buyer, the Company, and their respective Representatives, stockholders,
controlling persons and affiliates (collectively, the "INDEMNIFIED PERSONS")
for, and will pay to the Indemnified Persons the amount of, any loss, liability,
claim, damage (including incidental and consequential damages), expense
(including costs of investigation and defense and reasonable attorneys' fees) or
diminution of value, whether or not involving a third-party claim (collectively,
"DAMAGES"), arising, directly or indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by any Seller
or the Company in this Agreement (without giving effect to any supplement
to the Schedules), the Schedules, the supplements to the Schedules or any
other certificate or document delivered by any Seller pursuant to this
Agreement;
(b) any Breach of any representation or warranty made by any Seller
or the Company in this Agreement as if such representation or warranty were
made on and as of the Closing Date without giving effect to any supplement
to the Schedules, other than any such Breach that is disclosed in a
supplement to the Schedules and is expressly identified in the certificate
delivered pursuant to Section 2.4(a)(vii) as having caused the condition
specified in Section 7.1 not to be satisfied;
(c) any Breach by any Seller or the Company of any covenant or
obligation of either such Person in this Agreement;
(d) any matter disclosed on Schedule 3.16; or
(e) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with any Seller or the Company
(or any Person acting on their behalf) in connection with any of the
Contemplated Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Buyer or the other Indemnified
Persons.
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10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER.
Buyer will indemnify and hold harmless Sellers, and will pay to
Sellers the amount of any Damages arising, directly or indirectly, from or in
connection with (a) any Breach of any representation or warranty made by Buyer
in this Agreement or in any certificate delivered by Buyer pursuant to this
Agreement, (b) any Breach by Buyer of any covenant or obligation of Buyer in
this Agreement, or (c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions.
10.4 TIME LIMITATIONS.
If the Closing occurs, Sellers will have no liability (for
indemnification or otherwise) with respect to any representation or warranty, or
covenant or obligation to be performed and complied with prior to the Closing
Date, other than those in Sections 3.3 (Capitalization), 3.11 (Taxes), 3.13
(Employee Benefits), 3.15 (Compliance with Legal Requirements; Governmental
Authorizations), 3.20 (Environmental Matters), and this Article 10, unless on or
before the fifth anniversary of the Closing Date, Buyer notifies Sellers of a
claim specifying the factual basis of that claim in reasonable detail to the
extent then known by Buyer; a claim with respect to Section 3.3 may be made at
any time; and a claim with respect to Section 3.11, 3.13, 3.15 or 3.20 may be
made at any time up to the later of (i) the fifth anniversary of the Closing
Date and (ii) 60 days after the termination of the relevant statute of
limitations. If the Closing occurs, Buyer will have no liability (for
indemnification or otherwise) with respect to any representation or warranty, or
covenant or obligation to be performed and complied with prior to the Closing
Date, unless on or before the fifth anniversary of the Closing Date, Sellers
notifies Buyer of a claim specifying the factual basis of that claim in
reasonable detail to the extent then known by Sellers.
10.5 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under Section 10.2
or 10.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to give
such notice.
(b) If any Proceeding referred to in Section 10.5(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves Taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such
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Proceeding and provide indemnification with respect to such Proceeding), to
assume the defense of such Proceeding with counsel satisfactory to the
indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If
the indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of
the commencement of any Proceeding and the indemnifying party does not, within
ten days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines
in good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such Proceeding, but the indemnifying
party will not be bound by any determination of a Proceeding so defended or any
compromise or settlement effected without its consent (which may not be
unreasonably withheld).
(d) Sellers hereby consent to the non-exclusive jurisdiction of any
court in which a Proceeding is brought against any Indemnified Person for
purposes of any claim that an Indemnified Person may have under this Agreement
with respect to such Proceeding or the matters alleged therein, and agree that
process may be served on Sellers with respect to such a claim anywhere in the
world.
10.6 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS.
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
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11. GENERAL PROVISIONS.
11.1 EXPENSES.
Except as otherwise expressly provided in this Agreement, each party
to this Agreement will bear its respective expenses incurred in connection with
the preparation, execution, and performance of this Agreement and the
Contemplated Transactions, including all fees and expenses of agents,
representatives, counsel, and accountants. Buyer will pay the reasonable fees
of environmental consultants and other professionals in connection with a Phase
I review of the Atlanta Store and the adjoining property owned in fee by the
Company. In the event of termination of this Agreement, the obligation of each
party to pay its own expenses will be subject to any rights of such party
arising from a breach of this Agreement by another party.
11.2 PUBLIC ANNOUNCEMENTS.
Any public announcement or similar publicity with respect to this
Agreement or the Contemplated Transactions will be issued, if at all, at such
time and in such manner as Buyer determines. Unless consented to by Buyer in
advance or required by Legal Requirements, prior to the Closing, Sellers shall,
and shall cause the Company to, keep this Agreement strictly confidential and
may not intentionally make any disclosure of this Agreement to any Person.
Sellers and Buyer will consult with each other concerning the means by which the
Company's employees, customers, and suppliers and others having dealings with
the Company will be informed of the Contemplated Transactions, and Buyer will
have the right to be present for any such communication.
11.3 CONFIDENTIALITY.
Subject to Section 11.2, between the date of this Agreement and the
Closing Date, Buyer and Sellers will maintain in confidence, and will cause the
directors, officers, employees, agents, and advisors of Buyer and the Company to
maintain in confidence, any written, oral, or other information obtained in
confidence from another party or the Company in connection with this Agreement
or the Contemplated Transactions, unless (a) such information is already known
to such party or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party, (b) the
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
Contemplated Transactions, or (c) the furnishing or use of such information is
required by or necessary or appropriate in connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. Whether or not the Closing takes place, Sellers waive, and
will upon Buyer's request cause the Company to waive, any cause of action,
right, or claim arising out of the access of Buyer or its representatives to any
trade secrets or other confidential information of the Company
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except for the intentional competitive misuse by Buyer of such trade secrets or
confidential information.
11.4 NOTICES.
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by telecopier
(with written confirmation of receipt), provided that a copy is mailed by a
nationally recognized overnight delivery service (E.G., Federal Express) or (c)
when received by the addressee, if sent by a nationally recognized overnight
delivery service, in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
(a) If to Buyer, or to the Company after the Closing:
Guitar Center, Inc.
5155 Clareton Drive
Agoura Hills, California 91301
Attention: President
Telephone: (818) 735-8800
Facsimile: (818) 755-8833
In each case, with a copy to:
Latham & Watkins
633 West Fifth Street
Suite 4000
Los Angeles, California 90071
Attention: Anthony J. Richmond, Esq.
James P. Beaubien, Esq.
Telephone: (213) 485-1234
Facsimile: (213) 891-8763
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(b) If to Sellers, or to the Company prior to the Closing:
George A. Luther, Sr.
Nadine H. Luther
9365 St. Georgen Common
Deluth, Georgia 30155
Telephone: (770) 497-9626
Facsimile: (770) 497-0290
In each case, with a copy to:
J. Clifton Barlow, Jr., Esq.
5303 Fairfield West
Atlanta, Georgia 30338
Telephone: (770) 394-5550
Facsimile: (770) 394-5551
11.5 REMEDIES.
If the Closing does not occur due to a Breach of any representation,
warranty or covenant made by any Seller or the Company prior to the Closing, or
the failure of any condition set forth in Article 7, Buyer expressly retains the
right (but not the obligation), which shall not be Buyer's exclusive remedy, to
seek specific performance of Sellers' obligations under this Agreement, and each
Seller expressly waives its right to assert any defenses to Buyer's pursuit of
such remedy. If the Closing does not occur due to a Breach of any
representation, warranty or covenant made by Buyer prior to the Closing,
Sellers' damages shall be limited to a maximum of $500,000.
11.6 GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
11.7 DISPUTE RESOLUTION PROCESS.
The parties hereby agree that, in order to obtain prompt and
expeditious resolution of any disputes under this Agreement, each claim, dispute
or controversy of whatever nature, arising out of, in connection with, or in
relation to the interpretation, performance or breach of this Agreement or any
of the Concurrent Agreements (or any other agreement contemplated by or related
to any such agreement), including without limitation any claim based on
contract, tort or statute, or the arbitrability of any claim hereunder (an
"ARBITRABLE CLAIM"), shall be settled by final and binding arbitration conducted
in Washington, D.C. All such Arbitrable Claims shall be settled by one
arbitrator in accordance with the Commercial Arbitration Rules then in effect of
the American Arbitration Association. Such arbitrator shall be provided through
the CPR Institute for Dispute Resolution ("CPR") by mutual agreement of the
parties; PROVIDED that, absent such
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agreement, the arbitrator shall be appointed by CPR. In either event, such
arbitrator may not have any preexisting, direct or indirect relationship with
any party to the dispute. EACH PARTY HERETO EXPRESSLY CONSENTS TO, AND WAIVES
ANY FUTURE OBJECTION TO, SUCH FORUM AND ARBITRATION RULES. Judgment upon any
award may be entered by any state or federal court having jurisdiction thereof.
Except as required by law (including, without limitation, the rules and
regulations of the Securities and Exchange Commission and the Nasdaq Stock
Market), neither party nor the arbitrator shall disclose the existence, content,
or results of any arbitration hereunder without the prior written consent of all
parties. Except as provided herein, the Federal Arbitration Act shall govern
the interpretation, enforcement and all proceedings pursuant to this
Section 11.7.
Adherence to this dispute resolution process shall not limit the right
of the parties hereto to obtain any provisional remedy, including without
limitation, injunctive or similar relief, from any court of competent
jurisdiction as may be necessary to protect their respective rights and
interests pending arbitration. Notwithstanding the foregoing sentence, this
dispute resolution procedure is intended to be the exclusive method of resolving
any Arbitrable Claims arising out of or relating to this Agreement.
The arbitration procedures shall follow the substantive law of the
State of Delaware, including the provisions of statutory law dealing with
arbitration, as it may exist at the time of the demand for arbitration, insofar
as said provisions are not in conflict with this Agreement and specifically
excepting therefrom sections of any such statute dealing with discovery and
sections requiring notice of the hearing date by registered or certified mail.
The Arbitrators shall determine the prevailing party and shall include
in their award that party's reasonable attorneys' fees and costs.
11.8 REPRESENTATION BY COUNSEL.
EACH PARTY HERETO REPRESENTS AND AGREES WITH EACH OTHER THAT IT HAS
BEEN REPRESENTED BY OR HAD THE OPPORTUNITY TO BE REPRESENTED BY, INDEPENDENT
COUNSEL OF ITS OWN CHOOSING, AND THAT IT HAS HAD THE FULL RIGHT AND OPPORTUNITY
TO CONSULT WITH ITS RESPECTIVE ATTORNEY(S), THAT TO THE EXTENT, IF ANY, THAT IT
DESIRED, IT AVAILED ITSELF OF THIS RIGHT AND OPPORTUNITY, THAT IT OR ITS
AUTHORIZED OFFICERS (AS THE CASE MAY BE) HAVE CAREFULLY READ AND FULLY
UNDERSTAND THIS AGREEMENT IN ITS ENTIRETY AND HAVE HAD IT FULLY EXPLAINED TO
THEM BY SUCH PARTY'S RESPECTIVE COUNSEL, THAT EACH IS FULLY AWARE OF THE
CONTENTS THEREOF AND ITS MEANING, INTENT AND LEGAL EFFECT, AND THAT IT OR ITS
AUTHORIZED OFFICER (AS THE CASE MAY BE) IS COMPETENT TO EXECUTE THIS AGREEMENT
AND HAS EXECUTED THIS AGREEMENT FREE FROM COERCION, DURESS OR UNDUE INFLUENCE.
11.9 WAIVER.
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by any party
in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise
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of any such right, power, or privilege will preclude any other or further
exercise of such right, power, or privilege or the exercise of any other right,
power, or privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Agreement or the documents referred to in
this Agreement can be discharged by one party, in whole or in part, by a waiver
or renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (c) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to in this Agreement.
11.10 ENTIRE AGREEMENT AND MODIFICATION.
This Agreement supersedes all prior agreements between the parties
with respect to its subject matter (including the Confidentiality Agreement
dated January 22, 1997, between Buyer and George A. Luther, Sr.) and constitutes
(along with the documents referred to in this Agreement) a complete and
exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
11.11 SCHEDULES.
(a) The disclosures in the Schedules, and those in any supplement
thereto, must relate only to the representations and warranties in the Section
of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in the
body of this Agreement and those in the Schedules (other than an exception
expressly set forth as such in the Schedules with respect to a specifically
identified representation or warranty), the statements in the body of this
Agreement will control.
11.12 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS.
No party may assign any of its rights under this Agreement without the
prior consent of the other parties, except that Buyer may assign any of its
rights under this Agreement to any Subsidiary of Buyer or as collateral security
for any borrowings. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any Person other than the parties
to this Agreement any legal or equitable right, remedy, or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement
and all of its provisions and conditions are for the sole and exclusive benefit
of the parties to this Agreement and their successors and assigns.
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11.13 SEVERABILITY.
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree will remain in full force and effect to
the extent not held invalid or unenforceable.
11.14 SECTION HEADINGS, CONSTRUCTION.
The headings of Sections in this Agreement are provided for
convenience only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.
11.15 JOINT AND SEVERAL OBLIGATIONS OF SELLERS.
The obligations of Sellers set forth in this Agreement are joint and
several.
11.16 NO INTERPRETATION AGAINST DRAFTER.
This Agreement is the product of negotiations between the parties
hereto represented by counsel and any rules of construction relating to
interpretation against the drafter of an agreement shall not apply to this
Agreement and are expressly waived.
11.17 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
Company:
RHYTHM CITY, INC.
By: /s/ George A. Luther
-----------------------------------
Name: George A. Luther, Sr.
Title: President
Sellers:
GEORGE A. LUTHER, SR.
/s/ George A. Luther
---------------------------------------
NADINE H. LUTHER
/s/ Nadine H. Luther
---------------------------------------
Buyer:
GUITAR CENTER, INC.
By: /s/ Larry E. Thomas
---------------------------------------
Name: Larry E. Thomas
Title: President
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FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT
This First Amendment to Stock Purchase Agreement, dated as of April
16, 1997 (this "AMENDMENT"), hereby amends the Stock Purchase Agreement, dated
as of April 14, 1997 (the "STOCK PURCHASE AGREEMENT"), among George A. Luther,
Sr., Nadine H. Luther, Rhythm City, Inc., a Georgia corporation, and Guitar
Center, Inc., a Delaware corporation. Capitalized terms used herein but not
defined herein shall be as defined in the Stock Purchase Agreement.
The Stock Purchase Agreement is hereby amended as follows:
1. CASH TRANSFERS AT CLOSING.
Pursuant to the Stock Purchase Agreement, as amended hereby, certain
cash transfers by or on behalf of Buyer to Sellers are to take place at the
Closing. The purpose of this Section 1 is expressly to identify the payments to
be made, the manner in which they are to be made, and the related agreements
among the parties regarding the conveyance of control over Company assets
(including cash). Specifically, the parties agree as follows:
(a) PRELIMINARY PURCHASE PRICE FUNDING. The funding required by
Section 2.4(b)(i) of the Stock Purchase Agreement is $9,400,000, EXCLUDING
the Working Capital Advance provided for in subsection 1(c) of this
Amendment, below. Specifically, this amount represents the Preliminary
Purchase Price of $10,300,000, LESS $900,000 representing the Working
Capital Cash Holdback ($450,000) and the Indemnification Cash Holdback
($450,000). No reduction will be made in this calculation for Funded Debt
or other Liabilities of the Company at the Closing Date because, as a
component of the Working Capital Advance, Sellers represent that residual
cash funds will be retained by the Company in an amount adequate to pay any
such Funded Debt or other Liabilities. The $9,400,000 amount will be paid
by wire transfer from Buyer to Sellers on the Closing Date as provided in
the Agreement.
(b) ESCROW AMOUNTS. As set forth in Section 2 of this Amendment, the
Working Capital Cash Holdback ($450,000) and the Indemnification Cash
Holdback ($450,000) will be funded into an escrow account to be established
by a wire transfer of $900,000 from Buyer to the Initial Escrow Agent (as
defined in Section 2 of this Amendment).
(c) WORKING CAPITAL ADVANCE. As provided in the Stock Purchase
Agreement, the Sellers have represented that they currently expect the
Working Capital Adjustment Amount to be a positive amount and, accordingly,
the parties have agreed that on the Closing Date there will also be paid to
the Sellers an advance on such adjustment (I.E., an estimate of the
increase in the purchase price related to a positive Working Capital
Adjustment Amount). Based on the definition of Working
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Capital Advance provided in Section 2.4(c) of the Stock Purchase Agreement,
on the Closing Date, Erick Mason on behalf of Buyer, and George A. Luther,
Sr., on behalf of the Company and the Sellers, will consult and determine
the appropriate Working Capital Advance no later than the close of business
on the Closing Date. The parties acknowledge that such amount will be an
estimate which they will arrive at jointly and in good faith. George A.
Luther, Sr. will provide Erick Mason with reasonable detail to support his
estimate of the Working Capital Advance. The Working Capital Advance, as
determined in good faith by George A. Luther, Sr. and Erick Mason, will be
documented in the form set forth on Exhibit A hereto. Upon the agreement
of such parties, the Working Capital Advance will immediately be paid to
the Sellers (allocated among the Sellers in the same proportion as the
Purchase Price). If the Company has adequate funds, such payment may be
made by the Company, which payment shall be deemed to have been made on
behalf of Buyer as an element of the sale of stock by Sellers to Buyer.
Buyer and Sellers acknowledge that the sole purpose of the Working
Capital Advance is to pay an estimate of the Working Capital Adjustment
Amount to Sellers pending the calculation of the actual amount as to be
indicated on the Closing Financial Statements to be prepared promptly after
Closing pursuant to Section 2.5(b) of the Stock Purchase Agreement. Any
variance from the estimate to the actual amount will be a component of the
ultimate Working Capital Adjustment Amount upon the terms and subject to
the conditions set forth in the Stock Purchase Agreement.
(d) ACCOUNT SIGNATURES. In connection with the Closing and the
payment of the Working Capital Advance, Sellers acknowledge that control of
the Company will be assumed by Buyer as sole shareholder. In connection
therewith, George A. Luther, Sr. agrees to cooperate with representatives
of Buyer in causing all cash accounts of the Company to be subject to the
signature authority of those persons designated by Buyer. The parties
agree that this transition will take place on the Closing Date or at the
opening of bank business on the following day. The parties will cooperate
fully with each other during this transition.
2. ESCROW AMENDMENTS.
(a) WORKING CAPITAL ESCROW. Section 2.6 of the Stock Purchase
Agreement shall be amended and restated as follows:
2.6 WORKING CAPITAL CASH HOLDBACK AND ADJUSTMENT PROCEDURE.
(a) On the Closing Date, Buyer shall deliver a cash fund of
$450,000 (the "WORKING CAPITAL CASH HOLDBACK") into an escrow account (the
"ESCROW ACCOUNT") for a period of at least 90 days after the Closing Date
to be used as described in this Section 2.6 and to otherwise satisfy
claims, if any, for
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indemnification pursuant to Section 10 on a non-exclusive basis. Such
holding period is subject to reduction pursuant to Section 2.6(e).
(b) The term "WORKING CAPITAL HOLDBACK DIFFERENTIAL" (which
may be a positive or negative number) shall mean the sum of (i) the Working
Capital Cash Holdback, PLUS (ii) the Working Capital Adjustment Amount.
(c) Upon the later of (i) the 90th day after the Closing
Date, (ii) the date on which Sellers accept the Closing Financial
Statements without objection, and (iii) the date on which Sellers'
objections, if any, to the Closing Financial Statements have been
conclusively resolved pursuant to Section 2.5(c) (the "WORKING CAPITAL
DETERMINATION DATE"), the Working Capital Holdback Differential shall be
determined and distributed in accordance with Section 2.9 as follows:
(i) if the Working Capital Holdback Differential is a
positive value, then, except to the extent of any claims for Damages
(as defined in Section 10.2) then outstanding and unresolved, the
Escrow Agent (as defined below) shall pay the Working Capital Holdback
Differential to Sellers; PROVIDED, HOWEVER, that if such positive
value is less than the Working Capital Cash Holdback, the Escrow Agent
shall pay the difference between such positive value and the Working
Capital Cash Holdback (the "WORKING CAPITAL HOLDBACK RESIDUAL") to the
Buyer; and
(ii) if the Working Capital Holdback Differential is a
negative value, then the Escrow Agent shall pay the Working Capital
Cash Holdback to Buyer, and Sellers shall pay the Working Capital
Holdback Differential to Buyer by certified bank or cashier's check
payable to the order of Buyer.
(d) [Intentionally deleted]
(e) Notwithstanding subsection (c) of the this Section 2.6,
the Working Capital Determination Date shall occur on the 60th date after
the Closing Date if on such date: (i) Sellers have accepted the Closing
Financial Statements without objection, (ii) Buyer has received releases,
in form and substance satisfactory to Buyer, of all Encumbrances against
the assets of the Company, and (iii) the Buyer has received documentation
from the Company's 20 largest vendors (based on the dollar value of
merchandise purchased from vendors during the fiscal year ended August 31,
1996) that such vendors have been paid all amounts due and owing as of the
Closing Date.
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(b) INDEMNIFICATION ESCROW. Section 2.7 of the Stock Purchase
Agreement shall be amended and restated as follows:
2.7 INDEMNIFICATION CASH HOLDBACK AND ADJUSTMENT PROCEDURE.
(a) On the Closing Date, Buyer shall deliver a cash fund of
$450,000 (the "INDEMNIFICATION CASH HOLDBACK") into the Escrow Account for
a period of at least 180 days after the Closing Date to satisfy claims, if
any, for indemnification pursuant to Section 10 on a non-exclusive basis.
(b) The term "INDEMNIFICATION HOLDBACK DIFFERENTIAL"
(which may be a positive or negative number) shall mean the sum of (i) the
Indemnification Cash Holdback, LESS (ii) the amount of any claims for
Damages (as defined in Section 10.2) then outstanding and unresolved.
(c) Upon the later of (i) the 180th day after the Closing
Date and (ii) the date upon which the Sellers accept the Closing Financial
Statements without objection (the "INDEMNIFICATION HOLDBACK DETERMINATION
DATE"), the Indemnification Holdback Differential shall be distributed in
accordance with Section 2.9 as follows:
(i) if the Indemnification Holdback Differential is a
positive value, then the Escrow Agent shall pay the Indemnification
Holdback Differential to Sellers; PROVIDED, HOWEVER, that if such
positive value is less than the Indemnification Cash Holdback, the
Escrow Agent shall pay the difference between such positive value and
the Indemnification Cash Holdback (the "INDEMNIFICATION HOLDBACK
RESIDUAL") to the Buyer; and
(ii) if the Indemnification Holdback Differential is a
negative value, then the Escrow Agent shall pay the Indemnification
Cash Holdback to Buyer, and Sellers shall pay the Indemnification
Holdback Differential to Buyer by certified bank or cashier's check
payable to the order of Buyer.
(d) [Intentionally deleted]
(c) ESCROW MECHANISM. A Section 2.9 shall be added to the Stock
Purchase Agreement as follows:
2.9 ESCROW PROCEDURES.
(a) Pursuant to Sections 2.6(a) and 2.7(a), Buyer shall
deliver the Working Capital Cash Holdback and the Indemnification Cash
Holdback to Minkin & Snyder, P.C., as escrow agent (the initial "ESCROW
AGENT"), pursuant to an Escrow Agreement in the form of Exhibit B (the
initial "ESCROW AGREEMENT") delivered by each of Buyer, Seller
Representative (as defined below), the Company
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and the initial Escrow Agent. As soon as practicable after the Closing,
Buyer and Seller Representative shall jointly designate a mutually
acceptable successor Escrow Agent, which shall be a bank, title company or
similar financial institution independent of Buyer and Sellers, appointed
pursuant to a mutually acceptable successor Escrow Agreement substantially
similar to the initial Escrow Agreement. Upon such designation, Buyer and
Seller Representative shall execute joint written instructions to the
initial Escrow Agent instructing such initial Escrow Agent to deliver the
funds representing the Working Capital Cash Holdback and the
Indemnification Cash Holdback, and all interest thereon, to the successor
Escrow Agent.
(b) Upon the occurrence of the Working Capital
Determination Date and the determination of the Working Capital Holdback
Differential in accordance with Section 2.6, each of Buyer and Seller
Representative shall promptly execute joint written instructions to the
Escrow Agent instructing the Escrow Agent to disburse the Working Capital
Holdback Differential and any Working Capital Holdback Residual as set
forth in Section 2.6. and otherwise in accordance with this Agreement.
(c) Upon the occurrence of the Indemnification Holdback
Determination Date and the determination of the Indemnification Holdback
Differential in accordance with Section 2.7, each of Buyer and Seller
Representative shall promptly execute joint written instructions to the
Escrow Agent instructing the Escrow Agent to disburse the Indemnification
Holdback Differential and any Indemnification Holdback Residual as set
forth in Section 2.7 and otherwise in accordance with this Agreement.
(d) For purposes of this Agreement, Sellers represent and
agree that George A. Luther, Sr. (the "SELLER REPRESENTATIVE") is
authorized and empowered to take any actions and to grant any consent on
Sellers' behalf, individually and collectively, with respect to matters
contemplated by this Agreement or any related agreement (including, without
limitation, the initial Escrow Agreement and any successor Escrow
Agreement) and Buyer, the initial Escrow Agent and any successor Escrow
Agent shall be entitled to rely upon any such acts or consents done or
granted by George A. Luther, Sr. for himself and the other Seller.
(e) Upon the Working Capital Determination Date, to the
extent that any portion of the Working Capital Cash Holdback is paid to the
Sellers, the Sellers shall also be paid a pro rata share of the interest
earned on the Working Capital Cash Holdback to such date, and to the extent
that any portion of the Working Capital Cash Holdback is paid to Buyer,
Buyer shall receive a pro rata share of the interest earned on the Working
Capital Cash Holdback to such date. Upon the Indemnification Holdback
Determination Date, to the extent any portion of the Indemnification Cash
Holdback is paid
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to Buyer, Buyer shall receive a pro rata share of the interest earned on
the Indemnification Cash Holdback to such date.
3. INVENTORY. In clarification of Section 2.5(d) of the Stock Purchase
Agreement, the parties agree that Sellers, at their expense, may be present
during, and otherwise observe and check, the inventory count.
4. MISCELLANEOUS. From and after the execution hereof, the Stock Purchase
Agreement and this Amendment shall be read together as one and the same
agreement. Except as expressly amended pursuant to this Amendment, the parties
hereto hereby agree and acknowledge that the Stock Purchase Agreement, as
executed and dated as of April 14, 1997, remains in full force and effect. This
Amendment may be executed in counterparts.
(SIGNATURE PAGE FOLLOWS)
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IN WITNESS WHEREOF, the parties have executed and delivered this First
Amendment to Stock Purchase Agreement as of the date first written above.
Company:
RHYTHM CITY, INC.
By: /s/ George A. Luther
---------------------------------------
Name: George A. Luther, Sr.
Title: President
Sellers:
GEORGE A. LUTHER, SR.
/s/ George A. Luther
---------------------------------------
NADINE H. LUTHER
/s/ Nadine H. Luther
---------------------------------------
Buyer:
GUITAR CENTER, INC.
By: /Signature/
---------------------------------------
Name:
Title:
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